An amendment bill that fails to amend. Even worse, an amendment bill that is opposed by five leading law firms, NZLS, MBIE and Parliament’s Legislative Design and Advisory Committee. Worse still, an amendment bill that failed to get a tick from the Economic Development, Science and Innovation select committee tasked with deciding whether the draft legislation should proceed through the House.
Nevertheless, the Companies (Directors’ Duties) Amendment Bill, in a form clarified and amended by the select committee, has a good chance of getting through its second reading, though without the support of the Opposition and a raft of legal experts.
Supporting the private member’s bill, the brainchild of MP Duncan Webb and drawn from the ballot before his promotion to Minister of Commerce and Consumer Affairs, are the trade unions, and several non-governmental organisations and charities which say they support its policy intentions.
Rather than trying to amend directors’ duties piecemeal, especially via legislation that fails to actually change the law, some of the law firms opposing Webb’s bill want the Law Commission to instigate a full-scale review of the 30-year-old Companies Act 1993, particularly the contentious sections around directors’ duties. There is no need to wait for the Supreme Court’s decision in Mainzeal, they say.
Poor process
According to Chapman Tripp partner Roger Wallis, Webb’s bill is “a solution looking for a problem”.
It’s poor legal process to put incoherent provisions into the Companies Act,
Roger Wallis
He notes Webb himself has made a submission, criticising the bill.
“I don’t see that very often. I think everyone agreed it was badly drafted because you don’t put things into the law that aren’t needed. I think the Legislation Advisory Committee says legislation should be a last resort, not a first resort to solve policy issues that we can deal with in other ways. So, education would have been a far more cost-effective way to improve the understanding of what’s well understood by experts.”
While the select committee has tried to improve the bill by amending Webb’s subsection, “the right thing to do would have been to stop the bill in its tracks”, Wallis says.
The ‘amendment’
The bill is contentious because, in the view of its opponents, it simply re-states the current law. It is virtue-signalling and a waste of parliamentary time and money. Even the select committee says the bill’s intentions could be achieved by non-legislative means such as guidance or training materials to educate directors.
Webb’s amendment focuses on s 131 of the Companies Act – the section mandating that directors must act in good faith and in what they believe are in the best interests of the company. As with other directors’ duties, the wording of s 131 is principlesbased and broad and does not prescribe what directors may or may not take into account when determining what the best interests of the company might be.
Webb’s bill proposes a new subsection to s 131, making it clear that when a director is making decisions based on the best interests of the company, he or she may consider “recognised” environment, social and governance (ESG) issues. Ostensibly, the purpose is to clarify and make explicit what directors may take into account when making these determinations.
Webb’s detractors are quick to point out the ambiguity and confusion that might arise when there is no definition of “recognised” in the bill – an omission Webb himself concedes is an error. And they baulk at his words “for the avoidance of doubt” as, they claim, no doubt exists in the current law.
This view appears to have the backing of the Supreme Court. In its recent decision Debut Homes v Cooper, the court confirmed that the best-interests test is subjective and acknowledges the business judgment of directors. The court noted it was “not well-equipped…. to second-guess the business decisions made by directors in what they honestly believe to be in the best interests of the company”.
And, as Bell Gully puts it in a submission opposing the bill, “There is no New Zealand authority that holds that directors cannot consider wider stakeholder interests as part of their consideration of the best interests of the company.”
MBIE took no part in drafting the bill as private members’ bills are not part of its remit.
Nevertheless, it produced a report on the submissions, saying it did not support the bill and recommended it did not proceed – a recommendation, MBIE said, which was based on its understanding of the law and its consideration of other submissions made to the select committee.
MBIE says the bill’s problems include:
- the law already allows for directors to consider ESG factors;
- there is no clear problem that needs to be solved;
- the bill would not change the law;
- the wording will create uncertainty;
- social reform should be made through targeted legislation;
- negative effects on the economy;
- the bill could lead to litigation against directors for not taking these matters into account;
- as worded, the bill has no teeth as it provides no mechanism for holding directors to account;
- a member’s bill is not an appropriate process for this type of change;
- the proposed change does not align with Australian company law;
- there are inconsistences with recent case law around directors’ duties; and
- there is uncertainty as to whether the mandatory approach taken by the UK has been effective in changing directors’ behaviour.
We believe that the bill as introduced could have unintended consequences. It could confuse directors about their responsibilities by listing specific ESG factors and giving the impression that these factors should be given more weight than others,
MBIE
“The reference to the principles of Te Tiriti o Waitangi could be an additional source of confusion, because the relationship between the Crown and Māori is governed by Te Tiriti, and this relationship does not typically include other individuals or private entities.”
Not surprisingly, those supporting the bill have a different view. The say:
- it is important for directors to be able to consider factors beyond corporate profits;
- more action is needed in relation to the environment and climate change;
- any movement away from a focus on corporate profits is welcome; and
- the bill is a step in the right direction but does not go far enough because it does not require directors to consider ESG factors.
ClientEarth v Shell
On the issue of mandatory considerations and a possible increase in litigation risk that directors could face if Webb’s supporters get their way, MBIE cites the example of a recent case filed in the UK against Shell by ClientEarth (an environmental law charity).
It’s a derivative action taken by several large institutional investor shareholders, on behalf of the company itself, alleging breach of directors’ duties by the Shell board.
The plaintiffs claim a breach of s 172 of the UK Companies Act 2006, a section requiring directors to act in a way they consider will best promote the success of the company for the benefit of its members as a whole.
It’s the equivalent of New Zealand’s s 131 but the UK version includes a mandatory list of ESG factors the directors must consider. ClientEarth claims the board’s failure to adopt and implement a client strategy that aligns with the Paris Agreement is a breach of directors’ duties.
“This exemplifies how taking a mandatory approach could allow for litigation for breach of this duty,” MBIE says. “The [New Zealand] bill only clarifies what directors already can consider. This may raise the likelihood of legal challenge, but the extent of the risk is difficult to quantify.”
Superfluous
The bill is likely to come before the House for its second reading in the next few weeks.
National’s shadow Minister for Commerce and Consumer Affairs, Andrew Bayly, says the legislation simply isn’t necessary. The National Party agrees with NZLS, Bayly says, which “strongly cautioned against ad-hoc changes to the directors’ duties regime”.
“Whilst we agree that there is benefit in corporate leaders taking into account ESG factors, we note that directors already have existing obligations under their fiduciary responsibilities… If you have a customer-facing business and you’re not talking about social responsibility or environmental responsibility, you’re actually putting your own business at risk in many instances. So many directors already take those things into account and at the moment there’s nothing to preclude a director from having regard to those specific factors.”
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