SOE shares…will they be worth buying?
State owned enterprises at first glance look like ordinary companies incorporated under the Companies Act 1993. But lurking in the SOE Act are provisions that make them different animals altogether…ones that needs to be treated with utter care, respect and caution.
Section 9, dealing with the Treaty of Waitangi, is perhaps the most well known provision dealing with SOEs, but there are two others as important but far less visible than Section 9. Section 4 refers to social responsibility requirements, and Section 7 relates to contracting with the Crown. The government has not stated whether it will be keeping these provisions, or some version of them, for the partially privatised entities.
If you’re a member of the investing public interested in buying SOE shares when they are floated, or a voter or policy-maker, you should look carefully at Sections 4 and 7 in order to understand what sort of beast you’ll be selling, buying and, in the process, perhaps modifying.
Whilst requiring SOEs to be profitable, Section 4 of the SOE Act also charges each entity with being a ‘good employer’ and an organisation that ‘exhibits a sense of social responsibility’.
Is it possible that a litigant could use this section to require an SOE to change contracts with its employees or its environmental practices, for example, even at the expense of shareholder value – and even when the SOE’s actions satisfy other laws and regulations?
One possible view is that Section 4 doesn’t make SOEs that much different from companies that have adopted ‘corporate social responsibility’ provisions of their own. It could be said such social responsibility requirements, whether voluntary or statutory, are so vague that they are little more than window dressing anyway. In the 1990s, cases on Section 4 read the provision down to require essentially no more of SOEs than to be as profitable as possible.
But judges might take a different approach to Section 4 today, influenced by the trend of ‘social responsibility’ commitments in private companies and international developments such as the introduction of a provision broadly similar to sSction 4 into the UK Companies Act.
Policymakers, voters and investors should therefore be slow to conclude that Section 4 is essentially meaningless. The effect, if any, of keeping or removing it must be carefully examined. Options include clarifying what is meant by ‘social responsibility’, and considering whether the purposes of the section might be better met though existing or changing regulation, if required.
Section 7 is another provision that ordinary companies don’t have to deal with. When the government wants an SOE to provide goods or services, the two enter into an agreement where the SOE will do so, but the Crown is in return to pay ‘the whole or part of the price’.
Its purpose is to prevent the Crown from using SOEs ad hoc to subsidise goods and services. If the Crown wants to use SOEs to provide social benefits, it has to pay the entity transparently. SOEs then can’t use non-commercial obligations as an excuse for poor commercial performance.
The Government used Section 7 when it paid New Zealand Post $25 million annually to keep open 432 uneconomic post offices up until 1988, when the arrangement ended.
Section 7 doesn’t seem to be in common use now, possibly because when the Crown contracts with an SOE (such as MetService’s six-year contract to provide weather and road monitoring information to the Ministry of Transport), it is not clear whether that contract is made pursuant to Section 7 or is just an ‘ordinary’ contract that any company could make with the government.
Don’t be fooled into thinking that Section 7 is meaningless, though. In fact, it has never been tested by the courts, so we don’t currently know for sure whether the Crown could force an SOE to contract with it under Section 7. There are good arguments on each side. Why would Section 7 exist if it simply restates existing contract law…but wouldn’t the Crown forcing a contract undermine the point of requiring transparent contracting?
Sections 4 and 7, along with Section 9, deserve careful attention. They are part of what make SOEs unique. What is done about them during partial privatisation could have a big impact on things like the sale price, public attitudes and even how the SOEs continue to operate in the future.
Historically one criticism of SOEs has always been that they are neither fish nor fowl… merely hybrid forms of the corporation that cannot be held truly accountable for their performance. Partial privatisation and stock exchange listings will address to some extent that criticism.
But as SOEs become more like other companies – albeit state controlled – the issues around the extra requirements imposed on SOEs by the SOE Act become acute.
Professor Susan Watson and Dr Chye-Ching Huang lecture at The University of Auckland Business School’s Department of Commercial Law (Dominion-Post, February 22, 2012)