Section 175 of the Companies Act (2006) codifies the fiduciary no-conflict rule with regard to company directors. It provides: "A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company". It comes into force on 1 October 2008 (for details of this and other implementation dates, click here).
GC100 - the Association of General Counsel and Company Secretaries of the FTSE100 - has published guidance on Section 175. The document identifies situations in which Section 175 is likely to be breached and provides guidance for company secretaries when dealing with directors' conflicts of interest. The guidance is available here.
Friday, 25 January 2008
UK: FSA review of the Listing Regime
The Financial Services Authority has published a consultation paper concerning proposed changes to the Listing Regime. According to the FSA:
"To continue the Listing Regime's contribution to the success of UK markets, the paper sets out a new structure for the regime in which securities subject to higher standards will be more clearly separated from directive minimum standards. It proposes re-labelling Primary Listing 'Tier One Listing' and Secondary Listing and GDRs 'Tier Two Listing'. Alternatively, it suggests reclassifying Secondary Listing and GDRs. The securities would continue to be admitted to trading and subject to appropriate EU directive based obligations, but they would not be 'Officially Listed' by the FSA".
For further information click here.
"To continue the Listing Regime's contribution to the success of UK markets, the paper sets out a new structure for the regime in which securities subject to higher standards will be more clearly separated from directive minimum standards. It proposes re-labelling Primary Listing 'Tier One Listing' and Secondary Listing and GDRs 'Tier Two Listing'. Alternatively, it suggests reclassifying Secondary Listing and GDRs. The securities would continue to be admitted to trading and subject to appropriate EU directive based obligations, but they would not be 'Officially Listed' by the FSA".
For further information click here.
UK: Non-executive directors on the increase
At the end of December, the Financial Times reported (in an article titled "Big companies cut executives from boards"):
"Britain’s largest listed companies have sharply reduced the number of senior managers on their boards in the past five years, with non-executive directors now outnumbering executive directors in the FTSE 100 by more than two to one. Figures compiled by Cranfield management school show the number of executive directors of the 100 largest listed companies has fallen 27 per cent since the Higgs report called for a better balance between executives and non-executives. The fall has left more than a fifth of the FTSE 100 boards with only two executive directors – among them British Airways, Diageo and J.Sainsbury. There were just 12 when the Higgs report was published in January 2003. The changes mean that leading UK companies increasingly resemble their US counterparts, where an all-powerful chairman/chief executive and chief financial officer are the main source of information for the independent directors".
For further information click here.
"Britain’s largest listed companies have sharply reduced the number of senior managers on their boards in the past five years, with non-executive directors now outnumbering executive directors in the FTSE 100 by more than two to one. Figures compiled by Cranfield management school show the number of executive directors of the 100 largest listed companies has fallen 27 per cent since the Higgs report called for a better balance between executives and non-executives. The fall has left more than a fifth of the FTSE 100 boards with only two executive directors – among them British Airways, Diageo and J.Sainsbury. There were just 12 when the Higgs report was published in January 2003. The changes mean that leading UK companies increasingly resemble their US counterparts, where an all-powerful chairman/chief executive and chief financial officer are the main source of information for the independent directors".
For further information click here.
UK: Combined Code: Proposed Changes
In December 2007, the FRC began a consultation with regard to two changes to the Combined Code on Corporate Governance:
(1) the removal of the restriction preventing an individual from chairing more than one FTSE100 company
(2) for listed companies outside of the FTSE350, to allow the chairman to be a member of, but not chair, of the audit committee providing he or she was considered independent on appointment.
For further information click here.
(1) the removal of the restriction preventing an individual from chairing more than one FTSE100 company
(2) for listed companies outside of the FTSE350, to allow the chairman to be a member of, but not chair, of the audit committee providing he or she was considered independent on appointment.
For further information click here.
Scotland: Non-executive directors' fiduciary duties
Shortly before Christmas, Lord Reed gave his opinion in Commonwealth Oil & Gas Company Ltd v Baxter & Anor [2007] ScotCS CSOH198. This important decision deserves attention in and beyond Scotland for several reasons:
(1) it is one of the most important Scottish company law decisions of recent years
(2) it sends a clear message that the holding of directorial office should not be assumed lightly
(3) Lord Reed states that non-executive directors are subject to the same fiduciary duties as executive directors.
Postscript (24 April 2008): It has been reported that Mr Baxter, the non-executive director whose actions were found in breach of fiduciary duty, is to appeal.
(1) it is one of the most important Scottish company law decisions of recent years
(2) it sends a clear message that the holding of directorial office should not be assumed lightly
(3) Lord Reed states that non-executive directors are subject to the same fiduciary duties as executive directors.
Postscript (24 April 2008): It has been reported that Mr Baxter, the non-executive director whose actions were found in breach of fiduciary duty, is to appeal.
England and Wales: Separate legal personality upheld
In Sheldon Adelson v Associated Newspapers Ltd. [2007] EWHC 3028 (QB), it was argued that a company could recover damages for libel in respect of other companies within the same corporate group, and that there was no need for the companies suffering loss to be made parties to the litigation.
The trial judge, Eady J., rejected these arguments, noting that companies are individual legal entities and that companies cannot recover losses incurred by another. His Lordship also rejected the contention that the Court of Appeal had suggested otherwise in related litigation (see
[2007] EWCA Civ 701, noted in The WLR Daily).
The trial judge, Eady J., rejected these arguments, noting that companies are individual legal entities and that companies cannot recover losses incurred by another. His Lordship also rejected the contention that the Court of Appeal had suggested otherwise in related litigation (see
[2007] EWCA Civ 701, noted in The WLR Daily).
England and Wales: Directors' personal liability for company acts
In Societa Espolosivi Industriali SpA v Ordnance Technologies (UK) Ltd. [2007] EWHC 2875 (Ch), a company breached another company’s design right and its sole director was held personally liable. The company’s sole director and shareholder did not stop the company’s employees from committing the breach.
The trial judge, Lindsay J., stated that making a director personally liable for a mere omission to prevent a tort would represent a considerable departure from the traditional approach of the law. His Lordship nevertheless held that the case before him was not one of mere omission: the director had acted in a way that facilitated the breach by encouraging procurement of it.
The trial judge, Lindsay J., stated that making a director personally liable for a mere omission to prevent a tort would represent a considerable departure from the traditional approach of the law. His Lordship nevertheless held that the case before him was not one of mere omission: the director had acted in a way that facilitated the breach by encouraging procurement of it.
England and Wales: Directors' duties and the Re Duomatic principle
Lexi Holdings plc v Luqman [2007] EWHC 2652 (Ch) concerned an application for summary judgment, but nevertheless contains several important points concerning directors’ duties and the Re Duomatic principle. The trial judge:
(a) held the Re Duomatic principle does not apply where the company is insolvent
(b) declined to answer whether Re Duomatic could be invoked in respect of the approval of a beneficial rather than legal owner of shares
(c) stated that it was a firmly established legal principle that “no company director may simply leave the management of the company’s affairs to his or her colleagues, or to other delegates, without committing a breach of duty” (para. [219]).
(a) held the Re Duomatic principle does not apply where the company is insolvent
(b) declined to answer whether Re Duomatic could be invoked in respect of the approval of a beneficial rather than legal owner of shares
(c) stated that it was a firmly established legal principle that “no company director may simply leave the management of the company’s affairs to his or her colleagues, or to other delegates, without committing a breach of duty” (para. [219]).
England and Wales: Unfair prejudice: deadlock and the company's affairs
S. 994 of the Companies Act (2006) – formerly S. 459 of the 1985 Act – has been considered in Hawkes v Cuddy [2007] EWHC 2999 (Ch). The trial judge held that there was no absolute rule that the affairs of one company could not constitute the affairs of another for the purposes of S. 994. His Lordship also accepted that relief could be granted under S. 994 where there is a breakdown in trust and confidence coupled with deadlock, the result of which is that the company cannot be run as initially contemplated.
UK: Financial Reporting - Annual Report Survey
At the end of last year, Deloitte published its annual survey of FTSE350 companies' annual reports. Its report, titled "Written to Order: Surveying OFRs, EBRs and Narrative Reporting in Annual Reports", contained the following findings (to quote directly from the relevant press release):
(a) Annual reports have again increased in size, with the average number of pages at an all time high of 89, compared to 85 in 2006 and 45 pages in 1996.
(b) The narrative reporting sections are increasing in size. The largest increase was in the top 350 group of companies where the narrative reporting section has increased from an average 70 to 77 pages.
(c) The number of formal Operating and Financial Reviews (OFRs) has decreased from 41% in 2005 to 20% in 2006 to 10% in 2007. The official title, the OFR, is no longer being used to reduce the scrutiny burden on companies.
(d) The number of companies including Key Performance Indicators (KPIs) in their Enhanced Business Reviews (EBR) increased considerably from 67% in 2006 to 81% this year. The average number of KPIs is 6 but there continues to be a wide range in the number of KPIs, with one company in the top 350 disclosing 29.
(e) While the legal requirements are that an EBR must include a description of the principal risks and uncertainties facing the company, only 90% of the companies clearly met this. In particular, only 67% of companies included information on non-financial risks such as on strategic, operational and commercial matters.
The report is available here and there is further information here.
(a) Annual reports have again increased in size, with the average number of pages at an all time high of 89, compared to 85 in 2006 and 45 pages in 1996.
(b) The narrative reporting sections are increasing in size. The largest increase was in the top 350 group of companies where the narrative reporting section has increased from an average 70 to 77 pages.
(c) The number of formal Operating and Financial Reviews (OFRs) has decreased from 41% in 2005 to 20% in 2006 to 10% in 2007. The official title, the OFR, is no longer being used to reduce the scrutiny burden on companies.
(d) The number of companies including Key Performance Indicators (KPIs) in their Enhanced Business Reviews (EBR) increased considerably from 67% in 2006 to 81% this year. The average number of KPIs is 6 but there continues to be a wide range in the number of KPIs, with one company in the top 350 disclosing 29.
(e) While the legal requirements are that an EBR must include a description of the principal risks and uncertainties facing the company, only 90% of the companies clearly met this. In particular, only 67% of companies included information on non-financial risks such as on strategic, operational and commercial matters.
The report is available here and there is further information here.
UK: CSR Reporting
In December 2007, Deloitte reported:
"The number of FTSE 100 companies issuing corporate responsibility (CR) reports has reached a record high ... 80 of the UK’s top 100 companies now report on corporate responsibility in their Annual Report and Accounts. This compares with 56 five years ago".
For further information, click here.
"The number of FTSE 100 companies issuing corporate responsibility (CR) reports has reached a record high ... 80 of the UK’s top 100 companies now report on corporate responsibility in their Annual Report and Accounts. This compares with 56 five years ago".
For further information, click here.
Thursday, 24 January 2008
UK: FTSE350 companies' compliance with the Combined Code
Earlier this year, Grant Thornton published research exploring FTSE350 companies' compliance with the UK's Combined Code on Corporate Governance. The research revealed (to quote directly from the relevant press release):
(a) 66% of FTSE 350 companies still do not claim to be in full compliance with the provisions of the Combined Code.
(b) The most common areas where companies chose to depart from the Code's provisions were the terms and conditions of the appointment of non-executives, aspects of internal controls and audit committee independence and financial experience.
(c) 80% of businesses had attempted a Business Review in accordance with the new Companies Act, although the majority would not have been required to do so.
For further information, click here.
(a) 66% of FTSE 350 companies still do not claim to be in full compliance with the provisions of the Combined Code.
(b) The most common areas where companies chose to depart from the Code's provisions were the terms and conditions of the appointment of non-executives, aspects of internal controls and audit committee independence and financial experience.
(c) 80% of businesses had attempted a Business Review in accordance with the new Companies Act, although the majority would not have been required to do so.
For further information, click here.
Europe: The European Private Company
In December 2007, the European Commission published a summary of responses to its consultation on proposals for a statute for the "European Private Company" (Societas
Privata Europaea). The summary is available here and background information is available here.
Privata Europaea). The summary is available here and background information is available here.
Postscript (25 June 2008): Proposals were published today: see this post.
Europe: Ownership of audit firms and audit market concentration
The European Commission has published an independent study of the ownership rules applying to audit firms and their consequences on audit market concentration. The study is available here.
Europe: Internal Market Commissioner's speech on corporate governance
On 6 December, European Internal Market Commissioner McCreevy was at Westminster, delivering a speech to the All Party Parliamentary Corporate Governance Group. Some interesting points from Commissioner McCreevy include:
"My recent decision not to propose any EU measure on one-share-one-vote does not mean that I do not believe in one-share-one-vote any more. I continue to believe it is in the best interest of companies and their investors. However, I do not believe that EU action would be useful or fruitful".
"We are looking into the issue of whether we need a recommendation on Shareholders' rights to accompany the recently approved Shareholders' Rights Directive. We are also having a close look at the proper application of existing rules. One of the areas we are looking at in this context is the "acting in concert" rules in the Takeover Directive. I am concerned that some Member States are giving far too wide a reading on this concept, thereby preventing legitimate collaboration between shareholders".
The speech is available here.
A week or so after Commissioner McCreevy's speech, the European Commission published an impact assessment on the proportionality between capital and control in listed companies, which explores the arguments for and against legislation within this area. This is available here.
"My recent decision not to propose any EU measure on one-share-one-vote does not mean that I do not believe in one-share-one-vote any more. I continue to believe it is in the best interest of companies and their investors. However, I do not believe that EU action would be useful or fruitful".
"We are looking into the issue of whether we need a recommendation on Shareholders' rights to accompany the recently approved Shareholders' Rights Directive. We are also having a close look at the proper application of existing rules. One of the areas we are looking at in this context is the "acting in concert" rules in the Takeover Directive. I am concerned that some Member States are giving far too wide a reading on this concept, thereby preventing legitimate collaboration between shareholders".
The speech is available here.
A week or so after Commissioner McCreevy's speech, the European Commission published an impact assessment on the proportionality between capital and control in listed companies, which explores the arguments for and against legislation within this area. This is available here.
OECD: Statement on the proportionality between ownership and control
The OECD has published its view on the issue of proportionality between ownership and control, sometimes referred to as the debate concerning "one member, one vote". The OECD has concluded (to quote directly from its website):
(a) There is nothing a priori onerous about separating ownership and control.
(b) The cost of regulating proportionality would be considerable.
(c) Strengthening corporate governance frameworks is a better alternative.
(d) Specific problems can be dealt with through carefully targeted regulation.
For further elaboration, click here.
(a) There is nothing a priori onerous about separating ownership and control.
(b) The cost of regulating proportionality would be considerable.
(c) Strengthening corporate governance frameworks is a better alternative.
(d) Specific problems can be dealt with through carefully targeted regulation.
For further elaboration, click here.
UK: Walker Report on Private Equity published
At the end of November 2007, Sir David Walker published his report titled "Guidelines for Disclosure and Transparency in Private Equity". This contains guidelines for enhanced disclosure by private equity firms. Amongst the recommendations are the following:
(a) Private equity firms should publish either in the form of an annual review or through regular updating of its website:
- a description of its own structure and investment approach and of the UK companies in its portfolio, an indication of the leadership of the firm in the UK and confirmation that arrangements are in place to deal with conflicts of interest
- a commitment to conform to the guidelines on a comply or explain basis
- a categorisation of its limited partners by geography and by type
(b) A portfolio company should publish its annual report and accounts on its website within six months of the year-end and include:
- the identity of the private equity fund or funds that own the company, the senior managers or advisers who have oversight of the fund or funds, and detail on the composition of its board
- a business review that substantially conforms to the provisions of section 417 of the Companies Act 2006, including sub-section 5 that otherwise applies only to quoted companies, calling for an indication of main trends and factors likely to affect the future development, performance and position of the company’s business and to include information on the company’s employees, environmental matters and social and community issues.
A copy of the report - which provides definitions of a "private equity firm" and "portfolio firm" - is available here.
(a) Private equity firms should publish either in the form of an annual review or through regular updating of its website:
- a description of its own structure and investment approach and of the UK companies in its portfolio, an indication of the leadership of the firm in the UK and confirmation that arrangements are in place to deal with conflicts of interest
- a commitment to conform to the guidelines on a comply or explain basis
- a categorisation of its limited partners by geography and by type
(b) A portfolio company should publish its annual report and accounts on its website within six months of the year-end and include:
- the identity of the private equity fund or funds that own the company, the senior managers or advisers who have oversight of the fund or funds, and detail on the composition of its board
- a business review that substantially conforms to the provisions of section 417 of the Companies Act 2006, including sub-section 5 that otherwise applies only to quoted companies, calling for an indication of main trends and factors likely to affect the future development, performance and position of the company’s business and to include information on the company’s employees, environmental matters and social and community issues.
A copy of the report - which provides definitions of a "private equity firm" and "portfolio firm" - is available here.
US Supreme Court rules on third party liability towards company investors
On January 25, the American Supreme Court delivered its decision in Stoneridge Investment Partners LLC v Scientific-Atlanta Inc. et al., described by the UK's Financial Times as "the most important securities case in more than a decade". The issues and the finding of the majority (5 to 3) of the Court are well described in Justice Kennedy's opening remarks:
"We consider the reach of the private right of action the Court has found implied in §10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U. S. C. §78j(b), and SEC Rule 10b–5, 17 CFR §240.10b–5 (2007). In this suit investors alleged losses after purchasing common stock. They sought to impose liability on entities who, acting both as customers and suppliers, agreed to arrangements that allowed the investors’ company to mislead its auditor and issue a misleading financial statement affecting the stock price. We conclude the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations. We affirm the judgment of the Court of Appeals."
The decision is available here.
For further discussion, click here and here.
"We consider the reach of the private right of action the Court has found implied in §10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U. S. C. §78j(b), and SEC Rule 10b–5, 17 CFR §240.10b–5 (2007). In this suit investors alleged losses after purchasing common stock. They sought to impose liability on entities who, acting both as customers and suppliers, agreed to arrangements that allowed the investors’ company to mislead its auditor and issue a misleading financial statement affecting the stock price. We conclude the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations. We affirm the judgment of the Court of Appeals."
The decision is available here.
For further discussion, click here and here.
Norway: gender balance on company boards
Public limited companies in Norway were given until the start of this year to implement rules designed to increase the representation of women on company boards. The legal requirement is that each gender should have at least 40% representation on company boards. According to "Statistics Norway", 78% of public limited companies met this requirement on 1 January 2008. Of the total population of company directors on 1 January 2008, 36.2% were female (up from 29.8% on 1 July 2007).
For further statistical information, click here.
For further background information, click here.
For further statistical information, click here.
For further background information, click here.
Norway: revised corporate governance code
In December 2007, a revised edition of the Norwegian Code of Practice for Corporate Governance was published. This new edition further strengthens the role of independent directors and provides: "The composition of the board of directors should ensure that it can operate independently of any special interests. The majority of the shareholder-elected members of the board should be independent of the company's executive management and material business contacts. At least two of the members of the board elected by shareholders should be independent of the company's main shareholder(s)".
A copy of the revised Code is available here.