COMPANY BONDS

Dominion, Volume 28, Issue 119, 13 February 1935, Page 11

COMPANY BONDS

Reasons For Proposed Legislation

MINISTER’S REVIEW

Bill Aims at Protecting Bondholders

Remarkable interest, both in New Zealand and Australia, has been shown in the Dominion Government’s proposed legislation for the protection of bondholders in about 50 companies formed for the purpose generally of planting forests and tung oil plants. Since the Minister of Finance, Rt. Hon. J. G. Coates, announced some time ago that a pamphlet explaining the provisions of the Bill would be circulated, no fewer than 1500 cash applications have been made for copies of the memorandum. The original measure, the Companies (Bondholders Incorporation) Bill, mis introduced into the House of Representatives on November 9, but was not debated before the House adjourned. In the interval the measure has been revised to a considerable extent, and practically a new Bill will be reintroduced, either to-day, in the House of Representatives, or tomorrow, and proceeded with without further delay. The provisions of this Bill are explained in the Minister's comprehensive memorandum, which was circulated yesterday. The memorandum explains that the ' Bill arose out of the report of the Companies Promotion Commission, and deals with bond-issuing comnanies’ dif- ' Acuities which cannot be overcome adequately by the machinery of the Companies Act. “There are probably about forty to fifty bond-issuing companies incorporated and operating more or less actively in New Zealand at the present time,” i says tiie Minister. "It would seem j that many of these companies, particu- ; larly when formulating their realisation schemes, did not realise that such I large numbers of the public would favour this type of investment, or. con- 1 sequently, the extent to which the planting operations would grow. t “The appointment of a trustee was i no doubt a reasonable element in a 1 scheme for protecting the bondholders < during the period*—necessarily a long i period—while the trees were growing. I When, however, the directors of the i company seek to take practical steps < toward milling operations and other < activities for realising the company’s I assets, they find that there are serious > difficulties in the way, primarily due t to the facts that the trustees have - 1 limited powers of realisation and that ' the bondholders whose interests they c represent are a widely dispersed and unincorporated body. c Incorporating Bondholders. I i “In the case of some of the com- £ panies a combination of the different j bond issues is desirable, as it would be uneconomical to plan and create several similar operating plants' where one would do the necessary work and the existing trust deeds do not provide i satisfactory machinery for any such 1 combination. There would seem to be b no need to traverse the whole of these u difficulties or even to enumerate them, i ? They are indicated in the preamble to 1 the Act in the following words| l' ‘Whereas on account of the fact that 'J the bondholders are not incorporated, J and of the fact that the powers of the c trustees acting on their behalf are | limited, difficulties have arisen or may 1 arise in connection with the realisa- J tion of such laud or produce; and t ■whereas it is expedient that provision t should be made for the removal of such 1 difficulties.’ ‘ “It was on such considerations that < the commissioners came to the eon- £ elusion that there was no practical method of enabling any of the companies to approach, commence, and carry out their major realisation 1 schemes, except by incorporating the bondholders and converting their bonds ( into shares. The commissioners were ( helped to this conclusion by the fact . that the directors and legal advisers of 1 several of the companies and of bond- { holders appeared before them and an- ! nounced that they had come to the same 1 conclusion, and asked the assistance of t the commission to procure legislation ] to enable them to overcome the legal i difficulties created by the peculiar cir- t cumstances surrounding their trusts < and their bodies of beneficiaries. Other i companies had endeavoured, as a ; measure of self-help, to procure the in- 1 corporation of their bondholders only < to find it impossible to procure unani- < mity, and they were not prepared to j run the risk of commencing operations ( while there was even a small body of j dissentients or non-co-operating bond- . holders. They therefore joined with i the first-mentioned companies in appealing to the commission to recommend and endeavour to procure the passing * of legislation to clear away the difli- ! culties. j Independent Scrutiny. “The Companies (Bondholders In- i corporation) Bill is the outcome of 1 these considerations and negotiations. ; Its object is to provide a machinery for facilitating the incorporation of bondholders in companies incorporated in New Zealand. It is necessary, if this is to be done on an equitable basis,- that there should be some independent scrutiny of the baSis of incorporation, of the basis of substitution of shares for bonds, and of the terms and conditions on which the newly-incorporated body of bondholders is to carry out the projected realisation scheme. Bondholders’ Commission. “The Bill seeks to provide these features and elements by the setting-up of a commission to be called the Bondholders’ Incorporation Commission. The Bill provides, firstly, that every bondissuing company shall within three months after the passing of the Act deliver a statistical statement to the Registrar of Companies, giving information on certain points on which the Bondholders’ Incorporation Commission will require information. This requirement should procure for the commission as a starting point a comprehensive list of bond-issuing companies. “The next step is that the commission may order that a scheme be submitted providing for the incorporation of the bondholders of any given company, on the basis that each bondholder will receive a share or shares for his bond or bonds, and that existing rights among bondholders will be preserved relatively among them in their new character of shareholders as nearly as possible. This scheme, when submitted, together with any modification or further proposals suggested by interested parties, will be carefully considered by the commission, which will settle the terms on which the bondholders are to be incorporated. The commission will not necessarily be bound by the scheme of proposals sub-

mitted to it, but it must proceed on the basis that the incorporation is designed thereby to convert the bonds into shares without altering the rights of the parties more than is absolutely necessary to enable the conversion to be effected. Steps prescribed by the Bill will then be taken resulting in the due incorporation of the company, ft should be noted that this company will be a new company, quite distinct from the bond-issuing company. Its capital will be the bond capital subscribed by the bondholders, but converted into shares and stated as share capital. Its directors will be representatives of the bondholders, and its memorandum and articles of association will contain such provisions as are necessary to. procure the effective realisation of the project, and assets in which the bondholders (now shareholders) are interested. A Realisation Scheme. “After the statutory meeting of shareholders has been held, the directors of the new company may formulate their realisation scheme and applv to the commission for assistance to resolve any difficulties that may arise in connection with their proposals. Such difficulties-might arise where groups of bondholders may decide to combine or where the rights of different sets or issues of bonds have to pc adjusted, or where the rights of dissentients may call for settlement or where any existing contract may require modification. The commission Hl such cases will hear the applicants and the bondholders (now shareholders) or any representative of such bondholders, or any other person interested, and will examine all documents with a view to seeing that the proposed scheme of realisation is a fair and equitable adaptation to. the new circiimstaces of the scheme originally put to the bondholders (now shareholders)- The commission may, if it thinks necessary, order, meetingsof the shareholders (the original bondholders) to be held or postal ballots to be conducted for the purpose oi ascertaining the wishes or procuring the acquiescence of the bondholdershareholders. Position 'of Dissentients. “When the commission is satisfied that the scheme has been sufficiently discussed and that it is an equitable scheme, it will approve it and make an order making the scheme operative. The scheme will then be binding on the company and on all shareholders. If, nowever, a dissentient body of bondholders should object to taking shares in the new company, such persons may demand to be left as bondholders under their rights as originally created by the bonds. There is power for the commission to cut them out of the shareholding scheme and to apportion an appropriate part of the company’s land or products to such body of bondholders for the preservation of their rights under the original bonds. - This? means that while no man will be dragooned into, becoming a shareholder against his will, it will be impossible for a small minority to wi'eek a scheme that the great majority of bondholders has approved of. “The cost of the commission and of the above procedure is to be borne by the companies that receive the benefits of its provisions, and the commission has power to make a levy and to make charges on all the companies accordingly. No State Responsibility. “It is important to note, and the Bill enacts a declaration to the effect that the State, by introducing this legislation for the protection and benefit of bondholders, undertakes no responsibility for any of the projects in connection with which the bonds have been issued, nor does it give any warranty or assurance. It passes no judgment on the commercial prospects of land utilisation projects. These iemain purely a matter between the bondholders and the company they originally contracted with, and the Government has never taken and now takes no responsibility in the matter It merely enacts a special statute to clear away legal difficulties that have developed anil to which reference has already been made. Australian Bondholders.

“It may be desirable to add a few words as to the position of bondholders who are domiciled iu Australia and other countries beyond the Dominion of New Zealand... It is a fact that in the ease of some companies a fairly large proportion of their bondholders' are domiciled overseas. The present position of these bondholders is that they share with the New Zealand bondholders all the defects of the instruments known as bonds and all the difficulties arising out of the fact that their ■ assets are.in the hand of trustees who are uu- ’ able effectively to carry on a business. In addition, however, they suffer the disadvantage that on any attempt to enforce or protect their rights they must act from a point outside the jurisdiction of New Zealand Courts. Their rights are fixed by New Zealand law and they are foreign creditors of New Zealand companies. “The Companies (Bondholders Incorporation) Bill benefits these overseas bondholders in two ways. Firstly, by converting them into shareholders it secures to them the privileges and rights of shareholders in a company, and these rights (the rights of members) are much more easily capable of ascertainment and exercise than are the rights of bondholders (the rights of creditors). Secondly, the Bondholders Incorporation Commission may be relied upon to guard carefully the Interests of overseas bondholders and to take all necessary steps to see that they are kept advised of all terms and details of realisation schemes and that their views and wishes are ascertained. In some cases it will probably be necessary to encourage a measure of concerted action by groups of overseas bondholders, and tiie Commission may be relied on to recognise such needs and to facilitate the process. “The Bill in question relates oniy to companies incorporated in New Zealand, for the reason that it is only those companies that are amenable to our laws to the extent required by the Bill. Answers to Questions. “Certain questions relating to the Bill have been submitted since the publication of its main provisions. We append them, with official answers :— “Question No. 1: Why is provision made in this Bill for the setting-up of a commission to deal with matters that presumably could be dealt with by the Supreme Court? “Answer: The problems to be dealt with by the tribunal are of a very special nature. They affect only a limited class of the community, and they affect the rights of that class peculiarly. This consideration suggests the wisdom of a special tribunal. Further, the affairs of one large company, which is waiting the enactment of the Bill, will probably occupy the attention of the tribunal exclusively for some months. That fact alone is a sufficient answer to this question. Again, the Bill originated in discussions with the legal advisers of the companies and bondholders, and they have unanimously asked for this tribunal.

“Question No. 2: Why is it proposed that the commission shall sit in camera? “Answer; Because the applicant com-

panies and the bondholders will require to discuss matters involving the disclosure and consideration of their most intimate accounts and projects. They are of no interest to the public, and it might be embarrassing to have them made available to competing companies. Furthermore, it is believed that a sitting in camera will best promote the spnit “t friendly negotiation and compromise which will be necessary at many points. “Question No. 3: M liy relax the ruies of evidence and enable the commission to act on unsworn testimony and admit documents and matters that would not be legally admissible in a court of law'? “Answer: Because it is a special tribunal, created to deal with emergency legislation designed -to meet problems affecting the peculiar rights and interests of certain classes of the community, buch a provmion is common in such cases. See, for instances, section 68 of the Destitute Persons Act, section 100 of the 1 Magistrates’ Court Act, section 82 of the Industrial Conciliation and Arbitration Act. and section 23 of the Hawkes Baj Earthquake Act. No Review or Appeal. “Question No, 4: Why is it provided that there shall be nc review of or appeal against the orders of the commission? “Answer: Once again the answer is that such a provision is usual in the case of a special tribunal created to deal with special problems. There is no appeal against a magistrate s decision under section 100 of the Magistrate’s Court Act. against an award or the Arbitration Court, against an order of the Hawke’s Bay Adjustment Court, or against order of a magistrate or judge under the Mortgagors Relief -Acts. It. may be .pointed out, however, that under the Act we are now considering any part.,' may require the commission to submit a disputed question of law to the Supreme Court for decision. , “In many of the questions that wi.l come before this commission all that is wanted will be an independent decision of trustworthy men, given promptly and being certain and conclusive. Many of them will be like the question of the rme of the road: it will not matter whether a right-hand rule or a left-hand rule is cLecid-ed on. ■so lonjj <is it is minounced prompt!v -and finally and made binding on all parties. To allow a right of appeal to the ordinary civil courts in such cases, might.- at the instance of a litigous minority throw the door open to needless litigation which would often tend to waste the property which is at stake. “Question No. 5: Should not provision be made for Australian representation on the commission? ‘‘Answer: This does not seem practicable. Every argument for Australian representation can be urged with greater force for, say, Indian representation. It is believed that the Government can and will appoint men who will command the confidence of all investors, and who will give full consideration to all interests. “Question No. 6: Is there not a danger that the bond-issuing companies will gain control of the bondholders’ companies? “Answer: If the persons interested in the bond-issuing companies are alert and active while tiie bondholders are apathetic and passive, this danger will obviouslv be present. The remedy is equally obvious. The commission can be trusted to see that all matters are fully and fairly put before the bondholders, with opportunity to consider and vote on them. • "Question No. 7: Should not provision be made- for Australian representation on the directorates of the bondholders’ companies? “Answer: This is a matter, not for this Bill, but for the memorandum and articles of association of the respective companies as drafted by the parties and submitted to the commission for au--I'proval. If it seetns desirable and practicable in any given case,, it will be a proper matter for negotiation.-by the interested parties and the commission.”