Owner’s Expectations Manual for Crown Research Institutes

7. SHAREHOLDER APPROVAL AND STRATEGIC INITIATIVES

Approval and notification thresholds

The board of each CRI is required to seek the approval of, and expected to notify, shareholding Ministers before entering into certain transactions or strategic initiatives.

Approval for major transactions

Under the Companies Act, CRIs may not enter into a ‘major transaction’ (as defined by that Act) unless it has been approved by a special resolution signed by shareholding Ministers, or is contingent on such approval.

Approval and notification for significant transactions

Shareholding Ministers expect the board of each CRI to include in its SCI other significant transactions above a certain threshold agreed by shareholding Ministers and the board for which the board will either seek prior approval or, in line with the ‘no surprises’ policy, provide advance notification to shareholding Ministers.

Process for seeking approval

Shareholding Ministers are, on occasion, asked to approve transactions above a certain threshold.  This usually arises because the transactions are major transactions under the Companies Act, or shareholding Ministers are being asked for their approval as required under the company’s SCI, or shareholding Ministers are being asked to consider an equity injection.

Boards are encouraged to enter into contracts for the transactions covered under this requirement subject to shareholder approval, and to seek shareholder approval well before the transaction is due to proceed.  Generally, a minimum period of two weeks would be required for officials to analyse the business case and for shareholding Ministers to formulate their recommendation, although this depends on the complexity of the transaction.  Boards are encouraged, however, to engage with officials early to determine the time required for the process and the information that may be required to allow an informed assessment of the transaction.  Such information may include:

• expected financial and non-financial returns and risks,
• the size of the proposal and fit with the CRI’s core business,
• the CRI’s track record of success in similar transactions,
• the CRI’s proposed means of funding the transaction (in the case of a purchase) and how this would affect the CRI’s or Crown’s financial position,
• in the case of technology transfer activities:
  • maximisation of spillover effects to New Zealand (such as job creation/retention and export growth),
  • ongoing earnings to New Zealand, and
  • anchoring any technology transferred within New Zealand.

If approval is being sought during the business planning process, shareholding Ministers’ views on the transaction should be explicitly sought, ie approval should not be inferred from Ministers’ support for the business plan.

With regard to the provision of new capital, this may be a decision for Cabinet which will consider its relative capital priorities across government.  Shareholding Ministers, therefore, expect that any request for additional capital will demonstrate what shareholder value will be added, to assist them in prioritising demands on capital.

Shareholding Ministers expect CRIs to keep public comment on transactions that are yet to receive shareholder approval to a minimum to avoid giving stakeholders the impression that consent is a foregone conclusion.

Overseas activities

Shareholding Ministers are comfortable with CRIs engaging in activities overseas with the aim of extending science networks and/or generating income.  Boards, however, should ensure that any proposed overseas activities:

• are consistent with the CRI’s legislated operating principles, with particular emphasis on providing demonstrable benefits to New Zealand,
• are broadly consistent with and encompass the expectations in the Operating Framework,
• do not detract focus from the CRI’s core business activities in New Zealand,
• do not create undue risk for areas of core national science capability, and
• anticipate returns commensurate with risk.

‘Demonstrable benefits to New Zealand’ should include particular emphasis on, but are not limited to, the development of:

• intellectual property,
• strategic scientific knowledge, resources and capability, and
• technology transfer.

These benefits should be able to be applied in New Zealand and/or offered to a CRI’s local client groups. 

A CRI’s activities overseas should not create a risk that the New Zealand Government may be directly or indirectly associated with and held accountable for the CRI’s overseas actions and behaviour.  As CRIs may be perceived, however, to be acting on behalf of the New Zealand Government, they should always ensure that they act with high ethical standards.

Formation of subsidiaries

Under the CE Act, CRIs are required to notify shareholding Ministers before they acquire or form a subsidiary.  Shareholding Ministers also expect that:     

• the parent company will comply with any restrictions in its SCI relating to the acquisition or formation of subsidiaries,
• the powers and function of each subsidiary will be treated in practice as if it is subject to the same statutory limitations as the parent company, 
• in establishing the governance arrangements for the subsidiary, the parent will act in accordance with any relevant provisions of its SCI and accepted best practice in the identification and appointment of directors,
• the parent company will be accountable to the Minister of Research, Science & Technology for the subsidiary’s activities and performance and will have appropriate financial controls, business planning and monitoring procedures in place, and
• public accountability documents for the parent company – SCIs, financial statements and annual reports – are required to cover the parent CRI’s Crown entity subsidiaries.

Ownership

CRIs may wish to form joint ventures, partnerships or other similar associations with third parties.  Such engagement with industry can be useful for the transfer of CRI technologies but should not affect a CRI’s control over its core science activities and capabilities. 

This concern about dilution of control also extends to financial and budgetary controls.  Shareholding Ministers expect that any joint ventures entered into by CRI boards would be subject to at least the same level of financial budgeting and monitoring rigour as that which applies to CRIs and their subsidiaries.

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