The law recognises that in certain events which are beyond the control of a party that it is not fair for that party to have to continue to comply with the contract.

 

The first step is to check what the contract actually says.  It won’t apply if there is no such provision in the contract.  Normally it will be called a “Force Majeure” clause.  The courts will generally have a high standard if a party wants to rely on this as a grounds to not fulfill the contract.  The sort of factors which will be relevant are:

  • How are the events described?  Is it generic or specific?  In this particular case it will be relevant to see if there is any reference to “disease” or better, epidemics?  If there is a reference to an “Act of God” then that might arguably cover this too.  The most important thing is to check the specific words.
  • Even if there is an event, does that mean that the performance cannot be done?  Just because something costs more doesn’t make it impossible – it may be that you still have to comply.  Again, the context is key.
  • A party needs to be in control – one of the things I have seen is some arguments that a “strike” should be a force majeure event – if it is listed then it may be, but typically the management can control a strike occurring, or not.  So, it might not qualify as a force majeure event.
  • The last factor relates to mitigation.  A party should take steps to ensure that the contract is complied with (ie they are mitigating and stopping the impact, if they can).The key point here is perhaps that the wording of the contract needs to be reviewed.  If there is no such clause then it might be possible for the doctrine of frustration to apply – this is where an event makes performance impossible compared to what had been agreed.  Again, context is key. The other thing to look for in contracts would be a “material adverse change” clause – these can apply where an event occurs that means the contract is affected.  You should also review any termination clauses just to see what they provide for eg 30 days written notice? Start by reviewing your contracts and consider your current situation and what the next few weeks and months will hold.  If you would like to discuss your contract and situation then we would be happy to do so.

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. For any questions, feel free to contact Steven Moe stevenmoe@parryfield.com or Kris Morrison krismorrison@parryfield.com at Parry Field Lawyers.

Are you an entity that carries on business for the benefit of a registered charity? Then it is essential that you are aware of the incoming changes to business income tax exemptions. This article explains what the current law is and how the incoming changes will impact both registered and unregistered entities.

A key benefit of being a registered charity is enjoying the tax exemptions on business and non-business income set out in the Income Tax Act 2007. Under section CW 42, registered charities do not need to pay tax on their business income provided that they carry out their charitable purposes in New Zealand. However, the section goes further and extends the exemption to entities that carry on business for the benefit of a registered charity. This means that businesses can benefit from this exemption without registering with Charities Services. Therefore these businesses are not obliged to comply with the charity reporting requirements.

The Government has been concerned that some businesses may be taking unfair advantage of the provision, undermining the transparency and accountability mechanisms in the Charities Act 2005. As a result, the Taxation (Annual Rates for 2018-2019 Modernising Tax Administration, and Remedial Matters) Act 2019 narrows the eligibility for this exemption. Taking effect from the 2020-2021 income year, an entity must be registered as charitable to be eligible for a business income tax exemption. This means that an unregistered entity carrying on business for the benefit of a registered charity is no longer eligible.

This will have an impact on companies that are owned by a charitable trust. From 2020, the charity’s registration will no longer shield that company from income tax obligations. Entities that are currently relying on another’s registration need to consider whether they are eligible for charitable registration in order to retain this benefit. This could involve revising the constitution of the business and making clear it is sending profits to the charity.

 

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. Our team is experienced with charities, social enterprises and trusts that are common in this area of law. We would be happy to assist you in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or 021 761 292 should you require assistance.

We live in a time when paradigms are colliding. Old conceptions from an extractive economy which have been accepted for decades are being challenged by new ideas that are planted in the soil that dreams of a regenerative economy. One outworking of this is the growth of “Impact Investing”. In this paper we outline what that is, why it matters, discuss examples and cover the implications for NFPs interested in this area.

 

What is Impact Investing?

Traditionally, the primary driver when looking at an investment has been monetary returns for the investor. “You can offer a 9% return on investment? Well, I can get the 11% over here…” However, such an outlook is limited and narrow because it is only focussed on financial returns.

 

Impact investing offers a different and more holistic approach. The Global Impact Investing Network provides the following definition: “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”

 

So the alternative presented by impact investing is that there are other considerations that need to be thought about beyond financial returns, such as:

  • What does the business actually do – is it an extractive business which is harmful to the planet?
  • Who does the buisiness employ – is the business model built on the premise that there is exploitation in how cheaply it can produce whatever it makes, either onshore or offshore?
  • What other outcomes are there – perhaps social, cultural, environmental or other factors will be mpacted by the business?

 

Key attributes

Some of the key attributes of impact investing include a desire to achieve a positive social/environmental (or other) impact, a plan to measure this impact and an expectation of generating a financial return on the capital invested. So in an NFP context, this is more than just grant making (or receiving) as the funds actually come back to the investor. The key is that there will be some positive impact through the investment, while still generating positive return for the investor. This also means an investor may need to think a bit longer before they decide what to invest in.

 

How does Impact Investing Work?

Impact investing is not a one-size-fits-all model. Different investors may have different impact and financial aims, meaning the form and terms and conditions of investment will be different in each scenario. However, to create a level of consistency, the International Finance Corporation has created a framework for managing impact investing.

 

 

Source: Investing for Impact: operating Principles for Impact Management, IFC, 2019,

https://www.impactprinciples.org/sites/opim/files/2019- 06/Impact%20Investing_Principles_FINAL_4-25-19_footnote%20change_web.pdf

It is worth noting that there are different types of impact investing (e.g. managed funds, CDFIs (Community Development Finance Institutions), SIFIS (Social Investment Finance Intermediaries), social impact bonds, direct investment, investment clubs and catalytic investment).

 

Why is Impact Investing Important?

Increasingly, organisations are being pressured by both shareholders and stakeholders to achieve a social impact alongside financial returns. Larry Fink, CEO of Blackrock (the largest investor in the world at around US$6.8 Trillion) has stated, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” According to the Morgan Stanley Institute for Sustainable Investing, 85% of investors surveyed were interested in engaging with Impact Investing. It is clear that funders are now expecting more from the organisations they choose to invest in.

 

A Broader Shift?

This represents an expanded view of the role companies play and to whom they are accountable. While companies have traditionally focused on achieving the best financial outcome for their shareholders, the interests of stakeholders is becoming increasingly relevant. The Companies Act 2006 of the United Kingdom focuses on promoting a company’s success, “for the benefit of its members as a whole.” Impact investing is only one aspect of a much broader shift in thinking that is challenging (and hopefully transforming) the shareholder capitalist order.

 

Examples of Impact Investing in NZ

It is useful to look at some examples of impact investing to show this is more than just a theoretical discussion.

 

Ākina

The Ākina Foundation is dedicated to transforming the values of the New Zealand economy by supporting enterprises and businesses in creating positive impact for the land and people of Aotearoa. Ākina is leading the way in Impact Investing, co-establishing New Zealand’s first impact investing fund. The Impact Enterprise Fund manages $8.7 million and has supported several projects, including Waikaitu and Melon Health. Ākina also introduced Impact Investment Readiness Grants to provide social enterprise and impact-driven businesses support to become “investment-ready”.

 

Purpose Capital Impact Fund

The Purpose Capital Impact Fund has raised $20 million and is aiming to raise $30 million to, “generate meaningful impact and financial returns in its regions and across New Zealand.” Having already reached its initial target, it is one of New Zealand’s largest impact investing fund. The Fund focuses on tackling big issues such as affordable housing, environmental degradation, climate change and inequality and aims to generate financial returns of 5-6% per annum (net of fees and expenses).

 

Community Finance

Community Finance provides low cost finance to New Zealand’s Community Housing Providers to build new, safe and affordable homes for Kiwis (disclaimer: the author is he chair of this company). Their finance model enables investors, philanthropists and foundations to invest in a meaningful and ethical way to help develop thriving, diverse and inclusive communities. Their lending platform, called the “community-to-community model”, enables investors to ethically invest for the benefit of communities and help make a positive impact. Investors receive regular reports on the direct social impact of their investment as well as a financial return of between 2% pa and 2.50% pa, which is similar to the financial returns on corporate bonds and term deposits. Community Finance has partnered with a range of Community Housing Providers including the Salvation Army, Habitat for Humanity and Community Housing Aotearoa to activate new housing supply where it is most needed. Community Finance also has three pilot projects under way in Auckland, as well as emergency transitional, social and affordable housing projects in Bay of Plenty and Christchurch.

 

What does this mean for New Zealand NFPs?

By just relying on grants, NFPs are reliant on other activities (such as fundraising) to raise funds.Conversely, the tenets of traditional investment may clash with the charitable purposes of aNFP. Impact investing provides NFPs with a unique way to invest funds in accordance with their charitable purposes (or potentially to receive investment themselves). The trustees of a charitable trust may be able to invest the trust’s assets in projects that are making an impact, while receiving a return.

However, impact investing isn’t for everyone and there are many things that a NFP should consider before engaging with this new model of investing.

 

Option B: Those seeking to Invest

What do NFPs need to consider when exploring impact investing within their future investment plans?

It is important for NFPs consider what impact they want to achieve – is the way they have always done things the only way? One option that could be considered is through investing for impact. Critical to this is how to measure impact and set expectations and create accountability. The NFP will also need to address what to do if the impact is not achieved.

As with any form of investing, impact investing carries risks which NFPs should consider. For example, as impact investing is an emerging concept, there is less capital in the market. This means that it may be harder to sell investments if capital is needed. NFPs need to think about whether they will be in a position to wait the full duration of the investment. What are the primary motives – purpose or profit or both?

 

What types of projects suit this model of investment?

There are different types of projects that NFPs may invest in. An organisation may seek seed funding, allowing them to research and develop new ideas. Alternatively, money may be invested to grow an existing project or enable a business to perform a contract (e.g. social bonds). Finally, impact investment can allow an organisation to purchase assets which will provide revenue over time.

 

What legal questions does an organisation need to take into consideration before embarking on this model?

The governing body of a NFP must ensure their investing activity complies with legislation and their governing documents. For example, Sections 13A and 13B of the Trustee Act 1956 enable trustees to invest prudently in any property. This means that trustees must exercise care, diligence and skill when investing trust assets. Section 13E sets out a list of factors that trustees may consider when choosing to invest. It is important that trustees seek professional advice when choosing to invest and take steps to reduce the risk of breaching their duties.

The trustees must also ensure they are complying with the trust deed. The trust deed may direct trustees how to use the trust’s assets and have instructions on investing. The charitable purposes of a registered charitable trust will also guide the trustees as to the type of projects they should invest in. Where possible, it may be beneficial to amend the trust deed to expressly allow the trustees to carry out impact investing. If the trustees are unsure of their obligations, it is recommended that they obtain advice.

 

Positives

There are many positive aspects of impact investing. It represents the future of investing, as traditional views of business and charity are being challenged. Impact investing also diversifies income streams, opening up new opportunities to generate income while making a positive impact. And it empowers others through more than just providing grants. While there may always be a place for grants in the NFP sector, impact investing widens the scope of both fundraising and investing and successfully integrates profit with purpose.

 

Challenges

While impact investing is an exciting and emerging concept, there are several challenges that must be addressed to ensure its growth. Key challenges include:

  • Readiness: while there are many opportunities to create impact in New Zealand, some entities are not yet ready to seek investment. Groups that would traditionally seek grants may lack the training to engage with investors. This means that more resources need to be allocated for preparing these organisations for investment.
  • Greenwashing: as impact can be hard to measure, there is a fear that organisastions may claim their product/service creates a positive impact but, in reality, has very little social/environmental benefit. This means standards to measure impact must continue to be developed and investors need to have clear reporting mechanisms to ensure accountability
  • Inefficiency/difficulty: in a 2016 survey carried out by Ākina, 10% of organisations surveyed had sought impact investment but had found the process difficult and inefficient. They also noted that there was often a disconnect between the objectives of the investor and investee. This means that organisations need to consider how to make impact investing more accessible to organisations and investors need to clearly set out their expectations before investing.

 

Impact investing is here to stay and we are confident it will grow as more people step back and think through how they are investing their funds. It represents one element of a broader shift in thinking, as the traditional values of investing and capitalism are challenged. While not all organisations will be able to engage in impact investing, NFPs should consider how they can best achieve their desired impact and whether impact investment is the way forward. They should think about what impact they want to achieve, how to measure that impact and how to manage the risks of investment. Finally, they should ensure they comply with any legal obligations imposed on them to prevent a breach of duty. We look forward to see how impact investment reconciles profit with purpose, for the benefit of shareholders, stakeholders and the future of Aotearoa.

 

Should you need any assistance with these, or with any other NFP matters, please contact Steven Moe at Parry Field Lawyers stevenmoe@parryfield.com (+64 3 348 8480).

 

 

Interested in pursuing a purpose or cause that benefits the community? The type of vehicle you use is critical in ensuring your efforts are effective and that any assets you hold are protected.

Charitable Trusts and Incorporated Societies are two common vehicles used in New Zealand that often cause much confusion. We provide a short summary outlining the benefits and drawbacks of each option below:

Incorporated Society

• Governed by the Incorporated Societies Act 1908 until the society has reregistered under the Incorporated Societies Act 2022.
• Members can come and go without affecting the vehicle’s identity.
• Minimum number of 15 members required (Body Corporate members do however count as three (3) individuals).
• Usually used by sports clubs, cultural groups, etc. that see benefit in wider involvement.
• Accountability: committee members (officers) are accountable to the members.
• Administration costs: annual financial statements must be filed and annual general meetings held.
• Control: democratic control of the vehicle and its activities by its members. Inefficiency may result if majority of the members hinder the society’s purposes. There are some stories of members ousting officers but in our experience this would be very rare.

Charitable Trust

• Governed by the Charitable Trusts Act 1957/Trust Act 2019.
• We recommend at least three trustees or an odd number to prevent conflict.
• Accountability: individuals (a.k.a trustees) need to operate in accordance with the trust’s deed or be held personally liable for breaching their duties as trustees.
• Administration costs: proper records required for activities undertaken, etc. Trustees must meet regularly to make decisions as required by the trust deed.
• Control: decisions are made by a select few which may mean greater stability and efficiency. Conflict between the trustees however could adversely affect the performance of the trust. As trustees appoint each other, the ability to change hands of controlling power may be difficult.

Various factors must be considered before committing to a vehicle. We generally find that a Charitable Trust is the most flexible of the two. However, it is important that you consider how your operations are likely to look like. Imagine the future. Will your vehicle advance or hinder your ability to effect your purpose?

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. Our team is experienced with charities, social enterprises and trusts that are common in this area of law. We would be happy to assist you in your journey. We have free resources for start-ups, boards and companies including “Start-ups Legal Toolkit” which covers the key issues we see people face when starting out (it’s a free PDF guide in the resources section of this site). For more information, please feel free to contact us at Parry Field Lawyers:

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