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Owner's Expectations Manual

7.7 SOE borrowing

7.7.1 Explicit disclaimer of Crown guarantees and loan covenants

  • For all SOE financing not provided by the Crown, there must be a disclaimer associated with the finance contract that the Crown does not guarantee or financially support any such SOE borrowings. The disclaimer aims to give a clear signal to third parties/third-party financiers of the nature of the relationship between the Crown and SOEs in respect of any such borrowings.

7.7.2 Ownership review clauses

  • Some loan documents link the loan terms to the shareholder's identity, so that, if the control of the company changes, the lender reserves for itself the right to call up the loan. For SOEs, this would connect the terms of borrowing with the Crown, and could incorrectly give the appearance of an implicit Crown guarantee.
  • Notwithstanding the Crown's current long-term hold policy, the position on such clauses is as follows:
    • It is acceptable to have loan provisions that require lenders to be informed whenever an SOE becomes aware that its ownership will change.
    • Shareholding Ministers prefer SOEs not to enter into loan agreements that provide for a review of the loan at the lender's discretion, in the event of an ownership change.
    • It is not acceptable to have loan provisions that involve a technical default at the lender's discretion in the event of an ownership change.
  • If entities are considering changes to the ownership control clause, they are encouraged to consult with Ministers and officials, and are asked to bear in mind the above comments.
  • There are alternative mechanisms that can provide lenders with the comfort they desire without the drawbacks typically inherent in ownership change clauses. These range from covenants concerning debt/equity ratio and interest coverage to lenders taking security over specific company assets. However, these mechanisms can place constraints on the company and must be designed to minimise the extent to which they frustrate any future restructuring of an SOE. Boards should bear this in mind when considering such mechanisms.

7.7.3 Tax planning

  • SOEs are expected to conduct their businesses on the same basis as comparable businesses not owned by the Crown, including normal prudent planning of their tax affairs. SOEs are also required to act as good corporate citizens by exhibiting a sense of social responsibility where able to do so.
  • These objectives are not served by tax planning that is outside the spirit of the law. While shareholding Ministers are comfortable with SOEs engaging in normal tax planning in accordance with tax law, they are not comfortable with companies leading the market in developing aggressive tax-planning strategies.
  • Shareholding Ministers recognise that what might be considered aggressive may change over time and that there will always be an element of judgement involved. This is a judgement for SOEs' boards, not shareholding Ministers, to make.
  • The principles that shareholding Ministers expect boards to adopt when considering tax planning are as follows:
    • Final decisions regarding whether to proceed with any single or series of related transactions are for individual SOE boards to consider, subject to the usual shareholder consultation requirements set out at Section 8.1.2 and in each SOE's SCI, and thresholds specified in the Companies Act regarding major transactions.
    • All transactions should be legal in all jurisdictions in which they have effect, and with respect to unusual or non-trivial tax issues, have sign off from professional tax advisors and appropriate tax authorities where possible (eg, receiving a binding ruling on the transaction from Inland Revenue Department, where appropriate). Moreover, the tax-planning component of transactions should not be aggressive from a New Zealand or international corporate perspective, which should be confirmed in professional tax advice received by an SOE.
    • Ownership risks arising from the transactions should be remote.
    • The normal expectations regarding the “no surprises” policy and disclaimers on company financing apply.
    • Boards are fully accountable for their tax-planning activities, and so they need to be able to explain their decisions to all stakeholders, recognising the obligations imposed on SOE directors through the SOE Act and other legislation, and shareholder expectations.
    • When assessing performance, the Government views dividend payments as if they were a domestic resident taxpayer. This means imputation credits are treated as if they have value in the hands of shareholders, and should be reserved for attachment to dividends.
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