There are over 700,000 registered companies in New Zealand, and it's fair to say that compliance with Companies Act 1993 (Act) obligations varies materially between each company. However, it's important for boards to familiarise themselves with the obligations under the Act, as the penalties for failure to comply can be material for both the company and each of its directors.
Although the nature of capital raising is transactional, at Snowball Effect, we typically build an enduring relationship with our clients, assisting them with future fundraising as well as assisting them with their shareholder communications following a successful raise. The approach taken by the boards of the companies we work with varies regarding the financial reporting obligations under the Act that form part of those shareholder communications.
Snowball Effect's Director of Growth Capital, David Curtis, explains why financial reporting obligations should be top of mind for New Zealand businesses.
The Act imposes several key financial reporting obligations on companies with 10 or more voting shareholders and large companies (any company with assets totalling more than $66 million or revenue exceeding $33 million). Such companies are required to:
The penalties for failing to comply with the financial reporting obligations include fines of up to $50k for the company and each director. Therefore, it is prudent to ensure that your company is satisfying these obligations.
Where the financial reporting obligations are triggered due to the company having 10 or more shareholders, it is possible to opt out of all or some of these obligations by passing a shareholder resolution that is approved by not less than 95% of the voting shares. This can either be at a meeting of shareholders or by written resolution. However, it is important to note that this resolution must be passed before the earlier of the AGM and six months after the start of the relevant account period (the Opting Period).
A lot of the companies we work with use a nominee structure, whereby a nominee holds the legal title to shares on trust for minority shareholders thereby reducing the number of voting shareholders to less than 10. Although this may also mitigate the requirement to comply with the financial reporting obligations under the Act, it is worth noting that where a company has less than 10 voting shareholders, one or more shareholders that together hold more than 5% of the votes in the company can, by written notice to the company within the Opting Period, require the company to comply with one or more of the financial reporting obligations.
Although most New Zealand companies that we work with already provide their shareholders with regular updates, the annual report required by the Act must contain specific information. This includes, for example, Director remuneration and salary band information, which wouldn't typically be provided in a regular update.
The Act also provides companies with the ability to seek shareholder approval by way of a 95% majority to opt out of the inclusion of some of the required information, while still complying with the annual report obligation.
In our experience, companies often seek shareholder approval to opt out of one or more of the financial obligations under the Act at its AGM, which also needs to be held within six months of a company's balance date. However, not all companies wish to hold a physical AGM, and where a resolution is passed in lieu of a meeting, the company must send a copy of the resolution to every shareholder who did not approve the resolution within five working days of the resolution passing.
From a practical perspective, I think it is good practice to advise all shareholders of the outcome of each shareholder resolution, as well as provide a copy of the resolution. Most companies retain a copy of this in their online company register, like Orchestra, a platform that allows businesses to effortlessly share key company information with shareholders, that they can access at any time.