Part III - Issues for Consideration
31. Discussed below are a number of issues the Ministry of Economic Development is seeking public comment on. These include possible options for reform relating to:
- the definition of "relevant interest";
- convertible securities;
- differential voting rights;
- the application of the disclosure regime to collective investment schemes;
- the 5% disclosure regime threshold;
- the giving of notices;
- enforcement; and
- penalties.
Definition of "Relevant Interest"
When Will a Person Have a Relevant Interest?
32. Both the Australian and New Zealand disclosure requirements are triggered by a person having a "relevant interest" in a public issuer that is above the set threshold. In Australia, the disclosure requirements also apply to listed registered managed investment schemes.
33. In New Zealand, a person has a "relevant interest" in a voting security if that person:
- is a beneficial owner of the voting security; or
- has the power to exercise, or control the exercise, of any right to vote attached to the voting security; or
- has the power to acquire or dispose of the voting security; or
- has the power to control the acquisition or disposition of the voting security by another person; or
- has the power to perform the three previous actions by virtue of any trust, agreement, arrangement or understanding relating to the voting security.10
34. Under section 5(4), a person who has any of the powers referred to above will have a "relevant interest" regardless of whether the power is:
- express or implied;
- direct or indirect;
- legally enforceable or not;
- related to a particular voting security or not;
- subject to restraint or restriction;
- exercisable presently or in the future;
- exercisable only on the fulfillment of a condition;
- exercisable alone or jointly with other persons.
35. The definition of "relevant interest" in the Australian Corporations Act 2001 is similar in effect to the New Zealand definition. The basic rule in the Corporations Act is that a person will have a "relevant interest" if they hold the securities, have power to exercise, or control the exercise of, a right to vote attached to the securities, or have power to dispose of, or control the exercise of a power to dispose of, the securities.
36. The approach to the relevant interest test in the Amendment Act can be contrasted with the approach used in New Zealand's Takeovers Code. Instead of focussing on a "relevant interest" the Code focuses on a test of control which is defined in relation to a voting right as "having, directly or indirectly, effective control of the voting right". A "voting right" is defined in the Takeovers Code as "a currently exercisable right" to vote at a meeting of shareholders, provided that the right to vote is not one that can only be exercised in special circumstances. Under the Code, a voting right is not deemed to be controlled if it falls within one of the class exemptions formulated by the Takeovers Panel.
37. It could be argued that the substantial security holder disclosure regime should have a similar test to that used in the Code in the interests of consistency and so that the issue around how convertible securities should be treated would be removed (this issue is discussed in paragraphs 43 to 53). However, there may be good reasons to maintain a different test for the substantial security holder regime. In a takeover situation the issue of interest is the actual control of voting rights in the target company. It may be argued by contrast that a substantial security holder disclosure regime should also provide useful information to the market regarding holdings that do not presently have voting rights but may do so in the future, and important information regarding related parties transactions. For this reason the relevant interest test is more appropriate. Further, determining the actual control of voting rights in a situation can be a complex task that would create difficulties of compliance for substantial security holders. The test for relevant interest by contrast is simpler to apply.
When Will a Relevant Interest Be Disregarded?
38. The Amendment Act provides that a relevant interest shall be disregarded in a number of circumstances. These include:
- where the ordinary business of the person who has the relevant interest includes the lending of money or the provision of financial services, and that person has the relevant interest only as security given for the purpose of a transaction entered into in the ordinary course of the business of that person or that person has been designated by the Securities Commission as a person to whom this sub-section applies (section 6(1)(a));
- where a person has that relevant interest by reason only of acting for another person to acquire or dispose of that security in the ordinary course of their brokering business and that person is a member of a stock exchange or has been designated by the Securities Commission as a person to whom this sub-section applies (section 6(1)(b));
- where a person holds the relevant interest by reason only of being authorised to act as the representative of a body corporate at a particular meeting of members of a public issuer (section 6(1)(c));
- where it is held solely by reason of the person being appointed as proxy to vote at a particular meeting of members of a public issuer (section 6(1)(d));
- where the person is a trustee corporation or nominee company, and has the relevant interest by reason only of acting for another person in the ordinary course of business of that trustee corporation or nominee company, and the person has been designated by the Securities Commission (section 6(1)(e)); and
- where that relevant interest is held by reason only because the person is a bare trustee of a trust to which the voting security is subject (section 6 (1)(f)).
39. Under section 6(1) of the Amendment Act the Commission has the power to designate a person as a person whose relevant interest in a voting security should be disregarded in certain circumstances. In March 2002, the Securities Commission released a discussion document that sought comment on a number of issues regarding this function. These included questions such as whether there is a need for a power of designation in New Zealand's securities regulatory system, and whether there were alternatives, without the need for the Commission's involvement, to ensure that the relevant interests of persons are disregarded where appropriate in accordance with the present general policy of the law.
40. The Commission also asked for comment on whether they should designate all registered banks within the meaning of section 2 of the Reserve Bank of New Zealand Act 1989 on a class basis.
41. The Ministry does not intend to repeat the questions asked in that discussion document. However, we would like comment on the wider issue of whether improvements could be made to the provisions regarding when a relevant interest can be disregarded.
42. In Australia, section 609 of the Corporations Act deals with situations which do not give rise to a relevant interest. Section 609 is reprinted in Appendix A. It should be noted that there is no power of designation for ASIC in the Australian Corporations Act. There is simply a list of exemptions. Some subsections in section 609 are similar to provisions in section 6(1) of the Amendment Act, but other subsections have no corresponding provision in New Zealand. The Australian subsections which have no corresponding provisions in the Amendment Act deal with share buy-backs, market traded options and derivatives, conditional agreements, pre-emptive rights, and clearing and settlement facilities.
Convertible Securities
43. Under section 2 of the Amendment Act, a voting security "means a security of the public issuer or body which confers a right to vote at meetings of members or shareholders (whether or not there is any restriction or limitation on the number of votes that may be cast by or on behalf of the holder of the security)". It is specifically stated that the term "voting security" includes a security which, in accordance with the terms of the security, is convertible into a security of that kind.
44. An issue has been raised as to whether convertible securities which do not carry a right to vote (even if they can be converted in due course into securities which do carry the right to vote) should rank as voting securities for the purposes of the threshold for disclosure.
45. The Australian legislation does not include convertible securities within the definition of "voting share". The Australian legislation states that if one person with a "relevant interest" gives another person an enforceable right in relation to the security that would, if enforced, give the second person a "relevant interest" in the security, then the second person is taken to already have a "relevant interest".
46. This provision dealing with future rights is applicable to convertible securities, but only if the convertible provides a right to acquire a security that is already on issue.
Options for Reform
47. The issue is what, if any, information should a substantial security holder be required to disclose in relation to their interests in convertible securities? In other words, is disclosure of "relevant interests" in securities that carry a present right to vote sufficient, or is disclosure of "relevant interests" in convertible securities also desirable? Four possible options have been identified:
- No requirement to disclose any information about interests held in convertible securities;
- No requirement to disclose any information about interests held in convertible securities, but allow public issuers to require disclosure of relevant interests held in convertible securities;
- A requirement to separately disclose any relevant interest held in convertible securities in addition to any interest held in voting securities; and
- Retain the status quo.
Option One: No Requirement to Disclose Any Information about Interests Held in Convertible Securities
48. This option is simple and would bring the New Zealand disclosure regime into line with overseas jurisdictions such as Australia and the United Kingdom. The disadvantage of this option is that it removes the requirement for disclosure in substantial security holder notices of potential or contingent interests in voting securities that are not yet on issue.
Option Two: No Requirement to Disclose Any Information about Interests Held in Convertible Securities, but Allow Public Issuers to Require Disclosure of Relevant Interests Held in Convertible Securities
49. Under this option, sections 28 and 29 of the Amendment Act (which allow public issuers to request disclosure of relevant interests and other information) would be amended to continue to allow public issuers to request disclosure of relevant interests and other information in convertible securities, despite the fact that these securities would not come within the definition of "voting security".
50. This option retains the advantages of simplicity and compatibility with overseas jurisdictions. It also offsets the disadvantage of option one (i.e. - it removes the requirement of disclosure in substantial security holder notices of potential or contingent interests in voting securities that are not yet on issue) by allowing the public issuer to make themselves aware of relevant interests in convertible securities. The public issuer would then be required under the listing rules to provide this information to the NZSE, which could then inform the market generally.
Option Three: Requirement to Separately Disclose Any Relevant Interest Held in Convertible Securities in Addition to Any Interest Held in Voting Securities
51. There are two advantages to this option. First, the information about convertible securities when it is likely to be particularly relevant to the market - i.e. - when the person is already a substantial security holder of existing voting rights. Secondly, the information given to the market would be largely the same as that currently required, so there should be no additional compliance costs imposed on substantial security holders.
52. The disadvantage of this option is that substantial security holders are only required to give notice of convertible securities held when giving notice of substantial holdings in voting securities. Therefore, the market may be misled about a person's holdings of convertible securities. For example, a substantial security holder could purchase a large amount of convertible securities immediately after giving a notice. Given that no new notice would be required, the market could well be mistaken as to the extent of a substantial security holder's relevant interest in convertible securities.
Option Four: Retain the Status Quo
53. The Ministry of Economic Development and the Securities Commission believe that the current situation is not sustainable. This is because it has lead to difficulties for public issuers who have convertible securities on issue and for other market participants.
Application of the Substantial Security Holder Disclosure Regime to Collective Investment Schemes
54. The Australian Corporations Act 2001 applies in respect of holdings in listed companies and "listed registered managed investment schemes". In New Zealand, there is no such explicit reference to investment schemes. The Securities Commission noted in its discussion paper released in 1994 that it had difficulty in interpreting Part II of the Amendment Act in relation to collective investment schemes.
55. The main reason for the confusion is seemingly conflicting provisions. Section 2 of the Amendment Act defines "public issuer" as meaning a person "who is a party to a listing agreement with a stock exchange". In the case of listed collective investment schemes, the party to the listing agreement is usually the manager of the scheme. The securities of the investment schemes are the securities of the manager. On the other hand, section 2 also states that "substantial security holder in relation to a public issuer or other body, means a person who has a relevant interest in 5 percent or more of the voting securities of that public issue or body".
56. The question is whether changes should be made to the Amendment Act, particularly the definition of public issuer, to make it clear that Part II of the Amendment Act applies to investment schemes.
57. One argument given as to why the substantial security holder disclosure regime should not apply to investment schemes is that it is less likely for an investment scheme to seek control of companies in which they invest. Another argument is that experience in Australia (where the legislation states that a person must give notice within two business days of becoming aware of the fact that they are a substantial security holder) suggests that investment scheme operators in complying with this requirement believe that it adds cost to investing as their investment moves are signaled to other traders.
58. However, the opposing view is that investment schemes should not be given relief from the disclosure regime simply because they are unlikely to seek control of companies in which they invest. There are a number of reasons for this view. For example, the objectives of the disclosure regime extend beyond identifying controllers of a company. Investment schemes have the potential to change or influence control by selling their shares, just like any other security holder. Further, information about the identity of any substantial security holder is useful to the market. Ensuring that the market is well informed is one of the main rationales for having a substantial security holder disclosure regime, and this should apply regardless of whether the security holder concerned is an individual, a company or a collective investment scheme. Finally, managers of collective investment schemes can also potentially manipulate the market or insider trade, so it is important for information about their substantial security holdings to be available.
The Substantial Security Holder Threshold
59. The threshold for New Zealand's substantial security holder regime is 5%, meaning that the regime is applicable to any person who has a relevant interest in 5% or more of the voting securities of a public issuer.
Overseas Jurisdictions
60. In Australia, a person has a "substantial holding" if the total votes attached to voting securities in the body or scheme in which they have a relevant interest is at least 5% of the total number of votes attached to voting securities in the body or scheme.
61. In the United Kingdom, the substantial holding threshold is only 3%. However, collective investment schemes can acquire up to 10% of the issued shares in a company before being deemed to be a substantial holder. The 10% figure is used as the threshold for all securities in Hong Kong and Ontario.11
62. The argument in favour of having a higher threshold figure for collective investment schemes is similar to the argument for the substantial security holder regime not applying to collective investment schemes. That is, a different rule should apply to collective investment schemes because it is less likely for them to seek control of companies in which they invest. Therefore, although it is considered appropriate to require individuals and companies to disclose their relevant interests once they have a certain percentage of the voting securities of the public issuer (5% in New Zealand), collective investment schemes should not have to disclose their holdings until they have a higher percentage because only then does it become information that is important for the market to know.
63. Similarly, the argument against having a higher threshold for investment schemes is similar to the argument in favour of the substantial security holder regime applying to collective investment schemes. That is, different rules should not apply to collective investment schemes simply because they are unlikely to seek control of the companies in which they invest. They have the ability to change or influence control by selling their shares, just like any other security holder, and information about the identity of any substantial security holder is useful to the market.
Differential Voting Rights
64. Under section 2, a person is a "substantial security holder" if they have a "relevant interest in 5% or more of the voting securities of that public issuer or body". This definition refers only to the total voting securities and does not provide for situations where there is more than one class of voting securities on issue and different voting rights between those classes.
65. It has been suggested that the Amendment Act be amended so that a person will be a substantial security holder, and therefore be required to give notice, if they have a relevant interest in 5% or more of any class of voting securities of a public issuer or body, as opposed to 5% of the total voting securities of that public issuer or body.
66. The objective would be to ensure that the requirement to disclose is imposed on security holders with more than 5% of the voting securities. The following example illustrates the point:
- A company issues 50 A class shares that have twice the voting rights as the 50 B class shares that are issued.
- A person with a relevant interest in 4 A class shares will have more voting rights than a person with a relevant interest in 5 class B shares.
- At present, the holder of the 4 class A shares would not be required to disclose their relevant interest in the shares, although the holder of the 5 class B shares would be required to disclose their relevant interest.
67. A number of overseas jurisdictions have worded their laws so that they only apply to classes. For example, section 13(d)(1) of the United States Securities Exchange Act 1934 requires notice to be given by people owning more than 5% of a class of security. Similar wording is found in Australia's Corporations Act 2001, the United Kingdom's Companies Act 1985 and in Hong Kong's Securities (Disclosure of Interests) Ordinance.
68. This consistency with comparable overseas jurisdictions could be desirable given that overseas investors in New Zealand would be more familiar with the requirements.
69. Other advantages of this option are that the calculation required is simple (each person only has to know how many securities they hold in each class and the total number of securities of that class that have been issued) and that it involves only minor changes to the existing regime. In most cases it will not involve a change at all, given that most public issuers only issue one class of voting securities. The disadvantage of this suggestion is that it would impose additional compliance costs on the public issuers that would be affected. In other words, public issuers who issue more than one class of shares with different rights attached to them.
70. Instead of amending the definition of "substantial security holder" so as to refer to "5% or more of any class of voting securities...", an alternative approach is to require disclosure when a person has a relevant interest in 5% or more of the total voting rights, as opposed to an emphasis on the voting securities. The advantage of an approach focusing on total voting rights is that it would be compatible with the Takeovers Code. However, the disadvantage is that it is a complex approach. This is because voting rights may change over time, and in those cases, procedures will be required for keeping the information up to date Therefore, an approach focused on voting rights would increase compliance costs for the public issuers that would be affected (see also paragraph 37).
Giving of Notices
71. Under section 20(4)(e) of the Amendment Act, a person must give notice "as soon as the person knows, or ought to know, that the person is a substantial security holder". The Australian legislation is different. It states that a person must give notice "within two business days after they become aware of the information" to be disclosed, or by 9.30am on the next trading day of the relevant securities exchange after becoming aware of the information if a takeover bid is made for voting shares and the person becomes aware of the information during the bid period.
Constructive or Actual Knowledge?
72. The distinction between the New Zealand and Australian regimes is that in New Zealand the obligation to disclose arises even where a person only has constructive knowledge of the fact that they are a substantial security holder (i.e. - when they ought to have known of that fact), whereas the Corporations Act in Australia requires actual knowledge of the information to be known before any obligation arises.
73. Given that there are a large number of remedial orders that can be given against a person for breaching the disclosure provisions under section 32 of the Amendment Act, it may be argued that an obligation to disclose even where a person only has constructive knowledge of the fact that they are a substantial security holder is too onerous in some situations. This argument could receive further weight if there are more orders added to section 32 as a result of changes to the disclosure regime.
74. The counter argument to this is that the "ought to be known" test should be used because most substantial security holders are companies and it is too difficult prove that a company has knowledge of certain information. For this reason if constructive knowledge was not used very few breaches would be able to be proved and the entire regime undermined.
75. The question of how a company can "know" that it is a substantial security holder is determined by the rules of attribution laid out by the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission.12
76. It held that a court needs to first look at the constitution of the company and rules implied by company law (which were referred to as primary rules of attribution). In addition, the courts need to look at general rules of attribution (such as principles of agency and estoppel) which enable companies to do business.
77. The Judicial Committee made the point that this does not mean that whenever an employee of a company has authority to do an act on the company's behalf (such as entering into a transaction to buy shares), knowledge of that act will for all purposes be attributed to the company. It is a question of fact in each case as to whether the knowledge that an act has been done should be attributed to the company.
78. Clause 38 of the SMIB proposes adding a new section 19Q requiring directors and officers of public issuers to disclose relevant interests and dealings in relevant interests of a security of that public issuer or a related body corporate within five days of the acquisition of that relevant interest or the dealing in that relevant interest or the provision otherwise becoming applicable (i.e. - a person with a relevant interest becoming a director or officer). Clause 38 of the SMIB also proposes adding a new section 19Z stating that failure to comply with this obligation is an offence. The provision, which is consistent with the current test in the substantial security holder regime on this point, states that
Every person who is aware or ought reasonably to be aware of information that the person is required to disclose under section 19Q, and who fails to disclose that information in accordance with a directors' and officers' disclosure obligation, commits an offence.
79. Under the new continuous disclosure provisions proposed in the SMIB, the Act is silent as to when a public issuer has information. This means that common law precedent in Meridian will apply to determine this issue on a case by case basis.
80. This approach has consistency with not just the substantial security holder disclosure regime but also Part I of the Amendment Act (which deals with insider trading), in which there is currently no test to determine when an insider has information. There are two issues relevant here. The first is whether it is appropriate for the substantial security holder disclosure regime to be silent on this issue and rely on Meridian or whether legislation should state when a company is aware of information. The second issue is whether the constructive knowledge test in Meridian should stand.
81. It is desirable that the approach to the question of whether knowledge means actual or constructive knowledge is consistent across the substantial security holder regime, the new continuous disclosure provisions and the new provisions relating to directors' and officers' obligations.
Timing of the Disclosure
82. There are currently two different timing tests under existing and proposed legislation relating to securities disclosure. Under sections 20(4)(e), 21(4)(e) and 22(2)(e) of the Amendment Act, notice must be given as soon as the person knows or ought to know that they are a substantial security holder, that they have ceased to be a substantial security holder, or that there has been a change in holding respectively.
83. The continuous disclosure regime that is also introduced into the Amendment Act by the SMIB requires public issuers to comply with the provisions of the listing rules of the NZSE, under which disclosure must be immediate. That is, a public issuer which is aware of material information that is not generally available to the market must give that information to the exchange immediately after becoming aware of the information.
84. Under the SMIB, a director or officer of a public issuer who has a relevant interest in a security of that public issuer must disclose that fact within 5 trading days of the provision becoming applicable (see paragraph 78). The provision becomes applicable by the listing of the public issuer, or by the person's appointment as a director or officer, or by a director or officer acquiring or disposing of a relevant interest in a security of the public issuer or a related body corporate.
85. The question is whether the Amendment Act should continue requiring notice to be giving immediately or whether it should provide that notice must be given within a specified period of time. If a certain period of time is to be specified, the next question is what that time period should be.
86. The justification that can be given for the time frame being longer for the disclosure of directors' and officers' interests (within 5 trading days) than for material information under the continuous disclosure obligations is that the information that must be disclosed under the continuous disclosure provisions is seen as more likely to have a greater impact on the market. It may be that the time frame for disclosure of substantial security holdings should be somewhere between immediately and within 5 trading days.
87. There is an argument for following the substantial security holder disclosure period provisions in Australia, where the Corporations Act sets out a 2 day time frame in which notice must be given.
88. Both the United States and Canada have different provisions for institutional investors. For example, in Ontario, the standard disclosure period for holdings of 10% or more is 2 business days, but institutional investors have up to 10 days after the end of the month in which the substantial holding was acquired to disclose the holding.
89. In the United States, the standard disclosure period for holdings of 5% - 10% is 10 calendar days after the holding is acquired. Institutional investors have 45 days after the end of the calendar year in which the holding is acquired to report holdings of between 5 and 10%. Institutional investors must report holdings of more than 10% within 10 days of the end of the month in which the holding is acquired. The rationale for allowing institutional investors more time to disclose substantial holdings is to allow the marketplace and the staff of the SEC itself more able to focus on acquisitions that have the potential to change or influence control.13
Penalties and Remedies
90. There are a range of penalties and remedies that are utilised for breaches of securities law. There are essentially three types of penalties - criminal, civil and remedial. In criminal proceedings the standard of proof required to convict is "beyond reasonable doubt". In civil cases, the test is the "balance of probabilities".
91. With regard to securities law breaches, the degree to which general deterrence will be promoted will be affected by whether:
- The burden of proving an offence can be practically met;
- The detection systems are adequate;
- The systematic arrangements and resources of the enforcement agency are adequate;
- The penalties are sufficiently high to deter the undesirable behaviour; and
- an offender could pay the efficient fine where detection is difficult.
92. In May 2002, the Ministry released a discussion document entitled Penalties, Remedies and the Application of Securities Trading Law. It considered the possible introduction of criminal and civil penalties for insider trading, continuous disclosure and potential market manipulation law, and what level of criminal and civil pecuniary penalties may be appropriate.14
Criminal Penalties
93. Whether criminal penalties should be imposed for breaches of the substantial security holder provisions will be influenced by the direction that is taken on other issues discussed elsewhere in this paper, such as the constructive knowledge versus actual knowledge question. If the constructive knowledge test is retained, it could be argued that criminal penalties are too severe. Another argument against penalties is that a breach of the substantial security holder disclosure regime is likely to be viewed as less serious than a breach of insider trading provisions or the continuous disclosure obligations. However, the counter argument could be that as criminal penalties result in more "stigma" than an adverse judgment in civil proceedings and provide a greater deterrent, so in order to ensure the regime is effective they should be imposed.
Civil Penalties
94. Another option would be to consider civil penalties. It may be argued that appropriate and effective civil penalties that promote deterrence and that are effectively enforced need to be in place. It should be noted that there are now criminal and civil penalties in Australia for breach of their substantial security holding provisions.
95. The argument for a civil penalties regime is that it provides a "middle ground" between private civil action and criminal prosecution. It provides for State enforcement in the civil courts with the standard of proof on the balance of probabilities.
96. The SMIB will introduce new provisions into the Amendment Act allowing for the imposition of civil penalties for breach of the new continuous disclosure obligations. It may be considered desirable for there to be scope for the High Court to impose financial penalties so as to have a degree of consistency with other areas of securities law.
97. If there is to be a civil penalties regime, the question arises as to what the maximum penalty should be. It may be desirable to have consistency with the maximum penalty in the SMIB. The relevant provision states that if the Court is satisfied that a public issuer has contravened a continuous disclosure obligation or a term or condition of a continuous disclosure exemption, it may order the public issuer to pay a fine not exceeding $300,000.15
Administrative Financial Penalties
98. In the United Kingdom, the Financial Services and Markets Act 2000 empowers the Financial Services Authority ("FSA") to impose a financial penalty in the following circumstances:
- on a firm, where the FSA considers that the firm has contravened a requirement imposed on it under that Act;
- on an approved person, where the FSA considers that s/he is guilty of misconduct, which is defined as failure to comply with a Statement of Principle issued by the FSA;
- on any person, where the FSA is satisfied that the person is or has engaged in "market abuse" or, by taking or refraining from taking any action, has required or encouraged another person to engage in "market abuse"; and
- on an issuer of listed securities or an applicant for listing, where there has been a contravention of the listing rules (or on a director of an issuer or applicant who at the material time was knowingly concerned in the contravention).
99. The advantage of the regulator having the ability to impose financial penalties is that they are a specialist body and matters would go through the system quicker than in the courts. However, some people may take the view that only judicial bodies should be able to impose monetary penalties and that it is inappropriate for a body such as the Securities Commission to have this power. There is also a potential conflict of interest issue, in the sense that the Securities Commission would then have law reform, monitoring, enforcement and judicial roles.
100. If the Securities Commission were to be entitled to impose financial penalties, the question arises as to what the maximum penalty should be. In the United Kingdom, the FSA has the power to impose a penalty "of such amount as it considers appropriate" in the situations referred to above in paragraph 98.
101. However, sections 69 and 210 of the Financial Services and Markets Act require the FSA to issue statements of policy about the imposition of financial penalties, and it is required to have regard to those statements of policy in exercising its power to impose financial penalties.
102. The statement of policy lists a number of factors that may be relevant in determining the amount of the financial penalty, including:
- the seriousness of the misconduct or contravention;
- the extent to which the contravention or misconduct was deliberate or reckless;
- whether the person on whom the penalty is to be imposed is an individual, and the size, financial resources and other circumstances of the firm or individual;
- the amount of profits accrued or loss avoided;
- conduct following the contravention;
- disciplinary record and compliance history;
- previous action taken by the FSA ; and
- action taken by other regulatory authorities.
103. Even it is accepted that the Securities Commission should be able to impose financial penalties, they will only be administrative penalties for minor breaches, and therefore it may not be appropriate for them to be able to impose substantial pecuniary penalties.
104. There is also a question as to whether the Securities Commission should be able to make orders requiring disclosure similar to their powers in relation to continuous disclosure and directors disclosure under the SMIB. Section 38 of the SMIB proposes new provisions, including allowing the Securities Commission to make an order requiring a public issuer to disclose information if the Commission is satisfied that a public issuer has contravened a continuous disclosure obligation or a term or condition of a continuous disclosure exemption.16 It also allows the Securities Commission to order a person to disclose information if it is satisfied that the person has contravened a directors' and officers' disclosure obligation or a term or condition of an exemption from a directors' and officers' disclosure obligation.
Remedial Orders
105. The New Zealand and Australian courts have broadly similar powers to make orders where there has been a contravention of the substantial security holder disclosure regime. However, there are two main differences. First, the Australian courts have specific power to make additional orders, namely, making an order that securities be vested in ASIC, and making an order requiring a body corporate to repeal or modify its constitution.
106. The second difference between the two countries is the standard of proof required for a court to make an order. It seems that the ordinary civil burden of proof applies to proceedings under the Australian Corporations Act, but an order can be made in New Zealand if there are "reasonable grounds to suspect" non-compliance.17
107. In regard to the question of what is meant by "reasonable grounds to suspect", the Court of Appeal stated in Meridian Global Funds Management Asia Ltd v Securities Commission18 that:
Except in the event, unlikely in a disputed case, that there is direct proof, [a relevant] interest can be established only by the process of inference. It is to that process to which the words "reasonable grounds to suspect" relate. Inferences may be drawn only from facts, and the statute does not depart from that fundamental. But once the facts are established, the statute requires the less stringent process of deduction on the basis of reasonable suspicion, which would not be enough in an ordinary civil case, to say nothing of a criminal case.
108. In the new provisions introduced by the SMIB dealing with continuous disclosure by public issuers and disclosure of relevant interests by the directors and officers of public issuers, the Securities Commission and the High Court may take certain actions "if it is satisfied" that some action has occurred. For example:
- the Securities Commission19 and the High Court20 may make an order requiring compliance if it is satisfied that a public issuer has contravened the continuous disclosure obligations or a term or condition of an exemption from the continuous disclosure obligation;
- the High Court's can also impose pecuniary penalties if it is satisfied that a public issuer has contravened the continuous disclosure obligations or a term or condition of an exemption from the continuous disclosure obligation;
- the Securities Commission can make an order requiring disclosure if it is satisfied that a person has contravened a directors' and officers' obligation or a term or condition of an exemption from a directors' or officers' disclosure obligation.
109. It may be considered desirable that the wording used in the substantial security holder disclosure obligations be consistent with the wording used in the new provisions introduced by the SMIB. A threshold higher than the "if it is satisfied" standard may be too high for these situations as they are intended to rectify the breach efficiently and this may be undermined by a higher threshold. On the other hand, some people may consider this standard too low, and argue that nothing less than the balance of probabilities test should apply. The response to this may be that even if the standard is "if it is satisfied", people involved will still be entitled to present their case and will be entitled to the protection of the New Zealand Bill of Rights Act 1990 provisions. Furthermore, any Securities Commission hearings will be subject to judicial review.
Form and Method of Disclosure
110. The Securities (Substantial Security Holders) Regulations 1997 set out the form of the substantial security holder notices and state the information that must be disclosed. Regulation 4 states that form 1 of the schedule must be used for specified notices (form 1 is included in Appendix B).
111. In regard to the form and method of disclosure, the question is whether any changes could be made to the Securities (Substantial Security Holders) Regulations 1997 to make disclosure easier and reduce compliance costs.
112. Another question is whether the possibility of mutual recognition of substantial security holder notices in New Zealand and Australia should be adopted. The information that must be disclosed in each country is similar, and it may reduce compliance costs if a company can produce just one notice to satisfy the requirements of both countries.
Other Aspects of the Substantial Security Holder Disclosure Regime
113. The intention of the Ministry of Economic Development has been for this discussion document to cover all the main areas of the substantial security holder disclosure regime. However, we would like to invite you to discuss other provisions that have not been covered where you think that improvements could be made.
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