“Company” is a word without any technical meaning but is commonly used to denote a gathering or meeting of people. In the plural, however, the word is readily understood as referring to associations of persons incorporated into a separate legal entity for trading purposes. In New Zealand the great majority of companies in business are incorporated under local legislation which is based on United Kingdom law modified in the light of local conditions and requirements. Thus the Companies Act 1955, which came into force on 1 January 1957, was substantially modelled on the United Kingdom Companies Act 1948. Previous to the 1955 Act, the primary source of law relating to companies was the 1933 Act which repealed the 1908 Act. This, in turn, repealed earlier statutory provisions.
In the United Kingdom, prior to the passing of the Companies Act 1844, trading companies were incorporated by Royal Charter or by special Act of Parliament. One notable example was the East India Company, which was formed under Royal Charter in 1600. Another is the Hudson's Bay Company, formed as long ago as 1670. In 1825 the principle of limited liability was recognised for the first time in the Bubbles Company Act, but applied only to chartered companies. It was not until 1862 that statutory authority was given for the registration of companies with members' liability limited by shares or by guarantee. Since then United Kingdom legislation has, of course, been considerably altered and is at present contained in the 1948 Act.
The contribution made to economic growth by the introduction of limited liability, which substantially paved the way for the ensuing expansion in the number and size of companies, is incalculable. As even a cursory glance at any business directory will reveal, a large proportion of trading, manufacturing, and commercial activity is now carried on by limited liability companies. In passing it may be noted, however, that it is exceptional in New Zealand for farms to be owned and operated by companies.
The scope and importance of companies may be briefly illustrated by the figure for company income (before distribution). In 1962–63 it amounted to £159 million (in a total private income of £1,344 million), compared with £20 million in 1938–39. On 31 March 1964 the number of companies registered in New Zealand was 49,333. This total comprised 1,562 public companies and 47,771 private companies.
Under the Companies Act 1955 any number of persons from two to 25 may form a private company but a public company must have at least seven members. In the 10 years to 1962 over 30,000 private, about 229 public, and 216 overseas companies were registered. All but a handful, which were limited by guarantee, were companies with members' liabilities limited by shares.
Several factors explain this activity in company formation, prominent among them being the general growth in population, trade, and production, and the associated business expansion. Within the general framework of growth there has been the development and manufacture of new products by new as well as established firms and a trend for overseas companies to establish local subsidiaries. Undoubtedly, however, a principal factor especially in regard to the formation of private companies has been recognition of the advantages to be obtained from incorporation of a business as a company. These advantages include the limitation of members' liability, access to better financing facilities, transferability of shares, and continuity of existence. With relatively high death duties, this last is often the main factor influencing members of a private company to change to public company status.
As the recent experience of the liquidation of a major public company, the Standard Insurance Co. Ltd., shows, limited liability is an advantage not to be regarded lightly. Liability usually is limited by shares, that is to say, the liability of members – the shareholders – to contribute to the assets of the company is limited to the amount, if any, unpaid on their shares. The Act, however, also provides for a company to have “the liability of its members limited by the memorandum (of association) to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound up”; that is, limitation by guarantee. Very few companies registered in recent years have been limited by guarantee.
The better financing facilities available to a company are often a major consideration in a decision to incorporate either to carry on an individual existing business or to commence a new one. A company can issue shares, ordinary or preference, and debentures, and give security for loans by way of floating charge on its stock and its future property.
The other advantages, perhaps not as important, to be gained from forming a company are nevertheless real ones. Members may, subject to the company's articles of association, freely transfer their shares and thus are able to realise their investment should they so wish. Furthermore, as a company is a legal entity its existence is not affected by a transfer of shares or by the death or bankruptcy of a member.
Incorporation does, however, also possess some disadvantages. Briefly, the main ones are:
The statutory requirements in regard to information that has to be disclosed to the Companies Office where, for a fee, members of the public are able to peruse it – a facility which is of some relevance to “take-overs”;
Restrictions on a company's powers to those contained in its memorandum of association may mean that some profitable new business cannot be undertaken because the necessary power is not provided; and
The inclusion in the Companies Act of numerous statutory obligations which, unless strictly adhered to, will result in penalties for officers of a company in default.
A decision to form a company obviously reflects a careful assessment of the foregoing pros and cons and any other relevant factors, such as the implications of incorporation for a businessman's taxation commitments and, to be soundly based, should not be taken without the advice of people well versed in the requirements of the legislation. But, as the statistics previously quoted indicate, company formation has proceeded apace and it is clear that even relatively small firms have found it advantageous to incorporate.
In New Zealand available figures on company finance are limited, particularly as regards private companies. Some insight, however, into the operations and financing of public companies is provided by an analysis made annually in the Reserve Bank of New Zealand of the financial statements of about 300 such companies, including all the major ones listed on the stock exchange. The analysis covering the operations of 307 companies balancing during the year ended 31 March 1960 showed among other interesting facts that:
Four companies each have total shareholders' funds of £5 million or more.
Net profit to shareholders' funds varies considerably among companies engaged in different activities, ranging from 3.9 per cent for companies in the “gas” group to 10.1 percent for companies in “printing and publishing”.
Of the total funds available to the 307 companies (over £29 million) two-fifths represented depreciation and one-fifth long-term retained profits. Short-term sources of funds, namely increases in liabilities such as bank overdrafts, creditors, and deposits plus decreases in such assets as cash, debtors, and stock, provided nearly 8 per cent, and other long-term sources, largely paid-up capital, accounted for the balance of 32 per cent. The funds were mainly used in expenditure on property, plant, and depreciation, which totalled over £24 million or nearly 83 percent of the total.
Excluding meat-processing companies, which as a group sustained net losses in the period covered by the analysis, the proportion of net profits (after tax) distributed by companies was 58.9 per cent. This figure appears high but must be related to the figures for taxation. In 1960 the 307 companies' total income to be appropriated was just over £26 million, of which £13.3 million was paid in tax. Net profit after tax was £12.8 million.
Companies in New Zealand pay tax on their assessable incomes before the distribution of dividends. There are no special exemptions as in the case of individual taxpayers. The rate of tax for every £1 of taxable income is: (i) where the taxable income does not exceed £3,600, 2s 6d. increased by one-hundredth of a penny for every £1 of taxable income; (ii) where the taxable income exceeds £3,600, a flat 8s. 6d. per £1. In addition, companies pay the social security charge of 1s. 6d. per £1. Thus the maximum rate of tax is 10s. in the £1, but for certain companies the excess retention tax may be an additional charge. Excess retention tax, at the flat rate of 7s. per £1, is paid where dividends distributed are less than 40 per cent of income after normal taxation in the case of companies in which the public is not substantially interested, and where the shares are held by 20 or fewer persons, or where the company is under the control of seven persons or less.
The directors and management of a company requiring additional funds for expansion have a large number of factors to consider in determining the most suitable source or sources. If an issue of ordinary shares is being examined, they would have to take into account the cost of an issue, the need to comply with various statutory requirements and the implications for future dividend distribution, having regard to taxation that further profits would incur. If they are considering a debenture or preference share issue or the acceptance of deposits, they would have to take into account the company's capacity to raise the necessary funds at the current market rates of interest and to service the debt.
As a result of various measures announced in the 1962 Budget, there are, however, some factors which companies no longer have to take into account. Unless a New Zealand company wishes to borrow overseas, it no longer needs the approval of the Minister of Finance for the reason that capital issues control, exercised under delegated authority by the Capital Issues Committee, was abolished and the Committee's services terminated. If a company wishes to accept deposits, the maximum rates of interest it may pay are no longer fixed as the Interest on Deposits Order was revoked. If it decides to issue convertible notes, it is no longer handicapped by the fact that the interest payable on the notes is not deductible from the company's income for tax purposes. This concession only applies, however, to New Zealand companies officially listed on the stock exchange and in respect of interest on notes which are convertible into shares within five years of the date of issue.
An overseas company wishing to commence business in New Zealand must obtain the approval of the Minister of Finance. In his 1962 Budget the Minister gave the reason: “While welcoming overseas investment in this country, the Government desires to retain power to withhold approval for overseas companies wanting to commence business in New Zealand where this could, for example, lead to undue dominance of New Zealand industry by overseas concerns.”
The Overseas Take-overs Regulations of 1964 require that certain take-over offers made, or proposed to be made, by “overseas persons”, be registered for approval at the Reserve Bank of New Zealand in Wellington. “Overseas persons” are defined as persons not ordinarily resident in New Zealand; companies or bodies corporate incorporated outside New Zealand, or their New Zealand subsidiaries; or New Zealand companies in which 25 percent or more of the voting power is controlled by overseas persons. The regulations apply if the result of the acquisition of shares under an offer will be that the offerer controls 25 percent or more of the voting power in the offeree company. The Government has announced that it proposes to keep intervention to a minimum and that only a small percentage of take-over proposals is likely to be affected.
In the nineteen fifties 188 overseas companies were registered in New Zealand. One indication of their importance is provided by the statistics for overseas direct investment in New Zealand. In the year ended 31 March 1961 this amounted to £14.4 million made up by investment in New Zealand subsidiaries, £10.2 million (comprising holdings of paid-up capital £3.9 million, intercompany indebtedness £3.0 million, undistributed profits £3.4 million), and by increased net assets of branches, £4.2 million. New Zealand companies, in contrast, increased their investment overseas by £1.4 million. It seems probable that investment by overseas companies in New Zealand will expand in future years. It also seems equally probable that, while there may not be a steady annual increase in the number of companies registered, there will be significantly more at the end of the present decade than there were at the beginning.
by Robert John Familton, M.COM., Economist, Reserve Bank, Wellington.