Companies (Clarification of Dividend Rules in Companies) Amendment Bill

Thank you, Madam Chair. While it is somewhat surreal to stand and take a call on the Companies (Clarification of Dividend Rules in Companies) Amendment Bill here at committee of the whole House stage, it really does talk to the remarkable diversity of issues that get debated in this House. I don’t think you could get a bill quite as different in form and function than what we are talking about now from what we have been talking about for the last three or four members’ days. But, in its own way, this is an important bill, particularly for those who are wanting to run a business—nearly always in an agricultural context—who want absolute clarity that they do have the ability, under Companies Act legislation, if they so choose under their constitution, to treat the shareholding and the dividend regime for shareholders who supply the company different to those who do not supply the company.

This is a very minor technical amendment. Essentially—

💬 Angie Warren-Clark: We love it, Todd.

Thank you for that, Angie Warren-Clark. Currently, section 36, and a literal reading of section 36, of the Companies Act suggests that the provision for dry shares can be made in the constitution of a company. However, section 53 of the Companies Act, as read, can, in a particular reading, negate that right of a company to set themselves up via the constitution in such a way.

I know from experience that particularly companies who are involved in the agriculture sector, who like the framework of the Companies Act but want to be able to treat their shareholders differently with respect to dividend rights if they provide the company with share-backed supply relative to those shareholders who don’t, want the legal surety that there isn’t a problem in the reading of the Companies Act for them to treat those shareholders differently with respect to dividends. This is an issue that I know companies in the Bay of Plenty, particularly larger ones like Zespri and smaller ones that I have had some connection with, have had some challenge and have had competing legal advice over the primacy of which one of the sections of 36 or 53 should be held up as the most important.

So this tiny, rather technical amendment seeks to clarify the fact that if a company’s constitution so desires to be able to treat shareholders differently based on whether those shares are backed with supply or not then they can, but the normal protections that also exist in section 55 are maintained and enhanced. That is essentially it; not much more than that. We had a very successful and interesting conversation over a number of weeks and months of the Primary Production Committee, and I appreciate the fact that this has had the House’s support to this time, and I would very much like to see that continued through this evening. Thank you very much.

Madam Chair, thank you for allowing me to take a call on this. As the honourable member Todd Muller just noted, it is a relatively confined amendment bill, but nevertheless one that has attracted some, I guess, nuanced thinking in terms of the Companies Act. Before I turn to the substance of my remarks in respect of the amendment before us, I want to acknowledge the member for bringing forward this issue for our consideration through the Primary Production Committee. It’s been a little while now since we considered it in some detail, but the member worked closely with the relevant entities, in particular Zespri and their board and other key stakeholders.

I want to acknowledge as well the legal prowess of David Goddard QC, who turned his mind to the issue that the member has been grappling with. It came from his experience, as I best understand, when he was on the executive or in the senior leadership team at Zespri as they went to go through the delineation of dry and wet shares and found that there was a lot of legal uncertainty or there was a range of grey areas when it came to understanding or analysing the particular provisions between section 36 and section 53 of the Companies Act and how those two particular provisions sat together. I want to just—and I guess the ill of this bill, if it goes towards anything, was really trying to, I guess, ensure that other companies, particularly companies in the primary sector, didn’t have to grapple with or pay the costs of or go through such an arduous process to determine the way in which you could delineate or make clear what type of shareholdings a company could have if they wanted to go from the way that they had been structured, as Zespri had been, and move to another phase.

Look, we spent a lot of time deliberating about whether there was some legal uncertainty. I must give my regards to those officials from the Ministry for Primary Industries and Ministry of Business, Innovation and Employment that did do some work with us. I think they might have found it rather challenging as well, and I think the honourable member Todd Muller might agree that they were often, as we were, grappling to understand whether we might open up some kind of Pandora’s box if we were to make substantive amendments to the Companies Act through this member’s bill. There are relatively little academic writings in respect of how those two provisions—section 36 and section 53—should be read together. So I want to acknowledge them because I know that they did do a lot of work to try and provide us with a whole range of information.

I want to turn to the submission of David Goddard QC. He says that the bill addresses a real, albeit technical, problem, but he was very strongly of the view that this member’s bill had to go forward in order to clarify an area within the Companies Act that he and some colleagues had been, I think, thinking about for some time. So his issue was the way in which section 36 of the Companies Act provides a lot of flexibility in relation to the way that rights to shares are attached to shares and whether they were consistent with the goal of flexibility and internal shareholding arrangements. That particular provision contemplates that shares may carry different voting rights and distribution rights. But the issue that he was speaking to is whether section 53(2) of the Companies Act provides unnecessary restraints or too prohibitive restraints.

So section 53(2) of the Companies Act currently reads that: “The board of a company must not authorise a dividend—(a) in respect of some but not all shares in a class; or (b) that is of a greater value per share in respect of some shares of a class than it is in respect of other shares of that class—unless the amount of the dividend in respect of a share of that class is in proportion to the amount paid to the company in satisfaction of the liability of the shareholder under the constitution of the company or under the terms of issue of [that] share or is required, for a portfolio tax” and so on and so forth.

So Mr Goddard’s view was that that “provision prevents directors [from] discriminating between shareholders [with shares] who hold identical rights when they declare the dividends.”—and that he considers appropriate. I think the bill that the member Todd Muller has here accurately addresses the issues that Dr Goddard QC was concerned about. See, because he goes on to say that there’s “a difference of views in the profession about whether [or not], in addition to [the] restrictions [in section] 53(2), [whether] that prevents a company constitution from providing that in certain circumstances the board must not authorise dividends in respect of some shares in a class.” So what he’s trying to say there is that there’s a difference in views about whether the provision is designed solely to prevent discretionary board decisions about dividends in respect of the same class of shares or whether it prevents hard-wired differences in treatment and in which the board has no discretion.

Look, we have had substantive discussions, and the member knows that we’ve kind of gone on a journey. I hope he feels supported in terms of the advocacy that our side of the House has provided to him in ensuring that this bill did stay on the ballot, because we wanted to make sure that we were fixing any anomalies without, I guess, opening that Pandora’s box.

So I guess my question to the member in the chair, Todd Muller, is whether he’s comfortable—having had some time now to reflect and consider how these two provisions sit together, and on the advice that he’s received, and, obviously, under the stewardship of David Goddard QC—that we are not creating any unintended consequences in the enactment of this member’s bill, and whether he’s turned his mind to whether there will be any ramifications to current case law or anything throughout the rest of the application of the Companies Act. So I guess those are just a couple of questions that are sitting with me at the moment. I’m sure that many of my colleagues will have other questions to put to that member, and I certainly, myself, will have some in due course.

Look, to the member, thank you for your time and diligence and your service to Zespri, in particular, and the horticultural sector for bringing these issues and queries forward.

I seek leave for all provisions to be taken as one debate.

Leave is sought for that purpose. Is there any objection? There appears to be none. So we can now have a wide-ranging debate on the totality of this bill.

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