Business Law Reform Bill

The point that I hope will be clarified is why a Government department would be regarded as having knowledge of a matter when it has been brought to the attention of a senior employee, in circumstances in which a reasonable person would take cognisance of it. I would think that a third party—an outsider—would expect a Government department to have knowledge of a matter if it had been given notice in writing, and if a reasonable person would expect the notice to have been brought to the attention of such a senior employee. In other words, clause 59 seems to allow a department to deny knowledge through its own failure, when it should require that a department is deemed to have knowledge if it has been given notice, irrespective of whether the notice has been drawn to the attention of the senior employee. I would like to know whether I have misunderstood the purport, or whether a department would have a privilege that no other person would have. This clause essentially provides for a subjective test of knowledge, instead of an objective test of when a third party that had tried to inform a department should be able to rely on the assumption that the department has knowledge.

I suggest that “notice” should be something that has been notified in such a manner that a reasonable person would expect it to have been brought to the attention of a senior employee, so that it does not just catch someone who sends an email to, or rings and tells, a junior officer. “Notice” could even be a notice in writing. But it seems to me that clause 59 needs at least to explain that we are not creating a situation whereby a department can deny knowledge by merely not drawing something to a senior employee’s attention.

More significantly, I will move amendments to clause 90 in Part 10. They will be amendments to the Securities Act, designed to cut the costs of raising capital. One thing that has not been possible in securities markets is for someone with a bright idea, or someone with a project that he or she needs equity for, to go out and shop it around to test the market for a float.

It is possible to go to the brokers and the experts and ask them what they think, but new subsection (2CA) in section 5, inserted by clause 90, addresses a continuing problem for people who want to raise equity capital. There has been a very feeble exception from what is called the “ban on pre-prospectus publicity”, but it has not allowed people to go out there and do what happens in every other market; that is, start to offer what they have, see what the response is, modify it, and go backwards and forwards until they know they have a product that people want.

The relaxation in the bill is utterly pathetic. It provides that pre-prospectus market testing can occur, but only if no information can be given other than the name of the issuer, a description of the securities, the rates of interest, the number, the intended use, the terms of the offer, and the people to whom it will be made. In other words, it does not allow the perfectly natural process of going out with a trial balloon, putting it at its most attractive, and seeing whether it flies—developing a product that suits the people one wants to offer it to.

The Fair Trading Act applies in securities markets. if anything misleading and deceptive is put out, there is liability. Why should a person not be able to go out there and test the market in any way he or she likes, provided that person is not misleading and deceptive? Of course, it does not override the normal securities law requirement that someone cannot sign up until he or she has the formal offering documents.

The current law betrays a deep lack of confidence by securities regulators in their own efforts. It states that they do not believe their prospectuses and investment statement requirements are worth anything, because they will not trust people to withhold commitment until they have them. Even when they are required to have them before subscription, the securities regulators still believe that they should not let anyone go out and talk to the market, unfettered, before the documents can be distributed. In other words, the cart has to be built and pushed out before we have the horse—before we know that there is a demand that will drive the offering.

My amendments propose that the only restriction on pre-prospectus publicity should be that it does not circumvent the requirement that people not be signed up and locked in before they have the investment statement and the other documents, and that the material that is circulated by way of pre-publicity not be misleading or deceptive, so far as the promoter or issuer knows or ought to know. That is just a repeat of what is required under the Fair Trading Act, but it is included to reassure the “nervous Nellies” in the securities regulation industry that it will not be open slather.

The second amendment I have suggested is an opt-out from the offering restrictions, so that people can choose not to force someone, who is looking for equity capital, through the costs of a prospectus and investment statement, if they wish to take the risk. Again, that does not circumvent the Fair Trading Act—misleading and deceptive conduct is still out. In my amendment I go further and make it clear that it would not exclude liability or allow an opt-out for people who would then be at risk of fraud. Fraud will say that an opt-out simply does not work, and neither would deceptive or misleading conduct. It would mean that the whole exemption did not work.

The proposal in this amendment is simply that people in investment markets have the freedoms that every person has if he or she wants to buy property. Why should property investment be open to anyone without prior warning, disclosure statements, or all the sign-offs and audits? There are many property investments that would be far more risky than the traditional securities investment in the securities and capital markets. People are allowed to gamble away their entire fortunes on the horses, on Lotto, or on anything else, without disclosure statements. Participation in capital markets, at least, is usually not an all-or-nothing game. People who gamble can lose their entire investment. It is rare that one loses one’s entire investment when one puts money into even a foolish investment, in an initial offering. Any investor can also go into the secondary market without a prospectus or investment statement.

This amendment provides for people who deliberately opt out—who sign a statement that states: “In effect, I am not going to complain if I end up buying something that I don’t want, because I want to take the risk, and I acknowledge that I am doing so without the benefit of the offering documents required by Part 2 of the Securities Act.”

I realise that at this stage, it is unlikely that the Minister in the chair, Mr Cunliffe, will feel willing to approve the amendment and get the Labour Party to vote for it, but I would be very interested to know whether he has any significant reasons to oppose it in principle. It is what the Government should have been bringing forward. It is the kind of reform that would ease burdens. In my second reading speech I calculated that the offering document industry might cost $100 million a year. Much of it is a completely wasted cost to New Zealand business and capital raising. We could have an opt-out market that would test whether people really thought all that stuff was valuable. If people choose to opt out of the protections of the securities regime without repealing it, we would then know we had a revealed preference, which would tell us whether all the regulations are worth anything. I suspect that for reputable issuers, they do not add any value; they only add cost.

I want to start on the unusual basis of commending Mr Franks’ amendments to the Committee. I think they have been well argued. If members read them carefully, they will see how they would add value to the legislation. The Minister in the chair, David Cunliffe, should consider them very seriously. I am quite happy to yield my call to the Minister in the chair if he would like to take the opportunity to respond to Mr Franks, because I think the amendments are very noteworthy.

I will be very quick in picking up another issue, because while the Minister is on his feet he might be able to answer another question for me, as well. I am intrigued as to how we arrived at the definition of “wealthy” in new subsection (2CD) in section 5, inserted by clause 90. I see that a person is wealthy if “an independent chartered accountant certifies, no more than 6 months before the offer is made, that the chartered accountant is satisfied on reasonable grounds that the person—(a) has net assets of at least $2,000,000; or (b) had an annual gross income of at least $200,000 for each of the last 2 financial years.” If people meet those qualifications, it seems that they can determine their own investment strategy.

That seems to me to be a pretty arbitrary line in the sand. I was wondering why someone who has a salary of $180,000 a year and assets of, say, $1.5 million is determined not to be able to make his or her own investment determinations. When you are on your feet, I would be interested in whether you could let the Committee know how that definition was arrived at. As I said, it seems awfully arbitrary to me. I also see a contradiction of sorts in play here. In some ways, it is a double standard. For taxation purposes, we are considered wealthy in this country if we earn $38,000 a year, yet under this definition, “wealthy” is $2 million in net assets or $200,000 of income. Whilst you are on your feet, Minister, if you could get your head around those issues as well—

The CHAIRPERSON (H V Ross Robertson): You need to address the Minister through the Chair.

I apologise. If the Minister is on his feet and is taking a call, and could take some time to answer that question too, I would be extremely grateful.

💬 John Carter: I raise a point of order, Mr Chairperson. It is just a point of clarification. I did not understand that last comment that you made to my colleague Brian Connell. It has been a habit, in my observation, that a member can refer directly to a Minister to say: “Would the Minister respond to my questions?”. You may be able to point to a ruling, but I am unaware where it is written that members have to say: “Mr Chair, can you ask the Minister to respond.” I cannot recall it. Normal practice has been to say: “I hope the Minister will respond to my questions.”, but if you are telling us that this is a direction that I am unaware of and that the Committee should know about, then we would be pleased to know about it.

The CHAIRPERSON (H V Ross Robertson): It was a direction in relation to the use of the word “you” when referring directly to the Minister, rather than through the Chair.

💬 John Carter: I seek clarification. If I remember my colleague’s comments, he was saying: “Minister, I hope that you will make some comments.” That is actually quite correct English, and he should not have to say: “Minister, I hope the Minister will …”. I do not want to be pedantic here, but I just think we need to be careful on how we are ruling. Anyway, let us get on with it.

The CHAIRPERSON (H V Ross Robertson): Every time the member uses the expression “you”, the member is referring to the Chair. The member must refer to the Minister or another member as that Minister or member in the third person. The member can look at Standing Order 103.

💬 John Carter: I raise a point of order, Mr Chairperson. I know well the ruling that you are making, which has been repeated many times, but I want to make the point again. When the member said “Minister, I hope you will take a call, or answer my question …”, the fact is that he had to say “you, Minister”. It is quite correct English for him to make that statement—to use the word “you” in those circumstances. He has prefaced it by saying “the Minister” and then follows by saying “Minister, I hope you will take it.” You are quite correct in that members cannot say: “You will take the call”, because that does refer to the Chair—that is very clear. But if he says: “Minister, will you take this question …”, then that is quite correct English and we have to allow that to happen.

The CHAIRPERSON (H V Ross Robertson): The member should say: “Will the Minister take this question?” in future. That is what needs to happen. In other words, the member should not address other members directly. The member should be addressing the Chairperson and referring to other persons in the third person.

I respect your ruling and I accept it, but it has been a practice since I have been in this House to refer to the Minister in the chair, and in this case I prefaced my remarks by saying: “I hope the Minister will take a call and answer the question, and whilst you are on your feet I hope you will also deal with the other question that I posed.” So—

The CHAIRPERSON (H V Ross Robertson): It is my understanding that you said: “You will take the call”. That is the way that I saw it. As the Chair, I have ruled, and I refer the member to Speaker’s Ruling 20/3. Members are entitled to raise points of order, and that is quite correct, but once the Chair has ruled that is the end of the matter. To persist would lead to Standing Order 85(1) and that would mean the first yellow card for the member. As the member has been a member of the parliamentary rugby team, he knows what a yellow card is.

Thank you, Mr Chair.

It is always a pleasure to have the opportunity to respond to questions raised on matters such as the Business Law Reform Bill. This is one of the exercises that Parliament undertakes that is, typically, relatively bipartisan, which allows members to discuss technical matters that are embedded within the bill. They are typically preconsulted between the parties and discussed quite fully at select committee, so this discussion on the floor of the Chamber in Committee allows us to draw together some of the threads of that discussion.

I want to turn briefly to two related amendments that have been proposed by Stephen Franks from the ACT party. The first is the amendment to clause 90(2). He has expressed the view that the Government is unlikely to support it, and I can confirm that the Government will not be supporting the amendment. The reason is pretty clear. The proposed amendment would be a profound departure from the scheme of the Securities Act, which draws an appropriate balance between investor protection and promoting a vital securities market. The amendment would, in our view, tip the balance too far away from providing uniform and reliable information to investors.

I now turn to the second amendment to clause 90. Again, I am afraid, the Government cannot support that amendment. The bill sets up objective tests for when an investor may not need full disclosure. The amendment proposed would enable an investor, essentially, to opt out of Securities Act disclosure, meaning that the investor could be subject to undue pressure to do so or could sign away his or her rights on a pro forma basis without realising the full implications of doing so. It is the Government’s desire to reasonably protect investors by ensuring that they have a range of information available to them.

In closing, I take the opportunity afforded by Mr Connell to comment on section 5(2CD) in clause 90(2), which is the definition of “wealthy”. He has raised the perfectly valid question of whether that definition is an arbitrary one, and what basis lies behind it. I can confirm for the member that the test matches the test that is applied in Australia. As the member knows, we are attempting to harmonise our business and commercial law and regulation where prudent, so as to allow businesses to operate relatively freely and with minimum compliance costs on both sides of the Tasman, so it is in keeping with that objective. It follows from his question that, while the bill has implanted a specific figure—$2 million of assets, or $200,000 in income for each of the last 2 years—one might ask whether that figure is frozen for all time, and what happens if inflation erodes the real value of that figure. I can confirm for the member that the bill provides for the Governor-General to be able to increase by Order in Council those amounts in keeping with inflation, so that problem is dealt with.

I invite the member, in closing, to take a common-sense view of it. The counterfactual must surely be the question of whether someone with $2 million worth of assets, or an annual income of above $200,000 for each of the last 2 years, is not wealthy. I can assure him that my constituents in New Lynn, my colleague Ms Mahuta’s constituents in the Waikato, and probably his constituents in Ashburton—perhaps with the exception of one or two of the landed gentry out there on the plains—would probably be of one mind that the $2 million threshold would meet that test.

In closing, I commend the bill to the Committee. It is part of a regular update process to ensure that our commercial law does keep up with the times, that any remedial matters are taken care of expeditiously, and that business has an environment to work in that is as smooth and as low-compliance-cost as possible. I commend the bill to the Committee.

The question was put that the following amendment in the name of Stephen Franks to clause 90 be agreed to:

to amend section 5(2CA) by omitting paragraph (c) and substituting the following paragraph:

(c) contains no information which is misleading or deceptive so far as any promoter or issuer knows or ought to know; and