New Zealand: Financial Markets Conduct Bill - Part 7 – Enforcement, liability and appeals

Last Updated: 29 April 2012
Article by Roger Wallis

Meaning of "contravene" – accessory liability
106 It is generally accepted that directors should have responsibility for security offerings, subject to appropriate defences. The question of who, if anyone, beyond that should share responsibility seems to have been a vexing one, as the Exposure Draft of the Bill proposed significant changes from the previous law and the latest draft of the Bill has taken another major U-turn on the topic, through the expanded definition "contravene" in clause 447.

107 While use of this concept resolves some of the difficulties associated with the current law, we submit that it also creates a new set of problems. We discuss some of these issues below, but our primary submission is that these liability settings (in particular the ultimately inter-related issues of accessory liability, due diligence, fraud on the market, and the appropriate fault elements) are going to be the defining issue around the extent to which the Bill meets its objectives. On that basis, we strongly recommend that interested parties share their thoughts on both the policy and practical issues in this area so this 'once in a generation' opportunity to get it right is not missed.

108 For all the flaws with the existing law and its concepts of "promoters", it does have the virtue of clarity to the extent that:

108.1 officers and employees are not promoters, unless they have a defining role in formulating the offer, and

108.2 professional advisers are excluded under a specific exception.

109 The position with respect to investment banks and brokers participating in an offer is less clear, but generally if they are providing a service in a professional capacity, or only undertaking a discrete role such as distribution, they would not incur liability as a promoter.

110 The question of potential underwriter liability has its own complexities, because it is a feature of some overseas jurisdictions – but, against that, those jurisdictions tend to have much more evolved and institutionalised protections against that liability (for example, in the United States, the practice of receiving formal 10b-5 opinions and auditors' comfort letters, which – while helpful - come at very great expense).

111 However, we submit that the position of both employees and of professional advisers is much more cut-and-dried, from a perspective both of principle and policy. In terms of the former, both groups have limited and specific responsibilities, so we do not see that they should bear responsibility for an issuer's disclosures, which they do not ultimately control. For employees, any suggestion of such liabilities will make it very difficult to obtain their full engagement in preparing and verifying offering documents. For lawyers, any such responsibilities sit uncomfortably with both their role and their professional ethical responsibilities.

112 To a degree some of this new approach seems to reflect aspects of Australian law, such as the definition of "involved in a contravention" in section 79 of the Corporations Act 2001. However, it does so only on a selective basis, for example omitting important provisions of the Corporations Act such as section 729, which delineates who may be liable for what, and section 733, which permits reasonable reliance by participants.

113 We submit that there is a further difficulty in applying secondary forms of liability from traditional areas of the criminal law (such as under clause 66 of Crimes Act 1961), where the acts that are manifestly criminal, to the setting of a securities offering.

114 In a securities law context, the question of whether the act of producing offering documents is a "contravention" by virtue of containing a misstatement or material omission will often be far from clear (particularly from the perspective of a participant who only has a specific or limited role) and only established long after the fact. Decisions made will often be questions of judgement about materiality, relevance and so on. The push to have offer documents, particularly the PDS, be much briefer and include only 'key information' has only increased the need for such judgements to be made.

115 Further, the application of accessory liability in a commercial context is unsettled. We note, however, that in a recent case under the Commerce Act, the Court of Appeal said accessory liability could be established where there is "knowledge of a real risk of contravention ".1 This involves very considerable scope for scrutiny after the fact, and with the benefit of hindsight, that could deter participants from involvement in retail offerings, given the very severe sanctions that apply.

Civil remedies – implications of adopting `fraud on the market'
116 It has long been a curiosity of New Zealand securities laws that, in what is fundamentally a contractual context, there have been almost no civil actions brought under the Securities Act, and recourse has been had almost exclusively to the criminal sanctions. It is likely that this is due in large part to the hurdles created by what is now section 55G of the Securities Act, which require civil litigants to prove reliance and causation on an individualised basis.

117 We agree with the apparent policy that the position should be the exact opposite, with civil proceedings the norm and criminal proceedings reserved for egregious misconduct. As a result, we consider that there is merit in the changes made in clause 480 of the Bill, which effectively bring into play a "fraud on the market" concept. In doing so, we acknowledge that such presumptions and onus reversals are contrary to normal principles and also raise some difficult evidential questions, for example because of the many factors that can impact on the value of securities. This question is also tied up with the broader questions of facilitating class actions, which are the subject of a separate review. Ideally, these matters should be considered and debated together so that a position suitable to New Zealand market conditions and policy objectives can be reached.

Due diligence defence
118 In relation to due diligence, we submit it would be beneficial to align the position more closely with that in Australia. In particular, we submit that:

118.1 the Bill should revert to the more specific "reasonable inquiries" test included in the Exposure Draft with respect to disclosure contraventions, and

118.2 the framework should also include reasonable reliance provisions along the lines of section 733 of the Corporations Act.

119 We also note that the defences in clauses 472, 479 and 486 of the Bill are each expressed in an individualised way, giving the impression that due diligence is something conducted by each director and other participant individually. While it is true that each participant in due diligence will be expected to bring their own knowledge, judgement and 'diligence' to bear and to make full inquiries within the area of their responsibility, the reality is that due diligence is (and, to be effective, has to be) a collective undertaking. It would therefore be helpful if this were clarified, particularly since there is very little authority or other guidance in New Zealand on what a due diligence involves.

Criminal liability
120 As noted above, we submit that the policy of removing obstacles to civil proceedings and reserving criminal sanctions for egregious misconduct is correct and should assist in encouraging the development of New Zealand's capital markets.

121 In formulating the fault elements for the offences under clause 488 and 489, the drafters have opted to include recklessness as a fault element in addition to knowledge. While this might seem to be uncontroversial because it is a fault element that is commonly adopted for crimes, we urge a reconsideration for the following reasons:

121.1 the key distinction in a disclosure context between knowledge and recklessness is that in the former you know that there is a misstatement whereas in the latter you merely need to be aware that there is a risk of misstatement. To some degree, such risks are part and parcel of every offer. In practice, it is very difficult to draw the line between honest misjudgement and dishonest risktaking. Because recklessness involves objective elements, it blurs the line between conscious wrongdoing and negligence, misjudgement and other examples of simply getting it wrong?. In the context of the very serious sanctions of up to 10 years imprisonment, we consider it is important to ensure that these offences are truly preserved for situations of actual dishonesty, and

121.2 in policy terms, it is unnecessary to seek to draw this line through a recklessness fault element when "knowledge" in criminal law already includes wilful blindness (dishonest failure to make inquiries) and when the civil liability provisions include a wide range of remedies (including pecuniary penalties, compensation orders and management bans) that can be applied to situations not involving clear dishonesty. In our submission, these are sufficient to provide the required incentives and deterrence and it would be far better to draw the line based on the adequacy of the due diligence procedures.

Indemnities and insurance
122 It is unclear to us why associates should be excluded from providing indemnities, as has occurred under clause 503. Being a person separate than the issuer, they offer a further potential source of recovery for civil litigants. For similar reasons, it is unclear why insurance continues to be as heavily restricted as it is.

Infringement offences – punishing individuals for issuer defaults
123 There are a number of infringement offences in the Bill where the relevant duty is expressed as being upon the issuer but where, on the face of it, the infringement penalty itself (of up to $50,000) can be levied on any "person" involved in the contravention, potentially including (for example) one or a number of employees or advisers. It is not clear whether this is the result of a deliberate policy choice or is a slip of the pen. In any event, we submit that it is not justified as a matter of policy and would create very great difficulties in practice. If the relevant matter is the responsibility of the issuer, then it is against the issuer that any infringement fines should be levied.

Footnote

1 New Zealand Bus Ltd v Commerce Commission [2008] 3 NZLR 433, Arnold J.

Related Topics

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Roger Wallis
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions