Board breached NZX rule

A regulator’s report into board changes at NZ Automotive Investments (NZAI) has concluded the company unintentionally breached a stock-exchange listing rule. 

NZ RegCo’s investigation states NZAI, which owns 2 Cheap Cars, was in breach of NZX Listing Rule 2.7.1 when it decided not to put forward appointed director Samantha Sharif for re-election at its annual shareholders’ meeting (ASM) on September 2. 

It has determined to pursue an educative, rather than enforcement, outcome in relation to NZAI’s breach.

Joost van Amelsfort, chief executive of NZ RegCo, says: “The investigation report sets out a summary of the scope of the investigation and its findings. It also sets out best-practice guidance on matters relating to board-appointed directors.”

The report, which was published on November 18, states there were a number of changes to the composition of NZAI’s board In July and August.

NZ RegCo has concluded the company breached Rule 2.7.1 in relation to Sharif’s re-appointment at that time. 
The rule imposes obligations for the rotation of directors, subject to election by an issuer’s shareholders. It also applies to board-appointed directors. What follows is Autofile Online’s edited version of the report.

Background 

NZAI announced on July 19, 2022, that all then-directors – other than executive director Yusuke (David) Sena – had resigned. It stated those resignations would become effective on the earlier appointment of sufficient new independent directors to meet the rules’ requirements.

The announcement also identified three candidates nominated by Sena whose appointment would be voted on at NZAI’s scheduled ASM on August 25. Two subsequently withdrew their consent for nomination. 

On August 10, NZAI announced the ASM would be held on September 2 and the company published its notice of meeting two days later. 

That notice outlined Sena had undertaken to then-current board members that, immediately upon their resignations becoming effective on August 20, he would appoint Michael Stiassny and Gordon Shaw as directors pursuant to the company’s constitution to ensure board-composition requirements were met under Rule 2.1.

Those appointments were temporary, with Stiassny and Shaw to retire and offer themselves for re-election at the ASM. 

At this time, NZAI’s chief executive officer was David Page, who had resigned on July 1. The company had advised the market he would work out his notice until September 30. Over the weekend of August 20-21, he went on gardening leave for the rest of his notice period. 

On August 22, the company announced it had appointed Shaw as interim CEO pending the appointment of a new chief executive. That meant Shaw no longer qualified as an independent director of NZAI.

NZAI also announced it had appointed Samantha Sharif as an independent director on an interim basis pending the end of Shaw’s term as interim CEO, at which time he would revert to being an independent director. That announcement advised Sharif would seek approval of her appointment at the ASM.

Stiassny and Shaw were re-elected at the annual meeting. Sharif wasn’t put forward for re-election. Shaw stated, in his presentation at the ASM, that “as Samantha is a co-opted director, she does not stand for election”. 

NZAI stated in an announcement on September 2 that its board had reappointed Sharif as an independent director, effective at the ASM’s conclusion and on the same terms as she was originally appointed. 

Listing rules 

Rule 2.2.1(a) permits the board of an issuer to appoint directors if the issuer’s constitution or governing document provides for such appointments. NZAI’s constitution gives its board this power. 

Rule 2.7.1 limits this power by requiring board-elected directors to seek re-election. The rule states: “A director of an issuer must not hold office [without re-election] past the third annual meeting following the director’s appointment or three years, whichever is longer. However, a director appointed by the board must not hold office [without re-election] past the next annual meeting following the director’s appointment.”

Rule 2.7.1 reflects an underlying policy that the appointment of directors is a matter fundamentally reserved to shareholders,” states NZ RegCo’s report. Although the rules contemplate a constitution may enable the appointment of directors by the board, that appointment is temporary. 

It’s subject to a requirement that such board-appointed directors not hold office past the issuer’s next annual meeting following appointment. NZX has communicated this interpretation of Rule 2.7.1 on page seven of its “guidance note on governance”. 

Board-appointed directors are eligible for re-election. The requirements of Rule 2.7.1 are long-standing requirements and are also applied under the then-NZX Main Board Listing Rule 3.3.6 prior to the NZX’s holistic rules review in 2018.

Issuers must comply with the rules as interpreted in accordance with their spirit, intention and purpose by looking beyond form to substance, and in a way that best promotes the principles on which they’re based.

Investigation into NZAI

NZ RegCo investigated NZAI’s approach reappointing Sharif on September 2 given the requirements of Rule 2.7.1. The company submitted: 

• Sharif retired as a director with effect from the end of the ASM. Accordingly, her position as a director ended immediately after the meeting, consistent with Rule 2.7.1. 

• The purpose of Rule 2.7.1, in NZAI’s view, is to ensure a board does not become entrenched. Sharif’s appointment was temporary and limited to six months from the time of her appointment or until a new CEO was appointed. Given her appointment was only temporary, there was no risk the action the board took would result in her position as a director becoming entrenched. Accordingly, NZAI’s view was that Sharif’s re-appointment was within the purpose of Rule 2.7.1. 

• The rules do not expressly prohibit the board from renewing a director’s temporary appointment for the balance of its term. 

NZ RegCo interprets the requirements of Rule 2.7.1 in light of longstanding policy underpinning it. While this rule could be interpreted in the manner put forward by NZAI, NZ RegCo considered that would be inconsistent with that policy.

That approach could potentially enable a board to avoid shareholder approval of a director indefinitely, ie if board-appointed directors were to technically retire at an ASM to then be immediately reappointed after it. 

NZ RegCo noted Rule 2.7.1 doesn’t distinguish between directors board-appointed to hold office for a limited time and those without such limitation. Although an issuer’s board may intend to appoint a director to only serve a specific period, this doesn’t affect the application of Rule 2.7.1. 

It concluded NZAI breached Rule 2.7.1 by not putting forward Sharif for election at the ASM. It acknowledged the company relied on legal advice in taking the view Sharif wasn’t required to seek re-election at the ASM. 

NZ RegCo noted NZAI fully co-operated with its investigation and there was no evidence it sought to intentionally circumvent the requirements of Rule 2.7.1. 

Lessons for issuers 

Issuers and their advisers must bear Rule 2.7.1 in mind when considering governance and succession issues. 

If permitted by a governing document, the ability for a board to appoint directors can be an effective way to add valuable skills and manage compliance with the board-composition requirements under the rules. 

However, all board-appointed directors are subject to Rule 2.7.1. This requires they retire at the issuer’s next annual meeting following their appointment. They are eligible to seek reappointment at that time.

Issuers should avoid appointing new board-appointed directors after they have released their notice for an upcoming ASM if it’s intended for them to continue to serve on the board post-meeting. 

This is because the notice of meeting needs to include the appropriate resolution to enable the re-election of that director together with suitable information for shareholders. When this is unavoidable, issuers may wish to defer a scheduled meeting to allow the preparation of an amended meeting notice.

Click here to access a PDF of NZ RegoCo’s full report.