The NZX Listing Rules relating to the composition of Audit Committees are now under close regulatory scrutiny, so we encourage listed companies to do a compliance check.
The relevant requirements are contained in Rule 2.13 which stipulates that an Audit Committee must:
- be comprised entirely of directors of the company
- have a least three members
- have a majority of independent directors, and
- have at least one member with an accounting or financial background.
Further guidance is provided through NZX Corporate Governance Code recommendation 3.1 which suggests that Audit Committees should be restricted to non-executive directors and that the chair of the Committee should not also be chair of the Board.
The NZ Markets Disciplinary Tribunal (“NZMDT”) as the enforcement agency has asked NZX Regulation Limited (“NZ RegCo”) to remind listed issuers of these obligations after issuing four determinations for non-compliance last year – three for not meeting the three-member minimum threshold (attracting penalties of between $25,000 and $35,000) and one for breaching the independent majority requirement (fined $75,000).
The Tribunal acknowledged that the breaches were not ill-intentioned and were rectified promptly.
In addition, NZ RegCo issued four infringement notices, with fines of between $6,000 and $10,000, following a review of other issuer annual reports and finding lower-level non-compliance with the NZX Rule.
Chapman Tripp comment
The Tribunal noted that there was some confusion between NZX Rule, which is mandatory, and the NZX Corporate Governance Code, which is subject to a comply or explain regime under which any failures to follow recommendations must be explained in the issuer’s annual report.
We consider that greater clarity should be provided either by creating an exemption from the Code recommendation that only non-executive directors be appointed to the Audit Committee in circumstances where the issuer has a small board of only three directors or that the Rule should be reconsidered so that, say, two directors would be sufficient if there are only three directors. The latter approach is consistent with ASX best practice.
Thank you to Liora Bercovitch and summer clerk, Jana Stokes, for writing this note. Liora and Roger Wallis acted for an issuer subject to an NZ RegCo review that resulted in a $6,000 infringement notice. Chapman Tripp partner Rachel Dunne is a member of NZMDT and was chair of two of the NZMDT divisions that recently made non-compliance determinations.