SAFE INVESTING

Dominion, Volume 28, Issue 104, 26 January 1935, Page 8

SAFE INVESTING

Proposed New Bureau

PROTECTION OF PUBLIC

> In the course of an address on company legislation delivered yesterday to the executive committee of the Associated Chambers of Commerce, Mr. J. S. Barton explained the proposed Corporate Investments Bureau, the formation of which has been recommended by the Company Promotion Commission under his chairmanship. ‘‘lf the bureau had been in operation in the last decade,” said Mr. Barton, “it would have prevented most of the bad practices of that period, and would have involved very little in the way of restriction on honest company promoters and directors. The first of two major recommendations made bv the commission was the prohibition of the issue of bonds in the future, said Mr. Barton, and he judged that by almost universal consent that recommendation would be adopted. The other was the proposal for the formation of a Corporate Investments Bureau charged with the duty of endeavouring to ensure compliance with the provisions of the Companies Act. “The bureau will issue no certificates, minutes of approval, or licenses iu re- I lation to prospectuses,” said Mr. I Barton. “The only approval that a good prospectus will get will lie in the negative fact that .the bureau will do | nothing. This will be the fate of 99 per cent, of the prospectuses tiled. “In the case of the misleading prospectus however, the bureau may be expected to be active. It will respond to the invitations in the prospectus. It will examine preliminary agreements, options, memoranda of transfer, and agreements for sale and purchase, and all premilinary agreements between vendors and the company. It will examine carefully the transactions and proposed transactions on which the valuation of the promoters is based. All this will be done with the objec. of seeing that a fair and candid disclosure is made of such things as should be disclosed. Other Safeguards.

“If the device of ‘swopping cheques’ has been used to enable the promoters to say, with a merely colourable adherence to truth, that all shares have been paid for in cash, the bureau should have power to require . a more honest and accurate description of the transaction to be disclosed. If the directors are found to be personally interested in the vendor company or the brokerage company, those facts must be clearly and unequivocally stated. “It will be a function of the bureau to prosecute in all cases of breaches of the Act. At the present time it. is nobody’s duty to prosecute, and in spite of the practices that have been m vogue for the last'lo years there have been practically no prosecutions or civil actions. “If an aggrieved investor goes to his legal adviser now he is usually invited to authorise his solicitor to .endeavour to get his money back. Thisis done, and in this way promoters and directors manage to buy immunity from publicity in those comparatively rare cases where a dissatisfied investor’s rights are pushed to the limit. Most of the questionable practices lie in a difficult legal territory between public wrongs capable of punishment by criminal proceedings and civil wrongs, the remedy for which may lie anywhere between an action for misrepresentation or for money had and received and a mere action for accounts. This fact tends to give immunity to unscrupulous company operators in a large percentage of their transactions. “It is this fact that principally operates to make a dead letter of a penal provision in the Crimes Act relating to the issue of misleading prospectuses,” said Mr. Barton. “No public officer with the powers vested in him to-day can be expected on the complaint of an aggrieved shareholder to launch serious criminal proceedings in respect of a transaction which, if it eou.d be investigated fully from both sides, might turn out to be one giving rise to rights of civil action only. The only body whose functions include inquiry into such matters is the police, and, in the very nature of things, they cannot be expected to embark upon and conduct such inquiries skilfully. In any event, they have no right at all to require any statement from the company or access to its books, and it may be safely taken for granted that in every case where there was real ground for Inquiry the company’s officials would refuse to supply any information to the police. I have discussed this matter with officials of the Crown Law Department, with Crown prosecutors, and with the Commissioner of Police, and they all acquiesce in this view. System Offers Immunity. “The whole system tends to offer immunity to unscrupulous company operators. It can be changed without appreciable inconvenience to the 99 per cent, of honest companies. “It is suggested also that rhe bureau should have power in some carefullylimited and defined cases to apply statutory definitions. This proposal has been misunderstood and misrepresented. The proposal is that the cases in which this power should be used must be clearly defined and stated by Parliament and so far only two suggested exercises of the power have been recommended. One relates to toe definition of ‘subsidiary’ company and the other to the definition of ‘investment trust.’ It is a matter for consideration first by the commercial community and secondly by on'r legislators as to whether this is necessary in view of the difficulty of prescribing effective definitions. The effect will lie to pit brains against brains rather than to pit the skill of a draughtsman in 1935 against the misapplied zeal and ingenuity of an unscrupulous company operator in 1936.”

ACCOUNTANTS’ VIEW

Proposal Criticised

Commenting on the commission’s report, the “New Zealand Accountants’ Journal” observes:

“When we come to tire proposal of the commission that there should be established a corporate investments bureau, consisting of a controller and three members representing the Law Society, the Society of Accountants and the Stock Exchange Association, with extremely wide powers in respect to the promotion and control of companies, we are on debatable ground. It is stated that the main functions of the bureau will be to supervise prospectuses, investigate complaints, demand candid disclosure of company affairs, prosecute broaches of the Act, apply for injunction against unconscionable and specious schemes and representations, regis-

ter promoters, directors, salesmen ami valuers, and exercise powers of search and inquiry. "Theoretically, some of these ideas are quite sound, but we are afraid they are not possible of practical application. At least two difficulties would arise iu our opinion if an investment bureau on tlie lines suggested were set up. In the first place, propositions which are approved by the bureau would receive an imprimatur which may not at ail be warranted by subsequent events. Secondly, the bureau, by being over-cautions, might be tempted to discourage legitimate enterprises which, while they may have an element of speculation attached to them, are inherently sound.

“Apart from tlie fact that there are few supermen in our midst who are gifted with the requisite ability to determine just what companies are likely to succeed, there would be a distinct danger in the public interest in entrusting such despotic powers to such a small group of men. In our zeal to eradicate undesirable practices and abuses in public or business life, there is always a tendency to go to the other extreme, and it is desirable that this scheme of an investment bureau with Government or quasi-Government authority should receive the most, careful consideration. “Most of us know from bitter experience that companies with good sound boards of directors and every prospect of success have later proved to be dismal failures, whereas other concerns, which at the outset looked as if they could not possibly earn dividends, have ultimately turned out to be veritable money-spinners. In this matter we must not: hamper industry and commerce by so many rules and regulations that in our desire to make our financial structure watertight we seal the How of capital altogether.”