Griffiths, Shelley --- "Understanding Company Law, by John McDermott" [2007] OtaLawRw 13; (2007) 11 Otago Law Review 533

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Understanding Company Law

(by John McDermott, LexisNexis NZ Ltd, Wellington, 2005)

At the end of 2005, there were approximately 410,000 companies registered in New Zealand, a staggering statistic given a population of about 4 million. Nearly 170,000 new companies have been registered since the start of the new century. The company is the organisational structure of choice for entities ranging from the ‘one-person’ company of the classical Salomon type, to huge organizations with widely dispersed shareholding and a complete separation of ownership and control. As the song says, they are everywhere and nowhere, for the company is a fiction, an intangible thing that exists only because a statute says it does. Companies are ubiquitous and many people need to have at least some rudimentary understanding of them. Because companies are an abstract, they are elusive and while the ‘rules’ of company law can at one level be quite clear, some company law problems are very perplexing. Anyone who writes on any aspect of company law has to tread the path between the apparent clarity of the rules on one hand, and the amorphous nature of the underlying ‘thing’ on the other. Striking the right balance between those two paths is always a challenge and where the balance lies will be different, depending on the intended audience of the work.

The blurb on the cover of this book says it ‘is intended as an introductory textbook for students of the law of companies and partnerships.’ It is a further work in what might be styled the ‘LexisNexis understanding’ series. The series includes works on business law, commercial law and accounting principles. This volume is directed to the newcomer to company law. From the introductory comments, it seems that it is directed to those students in disciplines other than law who have some basic knowledge of statutes and the ideas of precedent and who need to study and understand company law. One would imagine business students are its principal market.

The title ‘Understanding Company Law’ is something of a misnomer. Included in the book are chapters on partnerships and ‘miscellaneous entities’ including State Owned Enterprises (SOEs), trading trusts and Maori enterprises. There is a separate chapter on securities law. While one might quibble about the appropriateness of classifying securities law as company law, the title certainly does not alert the reader to the full content of the book. For very good practical reasons, partnership law, a somewhat overlooked discipline in New Zealand, often accompanies company law. Its inclusion is thus no surprise. There is also a real need for students to be aware of other forms of business structure. Thus the breadth of entities covered is understandable. Perhaps the American term ‘business organizations’ might have been a better description for the content of the majority of the work.

Putting that criticism to one side, does this book achieve what it sets out to do? At one level its aims are simple; it is a ‘student text’ aiming to ‘elucidate principles and policies’ rather than engaging in an extended exposition of the cases because it declaims that as more appropriately belonging in a ‘practitioners’text’. (p v) Chapters 2 – 6 deal with company law per se. Here the structure is simple and entirely appropriate. Chapter 2 deals with the fundamental ‘separate entity principle’ and chapter 3 the nuts and bolts of formation and the Constitution. There are two chapters on shareholder issues; rights and powers and remedies. The final pure company chapter is about directors. The chapters are clearly written and well organised and guide the student through the issues.

In accordance with modern educational practice, each chapter begins with ‘learning outcomes’. These are somewhat ambitious if none-the-less predictable. For instance, after reading the chapter on the separate entity doctrine, 30 pages in all, the student will among other things be able to ‘analyse the concept of legal personality’, ‘explain the meaning of “attribution”’ and ‘critically discuss case law on liability of directors’. These ‘learning outcomes’ are very apposite summaries of the content of the separate entity doctrine. It is, however, a moot point whether the reader will be able to achieve these outcomes after reading the chapter. This is not because the material is poorly presented or obtuse. Indeed the writing is clear and the ideas are explained well. But many a company law scholar has spent a career and spilled a barrel or two of ink on a quixotic journey to achieve these ‘learning outcomes’. Corporate law scholarship is often like tilting at windmills. This reviewer ’s quibble is not with what is said in the chapter. It is with this formulaic approach to education that seeks to distil complex and subtle ideas into ‘outcomes’. The approach works rather better in the chapters on formation and constitution and some of the procedural elements in the shareholders rights and powers chapters.

Each company law chapter contains a very good overview of the law and there are references to appropriate cases and secondary writing where necessary. Because the work is an introduction it must be selective, but the selection of topics made gives a coherent pattern. For instance, the chapter on shareholders rights deals at some length with the unfair prejudice remedy, including a review of the English cases on ‘legitimate expectation’. The Court of Appeal decision in Latimer Holdings v Sea Holdings Ltd [2004] NZCA 226; [2005] 2 NZLR 328 post-dates this book and pre-empts some of the discussion. This is inevitable in legal writing and the author can comfort himself with the reassurance that he chose to write at length on an issue of relevance and there is something new for the next edition.

There is one lengthy chapter on partnerships. As is to be expected, this deals at some length with the principles of agency, building on the earlier brief discussion on agency in the company law context. There is a reasonably full discussion of the ‘special partnerships’, an entity that has fallen somewhat into oblivion since the heady days of the 1980s when it was the preferred structure for numerous tax effective investments. The chapter ends with a brief review of ‘reform’. Again subsequent events, with a discussion document released in 2006 raising the possibility of the creation of ‘limited partnerships’, leave rich pickings for another edition. The following chapter is a miscellany of other entities ranging from SOEs to incorporated societies and credit unions. The attention to these entities is necessarily rather scant. Co-operative companies are glanced at. Given the importance of this form of entity to New Zealand’s economic well being, co- operative companies might warrant rather more detailed consideration than this book or indeed most other New Zealand company law books ever given them. After all New Zealand’s only true multi national, Fonterra Co-operative Group Limited is a co-operative company, as are many other significant players in the agricultural sector. In chapter 9 there is a summary of the principles that apply on insolvency, and here again subsequent events provide more material for another edition with an Insolvency Law Reform Bill introduced in late 2005.

The chapter on securities law is divided into three parts. The first is a review of the key principles of the Securities Act 1978. It traverses what are securities and what are ‘offers to the public’ and considers the consequences of non- compliance with the Act. The other two parts of the chapter are entitled ‘Securities Markets Act 1988’ and ‘Stock Exchanges’. Under the ‘Securities Markets Act 1988’ heading, the only topic dealt with is insider trading. While arguably this is the most interesting issue dealt with in the Securities Markets Act 1988 (‘SMA’), it is not the only one. The SMA deals with a range of disclosure issues, including continuous disclosure, substantial security holder disclosure and disclosure of directors and officers relevant interests. It also deals with the registration and supervision of securities exchanges. Rather oddly, the disclosure topics and market manipulation are grouped under the ‘Stock Exchange’ heading. As one reads this chapter it seems as if the care and attention paid to structure in earlier parts of the book has lapsed. The insider trading section refers to the litigation concerning alleged insider trading in respect of dealings in Tranz Rail shares commenced by the Securities Commission in late 2004. Strangely there is no reference to the major securities law reform programme that commenced with a series of fundamental reviews by the Ministry of Economic Development in 2002 and culminated in new legislation in October 2006. Overall this part of the book is unsatisfying. A concluding chapter on ‘choice of entity’, an issue of especial importance to business students, follows a chapter on amalgamations and takeovers.

Overall, this book achieves its aim of providing a good introduction to the law of companies and partnerships. There is plenty there for another edition. For the future it might be better to choose a name that better reflects the content of the book. Alternatively, it might be worthwhile to leave out some of the other sections because it is in the analysis of company and partnership law that the book’s strength lies. And will students achieve the learning outcomes promised at the start of each chapter? This book gives them a good starting point. Some they will achieve. But as always, company law remains something of a Gordian knot.

Shelley Griffiths, Faculty of Law, University of Otago.