Meaning of "contravene" – accessory
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.
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.
1 New Zealand Bus Ltd v Commerce Commission  3 NZLR 433, Arnold J.
- Financial Market Conduct Bill - Part 1 – Preliminary Provisions
- Financial Markets Conduct Bill - Part 2 - Misleading or deceptive conduct or false or misleading representations
- Financial Markets Conduct Bill - Part 3 – Disclosure of offers of financial products
- Financial Markets Conduct Bill - Part 4 – Governance of financial products
- Financial Markets Conduct Bill - Part 5 – Dealing in financial products on markets
- Financial Markets Conduct Bill - Part 6 – Licensing and other regulation of market services
- Financial Markets Conduct Bill - Part 9 – Repeals, amendments, and transitional provisions
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.