STRICT CONTROL

Evening Post, Volume CXVIII, Issue 100, 25 October 1934, Page 20

STRICT CONTROL

INVESTMENT BUREAU

WIDE POWERS DEFINED

COMPANY AFFAIKS

Wo must not make a scarecrow of the Law, Setting It up to fright the birds of prey, And let It keep one shape till custom mafco it Their perch and not their terror. —Measure for Measure.

With this quotation from Shakespeare, tho Commission introduced^ the most important of its recommendations, tho establishment of a Corporate Investments Bureau, with extremely wide powers for the control of companies. It is proposed that the Bureau should have vested in it rights of search and inquiry as full as those of tho inspectors recently appointed under the Companies (Special Investigation) Act, 1934. The Commissioners stated that the various sections of the report had demonstrated the existence of serious evils connected with company promotion and with the conduct of companies after they had become established. "It should be unnecessary for us to labour the obvious fact that these evils have been possible(tdespito the existence of a considerable body of law • designed to prevent abuse and protect the investor,",the report stated. "Yet it is this very imperfection of the law, as an instrument of control and correction, which has forced us irresistibly to the conclusion that the time is overdue for the adoption of a new principle designed to strengthen and supplement tho operation of tho law as it applies to companies. This principle consists in the vesting of a defined and limited discretionary power .in tho hands of a body which we describe as a Corporate Investments Bureau. "The case for the establishment of such a Bureau may be stated thus: —

"(1) The statement and proper application of the law demands the formulation of precise definitions which shall include all persons, corporate bodies, conditions, or actions possessing ' the characteristics relevant to the purpose of the law, but which shall exclude all others. Unfortunately, the characteristics capable of such definition are not always those which really matter, while on the other hand the characteristics which matter in some instances are irrelevant, in others. The intention-of tho law may be frustrated both because it is frequently impossible to include all relevant examples or types without at the same time including examples or types in which the law is not interested; ,and because astute lawyers may evade tho law by superficial changes which.leave the real character of a transaction unaffected. FINDING A DEFINITION. "We may illustrate this problem by reference to difficulties with which we have been faced in our report. ■In our view it. is necessary that special legislation should apply to investment trusts; but while careful inquiry should demonstrate clearly enough when a company or other concern is operating as an investment trust, we are unable to frame a satisfactory legal definition covering all companies which so operate but excluding all others. Similarly it is necessary to legislate in regard to subt,idiary or affiliated companies,- but neither the definition in tho Companies Act, 1933 (section 133), nor .any. other definition which may bo devised is likely to be deemed satisfactory, because such a definition must bo in terms of readily discernible, concrcfo characteristics such as shareholdings iv each other, common shareholdings, or directorates. The real determinants are common control and common purpose, but these may be made in a variety of ways which arc incapable of effective definition in concrete terms; convorsely, shareholdings in each other and common shareholdings or directorates, though superficially indicative of common control or common purpose, may, in fact, bo quite misleading as evidence of subsidiary or affiliate relationships. "We consider that in these and similar cases power should be given to a Bureau such as wo recommend to determine whether or not a particular company comes within a particular definition or legal provision, such a decision being subject to appeal to the Couits. "(2) The law is not suflicicntly flexible as an instrument; of control or correction. . Usually substantial changes in statute law occur at wide and infrequent intervals. Hence evils may be rampant for years before, a remedy

is applied. A Companies Act was passed in 1908. Some twenty-six years later a new Act was passed. The setting-up of the present Commission is nrima facie evidence that even this was not considered entirely adequate. Further, many of the abuses revealed in this report have been in' existence for at least ten or twelve years, and were legally possible under' tlie Act of 1908. Many of them are. legally possible- under tho Act. of 1933.. (This point was emphasised, in effect, by the Minister of Finance in. introducing the Companies Act of 1933, and by tho setting-up of the present Commission.) Such a state of affairs is no reflection either on tho Legislature or on its advisers. It merely serves to demonstrate that the law can only provide against abuses which have already appeared, and only to a limited extent in anticipation of evils which may yet appear; that a law appropriate to one set of circumstances is no longer appropriate when those circumstances change; and that it i 3 not beyond tho wit of men to devise safe means of circumventing the' law, or even of making it 'their perch and not their terror.'

"We are impressed with the gravity of tho dangers' which may arise during the present period of extraordinarily rapid economic and social chango if the rigidity of the law unduly hampers social change or leaves too many loopholes for anti-social practices.

"In so far as the law relating to companies is concerned, wo believe that a Corporate Investments Bureau could perform a valuable service by exercising a continuous watch for new tendencies and scrutiny over the operation of txisting laws. It would then be in a position to recommend legislation to prevent abuses or remove restrictions as the need became apparent.

A .SALUTARY EFFECT. "(3) Even though the law may be adequate and wisely conceived, it may be ineffective because it is not called into operation. This may arise, first, because it is nobody's business to put the law into operation. This applies, for example, in the case of prospectuses. The formal fulfilment of tho requirements of the law insisted upon by the Begistrar of Companies provides some, but insufficient, safeguard against misrepresentation and other abuses, .and we think that the prior oversight of prospectuses by a Bureau would have ,a salutary effect and act as a powerful "deterrent.

"This ineffectiveness may arise also because shareholders may be unaware of abuses in the companies in which they are interested, or because it is unduly difficult for a sufficient number of them to tako action as a body. Further, there may be a strong personal disinclination on the part of a director, who has gradually become aware of undesirable tendencies and practices, to lay an information against co-directors. The powers of inspection which we recommend be given to the Bureau would act as a deterrent to such abuses and make them easier to discover and check.

"The case for some modification of the traditional attitude is strengthened not only because we- have already entered upon an era in which change is extremely rapM, but also because many of tho companies now established, or likely to be established in the future, exhibit features which are new to New Zealand. The scale of operations, measured in valuo of capital, is substantially larger than was contemplated in the past, the methods of raising capital are different, and subscribers for capital are scattered over wide areas extending to several other countries. As is shown elsewhere, the good name and national credit of Nov." Zealand overseas are closely involved In these developments.' 1 CONSTITUTION OF BUREAU. After referring to the fact that several precedents exist for the setting up of a bureau, the Commission proceeds to detail the constitution, powers, duties, and finance of the proposed institution. The main recommendations are:—

1. That a bureau be established to be known as the Corporate Investments Bureau;

2. That the bureau be administered by a controller and a council of three members, known as the Corporate Investments Council, these members to be nominees of —

(i) The New Zealand Law Society; (ii) The New Zealand Society of Accountants;

(iii) The New Zealand Stock Exrhange Association, respectively, and appointed by the Governor-General in Council.

o. That the controller, as a Government officer, shall have a skilled.staff

at his disposal, and be empowered, where necessary, to employ outside accountants and auditors.

The functions of the bureau arc set out as follows: —

"1. Prospectuses and Other Publications.—Wo consider it impostant that control over company promotion should bo exercised at the source. This will bo achieved, in large measure, by the provisions embodied in the Companies Act, but, as has been pointed out, this is not likely to bo fully effective. In addition, therefore, we propose that the Corporate Investments Bureau should exereiso supervision over prospoctuses and other publications. Copies of these should be sent to the bureau, which would examine them for inherent defects or obvious non-disclosures. The names of directors, promoters, and brokers would bo compared with the register and their records searched. Further lines of investigation might be suggested thereby. For examplo, it might be considered desirable to search land transactions at the Land Transfer Office, agreements, and other documents at the office of the company or of the company's solicitor and entries in the company's books. Future procedure in relation to the prospectus would depend on the results of such inspection. In most cases amicable discussion would be sufficient to effect the necessary changes. In tho exceptional cases where this did not suffice it would bo a matter for the discretion of the controller to decide whether or not an appeal should be made to the Courts for an injunction. We think that oversight exercised in the above matter would have a considerable moral cft'oct on company promotion, and that the occasions when action was taken through tho Courts would be rare. The prospectus would then be filed and made the basis of comparison when the statutory report and return were filed, or of further inquiry, if specific complaints should be made -subsequently. "AFFILIATE" COMPANIES. | "2. Powers of Definition.—Throughout this report, and in.the opening paragraphs of this section, we have indicated that the proper application of the law is rendered very difficult because, in many cases, it is impossible to framo definitions which include all relevant examples^ and types of transaction, or company, while excluding all others. By way of example, we have referred to the difficulty of framing a satisfactory definition of 'subsidiary' or 'affiliate companies. We think that, in certain cases, the law may best frame definitions in more or less general terms,' and that in such cases its effectiveness will depend upon vesting in the bureau the power to decide after inquiry that certain companies or transactions come within the definitions laid down. We think that such powers should be carefully limited and prescribed and in the cases in which they may be exercised should be determined by Parliament. It must be noted that the purpose is not to fix or interfere with rights or to impose penalties, but to determine the application of particular definitions for the future. "3. Statutory Discretion.—A discretion might be vested in the bureau to relax, in appropriate cases, the provisions of the Act or any regulations where absolute inflexibility might work harm. For instance, the time limit of four months, fixed .by section 50 of the Companies Act, 1933, as the limit of time allowed.to a company to secure its minimum subscription is likely to be a prohibition in case of large issues or overseas, offers. It might be considered desirable to allow tho bureau, if satisfied after inquiry. that tho law as it stands might endanger or restrict legitimate enterprise, to extend that period. KEEPING A REGISTER. "4. Registration of Stock Exchanges, Brokers, Company Promoters, Directors, and Officers, etc. —The bureau should keep a register of all promoters and directors of companies and of all companies on tho register, as well as of valuers, brokers, share salesmen, and stock exchanges. No person should be competent to act in any of the forgoing capacities, excepting whilst he is registered by the bureau as the holder of such an office.

"No licence should be issued by the bureau to any such persons, and it should be a punishable offence for any such person by advertisement or notice to claim to be licensed, or on any document to bo issued to the public to refer to the fact that he was registered, or to do any other thing calculated to lead tho public to believe that he was licensed or in any way acting under tho sanction of the bureau or any Department of State.

"The council should have power to strike off tho register the name of any person, enrolled, thereon, when^ in tiifj

opinion of tho council, his conduct in relation to the affairs of tho company justified such action, or when, for any 1 other reason touching the integrity i of such party, the council thought pro- ' per so to do. Any person whoso registration is re-fused or whose name is so struck off tho register should receive notice forthwith from the bureau of such refusal or striking-off, and should have a right of appeal to the Supreme Court against the decision of the bureau. 1 INSPECTION AND ACTION. "5. Powers of Inspection and Action. •—Attention has been drawn to the fact that, even where tho law itself is adequate, there may be a variety of reasons why it is not likely to be put into operation. Unscrupulous men may rely on tho probable immunity this gives to them to put through transactions from which they would be deterred if powers of inspection and report lay with the bureau. During the past few months, we, as a Commission, have received numerous complaints for which there are legal remedies, but in respect of which the law has not been invoked. Our experience suggests to us that tho bureau would be used in the same way, and that this would provide a most powerful deterrent to undesirable practices. "Accordingly, we consider tliat the bureau, through the controller and his officers, should have the right of access to all books, documents, and records of all companies at all times. In brief, it should have rights of search and inquiry as full as those of the inspectors recently appointed under the Companies (Special Investigations) Act of 1934. All balance-sheets and published accounts of all companies should, be sent to the bureau promptly. "All auditors of companies should have the right to report to the bureau confidentially, and, on the same basis, to invoke its assistance. Where in a prospectus the name of an auditor is mentioned as auditor of a proposed company it should be provided that he may bo required by the_ controller at any time to make an audit to date and report to the bureau. All secretaries and officers of the company should be required to forward to the bureau promptly copies of all minutes in either the minute-book of the general meetings or the minute-book of the directors' meetings, disclosing transactions and relations in which a director is personally interested. On the basis of information obtained from these sources the bureau should have power at its discretion to call a meeting of shareholders or debenture holders and to report to them. In appropriate cases, where a more drastic remedy is required, tho bureau should be in a position to apply to the Court for an injunction, or to institute proceedings alleging an offence against the Act. The powers of injunction which should bo given to the Court should be to enable it to deal with the practices described in general language to be interpreted by the spirit rather than the letter of the Companies Act. Unconscionablo transactions and profits or commissions or fees should be subject to review by the Court, which should have power either to disallow them or to demand full publicity to tho satisfaction of the' Court. There is no new principle involved in this latter requirement, for the' Courts have power now by certain statutes to inquire into transactions said to bo unconscionable. Tho Court can even reopen such transactions after they are settled and order a refund or other settlement on a basis dictated by tho Court. . INTENT TO DECEIVE. . "Any act or course of conduct or business calculated or put forward with intent to deceive the public or the purchaser of any security as to tho nature of any transaction or as to the value of such security should be subject to like powers in the Court. Whore a provision or requirement in the Companies Act is inserted for the protection of the public or of investors,_ any form of words which, in tho opinion of the Court, is either a mere colourable compliance with the Act, or is one which, while complying with the letter of Iho Act, is an intentional breach of its true spirit and intent, should bo subject to like powers of the Act. "In relation to the above itshouia be the duty of the Bureau to institute prosecutions promptly in all cases which become known to them of breaches of the law. Offences should be stated in two classes —summary and indictable —and the Controller might, wherever he thinks fit, institute summary proceedings. In the case of indictable offences it should be the duty of the Controller to place the facts before the council and to prosecute only by direction of the council. "In such cases tho Controller's function should bo to recommend a prosecution, and the decision should bo taken by a majority of tho members of the council, excluding tho Controller. Complaint in any matter might be made direct to the council, and if a majority of the council directed a prosecution, cither summary or indictable, the Controller should take action accordingly. The conditions precedent to an action for an injunction should be the same as those prescribed above for proceedings on indictment.NEED FOR SECRECY. '? (6) Secrecy.—lt should be enacted and required of tbo Bureau that the strictest secrecy be observed in respect of all information given to or obtained by the Bureau ami its officers, save where tho action roquircd of the Bureau is one the nature of which requires publicity as a remedy or one which involves an application to tho. Court.

"(7) Relation to Stock Exchanges— Elsewhere in thijs report we have made recommendations relating to the constitution and control of stock exchanges and the control of sharebrokers. We consider that the Bureau should exercise powers of regulation and control over sharebrokers and stock exchanges. The Bureau should keep separato registers of sharebrokers and stock exchanges, and none of these- should bo permitted Vo operate if unregistered. The rules of stock exchanges should require the approval of the GovernorGeneral on the recommendation of the Bureau.

"(8) ■ Reports of tho Bureau.—ln order to facilitate desirable changes in the law, the Bureau should- be required *to make an annual report to the Minister in Charge on the operations of the Bureau for the year, and in that report, should recommend such legislation as might be deemed necessary. Once at least in every year each member Of tho council should make to the body which nominated him a, report on practices and methods and tendencies rovoaled to him by the work of the Buj.-eau since the date of his last report, and bearing on the work of members of his prof ession or calling. Within three months of the receipt of this report the society or association in question should, by resolution, declare its policy in relation to sucli practices, •Kisothods, and tendencies, and comlriunieato it to the Bureau. Every such resolution if and to the extent to which it is adopted by the Bureau pjiould thereafter be taken into account by Iho Bureau in considering standards of conduct.

"(0) Finance.—The cost of the Bureau would be small, and should be wet by a levy on all companies, because, jn. the long ivn 3 Jhex tvjU de-

rive the benefits from its operation through tho deterrent effects on undesirable practices. An annual registration fee might also bo charged to sharebrokers and share salesmen. We are unable at this stage to estimate thn amount required, but think that the percentage levy on tho capital of each company would be trivial. A small feo chargeable on tho filing of each prospectus is also justifiable, and •would make no appreciable levy on legitimate business ventures. It is suggested that each existing company should pay its annual levy with , its annual licence fee as required by tho Stamp Duties Act."