Earlier this week the Government introduced into Parliament an omnibus Business Law Reform Bill (the Bill), to implement a number of recent decisions about various business laws.
Two proposals that are likely to be of particular interest to NZX listed issuers are to be made in the financial reporting area.
Annual Reports: opt in rather than opt out
Current law requires all shareholders to be sent an annual report. Shareholders can elect not to receive an annual report, but if they do so they must still receive audited financial statements, and some other limited information.
The Bill proposes to give companies an option to either send shareholders an annual report (as at present) or a notice advising them that a printed annual report is available on request, free of charge, and advising them how to obtain an annual report by electronic means (such as from a website, or by e-mail).
Companies will also have the option to prepare a concise annual report, which contains more limited less technical information than the content required in a full annual report.
These changes are likely to be welcomed by listed issuers, as they have the potential to considerably reduce printing, mailing and distribution costs. However they may prove to be controversial. Some shareholders expressed concerns about not automatically receiving an annual report, when similar proposals were recently mooted in Australia.
The Bill provides a strict liability offence if the board fails to comply with the proposed annual report availability rules, but not defences. Given that electronic technology can be prone to outages, we think directors should have a defence if they can show they took reasonable steps to make the report available electronically.
Infringement Notices: financial reporting speeding tickets
The Government has responded to criticisms that the Financial Reporting Act has not been enforced effectively, by introducing an infringement notice system, enabling the Registrar of Companies to issue a fine of $7,000 for failure to comply with the Financial Reporting Act. The $7,000 fine reflects recent District Court sentences for late or non filing of audited financial statements by overseas persons.
While the current law imposes a fine of up to $100 for late filing of audited financial statements, infringement notices are a controversial remedy for breach of business law statutes. The regime could be described as a 'speeding ticket' for breach of the Act. Although the Bill provides for those levied with the fines to object to the District Court, this obviously shifts the cost and onus of proving compliance onto the commercial community, rather than enforcement agencies having to establish a breach of the law.
Strangely the Bill does not give the Registrar a discretion to levy a lower fee, for less serious infringements. For example, in the case of late filings, there is no difference between being one month late or six months late - only the one amount of $7,000 can be levied as a fine.
Introduction of the regime is surprising, given that the Government recently rejected an infringement notice regime as a remedy for breach of securities law obligations, such as continuous disclosure rules.
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