Stephen Layburn

Introduction

In October 2021, New Zealand enacted legislation in the form of The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 – which amended the Financial Reporting Act 2013 and the Financial Markets Conduct Act 2013 (FMC Act).  The legislation introduced a mandatory reporting regime under a new Part 7A of the FMC Act for certain ‘climate reporting entities’ (CREs) to prepare climate statements in accordance with the climate-related disclosure framework to be issued by the External Reporting Board (XRB).

This regime will require CREs to disclose climate-related risks and opportunities affecting their businesses.  Although New Zealand claims to be the first to pass such legislation, many other OECD countries have taken or are taking similar steps.

The roots of the new reporting regime can be traced back to the work of the work (in 2017) of the international Task Force on Climate-related Financial Disclosures (TCFD).  In particular, that climate change is seen as an economic risk that is likely to impact business’ performance and prospects materially – because it encompasses physical risks (weather events and changes in land uses) as well as so-called transition risks such as governmental and market responses to the threat of climate change.

The new regime comes into force in October 2022 – although its first two, core, obligations (preparing climate statements and keeping records) are expected to start to apply from April 2024.  This is because CREs will have an obligation to release climate statements (and the undertake the record-keeping obligations in respect of those statements) in relation to financial years that begin the date that the XRB releases its final climate standards (NZ CS 1) – which is expected to be at the end of this year.  (Note that the requirement to obtain an assurance engagement in relation to climate statements which are required to disclose greenhouse gas emissions is not expected to kick in until 2 or 3 years later).

What is a CRE?

The new regime will apply to CREs – which are FMC reporting entities that are considered to have a higher level of public accountability than other FMC reporting entities.  It is estimated that around 200 large financial institutions will be captured, including:

• listed issuers (equity or debt)- with a market cap exceeding $60 million;
• large registered banks, licensed insurers, credit unions and building societies – with total assets exceeding $1 billion (for licensed insurers – where premium income > $250 million); and
• large managed investment schemes – with total assets exceeding $1 billion.

It is expected that some markets (such as insurers and other financial institutions) will see voluntary compliance even if participants are not sufficiently large. 

Compliance framework

The key requirements for CREs will comprise:

• preparing climate statements that comply with the new disclosure framework;
• keeping proper records (that will enable them to prepare climate statements);
• obtaining an assurance engagement in relation to the climate statements – to the extent that those statements are required to disclose greenhouse gas emissions; and
• lodgement of climate statements on the Financial Service Providers Register within 4 months after balance date.

Assurance engagements

Assurance engagements are aimed at independently verifying a CRE’s greenhouse gas emissions (where this is disclosed in a climate statement).

Those CREs that make disclosures of their greenhouse gas emissions have a breathing period, following the start of their obligation to prepare climate statements, for disclosing greenhouse gas emissions (and having that disclosure confirmed through an assurance engagement).  The reasons for this are:

• this is new territory and the professional services market needs time to build capacity to provide this expertise; and
• the most appropriate framework for assurance practitioners is still unknown – whilst the role is like that of an auditor (verifying the accuracy of what is disclosed) the newness of the subject matter means that it is yet to be determined whether such assurance engagements should be undertaken by the accounting profession or there is scope for the other professionals and, if so, the applicable framework (to make sure that their work is equally credible).

No longer comply or explain

Changes have also been made to the ‘comply or explain’ approach under the new regime.  Initially, it seemed that CREs could be exempted – if they determined that they were not materially affected by climate change.  However, the regime as enacted will require all CREs to comply – and to the extent that a CRE has determined that it is not materially affected by climate change, its disclosures (and forward-looking analysis) would note that not many (any?) material risks/opportunities exist.  As a result, the climate statements may state that minimal (or no) changes are expected for the CRE’s governance, risk management, strategy and targets.

On balance, I think this approach is likely to generate better, more comparable levels of disclosure than that seen in the NZX’s initial dabbling in this area (in the corporate governance disclosures required of listed issuers).

The work of the External Reporting Board (XRB)

The XRB started consultation, at the end of last year, on NZ CS 1.  The consultation material describes the XRB’s proposed approach to how NZ CS 1 will mandate standards in respect of a CRE’s governance and risk management frameworks. 

The XRB will seek to align NZ CS 1 with the recommendations of the TCFD.  As a result, the climate standards are expected to be forward-looking and succinct.  And they will seek to be at high-level disclosure and not be overly prescriptive.  This is a pointer to disclosure of the potential impact of the physical risks (and transition risks) of climate change on the CRE.  To date, the most obvious departure from the TCFD recommendations appears to be the inclusion of future as well as current investors as the primary audience for the climate statements.

It is also apparent that the current focus of the disclosures will be inward (i.e. the impact of climate change on a CRE’s business).  However, the market leaders (in Europe) are also looking at outward impacts (the label ‘double materiality’ has been used) – to look not only at the impact of climate change on the CRE’s business, but also the impact of the CRE’s business in contributing to, or mitigating, the effects of climate change (such as through its greenhouse gas emissions or investment and other decisions).

Amongst other things, this will see disclosures on:

• Governance:  Focusing on the level of oversight and monitoring by Boards (and senior management) on climate-related risks and opportunities.  CREs must disclose how the Board accesses expertise, performance metrics for climate-related policies, holds the business accountable on climate-related targets, and processes for making decisions on climate-related issues.  There is a proposal for a description of whether/how climate-related performance metrics are incorporated into remuneration policies.
• Risk Management:  The focus is on how climate-related risks are identified, assessed and managed, and how those processes are integrated into risk management processes.  CREs must disclose the tools and methods used and timelines applied to describe the processes for identifying and assessing climate risk.  Also likely to be required is disclosure of how the CRE determines the significance of climate-related risks – when compared to other business risks.  The objective being to provide a picture of the CRE’s overall risk profile – and the robustness/integrity of its risk management processes.

The role of the FMA

The FMA appear to seek to facilitate a process of capacity-building (aka learning by doing).   This seems to contemplate a period of some year in which it set expectations and support the market (both CREs and the public) to respond to compliance issues and enquiries – and only move to providing guidance at a later date.

Logic would suggest that there will be a few hurdles to overcome before the FMA can move to its more traditional role of supervision and enforcement.  Chief amongst these will likely be the big question of whether/how CREs can access to market data and models from which to build forward-looking scenarios.  This will depend on whether CRE will be required to build capacity internally or there will be access to centralised databases.

As a result, whilst the FMA will have a significant range of enforcement actions available to it under the CRD regime, and climate statements will be subject to the fair dealing rules in the FMC Act, as well as prohibitions on false, misleading and unsubstantiated statements, its work is likely to be focused on education and capacity-building for some time to come.

Getting ready

Realistically, CREs should be using the lead-time to prepare.

The draft sections of NZ CS 1 released by the XRB provide the opportunity to begin preparation ahead of the final standards being published.  And CREs should be building the systems to prepare climate statements in accordance with the expected standards.

Longer term, CREs will need to think about uplifting their governance and risk management processes, adapting strategies and aligning targets and measurement to meet their exposure to climate change risk.   This means looking at risk management processes and questioning if they are sufficiently robust to measure the risk of exposure to climate change and the effectiveness of any mitigation strategies used.

Late last month Commerce Minister David Clark announced Government plans for a new beneficial ownership register for limited partnerships and companies.  This announcement was coupled with an announcement about a Cabinet decision to create a unique identifier for directors of companies, general partners of limited partnerships, and beneficial owners of these entities.

The background to these latest announcements is, again, FATF evaluations of New Zealand’s AML/CFT regime and concerns that that New Zealand lacked transparency of beneficial ownership information – and that this was a key deficiency in New Zealand’s AML/CFT.

The key proposed changes include:

• requiring companies and limited partnerships to provide to the Companies Office with information about their beneficial owners; and
• establishing a unique identifier for individuals who hold the positions of beneficial owners, directors, and general partners of these entities.

The proposals will apply to all registered companies and limited partnerships – but not listed issuers (which are already subject to stringent public disclosure requirements).

Details of beneficial ownership

Key to data capture and disclosure regime is a definition of ‘beneficial owner’, with a focus on persons who have “significant control” over a company or limited partnership.  That is, seeking to capture individuals who:

• hold, directly or indirectly, a minimum percentage ownership interest in a company or limited partnership (which is to be prescribed by regulations);
• hold, directly or indirectly, a minimum percentage of the voting rights in a company or limited partnership (which is to be prescribed by regulations);
• have the right, directly or indirectly, to appoint or remove a majority of the board of directors of a company or general partners of a limited partnership;
• have the right to exercise, or actually exercise, significant influence or control over a company or limited partnership; and/or
• have the right to exercise, or actually exercise, significant influence or control over the activities of a trust or other organisation which is not a legal entity, but would itself satisfy any of the above conditions if it were an individual.

Some of the details about beneficial owners, directors and general partners is proposed to be made publicly available – on the companies and limited partnerships register.  This includes full name, date of and basis for becoming a beneficial owner or date of appointment, address for service, and chains of beneficial ownership.

Other, more sensitive details, such as the date of birth and email address will remain private (on a non-public corporate role-holder register).  However, government agencies (such as the FMA, SFO and OIO) and AML reporting entities may be able to access some details under certain conditions.

For limited partners, this will be a major departure from the current regime, which enables their details to remain private.  There will be increased (and ongoing) compliance burden for both the relevant entities and the beneficial owners.

Even for companies, where ultimate holding company details are currently required to be disclosed, the public identification of beneficial owners (including minority shareholders) will be a significant additional step.

The disclosure obligation will fall on the company or limited partnership itself.  Shareholders and limited partners will have obligations to take reasonable steps to ascertain whether they are or have become a beneficial owner and to inform their company or limited partnership if they are.  And, individuals who are aware or should reasonably be aware, that they are or have become beneficial owners are obliged to provide the necessary information to the company or limited partnership.

It seems that the Minister departed from officials’ recommendations that beneficial owner information be held on a private internal database within the Companies Office, and decided that having some information publicly accessible would be a better balance between the broader public interest in light of international trends and supporting law enforcement, versus privacy concerns.

Quite how the distinction between beneficial (requiring disclosure) and non-beneficial is to be made by the company or limited partnership will need to be clarified by the draft legislation.

The Cabinet decisions also include scope for beneficial owners to have the ability to request that public information about them be suppressed on the relevant registers if they have safety or welfare concerns.

Unique identifiers

The proposals also include introducing a unique Corporate Role-holder Identifier (CRI) for individuals who are or become beneficial owners, directors or general partners of a company or limited partnership.  The CRI will mean that an individual can be linked to all of the director, general partner, and beneficial owner roles they hold.

It will be similar to the NZBN issued to New Zealand entities.

Being able to identify if someone in respect of more than one entity can make it easier for businesses, creditors and consumers to undertake due diligence, and for enforcement agencies to detect potential unlawful activities.

Address for service

The details of the proposals include enabling directors and shareholders of companies, and limited partners of limited partnerships, being able to request that their residential addresses be supressed from public view if they provide an address for service (as an alternative).  This will bring these positions in line with beneficial owners.  But the proposals also include enabling creditors, insolvency practitioners, shareholders and other parties to have the right to request access to the residential address where they have been unable to reach the person using their address for service (i.e. about a matter related to a statutory role or duties).

Transition and penalties

A transitional period of 6-18 months (with longer periods where the entity is large or has offshore directors or beneficial owners) in which existing companies, limited partnerships and individuals associated with these entities (as beneficial owners or directors/limited partners) can meet their new obligations.

Proposed penalties for non-compliance can apply to both the entity and the individuals, and include, fines, criminal penalties (in some cases), and the ability of the Registrar to remove the entity from the register.

Thoughts

For detailed reasons, it is a coincidence that these proposals emerge hard on the heels of the Russia Sanctions Act.

Instead, this is just another (compliance) step as New Zealand plays its part in AML/CFT measures.  The step-change is not the collection of data, but its public display (such as that for limited partners – which, to date, has not been publicly available).  And depending on the thresholds adopted in the proposed legislation, small investors may escape the compliance net – which is likely to focus on significant/cornerstone investors.

Whether this makes New Zealand a less attractive “home” for some international investors remains to be seen.  Ultimately, the proposals are little more than an international alignment. 

And the proposals for dealing with the privacy of individual information (e.g. director residential addresses etc.) should be welcomed – for those involve with our nearly 700,000 companies and just over 3,000 limited partnerships.  It seems quite odd, many years after such concerns were first raised with MBIE, that director residential addresses are a mouse click away – when such personal data is protected in a variety of other contexts. 

One obvious issue is the lack of alignment between the definitions of “beneficial owner” under the AML/CFT regime – and that for the Companies Act and the Limited Partnerships Act.  As well as creating a compliance headache – as well as raising questions about whether such a lack of alignment will raise questions about the efficacy of public disclosure. 

Timeline

A Bill is expected to be made available for public consultation mid-year, for prioritisation and the Parliamentary process in late 2022.

Despite the efforts of many employers over a long time to make it very clear that various performances schemes, and particularly those involving some element of discretion, do not form part of the terms and conditions of employment – it seems that the Employment Court had its own view.

In 2016 and 2017, Metroglass invited a number of senior employees to participate in a discretionary bonus scheme.  The bonus scheme was subject to conditions that were attached to performance targets.  Importantly, it was clearly stated that any payments made under the scheme were entirely discretionary – and there was no obligation to make a payment even if the targets were met.

The Labour Inspector considered the payments made under the schemes were “gross earnings” for the purposes of calculating holiday pay under the Holidays Act 2003.

The Employment Court found in favour of the Labour Inspector – and the case ended up in the Court of Appeal.

Deliberation

The question for the Court of Appeal was whether the (discretionary) payments – were ones that Metroglass was required to make to its employees under their employment agreement and therefore captured by the definition of “gross earnings” under the Holidays Act.

In getting to the (IMHO:  right) answer, the Court of Appeal considered whether an ‘employment agreement’ for the purpose of the definition of ‘gross earnings’ should be interpreted narrowly to mean only the formal written employment agreement.  The found that it will depend on the context.

Under the Holidays Act the essential difference between a discretionary payment and gross earnings is whether the employer is contractually bound to pay.  If a contractual obligation exists, the source of the obligation is irrelevant.  As a result, the fact the bonus scheme was in a standalone letter and not the (formal) employment did not, alone, make any payments discretionary.

But the Court of Appeal disagreed with that incentive or productivity based payments will always be gross earnings under the Holidays Act and can never be discretionary.  This was a matter of statutory interpretation – because the Employment Court appeared to overlook the key element in the definition of gross earnings (i.e. that the employer must be contractually bound to pay).  Although Metroglass had a duty to exercise its discretion fairly and reasonably, the fact that payment was neither conditional nor guaranteed meant it retained its character as a discretionary payment under the Holidays Act.

Result

Consequently, the Court of Appeal found the Employment Court was wrong to find the payments were gross earnings – and to be included in the calculation of holiday pay entitlements.

Comments

Alarmingly, Business NZ participated in the appeal and commented that had, the Employment Court’s finding been upheld, it could have cost employers hundreds of millions of dollars in back pay.

Whilst the Court of Appeal decision marks a return to what the position has been understood to be in respect of discretionary payments, some effort is required to make certain that there is no contractual entitlement.  Simply labelling a scheme as ‘discretionary’ won’t be enough.  To be sure, that a payment is discretionary, the employer needs to retain the discretion not to make any payment at all – whether or not any or all the targets are met.

Alarmingly, the Labour Inspector submitted that, upholding the appeal and returning to what has been understood to be the positon for some time, would enable employers to pay a deliberately low salary, topped up with regular ‘discretionary’ payments – in order to escape holiday pay obligations and disincentivise employees from taking holidays.  Thankfully, the Court of Appeal commented that such an extreme example, without any supporting evidence, cannot detract from the correct interpretation of existing provisions.

Finally, the Government has accepted the recommendations of the Holidays Act Taskforce, to change the definition of ‘gross earnings’ to mean all cash payments an employee receives (except reimbursements for out-of-pocket expenses).  Legislation is expected next year.

Further information

Please contact me should you have any queries concerning the information to be provided.

Introduction

This note has taken a few days to piece together.  One of the catalysts was an article in Newsroom last week with the inflammatory headline ‘Covid-19 infected workers could sue bosses over poor health and safety’. 

Despite my distaste for the tabloid appeal of the headline, on closer inspection the article did highlight an important point about an employer’s need to do what was reasonably practicable to manage its health & safety obligations.  And the article noted that one such step for doing what was “reasonably practicable” was to implement a worksite vaccination mandate.

I am aware, that for many weeks, many employers have been seeking clearer guidance from all ports, but particularly Government, about their ability to ask staff if they have been vaccinated.  The triggers have been a range of issues – including concerns about the employer’s health and safety obligations, the need to protect the business (including feedback from some staff with concerns about working alongside people who may not be vaccinated) and despite what some in the media might have us believe, a concerns for not only for the health of their employees but also that of employee’s families.

From where I sit, as a bread & butter commercial lawyer, this type of employer concern is unsurprising as we are being fed a daily diet of increasing numbers of COVID cases across Auckland as a result of the Delta outbreak that has seen Auckland operating under health mandates since 17 August – with no (objectively identifiable) end in sight. 

Background – from a public health / legal context

The Health Act 1956 enables the Government (acting through the D-G of Health) to make orders to protect the public health.  As a result, the Health Act has provided the necessary power for the Government to enforce aspects of our public health response to the COVID-19 pandemic – such as the, now familiar, alert levels.  Likely it will be the platform for the traffic light system being hinted at for a big reveal on Friday. 

Most recently, this power has been used to implement a limited number of vaccine mandates – such as those for border workers and those working in MIQs.  In the last week, new mandates have also been announced for workers in the health sector – and schools.

However, my take on the various public announcements, is that it is highly unlikely that the Government will mandate widespread vaccination.  Instead, it seems likely to continue with the current pattern of carrot and stick – in terms of encouraging community efforts to achieve a high level of public vaccination and indicating that some freedoms (such as the ability to participate in mass events over summer) will be off-limits to the un-vaccinated.

The carrot and stick approach can also be seen in the broader context of responses (and movements in alert levels – and boundaries) to data about community transmission.  These responses, are also being said to be determined in the context of data about vaccination levels.  For example, those affecting Northland, where an ultra-cautious approach was justified on the basis of low levels of vaccination in some sectors of the Northland community. 

Employer’s obligation – to maintain a safe and healthy workplace

An employer has a responsibility to maintain a safe and healthy workplace.  Employers must also comply with the terms on which they have hired their employees (i.e. employment agreement).

There is a view that simply imposing a workplace vaccine mandate on existing employees could run the risk of breaching those employment terms.  And that there are limits on the manner in which an employer could “require” existing employment terms to be varied.  (And there are suggestions that an employer can mandate vaccination for new recruits – but this raises raise questions about a two-tier workforce).

Nonetheless, there are (clearly) practical reasons that would justify an employer requiring an employee to be vaccinated.  To date, those reasons are limited to border and MIW workers.

Away from the border / MIQ

For those away from the border / MIQ, the current view is that a “no jab, no job” type edict is likely to infringe employees’ rights under the Bill of Rights Act.  Nonetheless, there is a growing body of legal commentary that there is scope for an employer to introduce a mandatory vaccine policy in a wider range of cases – on the basis of an assessment of the health and safety risk.  And this appears to be in line with Worksafe guidance.

Also likely is that, as more data and experience are known, the scope for making rules based on such a risk-based approach will expand.  But the problem for many employers is that this is reactive – and may be seen to be outflanked by growing number of COVID cases as a result of community transmission. 

It is evident that a much wider range of (employee) roles have a health & safety component – than just those which come within the narrow terms of the order for border and MIQ workers.  Also, as events in the last week have shown, with announcements of vaccine mandates for front line health workers and those working in schools, it is likely that the Government will extend the coverage of (public law) vaccine mandates.  For example, given the tragic circumstances in the first wave of COVID outbreaks last year, it seems unbelievable that we (still) do not have a vaccine mandates for workers in aged care facilities.

As mentioned above, there is commentary that any drive by an employer to require vaccination for existing employees performing roles that our outside the four walls of the border/MIQ (and schools and healthcare) mandates, should be justified by a risk-based approach.  Such an approach would require a proper risk assessment (on a role-by-role basis) to support the employer’s decision – and justify the decision on the grounds of meeting the employer’s workplace health & safety obligations. 

The key factors for any such risk assessment are likely to include (in that role):

• the risk that the person/s undertaking the role is exposed to COVID-19;

• there is a risk for community transmission; and

• there is interaction with people who are at risk of illness (such as those with other health conditions – which make them vulnerable).

Note:  any such risk assessment may change over time – by data of community transmission / the risk of transmission.

But employers walk a narrow tightrope, including concerns about:

• existing employment terms

• taking care not to discriminate against someone – under the Human Rights Act 1993
• probably, not infringing the rights and freedoms preserved by the Bill of Rights Act 1990 (e.g. freedom of thought, conscience, and religion)

The available commentary points to the need for the employer to:

• explain why the role is risk sensitive – and requires a vaccinated staff member to perform it

• consider other available options for risk management/mitigation – i.e. is vaccination necessary as well as / instead of such measures

• engage with affected employees – to develop a vaccination policy

• apply any such policy consistently.

This may be more complicated where the employer does not conduct a customer-facing business.  Employment lawyers can advise on the likely options should an employee in a ‘sensitive’ role refuse a vaccination.

Proof of vaccination / negative test

Seeking proof of vaccination – involves seeking personal data, and triggers the protections of the Privacy Act 1990.  So the employer needs good grounds to ask – to manage the health & safety of its workplace.  The relevant commentary suggests that employers should seek a voluntary disclosure to avoid Privacy Act complications – and could do so while making it clear that the employer will treat a refusal to answer as a “No”.

Importantly, during periods of community transmission, an employer can ask if employees have been to any locations of interest (or are a ‘close contact’) – and insist on proof of a negative COVID test before allowing the employee back to work.  This must be entirely in keeping with the employer’s role as a PCBU – who needs to take all reasonable steps to protect the health & safety of employees (and visitors) at their workplace.  (To provide there is a lawful purpose, under the Privacy Act, for asking, care is needed to explain why the information is needed).

Away from the front line / in an office

The available commentary suggests that implementing a mandatory vaxx policy is unlikely to be viable in a “standard” office environment.  This seems to be based on the view that our alert level regime means there is a very low risk of transmission (at least until employees are allowed back into the office at Level 2).

I am not sure what a “standard” office environment is – in 2021.  For example, many CBD workplaces have a mixture of accommodation and various high traffic areas – including those where outsiders, such as couriers and service people, may come into contact with quite a broad cross section of the staff. 

As a result, any risk-based assessment must look at office dynamics.  Employers should also strongly encourage vaccination – and undertake a staff survey staff to understand the levels of vaccination in the workplace.  By doing so, they can both justify any practical measures – and manage their concerns of their staff that they will be exposed to risk by returning to work in the office.

Staff incentives (to get a vaxx)

The media tell us a number of large-scale employers are running incentive schemes, with a mix of paid time off to get a jab – and cash and/or prize draws.

But there are concerns about discrimination – and the potential impact on employees who have (genuine) health reasons for not getting a vaxx.  Over the weekend, the D-G told the media that the number who should not get a jab may be as low as 100-200.  As a result, my gut feel for the sustainability of a discrimination argument is that it won’t stack up.  Employers will already know which staff has had an organ transplant or the like and have the ability to reach out to them in private.

Response to customer/client/supply chain mandates

Already, we have seen steps by some thought leaders – who have said that people who can’t provide proof they have been vaccinated against COVID-19 will not be allowed access to their sites. 

Despite some apparent concerns from Worksafe about the enforceability of such a requirement, there will be little that a visitor can do to challenge conditions of entry of someone else’s premises. 

Employers will need to respond to such a requirement by customer/client/supply chain.

Response to staff concerns

To date, the response to staff concerns seems to be a two-sided discussion. 

• If the Government / its experts, decides that a step down in alert levels is appropriate – that decision will enable employers to require a return to work.

• But employees still may have concerns – about the risk (say for those with underlying health issues or the immuno-compromised) of working shoulder-to-shoulder with the unvaccinated.

• In the last week there is a developing view (promoted by some thought leaders) that a commitment to providing a safe working environment and prioritising the health & safety of employees justifies a more proactive approach.  So, in recent days, a number of high-profile businesses have announced worksite vaxx policies.

• A number have undertaken a staff survey – and considered the feedback before making a vaxx policy.

• Armed with hard data (from a staff survey), making a worksite vaxx policy can be seen to be respectful of the health & safety concerns of staff.  But, some care will need to be taken to acknowledge individual rights and freedoms (including the decision to get a jab) and encourage those who are “vaccine hesitant” to make use of the public health advice available.

• For consistency, visitors would also need to advise their vaxx status before they enter the worksite – so the employer can seek to proactively manage the same risk as those for staff.

Final thoughts

By definition, any policy will need to be flexible (and labelled as such).  What we have learned about COVID-19 is that we still have much to learn.  But, businesses cannot survive with the sort of information vacuum that seems to be a factor of much of the current environment.  Who would be a public sector official?  And who gets the feeling that they watch the media bulletins and are learning about much of the content at the same time as the public and the business community? 

It is little wonder that a number of private sector thought leaders have stepped up to the plate / filled the void.

For some weeks since the Court of Appeal decision came out at the beginning of September, I have been wondering if Birchfield tells us anything new about unfair prejudice claims by a minority shareholder.

The reason for that hesitancy is that a glance at the background to the decision shows a difficult family squabble.  Like most family breakdowns, the backstory is long and convoluted.  By contrast, the decision seems unsurprising – that, even if the minority shareholder has an unfair prejudice claim, they don’t have a different remedy to that which is in the table, in the shape of a buy-out offer for their shares.

However, the Court of Appeal decision does shed some light on what happens if the unhappy minority shareholder does not want to be bought out.

Background

Sadly, the background in Birchfield is all too familiar.  By appearances, a successful and quite large family-owned business was disrupted by a falling-out between siblings about the conduct and direction of the business.  As a result, one of the siblings (who held a minority stake) brought proceedings under section 174 of the Companies Act 1993, claiming that the affairs of the business (a group of companies) were being conducted in a manner that was oppressive, unfairly discriminatory or unfairly prejudicial to them. 

As a result, they sought wide-ranging orders reinstating the claimant as a director of the companies and regulating the future conduct of the business.

Section 174 – the unfair prejudice remedy

Section 174 of the Companies Act enables a shareholder (or former shareholder) who considers that the affairs of a company have been, or are being (or are likely to be) conducted in a manner that is / have been / or are likely to be

oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity

to apply to the [High] Court for an order under that section.

Section 174 provides the prejudiced shareholder with a wide range of remedies, including setting aside actions taken by the company or the Board in breach of the Companies Act or the company’s constitution.  Most importantly, it contains a buy-out remedy – which the company (or any other person) can be ordered to acquire the prejudiced shareholder’s shares.

Buy-out offer

In Birchfield, after the claimant had been removed by his siblings as a director, the company made a buy-out offer for his shares – at fair value to be determined in accordance with the company’s constitution.

The claimant rejected the buy-out offer and brought his section 174 claim.

Whilst that claim sought a range of remedies – the claimant did not seek a buy-out order for his minority stake.

The response of the company was to seek a Court order (by means of summary judgment) that its buy-out offer cured any unfair prejudice – alleged to stem from the claimant’s exclusion from the conduct of the company’s business.

The company’s buy-out offer was also tweaked – including by offering to have the fair value of the claimant’s share determined by an independent expert, and to waive its claim for costs that it said had been incurred by the company as a result of the claimant’s conduct.

The High Court granted that summary judgment application.

Sidebar – appraisal rights

Appraisal or buy-out rights are a remedy available to minority shareholders.  The concept is borrowed from North America and enables shareholders who dissent from specified decisions (special resolutions) to exit the company – by requiring it to purchase their shares at a fair and reasonable value.  The decisions that trigger appraisal rights were described by the Law Commission as involving “fundamental” changes to the nature of a company or changes to the rights attaching to their shares. 

The decisions are special resolutions to approve a major transaction, a long form amalgamation, a change to the constitution to impose or remove a restriction on the company’s activities (and a special resolution of an interest group that alters the rights attached to the shares of that group).

Enter the Court of Appeal

The claimant argued that the buy-out offer did not provide a complete answer to the unfair prejudice claim for 8 reasons.  The Court of Appeal found that none of the 8 (noting that the buy-out offer was tweaked slightly after the claim was lodged) was sufficiently material to be a barrier to summary judgment. 

Importantly, the Court said it was inconceivable that the Court would have made the [reinstatement] orders in relation to the future management of the company of the kind sought.  Also, liquidation of the company would make no sense – so that, in light of the facts and circumstances of the case, a buy-out offer would likely have been the only relief available to the claimant.

The decision did not conclude that a buy-out offer will always “cure” an unfair prejudice claim.  Instead, borrowing from the 2019 UK Court of Appeal decision in Sprintroom, the Court found that it is a question of fact which is “highly sensitive” to the facts and circumstances of each case – and an assessment of the nature and terms of the buy-out offer.

Again, referring to Sprintroom, the Court of Appeal identified a number of factors that (in many cases) will be relevant to the Court’s assessment of the reasonableness of a buy-out offer (and the reasonableness of the rejection of that offer):

• The value offered, or the means proposed for valuing the shares.  An offer inviting the claimant to join in the appointment of a mutually acceptable independent expert with full access to the company’s documents is more likely to be a fair offer than a fixed figure presented on a ‘take it or leave it’ basis.

• The ability of the claimant to satisfy themselves if the buy-out offer is reasonable before they accept or reject the offer.  A fixed price offer will rarely be “fair” if the claimant or their advisers are not provided with access to company documents necessary to see how the buy-out price has been calculated and to determine whether it is reasonable.  Similarly, an offer to instruct an independent expert will not be reasonable if the majority is not prepared to open the company’s books to that expert.

• The substance of the unfair prejudice claim – and its implications on fair value.  So, for example, an allegation that the majority have diverted business from the company or misapplied company assets, it may not be just to expect the minority to accept an expert valuation without determination of the claim.

• The likelihood of the majority to implement the buy-out offer.

• The proximity of the buy-out offer to (unfairly prejudicial) conduct complained of.

The Court of Appeal also provided examples of facts and circumstances of a case where it is unlikely that a buy-out will cure the unfairly prejudicial conduct complained of:

• Where the conduct alleged has arguably had a material effect on the company’s value.

• Where it is arguable that the company has not kept proper accounting records – and that this would have a material effect on the ability of an expert to assess fair value.

• Where the buy-out offer is made on terms which prevent the prejudiced shareholder from accessing information to satisfy themselves that the basis on which the offer is made is fair.

• Where the company can fairly be described as a ‘quasi-partnership’ – particularly where the shareholders work full time in the business, the unfairness that would result from exclusion from that business may not be cured by a buy-out offer.

Timing is critical for summary judgment

Noting that this was a case based on a summary judgment application (for which there must be no arguable defence) the Court accepted a summary judgment application can only be made by a defendant that seeks to answer an unfair prejudice claim with a buy-out offer where the offer has been made before summary judgment is sought.  Summary judgment will be granted only if the Court is satisfied that any arguable unfairness has been cured by the buy-out offer.  The buy-out offer must have been open for acceptance for a reasonable period of time (before the summary judgment application).

Also, there cannot be any material defects in the buy-out offer identified in the course of the summary judgment process.  However, minor adjustments to the buy-out offer can be made during the course of the proceedings (tweaks were made to address a costs issue).

Takeaways (for commercial lawyers)

The key points to be taken from the Court of Appeal decision are:

• A buy-out offer is not a cure-all where the minority bring an unfair prejudice claim.

• There is scope for tweaking a buy-out offer even once summary judgment proceedings are on foot (here the Court was quite pragmatic about a tweak affecting costs – noting that the costs in question were arguably immaterial in the context of the likely value of the claimant’s stake) – which seems to be coupled with the point that minor matters that will not materially affect the valuation of the company will not call into question the reasonableness of a buy-out offer to be assessed by an expert.

I am also very dubious about the scope for a disaffected minority seeking a remedy other than buy-out (or liquidation in some very limited cases).  Despite the prevalence of SMEs in New Zealand, many of which have significant elements of family ownership, I believe that a minority seeking reinstatement, even in what they claim is a quasi-partnership in which they have been involved full time should think long and hard about any buy-out offer.  Whilst they may wish to “talk up” the terms of the offer – the risk of damaging evidence of dysfunction and/or impracticality may mean that their remedy is (in economic terms) little different from an appraisal right.  And that they may be financially better advised to extract their capital and do something else with it.

Further information

Please contact me should you have any queries concerning the information to be provided.

At the end of last month a Labour MP announced that he had a Bill drawn from the ballot that has, as its aim, clarifying that a director can take actions which take into account wider matters other than the financial bottom-line.

This, the explanatory note for the Bill says, accords with modern corporate governance theory that recognises that corporations are connected with communities, wider society, and the environment and need to measure their performance not only in financial terms, but also against wider measures including social, and environmental matters.

The Bill takes the shape of an amendment to section 131 of the Companies Act 1993.  Section 131 specifies the (basic) duty of a director – to act in good faith and in best interests of company.  Specifically, the Bill proposes to amend section 131 by providing that, when determining what is in the best interests of a company, a director may take into account “recognised environmental, social and governance factors”.

Examples of these factors are listed as include:

• recognising the principles of the Treaty of Waitangi;
• reducing adverse environmental impacts;
• upholding high standards of ethical behaviour;
• following fair and equitable employment practices; and
• recognising the interests of the wider community.

Drivers for change

At first glance, the change proposed by the Bill may seem quite wide-sweeping.  The Law Commission report that drove the present Companies Act specifically rejected the idea that directors should have some sort of (enforceable) duty to wider stakeholder interests.  Instead, the Law Commission noted that such a primary obligation could be legislated elsewhere (it gave the example of employment law).

But, the Bill is proposing a “for the avoidance of doubt” provision.  And it says that directors “may” take such ESG factors into account.  

The architect of the Bill seeks to clarify the point that directors can take into account wider range of matters than the financial bottom-line.  Despite this, there already exists a body of opinion that a wider range of factors (for example those related to mitigating the environmental impact of the company’s business) must be considered as part of any consideration of the company’s economic performance.

Is there a problem that needs fixing?

Of course, a company can already identify wider, social good type objects in the constitution.  One of the benefits of doing so is that gives notice to all the worlds, and particularly those people with whom it is dealing, of those objects. 

And, in the case of listed companies, the NZX Corporate Governance Code contains recommendations on ESG matters – with NZX listed companies having “comply or explain obligations” in relation to those matters.

It must be considered unlikely that an expansion of the factors that directors may take into account when determining the best interests of the company will (of itself) lead to changes in corporate behaviour.  And it is difficult to know, because the Bill does not tell us, what problems it is seeking to fix.  To the extent that companies (or directors) may be accused of ‘short-termism’ or self-interested behaviour, this does not seem to be a direct route to the try line.  If a direct route is needed – in the face of a range of (societal) factors that are clearly driving many of the most successful companies, and their directors, to have regard to wider and longer-term factors wide identifying the meaning of what are the “best interests”.  Couple this with a body of governance practice that is better suited to flex with the size and shape of the business, and the communities of interest within which it operates, leaves the interested spectator wondering what the author of the Bill is trying to achieve – and whether the drafting of the Bill is the best means for doing so. 

The Bill also follows the recent IOD ‘white paper’ on the need to review directors’ duties.  Some of the points in the white paper seem to be well made.  Particularly the need for reform of sections 135 and 136.  Others are difficult to follow and do not make a good case for reform – and have been criticised as representing woolly thinking.

UK example

A 5-year old change to the Companies Act 2006 (UK) provides an example of how not to lead law reform.  It provides that a director of a company must act in the way [he] considers, in good faith, would be most likely to promote the success of the company for the benefit of its [shareholders] as a whole, and in doing so have regard a finite list of factors.

The result has been the creation of a new industry designed to provide directors with the appropriate paper trail.

Some commentators have suggested that it has led to precisely the opposite outcome to that proposed by its designers.  As a result, there have been efforts on law reform (largely to redefine what “success” looks like).

In short, let’s not go there.

Comments

The Bill will be subject to the usual Select Committee process.  It needs to do so for a variety of reasons – including inadequate problem definition and the need to clarify a laundry list of questions.  What, for example are “recognised factors” and will they change over time, by sector, or by region?  How does the proposed change interact with the balance of section 131 of the Companies Act?  And how does the architect of the Bill expect that the clarification might be back-stopped – should directors be said to have not met any new test for their behaviours?

Further information

Please contact me should you have any queries concerning the information to be provided.

Since the decision was delivered in the middle of last month, a number of commentators have provided some well-written pieces on the Supreme Court judgment in an appeal in Bathurst Resource Ltd v L&M Coal Holdings Ltd.

The appeal concerned the proper interpretation of a contract for the sale of coal mining rights.  Contract interpretation issues were described in the judgment as a perennial issue, and while over time the test to be applied to find the meaning of the (written) words has become settled, the issue of what evidence outside the words of the contract should be allowed to assist with this task continues to be debated.  The same can be said for the nature of the test for implication of terms in a contract.

As a result, the judgment indicated that all members of the Court agreed on the approach to the admissibility of extrinsic evidence in cases of contractual interpretation – and the test for the implication of terms.  As a result the judgment noted a unanimous decision on the interpretation of a key term of the contract that was in dispute.  However, a minority took a different view to the majority on the application of a second key provision in dispute.  As a result, the Court allowed the appeal, by majority – overturning earlier decisions of the High Court and Court of Appeal.

The appeal raised the issue of what evidence, outside the words of the contract, should be allowed to assist with the task of contractual interpretation, and the application of the Evidence Act 2006 in this area. It also raised the question as to the test to be applied to the scope for implying terms into a contract.

Background

The case arose from a disputed interpretation of a contract for the sale of prospective coal mining rights (primarily exploration permits).  In 2010, Bathurst acquired the shares in Buller Coal from L&M under a Share SPA.  Buller Coal held coal mining exploration permits on the West Coast – for which Bathurst paid US$40 m, with a promise to pay royalties on coal sales and two Performance Payments of US$40 m each – when certain quantities of coal (25,000 tonnes – and then 1 m tonnes) had been shipped.

In 2012, Bathurst and L&M entered into a variation, inserting a new clause 3.10 into the contract which provided that:

Failure to make Performance Payments For the avoidance of doubt, the parties acknowledge and agree that a failure by [Bathurst] to make, when and as due, a Performance Payment is not an actionable breach of or default under [the contract] for so long as the relevant royalty payments continue to be made.

By 2015, Bathurst had extracted more than 25,000 tonnes of coal from the Permit Areas during construction at the mine, and that coal was sold to a domestic buyer.

By early 2016, the international price for coking coal had plummeted and Bathurst suspended construction works at the mine, effectively mothballing it, and continued to pay L&M royalties from stockpiled coal.

There two key issues in dispute were:

• First issue:  Whether the first performance payment obligation had been triggered – which hinged on the interpretation of the words “shipped from the Permit Areas”.  Bathurst argued that “shipped” should be given a literal interpretation, meaning carriage by ship, and therefore the first performance payment had not been triggered by its extraction and transport off-site of 25,000 tonnes of coal which it sold into the domestic market.

• Second issue:  Whether, if the first performance payment obligation had been triggered, Bathurst was contractually entitled by way of clause 3.10 of the contract to continue to defer that payment even though it has stopped mining and (therefore stopped paying mining royalties).  L&M said that Bathurst’s entitlement to defer payment lasted only so long as it was continuing to pay royalties (from ongoing mining).  If this meaning could not be reached through the interpretation of the written contract, L&M asked the Court to imply a term to this effect.

Bathurst argued clause 3.10 was clear on its own terms, and meant that Bathurst could indefinitely defer paying the performance payment so long as it continued to pay any royalties that became due.

Decision

The Court was unanimous on the first issue and on the approach to extrinsic evidence and implied terms in contractual interpretation.  

The Court agreed that the approach to be taken to the interpretation of written contracts is governed by the law of contract and is an objective task.

However, the admissibility (or otherwise) of extrinsic evidence is an evidential issue, to be determined in accordance with the law of evidence.  As New Zealand’s evidence law is governed by the Evidence Act, admissibility hinges on – relevance and probative value (and its admission must outweigh any prejudicial effect and not needlessly prolong the proceeding).  This means that, for example, there cannot be a blanket rule that makes evidence of pre-contractual negotiations inadmissible.

Therefore, noting that contractual interpretation is an objective exercise (to determine the meaning the contract to a reasonable person having all the background knowledge reasonably available to the parties in the situation in which they were at the time that the contract was made), the Court stated that evidence of pre-contractual negotiations will be inadmissible to the extent that it proves only a party’s subjective intention or belief as to the meaning of the words, which were not communicated to the other party. Similarly, evidence of post-contractual conduct will often not assist a court to interpret the parties’ objective intentions (of the meaning of the contract) at the time it was made.

On the implication of terms, there was unanimous agreement that the implication of a term is part of the construction of the written contract as a whole.  They held that an unexpressed term can only be implied if it is strictly necessary, in that the term would spell out what the contract, read against the relevant background, must be understood to mean.  

• First issue:  The Court unanimously held in favour of L&M’s interpretation of the expression “shipped from the Permit Areas” – finding that the first performance payment had been triggered.  That is, agreeing with the High Court and Court of Appeal, that “shipped” should be given the generic meaning of “transported”.  

In reaching this decision, the Court rejected as inadmissible the subjective (and uncommunicated) declarations of intent as to the meaning of “shipped” from the principals of both parties.

• Second issue:  The majority, overturning the High Court and Court of Appeal, held that clause 3.10 correctly interpreted simply required royalty payments to be made under [the contract] as and when [the contract] required them.  

It did not impose any new requirement in relation to a certain minimum level of royalties, or any obligation on the part of Bathurst to develop and exploit the mine.  And they found that the requirements for the implication of a term to this effect were not met, and that L&M’s other fallback arguments could not succeed.

Therefore, Bathurst’s deferral of its obligation to pay the performance payment while suspending mining operations had not created an actionable breach, and the appeal was allowed.

The minority concluded that a reasonable person with all the available background would interpret clause 3.10 to mean that Bathurst could only rely on the right to deferral if it was paying royalties at a level consistent with a productive mine.  Since Bathurst was not doing so, L&M had become entitled to be paid the debt owing to it.

On this approach it was not necessary to consider the alternative argument for L&M of an implied term.  If it had been necessary, the minority would have implied a term that Bathurst ceasing to mine on a level equating to that which triggered the obligation to make the performance payment (while, at the same time, refusing to pay the USD 40 million payment that had become due) was a breach of contract, entitling L&M to compensation.

Takeaways (for commercial lawyers)

It seems unlikely that the Supreme Court decision in Bathurst marks some sort of opening of the floodgates for the likely range of evidence that a court may consider when reaching a landing on the disputed interpreting of a contract.  In large part, this is because the impact of rules of evidence under the Evidence Act should continue to act as a gatekeeper and avoid the need for courts to have to consider a smorgasbord of (unnecessary) extrinsic material.

As a result, the key takeaways for commercial lawyers appear to be:

• Clarity (say what you mean):  The words of the contract are the first port of call – and should also be the last.  Clarity is vital.  As a result, the drafter should always seek to ensure that the words reflect accurately what has been agreed.  In most cases, the parties should expect that the terms of the contract will be determinative of the dispute.

• Mean what you say (pre-contract dialogue):  Where necessary and appropriate, a court may rely on pre-contractual negotiations.  At the risk of stating the obvious – the parties must focus on negotiating contract terms that reflect what has been agreed.  They should not focus on “positioning” pre-contractual dialogue and correspondence in an effort to hedge their position just in case it may impact on the subsequent interpretation of the contract.  Such an approach is unlikely to help the negotiation process – let alone the relationship of the parties during the life of the contract.

• Mean what you say (post-contract conduct):  Some care needs to be taken to ensure that conduct and statements demonstrate a consistent position.  Admissions of liability may be held against you – although denials of liability may not carry as much weight.  In this case, the Court looked at Bathurst’s stock exchange announcements, financial statements and reports as aids to interpretation (without ultimately giving them much weight).

Further information

Please contact me should you have any queries concerning the information to be provided.

A recent High Court decision, from one of the strands of litigation flowing out of the collapse of CBL Insurance, should provide some comfort for advisory firms and others whose engagement terms include a limitation of liability.

In CBL Insurance Ltd v Harris & [2021] HC 1393, the liquidators of CBL brought proceedings against six directors of CBL seeking to recover losses of $316 million and against CBL’s actuaries seeking to recover $278 million.  The claim against CBL’s actuaries (PwC) alleged breach of contract – and negligence and breach of statutory duty by the two appointed actuaries (who were employees of PwC).

Last month’s High Court judgment was confined to the actuary defendants’ strike out application.  That is, they sought to strike out the claims against the individual actuaries – and to have the application of the liability cap (in the terms of engagement) determined as a separate question.  In the case of the liability cap, the application was to either strike out or requiring the liquidators to re-plead their damages claim against the actuary defendants in excess of the liability cap in the terms of engagement.

In the decision, the High Court confirmed that the liability cap is effective, and required the liquidators to limit their damages claim (i.e. by reference to that liability cap).

As well as providing comfort to advisory firms and others who include liability caps in their engagement terms, confirming that the liability cap applied at what was a preliminary stage of the liquidators’ claim should also encourage settlement of claims – rather than have a claimant in the belief that the defendant’s liability might (somehow) be un-capped.

Background

Some of the background is quite specific to the circumstances of CBL as an insurer that was subject to ‘prudential supervision’ by the Reserve Bank under the Insurance (Prudential Supervision) Act 2010 (IPSA) regime.  Nonetheless, the principles applied by the High Court have much wider application.

In 2014, PwC was engaged to provide actuarial services to CBL.  Importantly, for the purposes of the IPCA regime, an actuary must be a natural person (and not a limited liability company or a professional firm (which is typically structured as a partnership)).  PwC’s terms of engagement with CBL provided for employees to be appointed as CBL’s actuary.  During the 5 years that followed until CBL’s collapse, two employees undertook the actuary role.

Importantly, the terms of engagement provided that:

• CBL agreed that its contract was with PwC, and that in the event of a dispute, it could only sue PwC and not PwC’s employees; and
• PwC’s liability was limited (capped) to 5 times the total fees paid in the relevant period.

Despite this, the liquidators brought claims against both PwC and the PwC employees who were the appointed actuaries for CBL.  Those claims were for an aggregate of $278 million – many times in excess of the liability cap.

Result

The High Court ruled that PwC’s terms of engagement did not suffer from ambiguity – and clearly precluded claims against PwC’s employees (a contractual promise which was for the benefit of those employees and may be enforced by them under the contracts privity regime that is now part of the Contract and Commercial law Act 2017).  As a result, the claims against the employees were to be struck out.

The Court also ruled that the liability cap limited PwC’s liability (and the employees if relevant) to five times the total fees paid in the case of non-recurring work or five times the annual fees paid in the case of recurring work.  In particularly, the judge ruled that PwC’s liability in contract, tort or otherwise is limited to the amount of the cap.  Because the terms of engagement covered the actuarial services carried out by the appointed actuary as well as the additional services, the liability cap applies to PwC’s contractual assumption of liability in respect of the appointed actuary’s actuarial services as well as PwC’s liability for additional services.

However, rather than strike out the claims out entirely, the Court gave the liquidators the opportunity to re-plead their case in order to address the impact of the liability cap.

As noted above, some of the background to the case was unique to the status of CBL as an insurer that was subject to the IPSA regime.  As a result, the Court was required to address submissions not only on matters of contractual interpretation and claims of ambiguity but also on the (novel) claim that the IPSA regime created a private cause of action against actuaries (for breach of statutory duty).

Comments

The decision on the strike out application re-affirms the effectiveness of clearly-drafted liability caps.  This will be of comfort to advisory firms and others whose engagement terms include a limitation of liability.  

It is suggest that liability caps trigger attempts at (legal) manoeuvres designed to out-flank them.  In this case, the High Court rejected submissions that this was a novel duty case involving a complex and unreviewed statutory scheme, and that the Court should be careful not to strike out the breach of statutory duty cause of action without a full trial.  Instead, it applied the plain words of the engagement terms in order to conclude that the claim would breach the liability cap.

Further information

Please contact me should you have any queries concerning the information to be provided.

Introduction

The latest instalment of a case brought by a small telco consultancy (Creative Development Solutions Ltd) against Chorus concerning claims of breach of confidentiality undertakings reinforces some important lessons about issues of confidentiality. 

Most recently, a Court of Appeal decision on 13 May upheld an earlier High Court judgment that some of the information that Chorus obtained from Creative was confidential – but [only] in a minor incremental way did Chorus use it as an influence on the evolution of its own thinking and its mode of dealing.  The Court concluded that the dominant influences on that evolution in thinking were independent of any use of Creative’s confidential information. 

As a result, it upheld a decision of that High Court that if:

• if material advantage had been taken from exposure to the confidential information, using it as a springboard to advance the recipient’s own work in a way that it could not have done at that time and without undertaking further work of its own, then there would have been a breach of the confidentiality undertaking;
• it was not sufficient to characterise any use as a springboard; and
• (in this case) its use was not a springboard and there was no breach of the confidentiality undertaking.

Takeaways

Whilst the facts of the case, and some of the minutiae dredged up in evidence, are interesting, the decision serves to underline some frequent fliers, rather than breaking new ground. 

Regrettably, too many people still regard confidentiality undertakings as boilerplate – and others regard them as unnecessary.

In some regards, the boilerplate approach is more worrisome.  Whilst there are some common building blocks, it is vital to make sure that the undertakings are fit for purpose in the sense of adequately understanding not only what is “confidential” but also the proposed context in which it is planned to be used.

There is a fear, by some parties, that tabling an NDA will make the would-be recipient reluctant to engage (because they appear to be “difficult”).  By contrast, some (admittedly anecdotal evidence) suggests that well-organised industry participants expect a disclosing party to seek a confidentiality undertaking and that this is just an expected part of the journey.

A basic building block to most commercial conversations is that the parties arrive with some degree of knowledge.  It typically follows that large, established, industry participants staffed with experts who have spent their careers in a specific sector, will arrive with a high degree of knowledge (often developed over a long period of time) that is a soup of publicly-available information and proprietary information as well as personal skills and experiences.  As a result, this sort of industry context places quite a high burden on the discloser to identify what it is about (say) their discovery path that is actually confidential – about could provide the recipient with the sort of springboard that both the High Court judgment and the Court of Appeal decision refer. 

Even for an industry expert, as Chorus clearly is, significant new ideas (even if quite small in the context of a specific proposal) could be confidential information and therefore subject to the protection claimed by an NDA.  But there needs to be proven misuse in order for there to have been a breach. 

Great care needs to be taken not to claim confidentiality on too wide a scale.  An industry expert is likely to have covered much of the field with its own pre-existing knowledge and experience as well as things that are (common) industry knowledge and therefore in the public domain.  

In the Creative case, the evidence made it clear (in quite un-flattering terms) that Chorus did not make use of what was disclosed.

The flipside is that it can be just as damaging to draw the scope of what is confidential too narrowly.  This is particularly difficult for discoveries at an early stage where the extent of the discovery and its potential uses are still being explored.  For example, the developer/discloser may be equally unaware of the matters that the recipient is working on – with the result that the confidential information could be a springboard in areas it had not contemplated.

A checklist approach

Apart from the obvious starting point of taking great care to understand the subject matter, a checklist approach to a number of critical issues for drafting and reviewing confidentiality undertakings is worthwhile in order to address such must-haves, as:

• identifying the purpose for which the confidential information is being made available – and the need to vary the undertakings should that purpose evolve as the dialogue between discloser and recipient progresses; and
• getting comfort about the appropriateness of the definition of what is “confidential”.

Sadly, in this case, not only was Creative unable to partner with Chorus, but having lost its case – but it was then unable to meet a substantial costs award that followed the High Court decision and has been put into liquidation.  Not all outcomes to a discussion about confidentiality undertakings are so drastic.

Further information

Please contact me should you have any queries concerning the information to be provided.

Introduction

Following the announcements in September 2020, in which the Government announced that it would be introducing a (mandatory) climate-related financial disclosure regime that would require certain financial reporting entities to report against a standard developed by XRB, the Bill that will introduce the new regime has received its first reading.

The impact of the new disclosure regime will require affected financial reporting entities (listed issuers, registered banks and licensed insurers) to start making climate-related financial disclosures by the 2023/24 financial year.

The new disclosure regime contained in the Bill will be implemented through an amendment to the Financial Markets Conduct Act 2013.  The FMA will be responsible for the independent monitoring, reporting and enforcement of the new disclosure regime.

Background

While the law changes in the Bill is framed as a disclosure regime, providing a framework for a series of financial disclosures – its objective is to promote a more efficient allocation of capital in light of the potential impacts of climate change.  The aim is to help New Zealand transition to a sustainable and low-emissions economy, and to ensure that reporting entities consider and understand the financial impacts of climate-related risks and opportunities.  

This objective reflects the TCFD ‘s[1] view that climate-related disclosures will promote a greater understanding of the financial implications of climate change and potential for climate-resilient solutions, opportunities and business models for companies.  (So that investors valuing assets or investment opportunities “correctly” and lessen the risk of misdirected investment or “stranded assets”- by funnelling investment away from emissions-intensive sectors to low-emissions activities).

In 2017, the Government requested the Productivity Commission to inquire into how New Zealand could transition into a lower net-emissions economy.  This followed New Zealand’s ratification of the Paris Agreement on climate change.  At that time, the Government set New Zealand’s target as being to reduce greenhouse gas emissions by 30% below 2005 levels by 2030.  However, in 2018, the incoming Minister for Climate Change upped the ante by requesting the Productivity Commission to include a target of net-zero emissions by 2050 in its analysis.

One of the information barriers to climate change identified by the Productivity Commission was that of a systemic overvaluation of emission-intensive activities.  As a result, it recommended the introduction of a mandatory climate-related financial disclosure regime to overcome this information barrier and encourage investment that would support the transition to a low-emissions economy.

The Government response to the Productivity Commission was that of support for its recommendations – on the basis that disclosure (of the risks and opportunities associated with climate change) will help investors, lenders and insurers make decisions and incentivise reporting entities to manage those risks and opportunities.

There then followed a period of public consultation – which resulted in data being gathered which indicated a high level of support for a new mandatory, comply-or-explain, disclosure regime.

Reporting and disclosure regime

By way of background, the TCFD’s reommendations for as disclosure framework focus on (four) areas – representing the core elements of how organisations operate (governance, strategy, risk management, and targets).  These recommendations set the benchmark for international best practice for climate-related financial reporting.

A key element of the TCFD recommendations is ‘scenario analysis’ – whereby reporting entities describe the resilience of their strategy, taking into consideration different climate-change scenarios.  This includes a “2 degree scenario” (a scenario under which the Earth’s temperature has risen more than 2 degrees Celsius above pre-industrial levels).

Against this background, the Bill takes a comply-or-explain approach to disclosures, meaning that climate reporting entities must either comply with the applicable reporting standards or if not – explain why.  Failure to comply could attract a range of penalties, with the potential for significant fines ($500,000 for individuals or NZ$2.5 million for reporting entities) for more serious breaches.

Climate reporting entities

As noted above, the catchment of ‘climate reporting entities’ in the Bill is limited to listed issuers and other large private sectors entities (with $1 billion of total assets under management or annual revenues in excess of $250 million).  Public sector financial institutions with total assets of $1 billion or more are not mentioned in the Bill. 

The $1billion threshold has been set with the aim of ensuring that 90% of assets under management in New Zealand are captured by the new disclosure regime.

A number of large central and local government entities are likely to be major emitters of greenhouse gases and should be subject to the same requirements as the private sector entities covered by the Bill.  Instead, the Minister of Finance has issued letters of expectation to central government financial institutions (such as ACC and NZ Super Fund – but apparently not (for example) DHBs) which state the Minister’s expectation that they will report climate-related matters in line with the recommendations of the TCFD.  Clearly, this is less than a legal obligation – and is not backstopped by the penalty regime in the Bill. 

Reporting standards – to be developed by XRB

The External Reporting Board (XRB[2]) will develop new reporting standards, as well as guidance material, to underpin the new regime.  The new standards will be based on the TCFD recommendations.

Support will be provided by the Ministry for the Environment which will work on how to undertake the scenario analysis component to be required by the new reporting standards.

The basis of the comply-or-explain regime will likely mean that, where the required information is not available or the relevant disclosures cannot be made (on a best endeavours basis) the climate reporting entity will be able to explain.

Changes to the FMC Act / enforcement by the FMA

The new Part 7A to be added to the Financial Markets Conduct Act 29013 (FMC Act) providing for climate-related disclosure requirements for climate reporting entities.

Part 7A provides for climate reporting entities to:

• prepare climate statements in accordance with climate standards issued by the XRB;
• obtain an assurance engagement from a qualified climate related disclosure (CRD) assurance practitioner (who will be subject to a new licensing regime – separate from that of licensed auditors) in relation to those statements to the extent that those statements are required to relate to greenhouse gas emissions;
• to lodge those statements with the Registrar of Financial Service Providers; and
• keep CRD records.

The Bill appoints the Financial Markets Authority (FMA), to the role of providing independent monitoring and enforcement of the climate reporting entities’ compliance with the new climate reporting standards, with powers which include the making of stop orders, direction orders, and that of granting exemptions from compliance with Part 7A.

The Bill also provides amendments to the Financial Reporting Act 2013, which comprises:

• changes to provide for XRB’s new functions relating to the issue of climate standards – or other information to be prepared in accordance with those standards; and
• enabling XRB to issue guidance on a wider range of environmental, social, governance (ESG), and other non-financial matters that can be applied by entities on a voluntary basis.  The stated purposes of these provisions are:
  • to provide those who prepare financial statements with guidance on best practice ESG and related disclosures; and
  • to improve the quality of disclosures on a range of issues beyond the types of information presented in financial statements.

In short, the Bill provides the framework (skeleton) with much work to do by the target timeline for implementation – in an area that is very, very new and which is likely to be subject to a steep learning curve and which is still evolving.

By contrast to the financial reporting regime, which has developed against a backdrop of generally accepted accounting practice and international financial reporting standards, large swathes of the new regime will need to be developed on a greenfields basis.

Penalties for directors

In keeping with the penalty regime for defective disclosure or financial reporting under the FMC Act, a director of a climate reporting entity that has contravened any climate-related disclosure obligation is subject to personal exposure by being treated as also having contravened. 

As with defective disclosure or financial reporting contraventions, the Bill adds to the defences of a director under the FMC by providing that, in any such proceeding, it is a defence if the director proves that they took all reasonable steps to ensure that the climate reporting entity complied with the relevant provision.

Other Government factors

The new disclosure regime is being developed against a backdrop of moves by Government, such as its decisions about the recommendations of the Climate Change Commission – and its setting of emissions budgets (to meet its Paris Agreement commitments).

The implications of this cluster of new developments are still uncertain.  For example, some commentators suggest that it could impact (bank) lending criteria and the costs and availability of insurance cover. 

There is also, as demonstrated by such developments as the recent judicial review proceedings of the Waka Kotahi NZTA-led Mill Road arterial project, the risk that climate reporting entities and their directors may be exposed to the efforts of interest groups to hold the Government to account for its climate-change commitments.

Changes to the Emissions Trading Scheme (ETS) are also proposed – to lift the price cap on carbon credits.

In turn, this raises the prospect of farming being brought into the ETS, to reduce the pressure on other parts of the economy such as the transport sector – and increasing tensions about land use (such as pastoral farming versus forestry). 

Further information

Please contact me should you have any queries concerning the information to be provided.

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[1] Task Force on Climate-related Financial Disclosures (TCFD) is an industry-led taskforce created by the G20.

[2] XRB is an independent Crown Entity responsible for accounting and auditing & assurance standards.