Lecture Notes 204 - Jonathan Barrett PDF

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Lecture One, Week OneTypes of Business Organisations: - Sole trader - Partnership - Business trust - Limited partnership - CompanyInvestors Legal Risk: A key deciding factor regarding the type of Business Organisation:High: Sole Trader. Partnership. Medium: Trust. Joint Venture. Low: Limited partner...

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Lecture One, Week One Types of Business Organisations: - Sole trader - Partnership - Business trust - Limited partnership - Company Investors Legal Risk: A key deciding factor regarding the type of Business Organisation: High: Sole Trader. Partnership. Medium: Trust. Joint Venture. Low: Limited partnership. Company. Trust: A way of holding property for the benefit of another - Trustee Act 1956 and equity apply - Trust deed governs internal matters - Trustees assume business risk (indemnified against trust assets) and manage; beneficiaries share profits - Transfer of interests problematic Company: An entity (legal person) - Companies Act 1993 applies - Constitution governs internal affairs - Shareholder (almost always) have limited liability - Name must end w “Limited” or “Tapui (Limited)” - Company assumes business risk; directors manage; shareholder share profits - Transfer of interest easy

Lecture Two, Week One: Sole Trader (Proprietor) - One person - No governing legislation - No internal governance rules

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Can use a trading name, e.g. “Joe’s cafe” subject to general law, e.g. trademarks and fair trading act, tort of passing off → Can use any form of name that you like Proprietor: assumes full business risk; manages business; has right to profits Whole business can be transferred No sole trader register Internal government rules not Comply with fair business legislation Sole trader will be personally liable for the business debt Business can be easily transferred Advantages; small, flexible and private (Only have to go through the IRD process.)

Partnership and The Partnership Act: Definition of partnership is the: - Relation which subsists between persons, carrying on a business in common, with a view to profit. At least two people, need to have a relationship, need to be carrying on some sort of business together, working together with a mutual goal to make a profit. - No need to register a partnership. - Does not need a formal written partnership agreement, if there is no agreement the partnership can be governed by the Partnership Act → PA provides minimum standards - Partners can enter into contracts on behalf off the partnership to bind the other partner(s) - Partners are equally liable Joint Venture → Not bound in contracts. How do you know if it is a partnership if it has not been registered? - Satisfying 3 requirements of s 4 is basic requirement, but problem with this definition is that it could cover other forms of business entity (Joint venture) - Also need to consider other (disprovable) evidence of partnership but not; (a) Joint ownership of land (b) Sharing gross returns → Splitting the income stream, both contracting parties forfeit their own personal costs. (c) A 1908, s 5 - Overall courts look for factors indicating the intention of the parties and what agreement is called is not decisive.

A good indicator of partnership is if the parties split both the profits and the costs for the business. Review section four and five of the Partnership Act as well as the overall relationship (Like determining an employee agreement….) Whywait PTY LTD v Davison [1997] 1 QR R 225 (QD CA) Courts determined this relationship was in fact a partnership → One of the parties entered into a contract on behalf of a partnership and then left the country Davison “Partnership Agreement” with Cheers to build and sell four town hourses, on land that the Davidsons would buy. Other clauses referred to a “joint venture” The parties agreed that: - Davison → paid interest - Cheers → hire builder; manage site - Davison and Cheers ISSUE: Was the nature of the agreement a partnership or a Joint venture? What was APPLICATION: - Each took on different responsibilities - Relationship one of mutual confidence Mutual Agency; All partners bind each other in contract and tort law. Mutual fiduciary duties; Must act in good faith. Mutual ownership of partnership property; All partners share in the profits from the property that promotes the business. A partnership cannot own property; any assets must be owned in name or by the partners. Property can be held in one partners name but equally shared by the partners, if one partner leave the assets have to be transferred. If you are a partner you are an agent of the business mutually binding the other parties. - Every partner in a firm is liable jointly with the other partners for all debts and obligation of the firm incurred while he or she is a partner. What happens when you leave a partnership? → You won’t be liable for the debts incurred after you have left the partnership HOWEVER you need to give notice, ensure the firm does not continue to represent yourself as a partner, remove the association from the firm, give notice to all existing clients. Also have to give notice in the Gazette. If you don’t follow procedures correctly and giver proper notice you will still be jointly liable as a partner. REFER SECTION 39 OF THE PARTNERSHIP ACT.

Pont v Wilkins [1992] 4 NZBLC 102, 894 → Courts found that Pont was still liable as an apparent partner.

Week two, lecture three: What is a partnership? Partnership is the: (i) relation which subsists between persons (ii) Carrying on a business in common (iii) with a view to profit: PA 1908 s 4(1) What is a firm? Partnership property: Basic Rules: - Intention is critical → You can tell what what the intention is by the partners from the actions taken by the partners → Harvey v Harvey 1970 - Must be used for purposes of partnership - Property bought with fim money, prima facie partnership property → this would be a good indication that it is a partnership asset. - Must be used to pay firm’s debts on dissolution - Registered owner hold assets/ land in trusts for all partners if asset is partnership property. → the idea is that because you cant have separate entity it would be held in the name of one or all the partners it will be held in the trust. Introduction to business entities: Limited partnerships: A hybrid between a company & partnership - Limited partnership is an separate legal entity (legal person) - Must incorporate and be registered Limited Partnerships Act 2008 applies: - Written partnership agreement governs internal matters - Name must end with “limited partnership” or “LP” General partner assumes business risk and manages; - Limited partner (usually an investor) has no management role, but contributes capital (and is not liable for debts of partnership.)

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Does the day to day running and organising of the business Public disclosure on who the general partner is

The limited partner is usually just an investor that does not want to get involved with the management. → Can’t be liable for the debts. - If there is not enough money in the partnership the general partner is then liable for the debt. - The public register; needs to be stated on the application but not stated on the public record therefore have a degree of privacy.

General and limited partners share profits. → Up to them to agree, set out in the agreement. Joint Venture: No particular legislation or act A business term: - Identifies a joint venture - Is created by contract and - Is not a body corporate or a partnership - Parties are not mutual agents (of each other) and joint ventures can contractually exclude fiduciary duties. Joint Ventures and Business Risk: If there is any liability to outside parties → it is only the joint venture party that has signed that contract that will be liable. Trust: A way of holding property for the benefit of another: - Trustee Act 1956 and equity law apply - Trust deed governs internal matters - Trustees assume business risk (indemnified against trust assets) and manage; beneficiaries share profits - Transfer of interests problematic Companies can be appointed as trustees → Can isolate risk Company: An entity (legal person) - Companies ACt 1993 applies

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Constitution governs internal affairs Shareholders (must always) have limited liability Name must end with “limited” or “Tapui Limited” Company assumes business risk; directors manage; shareholders share profits Transfer of interest easy → Shareholders. If you have shares in a company and haven’t paid the balance and the company goes bankrupt the shareholder can be liable for the amount that has been unpaid on their shares → If your amount has been paid and the company goes bankrupt you as a shareholder will lose the amount money that you invested in the shares

Basic company terms: Share: Investor’s interest in a company Shareholder: Investor who holds a share (equity) in a company Board of directors: People who control and manage a company Distribution: transfer of economic value to a shareholder (as a shareholder) What is a company in NZ? CA 1993, s 2 → “company means a company registered under Part 2.” - Not a creature of common law/ equity - Registration under CA 1993 creates a company. Essential requirements of a company → s 10 of Companies Act 1993 A company must have: - A name; and At least one: - Share; - Shareholder; and - Director living in NZ (or enforcement country → Basically Australia,) to prevent abuse. Registration is mandatory under s 13 Separate legal personality s 15 A company is a legal entity separate from its shareholders; and - Continues to exist until removed from the NZ register. → Perpetuity ( a legal process of dissolution.) Full legal capacity s 16

A company has: Full capacity to; - Carry on or undertake any business or activity, - Do any act, or enter into any transaction → Full rights, powers and privileges. (Persons include corporate companies) What is a Corporation (Company)? → Five qualities of international companies: Legal personality (separate entity) - Limited investor liability - Transferable shares - Delegated management (board of directors) - Investor ownership (of share in the company) Companies have human rights: NZBORA ….. The provisions

Lecture 4, week 2: What is a corporation? Characteristics of a company: - Legal personality (separate entity)→ A legal person. A single contracting party. Contracts are entered into in own name and separate from those who are involved in the company. - Limited investor liability - Transferable shares - Delegated management (board of directors) - Investor ownership (of shares in the company.) - Company owns its own assets and are not available to shareholders or creditors of shareholder → a form of asset protection → Company assets are available to creditors, used a security for loans. → Stability - Difficult for shareholders to get back capital. → a shareholder only owns shares but does not own company assets. → Hard for the shareholders to retract their shares with the company. - If you are a shareholder and want to get your money back from your shares you will have to sell your shares → Not able to return the shares back to the company or very heavily regulated.

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Limited investor liability → The shareholders not liable for debts of company. → The creditors bear the risk of debt if the company fails. → The downside risk has shifted from the shareholders to the creditors.

Transferable shares: - Under the Companies Act shares are transferable. The liquidity of shares is what creates the market. → Investors like to invest into shares as they are easily and freely transferred. - Listed companies → shares are freely transferable. - SME can modify the rules regarding the transferability of shares. → make them not freely transferable. - Free transferability creates the market. The board → can be directors that are not shareholders. You can have multiple people on the board, people that are outside of the company and have minimal involvement in the company. - The directors are elected by the shareholders Shareholders: A shareholder (as a shareholder) is not liable for the company’s obligations, unless the company’s constitution provides otherwise. → Companies Act 1993 s 97(1) - No liability for debts - Liable for the unpaid shares by the company. What types of company are there? Co-Operative company (e.g. fonterra.) The main purpose of co-ops is mutual support for members, or the promotion of a specific purpose or social benefit. - Often have the word ‘co-operative’ in their company name. Unlimited companies: Incorporated under CA, however the shareholders of an unlimited company have unlimited liability meaning they must pay any debts the company can’t pay. - The liability is included in the company's constitution. Overseas companies can be registered in NZ - Set up as a NZ subsidiary - Establish a business e.g. a branch - Become a NZ company

What is a holding company? Pg 30 A company is a holding company if it has one or more subsidiaries CA 1993 s 5. A company being a subsidiary of another company if; → The other company: - Controls the composition of the board of the company; or - Is in a position to exercise or control the exercise of more than the half the maximum number of votes that can be exercised at a meeting of the company - Holds more than one half of the issued shares of the company, other than shares that carry no right to participate beyond a specified amount in a distribution of either profits or capital; The holding company must have more than 50% of shares. What is a related company? A company is related to another if; Why does being related matter? Subsidiary must not hold shares in its holding company - Reporting purposes; Financial Reporting Act - Assets of related companies may be pooled when one becomes insolvent if it is just and equitable Issuers: An issuer offers financial products, e.g. shares, to the public Issuers have special duties under: - Financial Reporting Act 2013 - Financial Markets Conduct Act 2013 Listed Companies: NZX (NZ stock exchange) is a market for shares Listing is by agreement with the NZX e.g. a contract not a statute - Financial Markets Authority has oversight over all financial markets. - Different levels of regulation depending on what your company is involved with.

Forming a company: Application for registration, s 12 → Registration, s 13 → Certificate of incorporation, s 14 Application for registration:

An application for registration for company under this Act must be sent or delivered to the registrar and must be (a) In the prescribed form; and (b) Signed by each applicant; and (c) Accompanied by a document in the prescribed from signed by every person named as a director, containing his or her consent to be a director and a certificate that he or she is not disqualified from being appointed or holding office as director of the company. -

The application must also state/ name how many shares available and who are the shareholders. Must also include a notice reserving a name for the proposed company. If your company has a constitution you have to file that Also have to identify who the holding company is and if you don’t have a director in NZ what is their address in an enforcement country (basically only Australia.)

Company names: Names must be reserved before you can apply to register a company Registrar and Company names: The registrar must not reserve a name that - Would contravene an Act → Only names protected by; Flaggs, Emblems and Names Protection Act 1981 → Reserve Bank of NZ Act 1989 → Cooperative Companies Act 1996. - Is identical or almost identical to the name of another company - Cannot be offensive. → Human Rights Act states that you cannot have a discriminatory name.

Week 3, lecture 5: Companies registered are all published and accessible by the public. → with the addresses You cannot have a company name that contravenes an act.

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The registrar must not reserve a name that Would contravene an Act or Is identical or almost identical to the name of another company or → almost identical can be defined by past cases → Search the companies register, identical means exactly the same. Almost identical has been held to mean - virtually indistinguishable. In the opinion of the Registrar, is offensive

High court decisions: Dr Rust not almost identical to The Rust Doctor Flight Centre (NZ) not almost identical to Rotorua flight centre The registrar may approve that Alpha (2014) Limited that it is not almost identical to Alpha Limited. Offensive: - Obscene - Contrary Importance of Limited. → If a new company is established with similar products or in the similar industry as a pre established company and the same name the existing company if losing money/ reputation/ customers because new company is trading in same area of business, then existing company has 2 remedies: - Passing off - S 9 FTA Tort of passing off: 3 requirements of torts: - Some reputation or goodwill attached to plaintiff’s name, make or get-up; and - Defendant’s use similar name etc confuses public; and → The defendant has used the same or deceptively similar name, mark or get up to confuse or deceive the relevant public or, if unrestrained, was likely to do so - Damage likely to plaintiff’s business (financial), reputation or goodwill. → Muzz Buzz Franchising PTY LTD v JB Holdings (2010) LTD [2013] NZHC 1599 Section 9 FTA

No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive → Taylor Bros ltd v Taylors Group Ltd [1988] 2 NZLR 1

Corporate personality: Salomon v A Salomon & Co Ltd [1897] AC 22 CONT → Important case for establishing company Lee v Lee’s Air Farming LTD [1961] NZLR 325 (Privy council) Lee held 2,999 of 3,000 share in LAF Lee “governing director” for life w “all powers, authorities and discretions” LAF employed Lee LAF insured Lee for workmen’s compensation Lee killed while topdressing Lee’s widow claimed compensation → insurance company argued that Lee was not in fact an employee → Not a servant → Privy council decided that Lee was a worker who could be insured (“Literalist” approach.) → Compensation was payable to Lee’s widow. Establishing the law of separate legal entity → The director, shareholder & employee.

Week Three, Lecture 2: Corporate social responsibility: a concept whereby companies integrate social and environmental concerns in their business operations and in their interactions with their stakeholders on a voluntary basis (2001) → the responsibility of enterprises for their impacts on society (2011.) United Nations Global Compact: to mobilize a global movement of sustainable companies and stakeholder to create the world that we want → UNGC supports companies to: - Do business responsibly by aligning their strategies and operations with 10 principles on human rights, labour, environment and anti corruption; and - Take strategic actions to advance broader societal goals, such as the UN sustainable development goals with an emphasis on collaboration and innovation → Human rights: - Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and

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Principle 2: Make sure that they are not complicit in human rights abuses.

Corporate and limited liabilities: are they privileges? - Business is permitted and encouraged by the law primarily because it is of service to the community rather than because it is a source of profits to its owners. The moral hazard: - Does limited liability cause illegitimate risk taking - is it a moral hazard? - Does corporate personality encourage directors to behave unethically? - Do costs outweigh benefits? Week four, lecture 1 Corporate Governance in NZ: Principles and guidelines: - High ethical standards - Balance on the board - Use of committees - Integrity in financial reporting and disclosure - Transparent, fair and reasonable director remuneration - Regular verification - Quality and independence of external audit - Constructive relationships with shareholders - Respect for shareholder interests. Companies must comply with all applicable laws → But should companies do more than comply with the law? Example of corporate tax abuse: - Apple plaid zero tax in NZ despite $4.2 billion in sales Tax abuse fundamentally contributes to poverty and bre...