COMPANIES (DIRECTORS DUTIES) AMENDMENT BILL

Last week, I had the opportunity to present the submission of the Commercial & Business Law Committee of the New Zealand Law Society to the Economic Development Select Committee.

Whilst I have worked around central Government a little bit, opportunities to participate in the engine room of Government, such as at Select Committee level, are still something that I regard as novel – and a bit of a privilege.

Like all of the work of the NZLS law reform committees, this sub was the product of time and effort by a team of volunteers – and marked the swansong from the CBLC of my former Simpson Grierson colleague Charlotte McLaughlin. 

The mainstream media seem to have picked up the day’s proceedings but the reporting is a bit hard to follow.

The Bill, which started life as a private member’s bill, seeks to amend section 131 of the Companies Act, by adding a ‘for the avoidance of doubt’ provision that is said to enable directors to consider a list of matters when determining how to discharge their duty to act in the best interests of the company.

As presently drafted in the Bill – that list is not exhaustive.

On one level, the Bill can be seen as an attempt to bring to a head, at a policy level, the debate in company law over “shareholder primacy” versus “stakeholder theory”.

The Law Society’s submission is that the Bill should not proceed.  In summary form, this on the basis of four headline points:

• The Bill seeks to solve a problem that does not exist:  Company directors can already consider the range of matters proposed. 

The sub refers to the 2020 Supreme Court, in Debut Homes – which confirmed that the legislative test in section 131 of the Companies Act is subjective.  It already allows directors to consider all the factors described in the Bill (and others) – if that is what a director believes to be in the company’s best interests.

• Caution against ad-hoc changes to the directors’ duties regime:  Attempts to reiterate or reinforce law on directors’ duties should not be made in an ad-hoc manner.  This is a fundamental element of company law, and changes should not be made piece-meal.  Instead, they should be the subject of a thorough and comprehensive law reform process, including early public consultation.  Making ad-hoc changes in this manner risks unintended and unconsidered consequences.

Here, a range of concerns about the Bill were highlighted:

• how the proposed add-on will impact director liability – in a regime that is already the subject of some uncertainty;

• the lack of clarity about what is meant by “recognised environmental, social and governance factors” (“recognised” by whom and to what extent?); and

• although the Bill intends a (permissive) ‘for the avoidance of doubt’ add-on to the section 131 duty – there is a real risk that it will be interpreted by some as a sort of ‘default setting’ for directors.  Coupled with a lack of clarity about its purpose – this raises the prospect of uncertain interaction with other legislation and the risk of unintended and unforeseen consequences.

• Any thorough examination of the drivers for law change must have an eye to overseas experience:  In this way, we not only benefit from overseas experience – but also manage the risk of being seen to take important elements of company law in directions that might be seen to be out-of-step with Australia.

• Law reform should focus on changing the right law, for the rights reasons:  No matter how well-intentioned, the Bill has not been through a comprehensive law reform process, and it is not clear if it is intended to achieve more substantive changes to the company law regime.  The Law Society has strongly and consistently advocated that significant changes in commercial law should follow a full policy development process and be clear in their intended effect.

If the Bill seeks to promote meaningful progress on issues such as reducing adverse environmental impacts then:

• this goal should be addressed in the context of an all-embracing review; and

• clear legal obligations (coupled with efficient enforcement mechanisms) are likely to have a more realistic chance of achieving their goal. 

The Bill, as presently drafted, does not do that.