Muller ToddCOMPANIES (CLARIFICATION OF DIVIDEND RULES IN COMPANIES) AMENDMENT BILLFirst ReadingTODD MULLER (National—Bay of Plenty): I move That the Companies (Clarification of Dividend Rules in Companies) Amendment Bill be now read a first time. I nominate the Primary Production Committee to consider the bill. It is with great pleasure that I rise to introduce the Companies (Clarification of Dividend Rules in Companies) Amendment Bill. I hope that it can receive broad cross-party support that will enable the Primary Production Committee to fully consider the bill.This small technical amendment might at first glance seem too inconsequential for Parliament's consideration. It simply amends section 53 of the Companies Act to make it absolutely clear that if a company's constitution so enables profits can be divided differently across the same class of share. But as with all legislation there is a defining principle at its core. In this instance it is the principle of freedom of association and through that association the freedom to design a commercial company structure in a manner that those freely associated deem appropriate.This philosophy has played out across many of the businesses that I've had associations with throughout my 20-year career in agribusiness in particular. This bill is about such freedom. It seeks to reaffirm through the removal of legal uncertainty that shareholders can via their company constitution choose the rules that will apply to their company. It clarifies a paramount shareholder freedom—how to distribute its company's profits—without lessening the critical balance of protections explicitly outlined in the Companies Act. It does not change the high threshold for constitutional change of 75 percent support of shareholder vote. It does not change the obligations of directors to apply their fiduciary judgment prudently. It does not change the rights and protections of minority shareholders who remain protected should the company change the constitution. But it does allow shareholders to pay out their profits only to those who are supplying shareholders if this is the expressed wish of the company and is outlined in the constitution.This bill amends the Companies Act 1993 to give clarification of dividend rules outlined in sections 36 and 53 of the Act. As currently written the Companies Act creates some doubt about the ability of a company constitution to provide for dry shares—i.e. shares which do not carry dividend rights in prescribed circumstances. The classic example is shares in a cooperative. Where the holder ceases supplying their cooperative cooperative companies registered under the Co-operative Companies Act can provide for dry shares but for companies registered under the Companies Act there is legislative doubt.The uncertainty arises because of the interplay between sections 36 and 53 of the Companies Act 1993. Section 36(1) provides the shareholder with (a) the right to 1 vote on a poll at a meeting of the company on any resolution … (b) the right to an equal share in dividends authorised by the board: [and] (c) the right to an equal share in the distribution of the surplus assets of the company." However subsection (2) provides for these rights to be "negated altered or added to by the constitution of the company or in accordance with the terms on which the share is issued". However the flexibility provided for in this subsection (2) is then subject to section 53 and section 53(2) prevents the board of a company from authorising "a dividend—(a) in respect of some but not all the 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 that company.There are different views within the legal profession about the effect of this section 53(2). On one view it prevents the board exercising a discretion to authorise a dividend in respect of some shares in a class but not others—typically the dry share scenario. But it does not prevent the constitution from containing a rule that some holders of shares in a class—for example non-suppliers—are not entitled to receive dividends on those shares. In those circumstances the board is not exercising its powers in a way that discriminates between shareholders but is simply giving effect to the rule in the constitution. However other experienced lawyers consider that the effect of section 53(2) is that it prevents the constitution from containing provisions of this kind as that would result in the board authorising dividends in respect of some of the shares—the wet shares—but not other shares in the same class—the dry shares. The former view in my view is probably the better view but the uncertainty is problematic and has caused a number of agribusinesses in particular to develop elaborate workarounds to make sure they have the capacity to treat dry shareholding differently in terms of dividends.This uncertainty can be removed by adding a new subsection (2A) to section 53 to remove doubt about dry share provisions along the following lines: "(2A) To avoid doubt nothing in subsection (2) prevents the constitution of a company providing that shares in a class do not confer a right to receive dividends in the circumstances specified in the constitution." This would clarify that the constitution of a company can provide for shares in the same class to carry different entitlements to dividends in different circumstances—in particular where the holder is no longer a supplier to the company. Such provisions do not raise any concern about discrimination among shareholders by the directors which is the concern that section 53 is aimed at. Rather this amendment enables companies and their shareholders to tailor their mutual rights and obligations to give effect to their commercial objectives.There are good reasons to permit this flexibility in structuring commercial arrangements and in my view no good reasons to limit it. Remember that at all times shareholders are free to exit and enter and have embedded protections in the Act should the company change their constitution in a manner they do not support. Specifically the potential for unfair treatment of shareholders by amending a company constitution to include a dry share provision is addressed by the interest group and minority buy-out provisions in the Act. Shareholders who object to the act can vote against it and if the resolution passes they are entitled to be bought out at a fair price.This amendment talks to a key fundamental principle—namely that it is the shareholders of a company who should have the discretion on how best to run their company. If a company wishes to act in a cooperative manner and attach different approaches to how they distribute profits then they should have the freedom to do so.In my experience of over 20 years in agribusiness I have engaged with many companies both large and small that have desired to treat their shareholders differently depending on their supply arrangements. They are companies registered under the Companies Act but wish to act in a cooperative style specifically in the way they choose to link supply with their profit distribution. Our country is underpinned by these types of businesses and where we can assist we should assist in their progression. I believe the Act should enable such diversity of company design. It is a key point of principle and one that I hope this Parliament sees the merit in supporting here this evening. Thank you."