New Zealand: where governance went wrong + review of corporate governance disclosure

Towards the end of last month, the chairman of the New Zealand Securities Commission - Jane Diplock - delivered a speech titled "Where governance went wrong - globally and in New Zealand". The following extracts are worth quoting directly:

In examining our own problems in New Zealand with failed finance companies, we have certainly seen that a lack of good corporate governance has been a contributor. We have not been alone in this. Considering international developments we see a common thread - a failure of good corporate governance. Good corporate governance remains a key underpinning of successful capital markets globally. Whether corporate governance systems have been rules-based or principles-based has not been material, we have seen failures in New Zealand and globally, across the board.

There has been the failure of boards of directors and management to transparently disclose the true nature of their products and the risks associated with them. We have also seen flagrant breaches of accounting standards. IOSCO's task force on the sub-prime crisis looked closely at the implications of institutions, investment banks and regulators relying on mark to model or as some have described it mark to myth, rather than to the market, especially at times of illiquidity in markets for those securities. There have been signs of poor governance in respect to matters of capitalisation and liquidity management.

In 2005 and 2006 the Commission reviewed corporate governance disclosures of issuers in their annual reports. Reviews revealed that while corporate governance disclosures by issuers were improving there was nevertheless significant scope for improvement. In particular, disclosures on how entities manage their shareholder and stakeholder relationships were very limited.

Therefore as part of its financial reporting surveillance programme, the Commission is about to undertake a fresh review of corporate governance disclosures and will report on this in due course.

UK: accounts and accounting reference dates - updated Companies House guidance

Companies House has published an updated version of guidance booklet GBA3: accounts and accounting reference dates: see here (HTML) or here (PDF). This booklet applies to accounting periods beginning on or after 6 April 2008 and provides an overview of three topics: accounting reference dates, preparing and filing accounts and the content of accounts. For information in respect of accounting periods beginning before 6 April 2008, see here.

Botswana: Companies Act 2003 - amendments

Botswana's Ministry of Trade and Industry has announced that a Bill amending the Companies Act 2003 has been passed by Parliament and will become law on receiving the president's signature. One of the main aims of the Act is to increase the speed with which a company can be incorporated by permitting the registrar of companies to delegate his powers to issue and sign certificates of incorporation. The Act also introduces a limited amnesty for those companies with outstanding annual returns when the 2003 Act came into force. 

Note: A copy of the 2003 Act is not, to the best of my knowledge, available to view online free of charge. Botswana case law is available on SAFLII - click here. 

UK: articles of association under the Companies Act 2006

The Companies (Model Articles) Regulations 2008 were laid before Parliament on 17 December 2008 and come into force on 1 October 2009. The Regulations contain the model articles for private companies limited by shares, private companies limited by guarantee and public companies.

The model articles provide default rules: they apply to companies formed on or after 1 October 2009 unless alternative provisions (in whole or part) are adopted. Further information is available in the accompanying explanatory memorandum. Non-statutory guidance (aimed at small companies) will be published in early 2009 on the DBERR website and will explain the differences between the default articles in the Companies (Tables A to F) Regulations 1985 and the new model articles. In addition, there are updated FAQs on the DBERR website. 

UK: Professional Oversight Board annual report

The Professional Oversight Board - part of the Financial Reporting Council - has published its report to the Secretary of State for BERR in respect of the year to 31 March 2008. In a statement accompanying the report's publication, the POB's Director, Paul George, noted:

The primary purpose is to report on our oversight of audit regulation carried out by the professional accountancy bodies that we recognise for this purpose. We focused in 2007/08 on key areas of risk at each body and on those regulatory systems where there had been significant recent change. Overall we conclude that the recognised bodies take their responsibilities extremely seriously and that much regulatory practice is of a high standard. However, the detailed comments in the report highlight those aspects of regulatory activity that are less strong or where there is room for improvement".

Click here for further information about the role of the POB. 

Canada: CSA corporate governance principles - proposed changes

The Canadian Securities Administrators are seeking comments on proposed changes to their corporate governance and audit regimes. These changes are set out in the following documents:

• Proposed National Policy 58-201 Corporate Governance Principles (intended to be more principles-based and broader in scope; it contains nine core corporate governance principles applying to all issuers).
• Proposed National Instrument 58-101 Disclosure of Corporate Governance Practices (introducing more general disclosure requirements).
  
• Proposed National Instrument 52-110 Audit Committees and its related companion policy 52-110 (introducing a principles based approach to determining director and audit committee member independence).

Further information is available here.

UK: Takeover Panel - Code amendments - publication of Responses Statements

On 19 December 2008 the Takeover Panel's Code Committee issued a couple of response statements: [1] RS 2008/2: miscellaneous code amendments and [2]RS 2008/3: electronic communications, websites and information rights. The amendments introduced by these statements come into force on 30 March 2009. 

Amongst the changes being introduced by RS 2008/3 is one to permit offerors and offeree companies to use electronic forms of communication (e.g., websites and e-mail) to send information about offers to offeree company shareholders. 

France: directors' remuneration - MEDEF/AFEP code

Earlier this year, two business organsiations - Association Française des Entreprises Privées (AFEP) and Mouvement des Entreprises de France (MEDEF) - published a voluntary code for directors' remuneration: recommandations sur la rémunération des dirigeants mandataires sociaux de sociétés dont les titres sont admis aux négociations sur un marché régleme. A copy in English has now been published: click here. It has been reported in the Financial Times that 25 companies within the CAC40 have complied and the remaining are expected to do so. 

UK: FSA approved persons regime consultation - the duties of non-executive directors

The UK's Financial Services Authority has published a consultation paper in which it sets out proposed changes to the approved persons regime with regard to directors. These changes form part of the FSA's response to its failings in the supervision of Northern Rock. Of interest are the proposals concerning non-executive directors and in this regard the FSA states (at para. 2.4):

Although their role is different to that of an executive director we expect them to ask challenging questions in order to understand (and if necessary, positively influence) the business model and inherent risks within the regulated firm. In order to do this effectively firms must have high quality non-executive directors committed to ensuring that their firms are run effectively. In this consultation we are proposing some changes to the APER Code of Practice to better reflect the duties of non-executive directors. We also want to make it clear that in the future we will be more likely to hold non-executive directors accountable, as well as the firm and its executives, if there is evidence to suggest that they have failed to fulfil their duties with competence and/or integrity". 

The FSA proposes the insertion of the following new principle within the Code of Practice for Approved Persons:

(1) An approved person performing the role of a non-executive director should seek to establish and continually maintain his confidence in the:

(a) conduct of the firm;
(b) performance of senior management;
(c) development of the firm’s business strategy;
(d) adequacy of financial controls;
(e) risk management;
(f) appropriateness of remuneration;
(g) appointment and replacement of key personnel; and
(h) plans for management development and succession.

(2) An approved person performing the role of a non-executive director should provide an independent perspective, and should constructively challenge and help develop proposals on strategy.

(3) An approved person performing the role of a non-executive director should scrutinise the performance and approach of senior managers in meeting agreed goals, objectives, and standards of conduct".

It is interesting to compare these responsibilities with directors' duties under the Companies Act (2006). Several points can be made.  First, the 2006 Act imposes duties on directors and does not distinguish between executive and non-executive directors (indeed, the Act does not provide a definition of non-executive director). Second, the duty imposed by company law with regard to directors'  skill, care and diligence (Section 174) is phrased in very general terms. The FSA's proposed principle is, in contrast, more detailed and identifies specific factors that the non-executive director should consider. Third, directors' company law duties are subject to enforcement by the board of directors and, in certain circumstances, a shareholder or shareholders. In contrast, a breach of the FSA's Code of Practice for Approved Persons can result in action (e.g., the imposition of a penalty) by the FSA under Section 66 of the Financial Services and Markets Act (2000).  This said, conduct giving rise to a breach of Section 174 may also breach the Code of Practice. 

For further information see:

Consultation paper | newsletter | press release | online response form | FSA internal audit report: Northern Rock | Northern Rock board trading statement (October 2008): no action to be taken against former directors | 

Europe: freedom of establishment - restrictions on the transfer of a company's seat

The European Court of Justice has held - in Cartesio Oktató és Szolgáltató bt. (Case C-210/06, 16 December 2008) - that Community law does not preclude a Member State from preventing a company incorporated under its national law from transferring its seat to another Member State whilst retaining its status as a company in the Member State of incorporation. This is an important decision, in which the ECJ also explained (para. 110) that each Member State:

... has the power to define both the connecting factor required of a company if it is to be regarded as incorporated under the law of that Member State and, as such, capable of enjoying the right of establishment, and that required if the company is to be able subsequently to maintain that status. That power includes the possibility for that Member State not to permit a company governed by its law to retain that status if the company intends to reorganise itself in another Member State by moving its seat to the territory of the latter, thereby breaking the connecting factor required under the national law of the Member State of incorporation"

An ECJ press release, in English, is available here. The decision has also been reported here by the ICLR as part of its WLR(D) service (this page will disappear if the decision is published in one of the ICLR's law reports). For further comment see this post on Siemslegal.

UK: corporate ownership and control

Over ten years ago research was published by La Porta, Lopez-de-Silanes, Sheifer and Vishny, which revealed the differences between common law and civil law countries with regard to the legal protection provided to shareholders. This work suggested that dispersed share ownership in common law countries could be explained by reference to the legal protection provided to minority shareholders; concentrated ownership in civilian countries is therefore the result of weak protection. 

The UK proves problematic for this thesis because share ownership became dispersed in the absence of strong legal protection. Indeed, La Porta et. al. have recognised the difficulties posed by the UK example in an article published earlier this year in the Journal of Economic Literature (and available here on ssrn). 

Against this background, the publication of Professor Brian Cheffins' book - Corporate Ownership and Control: British Business Transformed - is timely. Cheffins provides a rich, historical analysis of the separation of ownership and control within the UK from the seventeenth century to today. His book is providing the departure point for an interdisciplinary, one day conference being held in Cambridge on Monday, January 12.  Further information is available here. 

UK: the Companies’ Remuneration Reports Bill 2008-09

On December 16th, in the House of Lords, the Companies' Remuneration Reports Bill received its first reading. The purpose of the Bill, introduced by Lord Gavron as a Private Members' Bill, is to amend the remuneration reporting requirements imposed on public quoted companies by the insertion of the following new section in the Companies Act 2006:

430A  Annual accounts and report: public quoted companies

(1) Every public quoted company, as defined in sections 4(2), 385(1) and (2), shall publish on the first page of the chairman’s statement, chief executive’s statement, or directors’ report, whichever comes first in the annual accounts and report, the ratio between the total annual remuneration of the highest paid director or executive and the total annual average remuneration of the lowest paid ten per cent of the workforce".

It's not clear whether the Bill has Government support, without which it is unlikely to become law. 

UK: the Companies Act 2006 (Extension of Takeover Panel Provisions) (Isle of Man) Order 2008

The Companies Act 2006 (Extension of Takeover Panel Provisions) (Isle of Man) Order 2008 has been published on OPSI and will come into force on 1 March 2009. Its purpose is to give the UK Takeover Panel the ability to exercise its statutory powers with regard to the Isle of Man (one of the Crown dependencies) by applying Chapter 1 of Part 28 of the Companies Act (2006) to the Isle of Man. 

The Order also makes some amendments to the Financial Services Act 2008 (an Act of Tynwald, the Isle of Man Parliament). It was made under Section 965 of the Companies Act (2006) which gave the Queen the power to extend Chapter 1 to the Isle of Man or any of the Channel Islands.

UK: APB Bulletin - Going concern issues during the current economic conditions

The UK's Auditing Practices Board (APB) has today published a new bulletin: Going concern issues during the current economic conditions (2008/10). In the accompanying press release, it is stated that the 

...current economic conditions challenge all involved with annual reports and accounts ... One consequence is expected to be an increase in the disclosures in annual reports and accounts about going concern and liquidity risk. Auditors will need to ensure that they fully consider going concern assessments and only refer to going concern in their auditor’s reports when appropriate. To assist auditors to respond to this challenge the APB has today published Bulletin 2008/10 ..."

UK: FRC publishes 2009/10 draft plan and identifies risks to confidence in corporate reporting and governance

Yesterday the Financial Reporting Council published its draft plan for 2009/10. This includes updates to the FRC's strategic framework. The draft plan also sets out what the FRC believes to be the most significant risks to confidence in corporate reporting and governance. These include (to quote directly from the FRC's draft plan):

Corporate governance:

[1] During a period of volatility and increased uncertainty, boards may find the assessment and management of risk particularly difficult.

[2] Providing adequate information about governance practices may be significantly more challenging for boards in the current environment.

Corporate reporting:

[1] Current economic conditions increase the risk of error or omission in preparing financial statements, which may make it more challenging for directors to prepare financial statements which comply fully with the requirements of accounting standards and show a true and fair view.
[2] In the current environment, the challenges for directors to disclose adequate information regarding companies’ business models and business risks may increase.
[3] The goal of a single set of global accounting standards may be undermined by challenges to the ability of the IASB and other standard setters to exercise independent judgement, based on their skills and experience, and by the actions of jurisdictions to carve‐out or adapt IFRS, so reducing the quality of their accounting standards.  

Auditing and related services:

[1] The high level of concentration in the audit market may result in significant uncertainty and cost in the event of one or more of the major audit firms leaving the market.
[2] The complexity and volume of risks arising from the tougher economic conditions may be challenging for auditors to adequately address.

Actuarial practice:

[1] Providing information which adequately reflects the uncertainties arising from tougher economic conditions may be challenging for actuaries.

UK: the Open-Ended Investment Companies (Amendment) Regulations 2009

A draft copy of the Open-Ended Investment Companies (Amendment) Regulations 2009 was published yesterday on OPSI. The Regulations, when they come into force, will make it possible to transfer shares in open-ended investment companies by electronic communication in England, Wales and Scotland. Currently a paper instrument of transfer is required.

The explanatory memorandum accompanying the draft Regulations is available here. It should be noted that the Regulations published yesterday replace a draft statutory instrument of the same title (see here) which was published on OPSI at the end of November. 

Europe: private equity - review of industry codes

The European Internal Market Commissioner, Charlie McCreevy, has announced that he is conducting a review of the codes adopted by the private equity industry, considering their scope, content and performance. His findings are due to be reported to the European Parliament in March 2009. 

In his speech, Commissioner McCreevy acknowledged that there were concerns regarding corporate governance, transparency and reporting. He identified three areas that his review would concentrate upon:

• The coverage and adoption of codes (McCreevy noted the limited adoption of the Walker Guidelines)
  
• The monitoring and mechanisms for promoting compliance with the relevant codes
• Consistency across Member States

This review follows the European Parliament's adoption of a resolution earlier this year in which it recommended:

The Commission should undertake an examination of all existing Community legislation relevant to financial markets in order to identify any lacunae as regards the regulation of hedge funds and private equity and, based on the results of such examination, to submit to the European Parliament a legislative proposal or proposals amending the existing directives where necessary, in order better to regulate hedge funds, private equity and other relevant actors. Such proposed regulation should be purposive"

UK: first decision of the Company Names Tribunal

The Company Names Tribunal was introduced by the Companies Act (2006) to deal with disputes concerning opportunistic company name registrations. It started operating on 1 October 2008. Under Section 69 of the 2006 Act:

(1) A person ( “the applicant”) may object to a company's registered name on the ground-

(a) that it is the same as a name associated with the applicant in which he has had goodwill, or

(b) that it is sufficiently similar to such a name that its use in the United Kingdom would be likely to mislead by suggesting a connection between the company and the applicant.

The Tribunal's decisions will be published here. The first decision has been published: see here. It concerned the registration, in February 2008, of the company name Coke Cola Limited. The applicants - The Coca-Cola Company - were, unsurprisingly, successful in their application under Section 69(1)(b) and a change of name order under Section 73 was made by the company names adjudicator. Further information about the Tribunal's remit is available here.

Netherlands: revised corporate governance code issued

The Dutch Corporate Governance Monitoring Commission has published an updated edition of the Dutch Corporate Governance Code. In an accompanying press release - available here in English - the Commission states:

...the Code should encourage proper conduct on the part of management and supervisory board members and shareholders. This is why more emphasis is to be placed on how they perform their duties in practice rather than on how they account for their actions in retrospect. The Committee considers that too much energy has been spent in complying with detailed reporting rules, while the really important issues have received insufficient attention. The decisive factor in the operation of the Code is not strict compliance with the letter of the code (box ticking) but the extent to which all concerned act in practice in accordance with the spirit of the Code.

The main adjustments are in the areas of risk management, executive pay, shareholder responsibility, diversity in the composition of the supervisory board and corporate social responsibility.

UK: corporation tax - rewrite and reform

A couple of items. The Corporation Tax Bill received its first reading in the House of Commons on 4 December. The Bill is the fifth produced as part of the Tax Law Rewrite project and may well contain, by the time it becomes law, more sections than the Companies Act 2006! Explanatory memoranda are available here.

Not long after its defeat in Test Claimants In the FII Group Litigation v HM Revenue & Customs [2008] EWHC 2893 (Ch), in which the aspects of the UK corporate tax regime concerning dividends were found to breach Community law, HMRC has published draft clauses which will make significant changes to the taxation of companies' foreign profits. In the accompanying consultation paper, HMRC explains (paras. 5 to 7):

Currently the UK taxes overseas dividends received by UK companies and provides credit for overseas tax paid, whilst addressing double taxation domestically by exempting UK dividends. Many businesses view the tax with credit rules as administratively burdensome and disproportionate in comparison to the relatively low amount of tax they generate. It is further argued that the rules consequently hinder the UK’s competitive position. 

With this in mind, the central measure within the foreign profits reform package is an exemption from tax for dividends received by large and medium groups regardless of the source. The policy objective is to enhance the competitiveness of the UK by providing the widest possible exemption. Compared with other developed countries, this dividend exemption is one of the most generous as it is available regardless of the level of shareholding.

There is a fiscal risk associated with the introduction of such a wide-ranging exemption. In particular, it is likely that some groups will change their behaviour in order to take advantage of dividend exemption. For example, under dividend exemption multinational firms have more incentive to divert UK profit overseas. Therefore, in order to help manage the fiscal risk, the Government intends that dividend exemption will not be available where it is used for tax avoidance
purposes ..."

New Zealand: Listing Rules - proposed changes regarding capital raising and directors' remuneration

The New Zealand Stock Exchange (NZX) has issued a consultation paper setting out proposed changes to the Listing Rules governing the NZSX, NZDX and NZAX markets. The majority of these changes concern capital raising but some concern corporate governance.  Of interest is a proposed change concerning directors' remuneration which would permit directors to be remunerated in shares. The justification for this change is explained as follows (p. 10):

NZX believes that the issue of stock as a means of remuneration should be promoted. This would assist Listed Issuers to align management and shareholder interests more closely, and give firms that are potentially cash constrained more flexibility in the way they remunerate Directors. Any such arrangement would need to be approved by shareholders. The current rule relating to Director remuneration (Rule 3.5.1/ NZAX Rule 3.4.1) only contemplates Directors’ remuneration being paid by way of a monetary sum and makes no provision for the issuing of shares. For firms that may be cash constrained, flexibility on the type of remuneration paid is important. This Rule should be changed to allow firms to pay Directors, who so elect, in stock if approved by shareholders".

UK: ASB issues FRS improvements to financial reporting standards

The Accounting Standards Board has published FRS Improvements to Financial Reporting Standards. This makes changes to Financial Reporting Standards resulting from, inter alia, the International Accounting Standards Board's annual improvements project. Further information is available here.

Switzerland: corporate governance code available on ECGI website

A copy, in English, of the Swiss Code of Best Practice for Corporate Governance, updated in 2007, has been added to the codes directory maintained by the European Corporate Governance Institute.

UK: Keech v Sandford and free access to the English Reports

Keech v Sandford [1726] ER 954 is well known as one of the trustee cases used by the English courts in their development, through analogy, of directors' fiduciary duties.  Keech was, for example, cited in the leading directors' duties case Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, [1967] 2 AC 134 and more recently in the Court of Appeal cases Re Bhullar Bros [2003] EWCA Civ 424 and In Plus Group v Pyke [2002] EWCA Civ 370. 

Keech is reported in the English Reports.  This series of reports, which collected cases from the nominate reports for the period 1220 to 1873, is now available to view, free of charge, on the Commonwealth Legal Information Institute website: see here. Keech can be viewed here. Unfortunately, a search using BAILII will not, at the moment, include the English Reports but they can nevertheless be searched on CommonLII: see here. 

Slovakia: corporate governance code available on ECGI website

The directory of corporate governance codes maintained by the European Corporate Governance Institute has been updated to include a copy, in English, of the Slovakian corporate governance code (produced by the Central European Corporate Governance Association). In the introduction to the code it is stated:

The principles of the Code should be a guideline for companies without being too restrictive. They should ensure a balance between control and entrepreneurial freedom, and also foster communication and transparency in the company’s corporate governance. The principles and recommendations are very flexible in their nature, which allows for their implementation in every company regardless of size, orientation or corporate culture. The ‘comply or explain’ basis allows companies a certain degree of deviation from the principles, provided that it is justifiable by specific conditions and an appropriate explanation is given"

UK: improvements in auditing required says AIU

The Professional Oversight Board (part of the Financial Reporting Council) has published the Audit Inspection Unit’s (AIU) 2007/08 inspection reports for the following audit firms: BDO Stoy Hayward LLP, Deloitte & Touche LLP, Ernst & Young LLP, Grant Thornton UK LLP, KPMG LLP and KPMG Audit PLC, PKF (UK) LLP and PricewaterhouseCoopers LLP. This is the first time that these reports have been published: they are available here. An overview of the AIU's quality inspections has been published (see here), in which the AIU observes:

The AIU considers the quality of auditing in the UK to be fundamentally sound. The AIU public reports indicate that the senior management of the seven major firms are committed to audit quality and have quality control procedures in place which are appropriate to their size and the nature of their client base. The reports confirm that in each case the AIU has recommended to the relevant Audit Registration Committee that the firm’s registration to conduct audit work be continued. The AIU believes that its inspection process is both rigorous and challenging for firms and that the progress achieved by the firms in addressing the findings from its inspections in previous years has contributed significantly to an improvement in the overall quality of audit work in the UK.

In relation to its reviews of individual audits undertaken by the seven major firms, the AIU considered the audit work generally to have been performed to a good or acceptable standard. However, the AIU’s review of individual audits at each firm identified certain areas in relation to which further improvements need to be made by the firms.

A small proportion of the audits reviewed at the seven major firms were considered by the AIU to require significant improvement in certain areas. Only three of these audits related to entities which were listed on a regulated market1 and none related to FTSE100 entities. The proportion of audits requiring significant improvement was, however, higher at the “smaller firms”.

For media comment, and some comments from the firms, see this report in the Financial Times. 

Belgium: new Code + greater shareholder rights

A couple of items. First: the Corporate Governance Committee has announced that a new corporate governance code is likely to be published by the end of January 2009, following a review earlier this year. Second, it has been reported in the Belgian newspaper De Tijd that the Government proposes to make it easier for quoted company shareholders to table resolutions at shareholder meetings.

UK: ASB updates FRS8 - new definition of related party

The Accounting Standards Board has today published an amendment to Financial Reporting Standard 8 ("Related Party Transactions") which changes the definition of related party, following the introduction of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (see Section 72 of Schedule 1, where related party is defined by reference to international accounting standards). Further background information is available in the amendment.

NB: Chapter 11 of the Listing Rules contains provisions concerning related party transactions and Setion 177 of the Companies Act 2006 imposes on directors a duty of disclosure with regard to certain interests they may have in proposed transactions or arrangements with the company.

Switzerland: company law reform - update

An update on the reform of company law in Switzerland. On 5 December, the Federal Council announced the extension of the current programme of company law and accounting reform. The draft Bill will provide listed company shareholders with an annual vote on directors' pay. The Council has rejected the case for more stringent legislation, including the prohibition of golden hellos and golden parachutes (the so-called popular initiative). In a press release published by the Federal Department of Justice and Police, it is stated:

The Federal Council firmly believes that, were Switzerland to abandon its liberal company laws in favour of restrictive, heavy-handed regulation, it would lose its advantage over other countries as a business location. This would result in more firms being established outside Switzerland, companies moving their registered offices abroad, and fewer relocating to Switzerland. Jobs and tax revenues would then also be lost. In addition, were the popular initiative to pass into law, there would have be another major overhaul of company law, which would itself mean delays and legal uncertainty".

USA: credit rating agencies - further SEC reforms

The Securities and Exchange Commission has announced further changes to the rules governing credit rating agencies. The new rules have not yet been published but in a press release issued earlier this month the SEC chairman, Christopher Cox, observed that they would:

... touch every aspect of the credit rating process – from conflicts of interest, to publication of ratings methodologies, to disclosure of ratings track records ... The SEC’s examinations of credit rating agencies uncovered serious deficiencies that these rules will address, so that investors and markets will have better information to guide investment decisions.”

Hong Kong: company law reform - update

The Hong Kong Standing Committee on Company Law Reform (SCCLR) published its 2007/08 annual report on 5 December. The report provides a useful summary of the current programme of company law reform and its guiding principles.

In the press release announcing the publication of the report it is stated that the SCCLR will publish its final conclusions regarding the second and third consultations within the next few months (see here in due course). A draft Bill is likely to be published in the middle of 2009 for consultation before being introduced into the Legislative Council later in 2009.

Europe: Council endorses proposal for the European Private Company

The European Council, at its competitiveness meeting earlier this month, endorsed the Commission's proposals for the Small Business Act. Amongst the proposals put forward is one for a new corporate form - the European Private Company - and in this regard the Council observed that it would:

"take all possible measures to bring about as soon as possible the adoption of the thoroughly prepared European Private Company (EPC) statute with a view to facilitating the everyday management of small businesses, conferring a European label on them, cutting the cost of setting up subsidiaries and reducing the need for them to deal with national legislations when seeking to establish themselves in more than one Member State".

The Council's adopted conclusions are available here.

Europe: Single Market News 52 published

Issue 52 of the European Commission's Single Market News has been published. It provides an overview of recent developments including the Commission's proposals regarding credit rating agencies and changes to accounting standards. 

Canada: the Canada Not-for-Profit Corporations Act

The Canada Not-for-Profit Corporations Bill has received its first reading in the House of Commons. The purpose of the new Act, as explained in a press release published by Industry Canada, is as follows:

The proposed Canada Not-for-Profit Corporations Act will enable organizations to incorporate faster. In addition, it would improve their financial accountability, clarify the roles and responsibilities of directors and officers, and enhance the protection of members' rights.

The proposed Canada Not-for-Profit Corporations Act will allow for the repeal of the outdated Canada Corporations Act. It will also provide a modern, efficient corporate governance regime for some 10 share capital corporations created by Special Acts of Parliament by moving them into the Canada Business Corporations Act.

Corporations currently incorporated under the Canada Corporations Act will have three years to apply for corporate status under the proposed Canada Not-for-Profit Corporations Act. There will be no fees for this process".

Australia: adopting a broad interpretation of a term in the articles of association

In Dome Resources NL v Silver [2008] NSWCA 322, the New South Wales Court of Appeal considered the approach to take when interpreting a provision in a company's articles of association which provided the company's directors with the power to award benefits to the company's present and future non-executive directors. A unanimous court (Beazley, Basten and Bell JJA) observed:

[11] Although a company’s constitution has effect as a contract between the company and its officers and members, and between the members (Corporations Act, s 140), it is self-evidently a document having features which distinguish it from a commercial agreement between identified parties. Nevertheless, the approach to construing the clauses of a constitution is closely analogous to that adopted in relation to commercial contracts: see Austin RP and Ramsay IM, Ford’s Principles of Corporations Law (13th ed 2007) at [6.080]. Accordingly, it is appropriate to approach the task so as to give the document a “businesslike interpretation”, paying “attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure”: see McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; 203 CLR 579 at [22] (Gleeson CJ), language adopted in Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522 at [15] (Gleeson CJ, McHugh, Gummow and Kirby JJ, Callinan J agreeing at [53]). Even where a company’s constitution adopts the language of the Corporations Law (or now the Corporations Act) the importance of construing the language in its new contractual context requires a broader set of considerations to be addressed, not excluding, but not limited to, the statutory context: see Bluebottle UK Ltd v Deputy Commissioner of Taxation [2007] HCA 54; 232 CLR 598 at [31]; and see Deputy Commissioner of Taxation v Bluebottle UK Ltd [2006] NSWCA 360; 68 NSWLR 558 at [107]-[108].

[12] Applied in the present context, and subject to constraints imposed by the statutory regime, those principles require that a provision conferring power on the directors should be given as broad an operation as is reasonably available on the language and without imposing procedural constraints on the board, absent some contextual indication or purpose requiring the language to be so construed"

UK: Scotland: separate legal personality for unincorporated associations?

The Scottish Law Commission has published a discussion paper in which it seeks views on the desirability of introducing a new legal status for unincorporated associations. In the discussion paper's introduction it is noted (paras. 1.1 and 1.6):

Scotland shares with the other parts of the United Kingdom a law of unincorporated associations which rests upon common law and has been little developed by statute. Its most striking feature is the absence of legal personality accorded to associations and clubs which do not choose to establish themselves as companies or as some other form of incorporated body. Put shortly, the current law does not recognise the existence of such organisations as separate legal entities. In the case of associations of sufficient size to wish to enter into contracts, own property, engage employees and so forth, this absence of legal personality has given rise to a variety of problems, highlighted in a substantial body of case law over many years, only some of which have been pragmatically resolved.

The principal purpose of this Discussion Paper is to seek comment on the desirability of legislative reform which would accord separate legal personality to unincorporated associations which do not wish to incorporate as companies or as some other form of incorporated body but which meet specified minimum criteria".

The discussion paper is available here. A press release is available here; a letter to consultees is available here and a response form is available here.

UK: the Takeover Code (Concert Parties) Regulations 2008

A copy of the Takeover Code (Concert Parties) Regulations 2008 has been published on OPSI: see here (HTML) and here (PDF). An explanatory memorandum has also been published. The Regulations came into force at 12pm on 28 November and their purpose is to modify the operation of the mandatory bid rule (Rule 9) in the UK Takeover Code with regard to the banks in which the Government has invested.

Rule 9.1 requires a mandatory bid to be made where:

(a) any person acquires, whether by a series of transactions over a period of time or not, an interest in shares which (taken together with shares in which persons acting in concert with him are interested) carry 30% or more of the voting rights of a company; or

(b) any person, together with persons acting in concert with him, is interested in shares which in the aggregate carry not less than 30% of the voting rights of a company but does not hold shares carrying more than 50% of such voting rights and such person, or any person acting in concert with him, acquires an interest in any other shares which increases the percentage of shares carrying voting rights in which he is interested

Regulation 2 within the Regulations provides:

(1) For the purposes of Rule 9 of the Takeover Code the following persons are not to be regarded as acting in concert with each other or the Treasury or the Secretary of State or UKFI by virtue of the Treasury holding (through a nominee or otherwise) shares in each of those persons—
(a) a person some or all of the shares in which are held by a nominee of the Treasury or a company wholly owned by the Treasury as a result of the exercise of powers under the Banking (Special Provisions) Act 2008(4);
(b) a person participating in the recapitalisation scheme.

(2) For the purposes of Rule 9 of the Takeover Code, the Treasury, the Secretary of State and UKFI are not to be regarded as acting in concert with each other by virtue of the Treasury’s relationship with, and the Secretary of State’s and UKFI’s functions in relation to, a person listed in paragraph (1)(a) or (b)".

UK: overseas listed companies and corporate governance - proposed amendments to the Listing Rules

The Financial Services Authority has published a consultation paper in which it sets out proposed changes to the Listing Rules. The amendments are wide ranging and follow a consultation earlier this year. In this earlier consultation, the FSA sought views on whether companies with an overseas primary listing should be subject to the UK's Combined Code on Corporate Governance. The FSA has rejected this proposal but is making other changes. 

The FSA proposes to amend LR9.8.7R, which requires an overseas company with a primary listing overseas to disclose in its annual report and accounts: (1) whether or not it complies with the corporate governance regime of its country of incorporation; and (2) the significant ways in which its actual corporate governance practices differ from those set out in the UK Combined Code. These two requirements will be deleted and replaced by the following version of LR 9.8.7R:

An overseas company with a premium listing must disclose in its annual report and accounts: 

(1) the corporate governance regime to which it is subject; 

(2) whether or not it complies with that regime; 

(3) an explanation of the main ways in which its corporate governance regime differs from the Combined Code;

(4) the extent to which it complies with those provisions of the corporate governance regime to which it is subject that correspond with the Combined Code, and if it does not comply with any such provisions, an explanation of why it does not comply; and 

(5) the unexpired term of the service contract of any director proposed for election or re election at the forthcoming annual general meeting and, if any director for election or re-election does not have a service contract, a statement to that effect.

In addition, the FSA is proposing that all overseas issuers with a primary or secondary listing, and issuers of Global Depositary Reciepts, will be required to publish an annual corporate governance statement.

UK: The Registrar of Companies and Applications for Striking Off Regulations 2008 - published in draft

A draft copy of the Registrar of Companies and Applications for Striking Off Regulations 2008 has been published on OPSI and is available in HMTL and PDF. An explanatory memorandum has also been published. The Regulations (which are due to come into force on 1 October 2009) expand on the framework provided by the Companies Act (2006) and set out, inter alia, the circumstances in which there can be rectification of the Companies Register.

UK: House of Commons Business and Enterprise Committee reports

The House of Commons Business and Enterprise Committee has recently published two interesting reports. In its thirteenth report for the 2007/08 session, the Committee examined the operation of Companies House. The Committee concluded that Companies House "appears to be fulfilling its core functions reasonably well" but recommended a review of its role in verifying the information supplied to it. The Committee was concerned that users of Companies House were unaware that Companies House could not guarantee the accuracy of the information it held. The Committee also noted that the Companies Act (2006) could have given greater rectification powers to the Registrar to remove incorrect from the register without recourse to the courts.

In its fourteenth report, the Committee considered the accountability of the Secretary of State for Business, Enterprise and Regulatory Reform (Lord Mandelson), and the BERR ministerial team, to the House of Commons. The Committee was concerned that Members of the House of Commons were unable effectively to make their voices heard when a significant proportion of the BERR ministerial team was based in the House of Lords or shared with other departments. The Committee suggested:

The obvious solution, and the neatest, would be to the amend Standing Orders to allow the Secretary of State [Lord Mandelson] to answer questions at the Despatch Box [in the House of Commons]. But this may encourage governments to appoint more members of the House of Lords as heads of department, and that would be an unwelcome and significant constitutional change. Detailed discussion about a mechanism for parliamentary questions to the Secretary of  State for Business, Enterprise and Regulatory Reform is best taken forward by the Procedure Committee. However, we are convinced such a mechanism is needed, particularly at a time of such economic turmoil. We call upon our colleagues to look at this matter urgently, and upon the Government to co-operate fully in such an inquiry, particularly given the concerns expressed by the Secretary of State himself".

UK: implementing (and amending) the Companies Act (2006) - new Regulations

Within the past week or so, new Regulations have been laid before Parliament which provide further rules concerning the framework established by the Companies Act (2006). 

• The Companies Act 2006 (Annual Return and Service Addresses) Regulations 2008 - see here (PDF) and here (HTML) - an explanatory memorandum is available here.
• The Companies (Company Records) Regulations 2008 – see here (PDF) and here (HTML) - an explanatory memorandum is available here.
• The Companies (Fees for Inspection of Company Records) Regulations 2008 – see here (PDF) and here (HTML) - an explanatory memorandum is available here.
• The Companies (Registration) Regulations 2008 – see here (PDF) and here (HTML).
• The Companies (Particulars of Company Charges) Regulations 2008 – see here (PDF) and here (HTML).
• The Draft Companies (Disclosure of Addresses) Regulations - see here (PDF) and here (HTML) - an explanatory memorandum is available here.

Note: the Companies (Registration) Regulations 2008 contain the prescribed form for the memorandum of association as required under Section 8 of the the Companies Act (2006). 

UK: amending FRS2, FRS6 and FRS 28 - FRED published

The Accounting Standards Board has published a Financial Reporting Exposure Draft (FRED) in which it proposes changes to Financial Reporting Standard 2 ("Accounting for Subsidiary Undertakings"), FRS6 ("Acquisitions and Mergers") and FRS28 ("Corresponding Amounts"). The FRED will not amend the requirements of the existing FRSs. It will instead bring the legal references within them up to date, to reflect the Companies Act (2006) and the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008.

UK: more 'intrusive' regulation from the FSA

Today's Financial Times newspaper contains an interview with the FSA's chief executive, Hector Sants. Mr Sants states: “We do want to have a somewhat more intrusive approach to regulation ... The policy framework has failed us to some degree. But we need to understand that in addressing that, we will only be part of the process. ... We are acknowledging that we could have challenged those business models [of banks such as Northern Rock and Bradford and Bingley] more before they went into the downturn.”

UK: the Climate Change Act 2008 and company reporting

The Climate Change Bill received Royal Assent on November 26: the Climate Change Act 2008 is now on the statute book and a copy has been published by OPSI and is available here in PDF and here in HMTL. With regard to companies' reporting of greenhouse gas emissions, the Act does not contain specific reporting requirements. Instead, Section 85 ("Regulations about reporting by companies") provides:

(1) The Secretary of State must, not later than 6th April 2012— 

(a) make regulations under section 416(4) of the Companies Act 2006 (c. 46) requiring the directors’ report of a company to contain such information as may be specified in the regulations about emissions of greenhouse gases from activities for which the company is responsible,
or
(b) lay before Parliament a report explaining why no such regulations have been made.

(2) Subsection (1)(a) is complied with if regulations are made containing provision in relation to companies, and emissions, of a description specified in the regulations.

Background information about the Act is available on the DEFRA website here. It is interesting to compare the UK legislative framework with that established in Australia under the National Greenhouse and Energy Reporting Act 2007 - see here for further information. 

UK: Companies House - updated guidance booklets published

Companies House has published updated editions of a couple of its guidance booklets:

• GBA4: Auditors (version 17) - PDF and HTML. This booklet explains the role of the auditor and the circumstances in which an auditor need not be appointed. 
• GBA10: Dormant companies (version 17) - PDF and HTML. This booklet explains the obligations imposed on dormant companies if they are to remain on the Register at Companies House.

UK: FRC study of going concern and liquidity risk disclosure

The Financial Reporting Council has published the results of its study exploring going concern and liquidity risk disclosures. The FRC examined the December 2007 or March 2008 annual reports of 30 UK listed companies (including AIM). Companies were chosen if they had issued a profits warning, announced a rescue rights issue or announced funding difficulties during the first half of 2008. The following findings, inter alia, were made (to quote directly from the report):

The study found that information about going concern and liquidity risk was included in many different places in the annual reports reviewed. This made it difficult to develop a coherent and comprehensive picture of how liquidity concerns were relevant to the businesses. Disclosures were sometimes to be found in the chairman’s statement, chief executive’s report, Directors’ Report as well as in the notes to the accounts.

The study concluded that it would be particularly helpful if all of these disclosures could be brought together into a single section of a company’s annual report and accounts as this would facilitate a better understanding. If this is not practical, it would be helpful if the key disclosures are brought together by way of a note including cross references to other disclosures to help readers of financial statements find all of the relevant pieces of information.

UK: FRC publishes guidance for audit committees - key questions

The Financial Reporting Council has published a document titled "Challenges for audit committees arising from current economic conditions". In the document's introduction, it is stated:

Current economic conditions provide particular challenges to all involved with annual reports and accounts. The purpose of this document is to assist audit committees by identifying key questions that that they may need to consider when preparing for the year end and in carrying out their role in relation to annual financial statements. It does not establish any new requirements".

UK: FRC update for listed company directors: going concern and liquidity risk

The Financial Reporting Council has published an update for listed company directors concerning going concern and liquidity risk. According to the FRC, the update:

...brings together the requirements on directors to comment on going concern and liquidity risk in annual reports and accounts, in the light of the significant economic difficulties that were being experienced in the latter half of 2008. The update addresses the requirements of International Financial Reporting Standards, UK Generally Accepted Accounting Principles, the Listing rules of the Financial Services Authority, the 1994 Guidance for directors, The Companies Act 2006 and its requirements about the content of a Business Review in relation to December 2008 year ends. The update may also be useful for directors of unlisted companies".

USA: Council of Institutional Investors - revised corporate governance policies

The Council of Institutional Investors has amended its Corporate Governance Policies. The amendments include additions in respect of severance pay, proxy solicitation and shareholder rights to call special meetings. An updated edition of the Policies document is available here. The Policies set standards, or recommend practices, that CII members believe companies and boards of directors should adopt to promote accountability, independence, integrity, rigor and transparency.

KPMG international survey of corporate responsibility reporting 2008

KPMG's 2008 International Survey of Corporate Responsibility Reporting has been published. The survey tracks reporting trends in the world's largest companies and has a sample size of over 2,200. The report finds that corporate responsibility reporting has become the norm with 80% of companies including it in their reporting compared with 50% three years ago.

UK: annual elections for listed company boards?

The UK's Times newspaper recently reported that "leading institutional investors are gearing up for their biggest assault on corporate Britain by demanding the right to vote out the board of every listed company each year". This follows Barclays' announcement that its entire board will put itself up for re-election at next year's annual general meeting. 

Is such an annual vote for the entire board desirable? Will it encourage directors to act with the short-term in mind? How does it promote and encourage appropriate succession planning? What will be the impact on directors' remuneration? Would an advisory vote concerning the directors' performance be a better alternative?