Business Law Reform Bill — In Committee 
Business Law Reform Bill — In Committee 
[Volume:616;Page:12416] 
Business Law Reform Bill 
In Committee 
Debate resumed. 
Part 1 Building Societies Act 1965 ( 
continued 
)  
Hon MARK BURTON (Deputy Leader of the House) 
: 
 Following discussions with parties I seek leave that following the part we are about to conclude the remaining parts of the Committee stage of the bill be taken as a single wide-ranging debate following which we move on to the third reading as the House has already agreed; and that following that we take Government notice of motion No. 2 and at that point if it is before 10 p.m the House rise. 
JOHN CARTER (Senior Whip—National) 
: 
 We have to take the leave relating to Government notice of motion No. 2 when the House is resumed. We can take leave for the wide-ranging debate now. 
Hon MARK BURTON (Deputy Leader of the House) 
: 
 I am just explaining to the Committee what the intention is once the House is resumed. 
JOHN CARTER (Senior Whip—National) 
: 
 The member is advising the Committee of what the House will do when it resumes. 
Hon MARK BURTON (Deputy Leader of the House) 
: 
 Indeed. 
The CHAIRPERSON (H V Ross Robertson) 
: I am advised that members can seek leave in relation to the Committee stage but the Government notice of motion is another issue. 
Hon MARK BURTON 
: If I can clarify I am indicating to the Committee that once we return to the House I will seek further leave from the House to complete that intention. 
The CHAIRPERSON (H V Ross Robertson) 
: Is there any objection to that course of action being taken? There appears to be none. 
BRIAN CONNELL (National—Rakaia) 
: 
 Prior to the dinner interval I drew the attention of the Committee to the signing and distribution of financial statements and I read the section that said that if that did not happen then the society and every officer of the society who was in default would be guilty of an offence. That is really the notion of vicarious liability and I pose the question of how fair and reasonable it is. I can understand that senior officers of the society and the boards of directors have to shoulder that responsibility but to make every officer liable seems to me a little tough. I put it to the Committee that some officers in junior positions working in such a society would have very little idea about the financial management of the society and for them to be penalised in that manner would be unreasonable. 
I also turn my attention very briefly to the proposed section 97A of the Act “Distribution of copies of financial statements and reports”. I agree that they need to be distributed but I pose the question of why we think we need to legislate that. I would have thought that was sensible commercial practice in the first instance. I know that there would be a defence in that some depositors or members could claim that they did not know about the financial structure of the organisation they were investing in and I can understand that they might have an action if this measure was not done but I fail to see how this section will change the practice that has been taking place prior to this legislation concluding its passage through Parliament. 
DAIL JONES (NZ First) 
: 
 New Zealand First has no intention of delaying the passing of this bill. We were criticised in the very preliminary stages for doing just that. Now other parties seem to wish to delay it. As far as New Zealand First is concerned this bill has had more than enough deliberation and consideration. We intend to support it and we have no further contribution to make to this debate other than to see the bill proceed expeditiously. 
STEPHEN FRANKS (ACT) 
: 
 As this debate has been converted to a wide-ranging debate I have three areas on which I believe it would be helpful to have some comment from the Minister in the chair. In Part 9 “Personal Property Securities Act 1999” clause 59 states: “(c) a government department knows or has knowledge of” a matter when it “has been brought to the attention of a senior employee …”. I am concerned that— 
The CHAIRPERSON (H V Ross Robertson) 
: We are on Part 1 Mr Franks. 
STEPHEN FRANKS 
: I am sorry. I had not realised that the wide-ranging debate has not commenced. 
The CHAIRPERSON (H V Ross Robertson) 
: It is not until after the next vote. Then we have that debate. We are on Part 1. 
STEPHEN FRANKS 
: I will not waste the time of the Committee. Part 1 is not something that troubles me. 
The question was put that the amendment set out on Supplementary Order Paper 201 in the name of the Hon Margaret Wilson to clause 6 be agreed to. 
Amendment agreed to and Part 1 as amended agreed to. 
Clauses 1 and 2 and Parts 2 to 13 
STEPHEN FRANKS (ACT) 
: 
 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. 
BRIAN CONNELL (National—Rakaia) 
: 
 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 $2000000; or (b) had an annual gross income of at least $200000 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 $180000 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 $38000 a year yet under this definition “wealthy” is $2 million in net assets or $200000 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. 
BRIAN CONNELL 
: 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. 
BRIAN CONNELL 
: 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. 
BRIAN CONNELL 
: Thank you Mr Chair. 
Hon DAVID CUNLIFFE (Minister of State) 
: 
 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 $200000 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 $200000 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 
A party vote was called for on the question  
That the amendment be agreed to. 
Ayes 33 
New Zealand National 24; ACT New Zealand 8; Independent: Awatere Huata. 
Noes 84 
New Zealand Labour 52; New Zealand First 13; Green Party 9; United Future 8; Progressive 2. 
Amendment not agreed to. 
The question was put that the following amendment in the name of Stephen Franks to clause 90 be agreed to: 
to amend proposed new section 5(2CC) of the principal Act by adding the following paragraph: 
(d)persons who affirm in writing to the promoters and the issuer separately from their subscription that they accept the risks that they may have inadequate information or skill or experience to assess the merits of the securities but not the risks of fraud or deceptive or misleading conduct by or on behalf of the issuer or the promoters if no promoters not the issuer have reason to believe that the person so opting out of Part 2 of this Act is not competent to make a rational decision to do so. 
A party vote was called for on the question  
That the amendment be agreed to. 
Ayes 33 
New Zealand National 24; ACT New Zealand 8; Independent: Awatere Huata. 
Noes 84 
New Zealand Labour 52; New Zealand First 13; Green Party 9; United Future 8; Progressive 2. 
Amendment not agreed to. 
The question was put that the amendments set out on Supplementary Order Paper 201 in the name of the Hon Margaret Wilson to Parts 2 to 13 be agreed to. 
Amendments agreed to and clauses 1 and 2 and Parts 2 to 13 as amended agreed to. 
The Committee divided the bill into the Building Societies Amendment Bill the Commerce Amendment Bill (No 2) the Companies Amendment Bill (No 2) the Co-operative Companies Amendment Bill the Distress and Replevin Amendment Bill the Financial Reporting Amendment Bill the Friendly Societies and Credit Unions Amendment Bill the Life Insurance Amendment Bill the Personal Property Securities Amendment Bill the Securities Amendment Bill (No 2) the Securities Markets Amendment Bill (No 2) the Superannuation Schemes Amendment Bill and the Unit Trusts Amendment Bill pursuant to Supplementary Order Paper 196. 
Bill reported with amendment.