Berkahn, Matthew; Trotman, Lindsay --- "Public and Private Enforcement of Company Law in New Zealand 1986-1998" [2000] CanterLawRw 6; (2000) 7 Canterbury Law Review 516

This paper investigates enforcement action taken against company directors and managers in New Zealand and, in particular, the extent to which public and private enforcers actually make use of the wide range of enforcement mechanisms which are available to them.

It first outlines the two sides to the public/private (or "regulatory/ enabling") debate; then describes the enforcement regime which currently operates in New Zealand, including the recent reform to New Zealand's company law which had as one of its major goals the enhancement of shareholder enforcement of directors' responsibilities. It then considers the alternative approaches to enforcement employed in various jurisdictions, and the extent to which litigation against company directors in New Zealand is initiated by both private and public enforcers in practice.

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Professor Ian Ramsay's 1995 investigation into who - shareholders or state agencies like the Australian securities and Investments commission (ASIC)[1] - most often initiates action to enforce corporate rights and duties in Australia[2] provides a model for this paper. Ramsay found that shareholder litigation was comparatively rare and that, for various reasons, the ASIC was in a better position to undertake enforcement. Thus, it could be argued that all the recent and proposed reforms to enforcement mechanisms such as the statutory derivative action and oppression remedy will not be as useful in Australia as they may at first appear.

In contrast to Australia, where enforcement is perhaps the most important of the ASIC's obligations,[3] the New Zealand company law model relies heavily on private enforcement, almost to the exclusion of public agencies. Enforcement of corporate rights and duties may be undertaken in some cases by regulatory agencies including the Registrar of Companies and the New Zealand Securities Commission, but is largely left to shareholders and other private enforcers such as creditors and other directors. It would therefore be expected that a higher proportion of company litigation in New Zealand would be instigated by shareholders, and that law reform activity which increases shareholders' enforcement powers would be more effective in New Zealand than in Australia, simply because if shareholders do not take action to enforce directors' duties, no one else will.

II. The Public v Private Debate

It is generally acknowledged, whether one favours a light or heavy handed approach to corporate regulation, that some control of company managers is necessary. In 1776 Adam Smith noted:[4]

More recently, it has been observed that, whether losses to shareholders are caused by "corporate controllers abus[ing] their position of trust by arranging for the shifting of assets ... into their own hands",[5] or simply by "the euphoria and panic of public markets susceptible to rumour, ... rash decisions of investors large and small [and] by real changes in economic conditions and confidence",[6] the enforcement of legal standards is necessary.[7] The debate centres on how much State regulation is warranted.

At one end of the scale[8] is the "regulatory" approach, under which the State seeks to correct perceived deficiencies in the market system. Such an approach generally involves government regulatory agencies as the most prominent enforcers of legal obligations, which cannot be displaced by private agreement between parties.

The "enabling" approach, on the other hand, generally leaves parties free to set their own rules, subject only to certain basic restraints. Under this model, private enforcement of rights and duties is the norm.[9]

Although "performance-based", self regulatory methods are an important component of the enabling approach to company law; and although they are, strictly speaking, a form of private "enforcement", in the sense that they seek to remove the need for rigid State regulation by providing effective self regulation, they are not the focus of this paper beyond the brief references to them below. It is concerned instead with the legal controls available to shareholders and other private enforcers, and how they compare with the legal regulation imposed by public agencies.

(A) Arguments for Public Enforcement

Public agencies involved in company law enforcement may act as market regulators. Market regulation is designed to preserve stability and confidence in a market as a whole, without necessarily being concerned with individual failures within the market. An example of this approach is New Zealand's banking supervision regime, undertaken by the Reserve Bank of New Zealand under the Reserve Bank Act 1989:[10]

Those in favour of high levels of company regulation may also point to the potential for market failure as a justification for its imposition. For example, in 1991 the Australian Company and Securities Advisory Committee stated that "general market forces" did not guarantee adequate and timely disclosure of financial information to investors in public companies, and that a mandatory, publicly enforced, system of disclosure was therefore required to "promote investor confidence in the integrity of Australian capital markets".[11] It has also been noted that mandatory disclosure regimes and other forms of financial market regulation can serve to reduce risk to investors and maintain stability and confidence, without the need for more drastic action such as prohibiting a potentially risky activity.[12]

Public enforcers may also act as surrogates for company stakeholders. Action may be taken by the State on behalf (or for the benefit) of specific individuals or groups in cases where it is not considered feasible for the action to be taken personally. Action taken by the ASIC for breaches of the directors' duties set out in Part 2D.1 of the Corporations Law falls into this category.[13]

The costs of bringing a private action, the lack of information available to shareholders, and their inability to evaluate that information, are often put forward as reasons why public enforcement on behalf of company participants is necessary in some cases. Fitzsimons claims that the private enforcement of New Zealand's insider trading laws[14] has proven ineffective for these reasons. He recommends greater powers of enforcement for the Securities Commission and notes that, although the Commission does not currently have a formal enforcement role in this area, it has "found itself playing an increasing role in the regulation and detection of insider trading, in the total absence of shareholder and public issuer action". This has included informal investigations, publication of reports either suggesting or providing evidence of insider trading, and the summoning and admonition

of alleged offenders. [15] Other commentators also contend that shareholders in larger companies are, for the most part, inactive when it comes to corporate governance issues in general,[16] and enforcement in particular.[17]

(B) Arguments for Private Enforcement

One argument in favour of private enforcement is that it reduces overall costs, and imposes them on the parties who stand to benefit most from enforcement proceedings - the company and/or its shareholders - rather than on the public purse. Schwartz makes the point that "private enforcers with proper incentives reduce the need for government supervision which, but for the activities of private enforcers, would be necessary."[18] He favours shareholder enforcement on the grounds that it reduces average agency costs, that is the monitoring and other costs that are incurred in holding managers accountable.[19] These costs include those involved in interpreting the law so as to avoid potential liability. [20]

It is also argued that public enforcers lack the motivation and understanding of business conditions which is required to adequately administer the enforcement of corporate rights and duties. Mason, for example, states that public enforcement action, such as investigations by the ASIC where it has reason to suspect a contravention of any of the national scheme laws,[21] tends to be undertaken with little regard to the interests of the company involved or its shareholders:[22]

The most common argument against high levels of public regulation is that, by limiting individual freedom of choice and stifling initiative, it may inflict serious harm on a nation's competitiveness and efficiency. Too much

"black letter" regulation of corporate managers is said to discourage them from their primary role, that of "creating value to enhance their company's and their country's competitive position", resulting in boards becoming motivated by penalties for failure to conform to the rules rather than by the rewards of good performance.[23]

Black and Kraakman state that the aim of corporate regulation is the provision of[24]

These two elements of corporate governance - accountability of managers for the money entrusted to them by shareholders and other stakeholders, and the enhancement of corporate performance - are also noted by Keasey and Wright. They emphasise the fact that the performance element is just as important as the prevention of actual fraud or carelessness, if not more so. Good governance, they conclude, should be "as much concerned with correctly motivating managerial behaviour towards improving the business, as directly controlling the behaviour of managers". [26] Significantly, Keasey and Wright pay little attention to law enforcement procedures as tools to achieve good corporate governance, focusing instead on self regulatory mechanisms such as the relationship between executive remuneration and company performance, and internal control mechanisms designed to improve the quality of the financial and business information which is available to directors.[27]

The arguments outlined above appear to assume two quite distinct models of a typical company, and two different views of the role of a shareholder.

The arguments in favour of a significant role for public enforcement agencies - based primarily on the assumption that private parties have insufficient information and influence on (and therefore little interest in) the internal workings of companies, and so are unable to successfully enforce corporate rights and duties - are only really relevant to large, widely held companies. It will have been noted that all the examples used above refer to the enforcement of securities law which, by definition, deals with the offering of investment opportunities to the general public. In such cases, shareholders are relegated to the status of "bystanders" or passive investors, with little power over their investment or influence on the activities of the company.[29] The companies they invest in could, however, be described as "public" entities, in that their actions affect a widely dispersed group of participants.

Bottomley, after exploring the conceptual linkages between company and administrative law, concludes that they are both based on the control of "bureaucratic power":[30]

Bottomley also notes that, for this reason, the principle of non- interference by outside parties in the governance of companies, as enshrined in Foss v Harbottle[31] for example, is more applicable to small "private" companies like the one which was involved in that case,[32] than to larger enterprises or corporate groups.[33]

If this view is taken, it is quite legitimate for public agencies to enforce shareholders' rights, at least to the extent required to ensure "a free and open market, offering shareholders ease of entry and, critically, exit".[34]

However, if one considers the arguments in favour of an enabling approach to corporate regulation, the opposite assumption appears. Shareholders and other potential private enforcers are assumed to be integrally linked to the company, possessing a level of motivation and understanding which an outside agency would not have. Corporate actions are seen as resulting from informed and consensual decisions. Such a state of affairs would only exist in a closely held company, where there is no significant separation of ownership and control.

In such cases, shareholders could be described as "owners" or at least "beneficiaries" of the company (for whom managerial powers are held "in trust"),[35] and so could be expected to take responsibility for the actions of management. It is easy to understand the characterisation of State regulation as "rules enforced by government power irrespective of the prior consent of adult parties ... crowd[ing] out self-reliance and voluntary co-operation"in cases where the participants are genuinely free to "sort out their preferred arrangements".[36] But this is not necessarily a realistic assumption in an age where the widely dispersed corporate group is the "quintessential model of corporate business activity".[37]

III. Private Enforcement in New Zealand

(A) The 1993 Company Law Reform Package

New Zealand's company law underwent a major transformation with effect from 1 July 1994. The reform programme had its beginnings in September 1986 when the New Zealand government announced its intention to undertake a comprehensive review of the law in that area, with the New Zealand Law Commission being given responsibility for the formulation of a new Companies Act.[38]

The Commission's brief, forwarded to it by the Minister of Justice pursuant to s 7(2) of the Law Commission Act, was to[39]

A discussion paper was prepared to identify the areas and issues which the Commission felt would be prominent in shaping the form and content of a new Companies Act, and to seek comment from interested parties as to how these issues should be treated. [40]

Specific questions were raised regarding each area of the law, with tentative suggestions being made wherever possible by the Commission as to the direction it favoured, based upon consultation with an informal committee set up to advise on the way in which the inquiry should be handled and to identify the major policy issues to be considered. This committee included accountants, legal practitioners, academics, business people and government officials.

Previous attempts at company law reform in New Zealand had largely been confined to ad hoc amendments to combat weaknesses in particular areas of the law, with the result that the Companies Act 1955, which was closely modelled on the United Kingdom Act of 1948,[41] was not very dissimilar to the Joint Stock Companies Act 1860, New Zealand's original companies statute. The Commission's approach, set forth in its Report No. 9 and the appended draft Companies Act,[42] was not to follow closely any existing company law model, but rather to start afresh; to assess what the appropriate issues to be considered were, and then to discuss all feasible options, rather than proceed with any preconception that a particular model should be preferred over all others. The Commission did, however, acknowledge that the Canadian Dickerson Report of 1971[43] and the United States Model Business Corporations Act had provided working models for many of the reform proposals:[44]

Harmonisation with Australian law,[45] in the sense of using the existing Australian legislation as a model, was rejected by the Commission on the grounds that the law in Australia was "in a state of flux", with the eventual outcome of reform proposals in that country still uncertain; and that the Australian legislation was (and still is) comparatively complex [46] and difficult for the uninitiated to understand, which ran contrary to a major aim of the New Zealand reform exercise - to make the law more accessible and intelligible. In any case, it was considered that there was no significant benefit in complete harmonisation. The Commission noted that "the essential elements of the company law of both jurisdictions ... remain comparable",[47] and this was sufficient to create an environment conducive to trans-Tasman trade, the overall goal of the harmonisation of business laws.

The approach selected by the Commission and embodied in its draft Act was to formulate a "basic law applicable by reason of shared principle to all companies", governing their creation, operation and termination; that is, a "core" company law statute, with other "legal requirements not derived from these shared principles or applicable only to some companies (for example, to listed companies) imposed through specific legislation and rules superimposed upon the general company law base".[48]

In September 1993 a new regime was enacted to replace the 1955 Act,[49] comprising a package of 23 separate pieces of legislation relating to, amongst other things, financial reporting, takeovers and securities, as well as the new core company law statute, the Companies Act 1993. With a few exceptions, some of which are noted below, the 1993 Act essentially gives effect to the Law Commission's recommendations.[50]

(B) Reform of Directors' Duties and Shareholder Remedies: The Private Enforcement Model

Control of company directors, particularly by shareholders, has historically been notoriously difficult to achieve.[51] Directors have traditionally owed their duties to the company rather than directly to shareholders, and therefore the right to take action has generally lain with the company only (in practice the directors themselves) unless the shareholders could justify their standing on the basis of a "fraud on the minority", or some other reason "of a very urgent character."[52] A further hurdle in the way of shareholder enforcement was the principle of majority rule, under which the courts were reluctant to intervene in a company's affairs to remedy conduct which had been legitimately approved by a majority of shareholders, even if it was damaging to minority interests.[53] Although existing shareholder remedies have in recent years been interpreted increasingly liberally,[54] and despite the New Zealand Law Commission

initially expressing doubt as to the inadequacy of these remedies,[55] it was ultimately the view of the Commission that reform to this area of the law was necessary.[56]

The most obvious supervening event to occur between these two pronouncements was the October 1987 share market crash,[57] which may have influenced this apparent turnaround:[58]

Thus, a major goal of the 1993 reform package, now expressed in paragraph (d) of the Long Title to the Companies Act 1993, was

The Commission's view was that the majority rule principle was not an effective method of shareholder protection,[59] and that individual shareholders should be given greater rights of enforcement. The option that enforcement should largely be conducted by a public authority such as the Registrar of Companies or a Companies Commission was discarded early in the reform process in favour of a model based predominately on private enforcement.[60] The Law Commission saw state enforcement as a "legitimate backstop to the remedies provided to shareholders under the ... Companies Act", but considered that that backstop should only be resorted to when the wider public interest, rather than shareholders' private interests, were at stake.[61]

Instead, enforcement power was placed primarily in the hands of shareholders and other "insiders" such as directors and "entitled persons".[62] The Commission recommended that no enforcement power be given to creditors. Although contributors to the company's capital and therefore insiders in the wider sense, the status of creditors is contractual rather than statutory and this, the Commission said, should be emphasised. It recommended that the only protection given to creditors should be via the duty of directors to the company to maintain solvency, and through their standing to restrain conduct in breach of the Act or the company's constitution.[63] This was designed to clarify the law in favour of the approach taken in cases like Multinational Gas & Petrochemical Co. v Multinational Gas & Petrochemical Services Ltd [64] and Kuwait Asia Bank v National Mutual Life Nominees Ltd,[65] where the existence of directors' duties to creditors was denied, in the face of doubts raised in Nicholson v Permakraft (NZ) Ltd [66] and Hilton v Hilton International Ltd,[67] amongst others.[68]

As the basis for an enhanced private enforcement regime, the Law Commission recommended the introduction of an extensive list of statutory directors' duties and shareholder remedies which would be available to shareholders in cases where the company or its controllers took action which fell outside the agreed decision-making structure.[69]

The Commission's aim was an enforcement regime which was enabling and performance oriented, rather than regulatory and conformance oriented.[70] Despite this, and a strong preference for an enabling statute from the business community,[71] the Companies Act 1993 as finally enacted represents an amalgam of regulatory and enabling provisions,[72] due largely to the changes made to the Law Commission's draft Act by the Law Reform Division of the New Zealand Department of Justice, which drafted the 1993 Act.

On the issue of directors' duties, the Commission's draft sought to draw together those duties which had previously been found only in case law[73] and to arrange them in a hierarchical structure. Those duties owed to and enforceable by "other interests" such as shareholders, employees and creditors were expressly subordinated to the directors' "fundamental duty" - to act in good faith and in what the director considers to be the best interests of the company.[74] The proposed hierarchy, by separating the duties owed to the company from those owed to shareholders and others, implicitly equated "the company" with the business enterprise itself rather than the collective shareholders.[75]

This was designed to make the law on directors' duties more accessible and clear, and thereby make directors more aware of precisely what their obligations were, and make enforcement of these obligations easier.

However, the Law Reform Division rejected the Law Commission's hierarchical structure in favour of a simple restatement of the existing common law duties.[76] In the absence of any explanation for this decision from the Law Reform Division, the reasons for it are unclear,[77] but the result is a set of enacted duties which are, in many cases, no more precise than their common law predecessors. The major difference is that now, with the duties set out in statutory form, they are much more accessible and provide at least a "text of first resort" for directors to understand their obligations.[78] In addition, although it does not retain the hierarchical structure of duties recommended by the Commission, the Companies Act 1993 does continue the clear separation between corporate and personal rights (and hence the company and its shareholders) by specifying which directors' duties are owed to whom in s 169(3).

The Commission's recommendations on the expansion of shareholders' enforcement mechanisms,[79] on the other hand, were followed closely in the 1993 Act, with the exception of the recommendation that the Attorney General be given standing to bring proceedings as if a shareholder when the public interest is affected.[80] The Law Reform Division was of the opinion that this recommendation had been overtaken by the enforcement functions exercised by the Registrar of Companies and the Securities Commission.[81] Those provisions, modelled in part on existing North American legislation,[82] which are now available to shareholders to enforce directors' duties include: [83]

IV. Public Enforcement in New Zealand

(A) Statutory Roles of Public Enforcers: The Registrar of Companies

The proposed role of the Registrar of Companies under the Law Commission's draft Companies Act was confined to receiving and filing documents and the maintenance of various registers. [84] The Law Reform Division of the Department of Justice, however, decided against limiting the Registrar's functions to this degree and re-introduced into the Companies Act 1993 the existing powers to inspect relevant documents for the purposes of detecting offences under the Companies, Financial Reporting and Securities Acts,[85] and to prohibit any person from being involved in the management of a company where that person's mismanagement has contributed to a company's insolvency.[86]

The Registrar also has the primary enforcement role with regard to offences under the Securities Act, including those involving offers and allotments of securities in breach of the Act, and misstatements in registered prospectuses and advertisements for securities.[87]

Other functions of the Registrar are mainly of an administrative nature, including the registration of companies under Part II of the Companies Act 1993 (although, with the simplification of the registration process brought about by the 1993 Act, the Registrar's function in this regard is not as extensive as it was previously)[88] and the reservation of company names under Part IV of the Act.

Any person aggrieved[89] by any act or decision of the Registrar under the Companies or Securities Act may appeal to the High Court.[90] Almost all such appeals to date have arisen from decisions relating to company names.[91]

(B) The Securities Commission

The Securities Commission, established by s 9 of the Securities Act 1978, has been described as giving "legal clothing to what is essentially a coherent ... system of self regulation".[92] Section 10 of the Act sets out the functions of the Commission. These include:

acting as a "watchdog" for the investing public, rather than with enforcement as such. Verbiest, March and Sandeman categorically state that "the Securities Commission is not an enforcement agency"; [95] and the chairman of the Commission has stated:[96]

However, as noted by the Ministry of Commerce in its 1997 review of the Commission's role,[97] the Commission does have a number of powers which may be categorised as powers of enforcement. These include the power to prohibit or suspend the distribution of an investment statement, registered prospectus or advertisement for securities on the grounds that it is misleading or deceptive or does not comply with the Securities Act,[98] and the power to apply to the court for orders directing substantial security holders in public issuers to disclose their interests.[99]

V. Overseas Approaches to Enforcement

The New Zealand reforms are, in terms of their general aims at least, consistent with recent reform activity elsewhere. It appears to be generally accepted that the common law directors' duties and enforcement mechanisms are unsatisfactory, and a more liberal attitude to these issues has prevailed recently in most jurisdictions which share New Zealand's company law pedigree.[100]

The Canadian approach is largely based on private enforcement as is that proposed for Hong Kong. While Australia and the United Kingdom currently rely to a much greater degree on action by public enforcement agencies, there appears also to be movement in those countries towards more reliance on private enforcement, as evidenced by recent proposals for reform.

As has been noted previously,[101] North American, and particularly Canadian, enforcement provisions provided a model for New Zealand's 1993 reforms. The North American approach is[102]

It has been noted that, with the reforms following the recommendations of the Dickerson Report of 1971,[103] Canadian corporate legislation now gives shareholder remedies a higher profile than any statutes based on the English model ever have. These remedies include the statutory derivative action, the oppression remedy and the appraisal remedy, otherwise known as the minority buy-out right, for shareholders who dissent from fundamental changes in corporate policy.[104]

Although the Canada Business Corporations Act gives some enforcement powers to the Director General of the Corporate Directorate, an official of

the Canadian Ministry of Industry,[105] it is a major premise of the Act that[106]

In Hong Kong, a similar approach is evident in the recent review of that country's company law.[107] The author of that review considered that company law in Hong Kong should be freed of a heavy regulatory burden and become "permissive, facilitative and enabling":[108]

Public enforcers such as the Registrar of Companies and the Financial Secretary would retain a primarily administrative role, with residual enforcement powers in cases involving the public interest.[109]

In Australia, the Corporations Law, Part 2D.1, Division 1 provides a list of statutory directors' duties similar to those found in ss 131-138 of New Zealand's Companies Act 1993. Until 1 February 1993 these duties were sanctioned by criminal penalties. However, these were found to have "more bark than bite", due in part to the difficulty in establishing, to the required standard, that a director's business decision was dishonest or lacking in due care and diligence.[110]

The Corporate Law Reform Act 1992 introduced into the Corporations Law what Sealy describes as "an even more formidable deterrent", namely civil penalties of up to $200,000 or prohibition from managing a company. As civil proceedings, the standard of proof applicable to civil penalty actions has been lessened from beyond reasonable doubt to the balance of probabilities.[111] Criminal liability remains in cases where directors or officers are reckless or intentionally dishonest, and fail to act in good faith or for a proper purpose; and where they use their positions with the intention of gaining an advantage for themselves or causing detriment to the company.[112] Criminal proceedings may only be brought by the ASIC, while civil penalty provisions may be enforced by either the ASIC or the affected company.[113]

There are signs that Australia is moving towards a more self regulatory approach to enforcing directors' duties, as evidenced by the recent introduction of a statutory business judgment rule [114] and statutory derivative action.[115]

The ASIC is not included as an eligible applicant under the proposed derivative action, as[116]

However, the Australian system remains basically "conformance" (rather than performance) oriented.[117] Sealy concludes:[118]

In the United Kingdom, both public and private enforcement are used to enforce company law. Both the Registrar of Companies and the Department of Trade and Industry have enforcement roles under the Companies Act 1985, the Registrar in the areas of company formation, company names and the registration of charges; and the Department in these areas and for non-compliance with provisions relating to share capital, company accounts, appointment, removal and disqualification of directors and fraudulent trading. The Department may also initiate proceedings to protect members from unfair prejudice,[120] and to enforce certain directors' duties set out in Part X of the Act, some of which carry criminal as well as civil liability if the action was committed "knowingly" and "wilfully". [121]

The English Law Commission has, however, also recently stressed the importance of private enforcement. The stated aim of its 1997 report on shareholder remedies was to make "shareholder remedies more affordable

and more appropriate in modern conditions".[122] The Commission recommended improvements to the unfair prejudice remedy including a presumption that, in cases involving closely held companies, exclusion of a petitioner from the management of the company amounts to unfairly prejudicial conduct; and the introduction of a statutory derivative action which would be available to shareholders in respect of breaches of duty by directors.[123]

VI. New Zealand Enforcement Litigation 1986-1998

The tables below present the results of a survey of reported and unreported New Zealand cases involving enforcement action against company directors and managers (including receivers) for the years immediately before and after the 1993 company law reform package was introduced.

Cases involving breaches of directors' duties, or where it is sought to hold a director personally liable in tort or otherwise, are generally brought by the company or other party against the director personally. Such cases obviously fall within the purview of this survey. in addition, some cases brought against the company rather than the directors personally, such as those where a breach of securities legislation is alleged, or where a shareholder claims that the affairs of a company have been conducted in an oppressive or unfairly prejudicial manner, have also been included. in such cases it is usually the actions of the directors, as the "directing mind and will of the corporation",[124] which are subject to the courts' scrutiny. As has been noted by Gray, in the context of directors' liability for non- compliance with regulatory provisions, "the buck has to stop somewhere with a real person, not just a corporate person, for sanctions ... to have any sting in their tail."[125]

Relevant cases were identified by searching Brooker's Company and Securities Cases, an electronic database included in the Brooker's Company Law Library CD-ROM.[126] Those cases identified as relevant were then divided according to whether the company involved (that is, the defendant company or company of which the defendant was a director) was closely or widely held. The definition of "closely held" generally used for the purposes of this survey is that used in the South African Close Corporations Act 1984, and in the Australian Close Corporations Act 1989 (now repealed), namely a company with ten or fewer shareholders. An exception has been made in cases where a company's shares were wholly or substantially held by another, widely held, company or other corporate entity. Such companies have been classified as widely held despite having fewer than ten shareholders, on the grounds that their asset values and turnovers are more akin to those of a widely held company. A total of four companies surveyed fell within this

exception. Not all cases surveyed gave a clear indication as to which category the company involved fell into. In those cases where a definite categorisation was not possible, a judgment was made based on the facts given in the case report and information gleaned from other sources such as the New Zealand Companies Office database.[127]

Section references in Tables (A) and (B) are to the Companies Act 1955, and in Tables (C) and (D) to the Companies Act 1993, unless otherwise stated. As noted above,[128] the Companies Act 1955 was not fully repealed until 1 July 1997. Post 1993 cases involving companies which had not yet reregistered under the Companies Act 1993 were therefore brought under the 1955, rather than the 1993, Act. The 1955 Act was, however, amended with effect from 1 July 1994 to align it with the new legislation in certain key areas including directors' duties and enforcement.

It should be noted that this survey refers only to actions which resulted in at least one judgment, rather than to all enforcement action commenced by the various enforcers during the period under review.[129] Thus, no account has been taken of private actions which were discontinued or settled, or of administrative decisions of the Securities Commission or Registrar of Companies which were not challenged.[130]

(A) Litigation Commenced by Private Enforcers 1986-1993

Litigation by Shareholders	No. of Cases
Litigation by Shareholders	Closely Held Companies	Widely Held Companies
Oppressive Conduct (s 209): • Share allotment • Sale to director at undervalue • Share forfeiture • Directors acting in own interest	1 1 1	3
Derivative action: • Recovery of debt owed to company	1
Tort: • Deceit • Negligence		1 2
injunction: • Inadequate notice of meeting • Restraining entry into service contract with director	1	1
Directors' duties: • Duty of care and skill • Conflict of interest • Fiduciary duty to shareholders • Fiduciary duty to company	2 1 1	1 1 2 1
Misleading and deceptive conduct (Fair Trading Act 1986)		1
Compulsory share acquisition (s 208)		1
Allotment of securities without registered prospectus (Securities Act 1978 s 37)	1
Just and equitable winding up (s 217)	1
Valuation of shares	1
Total claims by shareholders:	12	14

Litigation by Directors (including shareholder/ directors)	No. of Cases
Litigation by Directors (including shareholder/ directors)	Closely Held Companies	Widely Held Companies
Injunction: • Invalid appointment of receiver • Registration of share transfer • Restraining threatened proceedings by liquidator	2	1 1 1
Derivative action: • Invalid appointment of receiver	1
Oppressive conduct (s 209): • Management deadlock • Preferring majority interests over minority • Withholding dividends	3 1 1
Just and equitable winding up (s 217)	5
Illegal takeover (Companies Amendment Act 1963)		1
Breach of receiver's duties	2
Breach of prohibition on company purchasing own shares (s 62)		1
Compulsory share purchase under articles		1
Total claims by directors:	15	6

Litigation by Creditors	No. of Cases
Litigation by Creditors	Closely Held Companies	Widely Held Companies
Improper use of company name (s 116)	4
Guarantee of company debt	3
Tort: • Negligence	1	1
Directors' duties: • Duty of care and skill	1	1
Breach of prohibition on company purchasing own shares (s 62)	1
Failure to keep proper accounting records (s 319)	1
Reckless or fraudulent trading (ss 320 and 321)	2
Breach of receiver's duties	1
Total claims by creditors:	14	2

Litigation by Outside parties: clients, principals, auditors	No. of Cases
	Closely Held Companies	Widely Held Companies
Guarantee of company debt	1
Tort: • Negligence • Procuring breach of contract	1 1
Directors' duties: • Fiduciary duty as agent	3
Misleading and deceptive conduct (Fair Trading Act 1986)	1
Total claims by outside parties:	7	0

Litigation by the Company	No. of Cases
Litigation by the Company	Closely Held Companies	Widely Held Companies
Breach of receiver's duties	1
Directors duties: • Conflict of interest • Fiduciary duty to company	2	1
injunction: • Conflict of interest	1
Total claims by the company:	4	1

Litigation by Liquidators	No. of Cases
Litigation by Liquidators	Closely Held Companies	Widely Held Companies
Failure to keep proper accounting records (s 319)	7	1
Reckless or fraudulent trading (ss 320 and 321)	12	1
Directors duties: • Fiduciary duty to company • Duty of care and skill	1	1
Transaction for inadequate consideration (s 311c)	1
Voidable preference (s 309)	2
Total claims by liquidators:	23	3

Litigation by Receivers/Statutory Managers Breach of receiver's duties	Closely Held Companies	Widely Held Companies 1
Disclosure of interest (s 199)	1
Total claims by receivers/statutory managers	1	1
Total Claims 1986-1993:	77	27
Average Claims per Year:	9.5	3.4

(B) Litigation Commenced by Public Enforcers 1986-1993

Litigation by the Securities Commission	No. of Closely Held Companies	Cases Widely Held Companies
Failure to give notice of relevant interest (Securities Amendment Act 1988 s 20)		3
Breach of prohibition on company purchasing own shares (s 62)		1
Total claims by the Securities Commission:	0	4

Litigation by the Registrar of Companies 131	No. of Cases
Litigation by the Registrar of Companies 131	Closely Held Companies	Widely Held Companies
Registration of prospectus declined (Securities Regulations 1983)		1
Company names: • Reservation of name (s 32)	7	2
Criminal liability for misleading statement in registered prospectus (Securities Act 1978 s 58)		3
Winding up petition (s 217)	1
Restoration to Register of Companies (s 336)	2
Failure to file annual return (s 132)	1
Total claims by the Registrar:	11	6

Total Claims:	11	10
Average Claims per Year:	1.4	1 3

Litigation by Shareholders	No. of Cases
Litigation by Shareholders	Closely Held Companies	Widely Held Companies
Oppressive Conduct (s 174): • Share forfeiture • Excessive directors' salaries	1	1
Derivative action (s 165): • Director's conflict of interest • Breach of fiduciary duties • Excessive directors' salaries • Misappropriation of company funds	1 1 1 1	1
Disclosure of company information		1
Tort: • Negligence	1
Injunction: • Restraining share forfeiture		1
Directors' duties: • Duty of care and skill (s 137) • Fiduciary duty to shareholders • Fiduciary duty to company • Good faith and company's best interests (s 131) • Proper purpose (s 133)	1 2 1 1 1	1 1 1
Total claims by shareholders	12

Litigation by Directors (including shareholder/ directors)	No. of Cases
Litigation by Directors (including shareholder/ directors)	Closely Held Companies	Widely Held Companies
Injunction: • Restraining unauthorised use of company funds • Share purchase by directors	1	1
Derivative action (s 165): • Breach of fiduciary duties • Director's conflict of interest • Unauthorised use of company funds	1 1 1
Oppressive Conduct (s 174): • Conflict of interest • Exclusion from management • Financial mismanagement	3 3 2
Appointment of liquidator (s 241)	2
Illegal takeover (Companies Amendment Act 1963)		1
Directors duties: • Fiduciary duty to company • Fiduciary duty to shareholders	2	1
Total claims by directors:	16	3

Litigation by Creditors	No. of Cases
Litigation by Creditors	Closely Held Companies	Widely Held Companies
Liability for misapplication, default, breach of duty, etc (s 301)	5
Misleading and deceptive conduct (Fair Trading Act 1986)	1
Tort: • Negligence	2	1
Directors' duties: • Fiduciary duty to creditors • Proper purpose (s 133) • Reckless trading (s 135)	2 2	3 1
Guarantee of company debt	1	1
Injunction: • Restraining restructuring of business		1
Total claims by creditors:	13	7

Litigation by Outside parties: clients, principals, auditors	No. of Cases
	Closely Held Companies	Widely Held Companies
Tort: • Negligence	3	1
Directors' duties: • Fiduciary duty as agent • Reckless trading (s 135) • Duty of care and skill (s 137)	1 1	1
Liability of directors for debts of solicitors' nominee company	1
Total claims by outside parties:	6	2

Litigation by the Company	No. of Cases
Litigation by the Company	Closely Held Companies	Widely Held Companies
Directors duties: • Good faith and company's best interests (s 131) • Fiduciary duty to company	1 1
Breach of prohibition on company purchasing own shares (Companies Act 1955 s 62)	1
Injunction: • Conflict of interest	1
Total claims by the company:	4	0

Litigation by Liquidators	No. of Cases
Litigation by Liquidators	Closely Held Companies	Widely Held Companies
Failure to keep proper accounting records (s 300)	1
Liability for misapplication, default, breach of duty, etc (s 301)	2
Failure to notify Registrar of share allotment (Companies Act 1955 s 60)	1
Liability as contributory on winding up (Companies Act 1955 s211)	1
Production of company documents (s 261)	1
Voidable preference (s 292)	2
Total claims by liquidators:	8	0

Total Claims:	59	20
Average Claims per Year:	11.8	4

(D) Litigation Commenced by Public Enforcers 1994-1998

Litigation by the Securities Commission	No. of Cases
Litigation by the Securities Commission	Closely Held Companies	Widely Held Companies
Obtaining evidence for overseas Commission (Securities Act 1978 s 18A)		1
Breach of exemption notice (Securities Act 1978 s 5)		1
Offer of Securities without registered prospectus (Securities Act 1978 s 33)		1
Misleading advertisement (Securities Act 1978 s 44A)		1
Total claims by the Securities Commission:	0	4

Litigation by the Registrar of Companies	No. of Cases
Litigation by the Registrar of Companies	Closely Held Companies	Widely Held Companies
Inspection of documents (Securities Act 1978 s 67)		1
Company names: Reservation of name (s 22) • Use of the word "Limited"	4	1
Termination of liquidation (s 250)	1
Restoration to Register of Companies (Companies Act 1955 s 336)	2
Criminal liability for misstatement in registered prospectus (Securities Act 1978 s 58)		1
Criminal liability for allotment In breach of Act (Securities Act 1978 s 59)		1
Commencement of business without filing statutory declaration (Companies Act 1955 s 117)		1
Total claims by the Registrar:	7	5

Total Claims:	7	9
Average Claims per Year:	1.4	18

(E) Patterns of Enforcement

Both before and after the 1993 reforms, the vast majority of enforcement litigation was brought by private rather than public enforcers. Those parties traditionally considered to be corporate "insiders" - shareholders, directors and creditors - were responsible for most of these actions, although in the earlier period cases brought by liquidators outscored those brought by directors and creditors, and equalled those brought by shareholders. This may be due to the high numbers of liquidations following the 1987 sharemarket crash, and the inevitable attempts to recover losses from directors which followed.[132] Enforcement action by the company itself, however, was rare - only five cases between 1986-1993 and four between 1994-1998, perhaps reflecting the fact that it is the directors who control company litigation.

These figures are in stark contrast to the patterns observed by Ramsay in Australia. Ramsay found that the ASIC was many times more likely than shareholders to undertake action to enforce corporate rights and duties. Citing studies from the United States as well as Australia, he concluded:[133]

although there will always be situations where shareholders will commence litigation to enforce corporate rights and duties, such enforcement is more typically undertaken by a regulatory agency such the [ASIC].

The most common causes of action for shareholders and shareholder/ directors during both periods were breaches of directors' duties and the oppression remedy, often combined with an application for ajust and equitable winding up. Interestingly, breaches of fiduciary duties were claimed more often than breaches of the statutory duties introduced in the 1993 Act. This may reflect the fact that these duties are stated to be owed to the company rather than to shareholders and, although they may be enforced by way of a derivative action, this requires leave of the court. The statutory derivative action has, however, proven more popular than its common law equivalent - a total of eight cases were brought under the statutory provision between 1994-1998, compared to only two common law derivative actions between 1986-1993. This is again in contrast to Ramsay's prediction that a statutory derivative action will have little effect on the extent of shareholder litigation in Australia.[134]

Approximately 75% of all cases brought by private enforcers during both periods involved closely held companies This is not surprising given that the vast majority of New Zealand's registered companies are closely held,[135] and supports the view that shareholders (and even perhaps creditors) of widely held companies are, in reality, passive investors with little interest in having (or perhaps little scope to have) any say in the governance of the companies in which they invest.[136]

Action by public enforcers which actually sought to enforce the law was almost entirely conducted against widely held companies. During the period surveyed, not one case was brought by the Securities Commission against the management of a closely held company,[137] and those involving the Registrar of Companies were mainly of an administrative nature, most often involving the refusal to reserve a company name because of its similarity to that of another company. This seems to reflect the policy of the Law Commission that public enforcement should only be resorted to when the wider public interest, rather than private interests, are at stake,[138] and seems to indicate that this policy prevailed in practice even before the 1993 reforms.

VII. CONCLUSION

It is contended by Shirtcliffe and others that the law on directors and the enforcement of their duties in New Zealand represents an "inexorable tide of legalism". The 1993 reforms, although intended to follow an enabling model, have brought only "complexity, compliance costs, frustration and alarm", it is claimed.[139] In particular, the newly enacted directors' duties have been singled out for criticism. It was feared that these, in combination with the liberalising of shareholder remedies and a perceived increase in government regulation, would lead to an unwillingness by directors to take legitimate business risks. It was also predicted that capable business people would be discouraged from accepting directorships due to the excessive standards of care and caution which are now required.

Such arguments have, however, been balanced by those of other, less critical, commentators. While justifiably describing the rewriting of the Law Commission's draft Act by the Law Reform Division as unnecessary and, at times, confusing, they have also noted that the complaints levelled at the 1993 Act's provisions on directors and enforcement are in many cases not realistic ones. Hodder, for example, suggests that "there have been no conspicuous signs of directors being hard to find, or of mass resignations by experienced commercial players", that the "much discussed minority remedies in the 1993 reform package have been little exercised", and that the law has been interpreted by the courts with an "awareness of the general intentions of the reforms", as expressed in the Long Title to the Act.[140] This is in contrast to the dramatic increases in enforcement activity, from both public and private enforcers, foretold by the critics of the 1993 reform package.

The results of the survey of enforcement litigation contained in Part 6 of this paper lend support to the more benign view of the reform package. Despite some obscuring of the Law Commission's original vision arising from the Law Reform Division's changes, a largely self-enforcing system has emerged. Arguably, the 1993 reforms have had little effect on who enforces corporate rights and duties or on the methods used. Most enforcement action in both periods surveyed was initiated by private parties, primarily shareholders and shareholder/directors, and the newly enacted directors' duties have produced comparatively few claims since their commencement in 1994.

Enforcement activity by the State, through the Registrar of Companies and the Securities Commission, remains confined to administrative matters and the enforcement of securities law provisions, as was also the case prior to the introduction of the reform package. This is consistent with the principle that "self-reliance and voluntary co-operation" should be relied upon in cases where the parties are, in fact, in a position to protect their own interests. Those provisions which are, and have been, subject to public enforcement are those designed to ensure "a free and open market" through the disclosure of information which may not otherwise be available to widely dispersed groups of investors.[141]

[1] Formerly the Australian Securities Commission (ASC), but renamed with effect from 1 July 1998: see s 7(2) of the Australian Securities and Investments Commission Act 1989, as amended by the Financial Sector (Amendments and Transitional Provisions) Act 1998.

[2] I Ramsay, "Enforcement of Corporate Rights and Duties by Shareholders and the ASC: Evidence and Analysis" (1995) 23 ABLR 174.

[4] Smith, The Wealth of Nations, Books IV-V (1776; reprinted: London, Penguin Books, 1999), pp330-331, noted by Jensen and Meckling, "Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure" (1976) 3 J Fin Econ 305 at 305.

[5] Companies and Securities Advisory Committee, Report on Reform of the Law Governing Corporate Financial Transactions (Sydney, 1991), p1.

[6] Walls, "Where Are We, and How Did We Get Here?", paper presented to the New Zealand Law Society and New Zealand Society of Accountants Company Law Conference (1994), p2.

[7] Shirtcliffe, "Good Governance: A Case for Paternalism or Personal Responsibility?" [1998] CSLB 66 at 66. Shirtcliffe, although strongly in favour of self regulation, concedes that "it may be that humans need a certain quantum of rules ... If people are not constrained by social rules, ... then binding legal rules will be sought to fill the gap". See also Ramsay, "Models of Corporate Regulation: The Mandatory/Enabling Debate" in Corporate Personality in the 20th Century (Hart Publishing, Oxford, Grantham and Rickett eds.[1998] ), p 221.

[8] See Ogus, Regulation: Legal Form and Economic Theory (Clarendon Press, Oxford, 1994), pp 1-3; and Ramsay, "Models of Corporate Regulation: The Mandatory/Enabling Debate", in Corporate Personality in the 20th Century (Hart Publishing, Oxford, Grantham and Rickett eds. 1998), pp218-221. The following discussion assumes that high levels of State regulation and public enforcement are necessarily linked, and that a market-based system will be characterised by private enforcement although, as noted by Ogus, this is not always the case.

[9] Black and Kraakman, "A Self-Enforcing Model of Corporate Law" (1996) 109 Harvard Law Rev 1911 at 1916 list "enforcement, as much as possible, through actions by direct participants in the corporate enterprise (shareholders, directors and managers)" among the central features of the enabling model.

[10] White, "Why are Banks Supervised?", in Reserve Bank of New Zealand, Monetary Policy and the New Zealand Financial System (GP Publications, Wellington, 3rd ed, 1992), p182.

[12] Francis, The Politics of Regulation: A Comparative Perspective (Clarendon Press, Oxford, [1993]), p20.

[13] See Ramsay, "Enforcement of Corporate Rights and Duties by Shareholders and the ASC: Evidence and Analysis" (1995) 23 ABLR 174 at 177 and 181.

[15] "Enforcement of Insider Trading Laws by Shareholders in New Zealand: An Analysis and Proposals for Reform" (1995) 3 Waikato Law Rev 101 at 120-121.

[16] Black, "Shareholder Activism and Corporate Governance in the United States", in The New Palgrave Dictionary of Economics and the Law (London, Macmillan Reference Ltd, Newman ed, 1998) vol 3, pp459-464; available at <http://www.ssrn.com>

[17] Galbraith, "The 1993 Act - Balancing the Rights of Shareholders, Directors, Executive Officers and Creditors", paper presented to the New Zealand Law Society and New Zealand Society of Accountants Company Law Conference (1994), p136. Galbraith notes that "in the past shareholders have either been reluctant to act, as in the case of institutional shareholders who generally have not rocked the New Zealand corporate boat, or have been unable to act, as in the case of smaller shareholders or minority shareholders, because of cost". See also Ramsay, "Enforcement of Corporate Rights and Duties by Shareholders and the ASC: Evidence and Analysis" (1995) 23 ABLR 174 at 175 and the references cited therein.

[18] "In Praise of Derivative Suits: A Commentary on the Paper of Professors Fischel and Bradley" (1986) 71 Cornell Law Rev 322 at 328.

[19] See American Law Institute, Principles of Corporate Governance: Analysis and Recommendations (ALI Publishers, St Paul, 1994), vol 2, p14; and McEwin, "Public versus Shareholder Control of Directors" (1992) 10 C&SLJ 182 at 183.

[20] "In a lawyer-led economy, there will be thousands of expensive lawyer hours spent on interpreting the law ... As transaction costs may consume nearly 50% of all resources in a modern economy, it is not surprising that heavily regulated countries have puny growth rates": Shirtcliffe, "Good Governance: A Case for Paternalism or Personal Responsibility?" [1998] CSLB 66 at 71, citing North, "Economic Performance Through Time" (1994) 84 American Econ Rev 359.

[22] "Possible Alternatives to an Australian Securities and Exchange Commission: Contingent Fees and Derivative Actions by Shareholders" (1976) 50 ALJ 26 at 27-28.

[23] Francis, "The Responsibilities of Corporate Governors: Conformance or Performance?" [1995] 12 BCLB 8.

[24] "A Self-Enforcing Model of Corporate Law" (1996) 109 Harvard Law Rev 1911 at 1920.

[25] "Good Governance: A Case for Paternalism or Personal Responsibility?" [1998] CSLB 66 at 69; See also Sealy, "Corporate Governance and Directors' Duties" (1995) 1 NZBLQ 92.

[26] Corporate Governance: Responsibility, Risks and Remuneration (John Wiley & Sons, Chichester, 1997), p2.

[27] Ibid at pp5-16. See also Cadbury, Report of the Committee on Financial Aspects of Corporate Governance (Gee & Co., London, 1992), which concluded that self regulation, by means of a voluntary "code of best practice" and other extra-legal controls, is preferable to legislation as a means of improving the way companies are run.

[28] Sealy, "Company Law: Directors and the Company They Keep" [1990] NZLJ 434 at 434.

[29] Hill, "Changes in the Role of the Shareholder", in Corporate Personality in the 20th Century (Hart Publishing, Oxford, Grantham and Rickett eds. 1998), pp190-192.

[32] "Corporations like this, of a private nature, are in truth little more than private partnerships":

[34] Hill, "Changes in the Role of the Shareholder", in Corporate Personality in the 20th Century (Hart Publishing, Oxford, Grantham and Rickett eds. 1998), p191.

[36] Shirtcliffe, "Good Governance: A Case for Paternalism or Personal Responsibility?" [1998] CSLB 66 at 66 and 68.

[38] See McKenzie, "Corporate Law Reform: The New Zealand Experience" (1994) 4 AJCL LEXIS 11, pp1-2. The New Zealand Law Commission was established by the Law Commission Act 1985 to "promote the systematic review, reform and development of the law of New Zealand": s 3. The Commission's specific functions are set out in s 5 of the Act, including the making of recommendations for law reform where required; advising on the review of any aspect of the law of New Zealand conducted by any Government department or organisation, and on proposals resulting from such a review; and advising the Minister of Justice on ways to make the law more understandable and accessible, having regard to the desirability of simplifying the expression and content of the law as far as is practicable.

[39] Cited in the Preface to The Law Commission, Report No 9: Company Law: Reform and Restatement, NZLC R9 (1989) (hereinafter "NZLC R9"), p ix.

[40] The Law Commission, Preliminary Paper No 5: Company Law: A Discussion Paper, NZLC PP5 (1987). See Goddard, "Company Law Reform - Lessons from the New Zealand Experience" (1998) 16 C&SLJ 236 at 239 for a summary of the issues identified by the Commission.

[41] The approach employed in New Zealand between 1860 and 1955 of following the corresponding United Kingdom Acts almost verbatim is exemplified by the following extract from the Explanatory Memorandum to the Companies Bill 1933:

"[New Zealand Companies Acts] should as far as possible adopt the ipsissima verba [ie. the precise words] of the Imperial Acts. Any attempts at improvement in language or arrangement would in large measure defeat the ultimate purpose of the [New Zealand Acts] - namely that there should be in this department of law be uniformity, as far as that is attainable, within the British Commonwealth, and that the decisions of the English Courts should be applicable in New Zealand as they are in England. If the criticisms of the Imperial Act, made in text books, legal journals and elsewhere, prove to be well founded and substantial, they will inevitably be followed by amending legislation in England, and it will then be a simple matter for the New Zealand legislature in its turn to adopt those amendments."

[43] Dickerson, Howard and Getz, Proposals for a New Business Corporations Law for Canada, Report to the Department of Consumer and Corporate Affairs (Ottawa, Information Canada, 1971).

[44] Preface to The Law Commission, Report No16: Company Law Reform: Transition and

[45] See NZLC R9, para 145-153. See also du Plessis, "Some International Developments in Company Law: A South African Perspective" (1993) 14 Co Law 224 at 226-227 and the references cited therein.

[46] For example, Wishart, "From our Australian Correspondent" [1995] CSLB 121at 122, refers to the "more Australian (ie. longer)" terminology used in the proposed Corporations Law provision allowing derivative actions, compared to that used in the equivalent New Zealand section. See also du Plessis, "Some International Developments in Company Law: A South African Perspective" (1993) 14 Co Law 224 at 230, who notes that the Australian companies legislation consists of around 1,530 sections, compared to 397 in New Zealand's Companies Act 1993, the statute which eventually resulted from the Law Commission's recommendations. By the same token, however, the Canada Business Corporations Act totals only 270 sections, yet is generally considered to operate at least as well in practice as the New Zealand model: Goddard, "Company Law Reform - Lessons from the New Zealand Experience" (1998) 16 C&SLJ 236 at 247 and 249.

[49] The Companies Act 1955 was not repealed immediately. Existing companies were given a three year period from 1 July 1994 to 30 June 1997 in which to reregister under the new Act. At the end of this transition period all companies which had not followed the prescribed reregistration procedure (set out in the Companies Reregistration Act 1993) were deemed to be reregistered, with the result that all companies are now governed by a single company law regime.

[50] McKenzie, "Corporate Law Reform: The New Zealand Experience" (1994) 4 AJCL LEXIS 11, p9; Explanatory Note to the Companies Bill 1990.

[51] See Redmond, Companies and Securities Law (Law Book Co., Sydney, 2nd ed, 1992), p524; Beck and Borrowdale, Guidebook to New Zealand Companies and Securities Law (CCH New Zealand Ltd, Auckland, 6th ed, 1998), p301; Farrar and Russell, Company Law and Securities Regulation in New Zealand ( Butterworths, Wellington, 1985), p257-258; and Davies, Gower's Principles of Modern Company Law (Sweet and Maxwell, London, 6th ed, 1997), pp658-660. Davies notes that "English law has ... developed [an] ... elaborate and restrictive set of criteria for determining when a individual shareholder [or the 'independent' shareholders as a whole] may sue to enforce the company's rights against the wrongdoing directors".

[54] See, for example, Baxt, "The New Remedy in Oppression: A Reworded Provision or a New Remedy?" (1985) 3 C&SLJ 21; Shapira, "Statutory Protection of Minority Shareholders: Towards the 'Squeeze Out'?", in Contemporary Issues in Company Law (CCH New Zealand Ltd, Auckland, Farrar ed, 1987), pp205-225; and Berkahn, "The Oppression Remedy and the 'Group' Approach to Shareholder Remedies in New Zealand" (1997) 10 CBLJ 1, where the recent liberalisation of the oppression remedy is discussed. Shapira states at p207 that the turning point came with the revision of the oppression provision and its replacement by the remedy for "unfair prejudice". This occurred in New Zealand in 1980, and the transition from a test requiring fraud or legal impropriety to one based on "fair dealing" and "wider equitable considerations" was cemented by the Court of Appeal decision in Thomas v HW Thomas [1984] 1 NZLR 686. This approach has since been mirrored in other remedies such as the derivative action: See Sealy, "The Rule in Foss v Harbottle: The Australian Experience" (1989) 10 Co Law 52; and Berkahn, "The Derivative Action in Australia and New Zealand: Will the Statutory Provisions Improve Shareholders' Enforcement Rights?" [1998] BondLawRw 5; (1998) 10 Bond L R 74 at 83-88, on the growth of the wide ranging "interests of justice" exception to the rule in Foss v Harbottle.

[55] The Law Commission, Preliminary Paper No. 5: Company Law: A Discussion Paper,NZLC PP5 (1987), para 295-297.

[57] Although NZLC PP5 was not published until December 1987, much of it was presumably written prior to the October crash.

[58] Tompkins, "Directing the Directors: The Duties of Directors under the Companies Act[1993]" (1994) 2 Waikato Law Rev 13.

[59] "The general meeting has not historically operated to protect shareholders from director abuse of their powers of management, but rather has often been used as a cypher by directors to absolve themselves of responsibility": NZLC R9, para 197. See also Sneed, "The Stockholder May Vote as He Pleases: Theory and Fact" (1960) 22 U Pitt Law Rev 23 at 54: "While, in theory and in pious and traditional corporate phraseology, the stockholder may vote as he pleases, the fact is he cannot."

[60] Shapira, "Shareholders' Action and Remedies", in Morison's Company and Securities Law (Butterworths, Wellington, 1994 ) vol 2, para 36.1.

[61] NZLC R9, para 318; Fitzsimons, "Australia and New Zealand on Different Corporate

[62] That is, non-shareholders who are given shareholder-like rights or powers under a company's constitution: Companies Act 1993 s 2(1).

[63] NZLC R9, para. 214-222. See also Wishart, "Models and Theories of Directors' Duties to Creditors" (1991) 14 NZULR 323 at 324. The provision giving creditors the right to apply to the court for an injunction was deleted from the Companies Bill at the Select Committee stage.

[64] [1983] Ch 258 at 288: "The directors indeed stand in a fiduciary relationship to the company ...and they owe fiduciary duties to the company, though not to the creditors, present or future, or to individual shareholders".

[65] [1990] 3 NZLR 513 at 530-531, applied in ANZ Executors & Trustees Co. Ltd v Qintex Australia Ltd (1990) 2 ACSR 677 at 682 where it was held that directors have no "duty in law directly owing to and enforceable by creditors, and sounding in debt or damages".

[68] The suggestion of a duty to creditors seems to be derived from Mason J's statement in Walker v Wimborne [1976] HCA 7; (1975) 137 CLR 1 at 6: The directors of a company in discharging their duty to the company must take account of the interests of its shareholders and its creditors.

[69] NZLC R9, para 198-199 and 564-585. The Commission was of the view that shareholder "discipline" over directors in particular was an important aspect of company law, and one that ought not to be restricted. See also Wishart, Company Law in Context (Oxford University Press, Auckland, 1994), p186. As well as the directors' duties, the statutory solvency test, under which directors are obliged to establish a company's solvency before entering any transaction where wealth is transferred from the company to shareholders, also reflects the Commission's push towards greater director accountability: see s 4 of the 1993 Act, and Haynes, "The Solvency Test: A New Era in Directorial Responsibility" (1996) 8 AULR 125.

[71] See, for example, Fitzsimons, "Australia and New Zealand on Different Corporate Paths" [1994] OtaLawRw 6; (1994) 8 Otago LR 267 at 286; Deane, "Besieged by Duties: Will the New Companies Act Work for Directors?", paper presented to the New Zealand Law Society and New Zealand Society of Accountants Company Law Conference (1994); and Shirtcliffe, "Good Governance: A Case for Paternalism or Personal Responsibility?" [1998] CSLB 66.

[72] Tompkins, "Directing the Directors: The Duties of Directors under the Companies Act 1993" (1994) 2 Waikato Law Rev 13 at 14; Hodder, "Whither the Companies Act 1993?" [1997] NZLJ 97 at 98-100; and Goddard, "Company Law Reform - Lessons from the New Zealand Experience" (1998) 16 C&SLJ 236 at 240-244.

[73] Sealy, "Company Law: Directors and the Company They Keep" [1990] NZLJ 434 at 435 notes that there is little disagreement among different jurisdictions as to what the substantive rules governing directors' duties should be, although they may be expressed differently and carry different consequences when breached:

When legislation replaces the common law the statutory wording, whether it is formulated in broad terms or specified in quite elaborate detail, does not differ substantially from the rules which have come through to us from our forefathers by the doctrine of precedent and evolution in the common law. Different jurisdictions may prescribe different sanctions, or play about with the onus of proof. But generally speaking, we find the new look obligations include the same formulations which we find in the common law.

[76] See ss 131-149 of the Companies Act 1993. These include duties to act in good faith and in the company's best interests; to act for a "proper purpose"; not to create a substantial risk of serious loss to creditors, or agree to an obligation unless the director reasonably believes that the company can perform it; and a duty of reasonable care, diligence and skill.

[77] Tompkins, "Directing the Directors: The Duties of Directors under the Companies Act 1993" (1994) 2 Waikato Law Rev 13 at 15-16. The Explanatory Note to the Companies Bill simply notes that the Law Commission's characterisation of the duty to act in good faith and in the company's best interests was not adopted, with no further comment: p vi.

[78] Tompkins, "Directing the Directors: The Duties of Directors under the Companies Act[1993] " (1994) 2 Waikato Law Rev 13 at 17 and 38-39.

[82] See, for example, Part XX of the Canada Business Corporations Act, which provides, inter alia, for derivative actions, a remedy for unfairly prejudicial conduct and restraining or compliance orders; and Rule 23.1 of the united States Federal Rules of Civil Procedure, which governs derivative actions in federal courts.

[83] See McKenzie, "Corporate Law Reform: The New Zealand Experience" (1994) 4 AJCL LEXIS 11, pp31-32; Tompkins, "Directing the Directors: The Duties of Directors under the Companies Act 1993" (1994) 2 Waikato Law Rev 13 at 36-37; and Fraser, "The Companies Act 1993: Shareholders' Remedies" (1994) 7 AULR 739.

[84] NZLC R9, para 119; McKenzie, "Corporate Law Reform: The New Zealand Experience" (1994) 4 AJCL LEXIS 11, p 34.

[87] Securities Act 1978 ss 58-60. See Ministry of Commerce, Review of the Securities Commission: Discussion Document (Competition and Enterprise Branch , Wellington,[1997]), pp50-52.

[88] Beck and Borrowdale, Guidebook to New Zealand Companies and Securities Law (CCH New Zealand Ltd, Auckland, 6th ed, 1998), p20.

[89] That is, "a person who has some genuine grievance because [a decision] has been made which prejudicially affects his interests": Attorney General of Gambia v N'Jie [1961] AC 617 at 634.

[91] McDonald, "Registrar of Companies", in Morison's Company and Securities Law (Butterworths, Wellington, 1994) vol 2, para 42.6.

[92] Farrar, "The Securities Act 1978" (1979) 8 NZULR 301 at 311. Farrar notes that the Securities Act as a whole retains "the traditional company law approach of laissez-faire, tempered by disclosure".

[93] Securities Act 1978 s 10(b) and (c); City Realties Ltd v Securities Commission [1982] 1 NZLR 74 at 77-80.

[94] See Fitzsimons, "The New Zealand Securities Commission: The Rise and Fall of a Law Reform Body" (1994) 2 Waikato Law Rev 87.

[95] "The Securities Commission", in Morison's Company and Securities Law, (Butterworths, Wellington, 1994) vol 3, para 2.12.

[96] Abernethy, "The Securities Amendment Act 1988: The Regulator's Perspective", speech to the Research Centre for Business Law at the University of Auckland, noted by the Ministry of Commerce, Review of the Securities Commission: Discussion Document (Competition and Enterprise Branch, Wellington, 1997), p49.

[99] Securities Amendment Act 1988 ss 30-32. See Securities Commission v Jones [1993] NZHC 2280; (1993) 6 NZCLC 68,547 and Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 NZLR 7 for examples of the use of this power.

[102] Hodder, "Harmonisation with Australia in Directorships - Current Difficulties and Future Problems", Institute for International Research Conference (1992), noted by Fitzsimons, "Australia and New Zealand on Different Corporate Paths" [1994] OtaLawRw 6; (1994) 8 Otago LR 267 at 284.

[103] Dickerson, Howard and Getz, Proposals for a New Business Corporations Law for Canada, Report to the Department of Consumer and Corporate Affairs ( Ottawa, Information

[104] Cheffins and Dine, "Shareholder Remedies: Lessons from Canada" (1992) 13 Co Law 89; Griggs and Lowry, "Minority Shareholder Remedies: A Comparative View" [1994] JBL[463] at 468-477.

[105] These include the power to apply to the court for an order directing an investigation of a company if it appears that its business is being carried on fraudulently or in an oppressive or unfairly prejudicial manner; and the power to inquire into the ownership of any security of a company to establish compliance with certain of the Act's securities law provisions: Canada Business Corporations Act ss 229 and 235. In addition, the Director may participate in an action taken under the oppression remedy where the person complaining of oppressive conduct has a good reason for not bringing the action personally: sec 241. This occurs very infrequently: "Investigations and Remedies", in Canada Corporations Reporter (CCH Canadian Ltd, North York, 1997) vol 1, para 9950.

[107] Jordan, Consultancy Report on the Review of the Hong Kong Companies Ordinance (Financial Services Branch of the Hong Kong Government, Hong Kong, 1997).

[108] Jordan, "The Politics of Law Reform: The Making of New Companies Law in Hong

[112] Corporations Law, s 184. See Gething, "Do We Really Need Criminal and Civil Penalties for Contraventions of Directors' Duties?" (1996) 24 ABLR 375 at 382-385.

[113] Corporations Law, ss 1315,1317J; Mesenberg v Cord Industrial Recruiters Pty Ltd (1996)[19] ACSR 483.

[114] Corporations Law, s 180(2). See Tan, "Delivering the Judgment on a Statutory Business Judgment Rule in Australia" (1995) 5 AJCL 442; and Mayanja, "Directors' Duties, Business Judgment and Takeover Defences: Agenda for Reform" (1997) 10 CBLJ 39.

[115] Corporations Law, Part 2F.1A. See de Vere Stevens, "Should We Toss Foss? Towards an Australian Statutory Derivative Action" (1997) 25 ABLR 127; and Berkahn, "The Derivative Action in Australia and New Zealand: Will the Statutory Provisions Improve Shareholders' Enforcement Rights?" [1998] BondLawRw 5; (1998) 10 Bond LR 74.

[116] Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998, para 6.30.

[117] Francis, "The Responsibilities of Corporate Governors: Conformance or Performance?" [1995] 12 BCLB 8.

[119] "From Our Australian Correspondent" [1995] CSLB 121. Admittedly, the comments of both Sealy and Wishart were made before the latest round of reform activity in Australia.

[121] Company Law Review Steering Group, Modern Company Law for a Competitive Economy: The Strategic Framework (Department of Trade and Industry, London, 1999), pp92 and 190 -204.

[122] The Law Commission (UK), Shareholder Remedies, Law Com No 246 (1997), Executive Summary.

[124] Lennard's Carrying Co. Ltd v Asiatic Petroleum Ltd [1915] AC 705 at 713.

[125] "Company law and Regulatory Complexity" in Corporate Personality in the 20th Century (Hart Publishing, Oxford, Grantham and Rickett eds. 1998), p156.

[126] Brooker's Company and Securities Cases (Brooker's, Wellington, updated to February 1999). The database includes all Privy Council, New Zealand Court of Appeal, High Court and District Court cases relating to company and securities law received by the publisher from the courts since 1986. The cases are published in full text. Sets of facts resulting in more than one judgment, such as appeals or procedural hearings, have been counted only once. inevitably, some relevant cases will have not been identified.

[129] This limitation was also noted by Ramsay in his 1995 investigation into company law enforcement in Australia: "Enforcement of Corporate Rights and Duties by Shareholders and the ASC: Evidence and Analysis" (1995) 23 ABLR 174 at 175.

[130] According to the Commerce Committee's "1997/98 Financial Review of the Ministry of Commerce", in Reports of Select Committees on the 1997/98 Financial Reviews of Government Departments and Offices of Parliament (1999), the Securities Commission actually undertook 55 enforcement actions in 1996, reducing to 47 in 1998. Presumably this includes all prohibitions or suspensions of investments statements, prospectuses and advertisements, as well as actions requiring applications to the court. Moreover, the company names provisions of the Companies Act were presumably enforced by the Registrar on thousands of occasions during the period under review without the decision being challenged.

[131] The majority of these cases were actually appeals by companies from decisions of the Registrar. Although not initiated by the Registrar as such, they have been included because they stem from action taken by the Registrar to enforce statutory provisions

[132] Tompkins, "Directing the Directors: The Duties of Directors under the Companies Act 1993" (1994) 2 Waikato Law Rev 13 at 13

[133] For the three and half year period September 1989-March 1994, Ramsay found only 93 reported judgments involving enforcement by shareholders, compared to 291 criminal actions, and 79 civil matters commenced by the ASIC in the single year to June 1994: "Enforcement of Corporate Rights and Duties by Shareholders and the ASC: Evidence and Analysis" (1995) 23 ABLR 174 at 175 and 180-183.

[135] Governance Issues for Closely Held Companies^ Wellington, Victoria University of Wellington, 1997) pi. Dugan notes that over 90% of New Zealand companies have less than six shareholders. 136 Hill, "Changes in the Role of the Shareholder", in Corporate Personality in the 20thCentury (Hart Publishing, Oxford, Grantham and Rickett eds. 1998), ppl90-192. 137 This is not surprising given that closely held companies generally do not offer securities to the public. 138 NZLC R9, para 318.

[139] Shirtcliffe, "Good Governance: A Case for Paternalism or Personal Responsibility?" [1998] CSLB 66 at 66. See also nn 70-78, and accompanying text; and Goddard, "Company Law Reform - Lessons from the New Zealand Experience" (1998) 16 C&SLJ 236 at 246.

[140] Hodder, "Whither the Companies Act 1993?" [1997] NZLJ 97 at 99-101. See also Tompkins, "Directing the Directors: The Duties of Directors under the Companies Act[1993]" (1994) 2 Waikato Law Rev 13 at 27, 29 and 38.

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