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Griffiths, S --- "Company and Securities Law Commentary and Materials" [2003] OtaLawRw 11; (2003) 10 Otago Law Review 453

Company and Securities Law Commentary and Materials

(by Ross Grantham and Charles Rickett, Brookers, 2002)

There is nothing like a bit of scandal to grip the imagination. Business has certainly had its share of scandals in the past year or so. The opaque accounting at Enron, the devilishly simple mis-categorization of expenditure at World Com and the collapses of HIH and One-Tel much closer to home have brought questions of corporate accountability and governance to the fore. How could this happen? Where were the auditors? Does good corporate governance mean anything? In New Zealand as well as in most Western economies the company has become a dominant form of business structure. Because that is so, and because of the perceived importance of capital markets to the strength of the New Zealand economy[1], the form and content of corporate law rules have implications not only for a particular company but for the economy generally. While there have been no significant business scandals in New Zealand in recent times, there is some pressure to review corporate governance practices and regulation of the secondary market. Whenever there is change in the law, there are choices to be made and an adequate understanding of the implications of those changes is only truly possible when there is analysis of the underlying principles and policies.

For the student and no doubt the practitioner and maybe even the academic, it is difficult sometimes to see company and securities law as anything more than voluminous sets of rules. Linking the theory of company law and the rules that give expression to those theories can be problematic. The concept of corporate governance is a good example. It would be a rather perverse individual who would argue against the proposition that companies need ‘good corporate governance’. The harder question is what does that entail. Why is it assumed that independent directors will ensure good corporate governance? What does independent mean? Why might we expect audit committees of boards to deliver a better audit process than it is feared professionally trained auditors are able to do? It is possible to state the rules. It is even possible to suggest the theory. Linking the rules and the theory is an altogether more difficult project. In their source book, Company and Securities Law, Commentary and Material, Ross Grantham and Charles Rickett aim to do just that. As they write in the preface, their intention is not to provide ‘merely a stroll through company law’. Rather, the reader is invited to ‘engage with the concepts, doctrines, principles and policies’ that lie behind and beneath the plethora of statutory and common law rules. This is an international trend in company law scholarship,[2] and this book makes a valuable contribution to the process in New Zealand.

Company and Securities Law is a contribution to a growing market in publications of this type of source book. What is distinctive about this work is its linkage of the theoretical underpinnings with specific rules of corporate law extant at a particular time. Ross Grantham has written elsewhere of the widespread failure, in the Commonwealth at least, to integrate law and theory.[3] The themes in this work indicate a commitment to relate the theory to the Companies Act 1993 and to the common law. In the introduction the authors express the hope that the work might foster enthusiasm for corporate law scholarship. That is a commendable aim. In a time when the rules regulating the secondary securities market are in such a state of flux and concern about the standards of corporate governance are rife, it is important that change is not simply an expression of outrage at perceived corporate excess. The enterprise in which the authors hope the users of their book will engage is necessary for all involved in company law in this country.

The book is very sensibly structured. What would have been useful is a summary of contents. The contents are spread over seventeen pages and are very detailed. A summary would have been very useful in a book that users will dip in to, rather than necessarily read from cover to cover. Part 1 lays out the history of the corporate form and the various theories of the corporation. The traditional theories focussed on concepts of corporate personality and in what ways the company can be said to be a person. There are useful readings summarising the content of that analysis. The book then outlines the economic theories of corporate law, beginning with a selection from Bearle and Means’ seminal work. There are also appropriate extracts illustrating the theories of agency, contractarianism and communitarianism. The section ends with a useful summary of the debate about the necessity of mandatory rules. The notes and questions will stimulate thought and further reading.

The remainder of the book’s six parts more or less follow the life cycle of a company from formation in Part 2 to death in the distinctively corporate form of liquidation and receivership in Part 7. Along the way the book deals with the bread and butter issues. Part 2 examines the process of formation, registration and the corporate constitution and deals effectively with some of the mechanical and mundane but important issues such as amendment of the constitution. Part 3 is entitled the consequences of incorporation. It deals with the doctrine of separate legal personality and limited liability. The selection of material and the commentary on the issues of the legal capacity of the company and the potential liability of companies for civil and criminal wrongs is particularly strong. It is in this area that a theory of the company is essential to formulating some coherent rules for dealing with the liabilities that a company might incur in the course of its life. Once it was accepted that an abstract entity could commit civil and criminal wrongs, some theory needed to be posited to explain how this might happen. For those in management roles, some rules were necessary for them to determine when they are liable and when it is the company that is liable. How far the Courts have made these sufficiently transparent is a moot point. Attributing the notions of actus reus and mens rea to an abstract entity has seemed extraordinarily difficult, yet practically very important. This part of the book is particularly insightful, drawing on the authors’ scholarship in the area. It links well to the introductory readings on the traditional ‘company as person’ analysis. Part 4 deals with management of the company and the particular issues of allocation of power between shareholders and managers and the authority of directors to bind the company. Part 5 addresses corporate governance. It considers directors’ duties, enforcement of duties, the position of controlling shareholders, financial reporting obligations and audit. Company law moves fast. This is illustrated by the fact some issues, such as the particular role of independent directors in corporate governance, have come to the fore since the book was completed.

If there is any significant criticism to be levelled at this work it is that the section on securities law is rather too brief in a book that includes securities law in its title. The sections on securities law are included in Part 6 ‘Corporate Finance’. There are four chapters that might be described as relating to securities law - raising finance from the public, debt capital, takeovers and insider trading. It might be a simplistic measure, but there are approximately 113 pages directly on securities law in a book of 1070 pages. There is coverage of some of the key concepts in this area and there can be no argument with the content. There is good material on mandatory disclosure and also on the arguments for and against the regulation of takeovers. The readings on insider trading introduce the issues and the particular difficulties that follow from the way in which New Zealand insider trading law is presently drafted. Securities law is a huge subject in itself and full of immensely intriguing and challenging philosophical debate. In the introductory chapters there is little that is directly about the role and purpose of, and reasons for securities regulation. Securities regulation has been principally erected on the semi-strong form of the efficient capital markets hypothesis. This hypothesis suggests that security prices immediately impound all available information. The implication for capital market law is that the market should have available to it all the relevant information. Whether rules are necessary to achieve this aim, or whether the market can itself do it more efficiently and fairly, has been the locus of much academic debate. Recent research suggests that the efficient markets hypothesis itself may not hold. If that is true, the implications for capital market regulation law are profound. Only very few of these ideas are alluded to. There is presently a significant amount of securities law reform taking place in New Zealand. The rational for this is that a strong capital market is a public good and investor confidence is a vital ingredient in a strong capital market. It is this public good aspect of securities law that is missing from this book. The coverage of securities regulation seems rather scant in a book in which it shares equal billing with company law. Perhaps the font on the front cover could have reflected the relative coverage of the two topics.

Overall this is an excellent book. It draws together all the major themes of company law. It will serve as a very useful resource for students. But in no way does it spoon feed its readers and the notes and questions are full of challenge. Much of the hard work will have to be done by the reader. But, as the authors themselves note, that is the nature of true legal education. It is that which will make it such an excellent resource for company law students.

Shelley Griffiths,
Faculty of Law,
University of Otago.

[1] See for example the media statement by Hon Paul Swain, then Minister of Commerce on the release of the Ministry of Economic Development, Securities Trading Law Discussion Documents, 31 May 2002.

[2] Brian Cheffins, ‘Using Theory to Study Law: A Company law Perspective’ [1999] CLJ 197.

[3] Ross Grantham, ‘Corporate Governance: A New Name for an Old Problem’ (2002) 8 NZBLQ 257.