Saturday, 31 May 2008

Australia: Large cap companies' corporate governance compliance

The 2008 BDO Kendalls large-cap corporate governance survey has been published. Amongst the findings are the following (to quote from BDO Kendalls' press release):
Australia’s largest publicly listed companies generally meet all aspects of best practice guidelines for corporate governance; however full independence still remains a key issue for some major companies.

Areas highlighted included some companies having audit, remuneration or nomination committees that were either not made up of all independent directors or the chair was not independent. The survey findings are based on the 2007 annual report disclosures of the 20 largest Australian listed companies by market capitalisation as at 13 March, 2008.

Several companies (15%) were also found to be paying a high proportion of non-audit fees to their statutory auditors. News Corporation and Newmont Mining were the only companies not to have a formal Share Trade Policy. Also, 40% of the top 20 companies did not have a dedicated Risk Management Committee.

However, despite some of the largest caps needing to improve in certain areas, the broad finding for Australia’s biggest listed companies is that their corporate governance structures are robust and in most areas meet best practice guidelines.

For further information click here. For further information about corporate governance in Australia, see here. For BDO Kendalls 2007 mid-cap corporate governance report, see here.

Friday, 30 May 2008

UK: changes to the Combined Code

The Financial Reporting Council has announced several changes to the UK's Combined Code on Corporate Governance:
  • the removal of the restriction on an individual chairing more than one FTSE100 company.
  • for listed companies outside of the FTSE350, permitting the chairman to sit on the audit committee where he/she was considered independent on appointment.
These changes follow a consultation earlier this year.  The revised Code will be published at the end of June and it will apply to accounting periods beginning on or after 29 June 2008.  Click here for further information.  The FRC has also published a regulatory impact assessment and a summary of consultees' responses.

NB: The revised Code will come into force on the same day as new FSA rules implementing European Directive 2006/46/EC which will require a corporate governance statement to be published in the annual reports of companies who have their registered office in the Community and whose securities are admitted to trading on a regulated market.  For further information, see here.

Postscript (27 June 2008): Further information about the new FSA rules is available here and information about the revised Combined Code is available here.

France: executive pay

The Financial Times has reported, in an article titled "France eyes curbs on executive pay" (published online, 29 May):

The French government on Thursday threatened to take further action to curb pay for bosses of poorly performing companies, calling recent rises for some executives 'perfectly scandalous'.  Christine Lagarde, finance minister, called on employers to ensure that remuneration for their top managers reflected the company’s performance, suggesting further legislation if they failed to do so.  The French government intends to use its presidency of the European Union, which begins in July, to press for EU-wide rules governing executive pay, officials said, arguing that there was a head of steam building among finance ministers for a Europe-wide clampdown"

For information about the European Commission's past work on directors' remuneration, see here. Note also this earlier post.

Thursday, 29 May 2008

IOSCO: revised code of conduct for credit rating agencies

The International Organization of Securities Commissions (IOSCO) has published a revised Code of Conduct Fundamentals for Credit Rating Agencies. The chairman of IOSCO's Technical Committee, Michel Prada, has observed:
IOSCO’s Code of Conduct aims to improve investor protection, improve the fairness, efficiency and transparency of securities markets and to reduce systemic risk. We have engaged in a frank and constructive dialogue with the CRA industry, issuers and investors and have taken a broad range of views into account in finalizing the changes to our code. I believe that these changes to the Code of Conduct will help to address a number of issues that have arisen as a result of the current credit crisis regarding how the credit ratings for structured finance products are developed by credit ratings agencies and relied upon by issuers and investors."

The revised Code is included as part of the Technical Committee's report and an overview of the changes is available in this press release. For newspaper comment, see here.

Wednesday, 28 May 2008

Canada: directors' duties during a takeover

The Quebec Court of Appeal has delivered an important and controversial opinion concerning the duties of directors during a takeover. In BCE inc. (Arrangement relatif à), 2008 QCCA 935 (available in PDF here) the court unanimously rejected the position adopted by the board of a target company (in reliance on the famous Revlon case from Delaware: 506 A. 2d 173, Del. Sup. Ct. 1986) that its overriding duty was to maximise shareholder value and obtain the highest value for the shareholders.  The court held:
It is clear from the principles enunciated by the Supreme Court in Peoples [Department Stores Inc. (Trustee of) v. Wisethat 2004 SCC 68] that at no time do the directors have an overriding duty to act only in the best interests of the shareholders and to ignore the adverse effect on the interests of the debentureholders" (para. [99], emphasis in the original).

In Canada, the directors of a corporation have a more extensive duty. This more extensive duty embodied in the statutory duty of care encompasses, depending on the circumstances of the case, giving consideration to the interests of all stakeholders, which, in this case includes the debentureholders. They must have regard, inter alia, to the reasonable expectations of the debentureholders, and those may be more extensive than merely respecting their contractual legal rights" (para. [107]).

BCE, the target company, has begun appeal proceedings: the Canadian Supreme Court will hear the motion to appeal on June 17. For further background information see here.

NB: For further discussion of Revlon, see: Kraakman, R. and Black, B., "Delaware's Takeover Law: The Uncertain Search for Hidden Value", (2002) 95 Northwestern University Law Review, 521-566, available on SSRN here.

Tuesday, 27 May 2008

UK: survey of FTSE100 companies: environmental, social and governance issues

Ethical Investment Research Services has published a report titled FTSE100 snapshot: Trends in ESG performance, which explores the progress FTSE100 companies have made on environmental, social and governance (ESG) issues over the past 5 years. The report states that "FTSE 100 companies are making good progress on ESG issues, however a small minority of companies continue to demonstrate poor performance" and highlights the following findings (to quote directly from the report):

[1] Greatest improvements have been seen in environmental policy development, as well as human rights and supply chain management

[2] Progress has been slower in areas such as environmental disclosure, equal opportunities and board diversity

[3] Responsible investment, has and will continue to be, a key driver for improved corporate social responsibility

[4] Other drivers for improved performance include increased regulation, continued shareholder and stakeholder pressure or a recognition that proactive management of ESG issues can lead to competitive advantage

[5] The future trend is for continued improvement in management response and a widening of scope as ESG issues are increasingly viewed as business critical risk issues

The report is available here and a press release is available here.

Monday, 26 May 2008

UK: board performance evaluation - room for improvement, according to ICSA

ICSA - the Institute of Chartered Secretaries and Administrators - will this week publish the 2008 edition of its annual board performance evaluation survey (copies can be requested here). A short overview has, however, been published in the Chartered Secretary magazine and this states:
A new ICSA survey has revealed that only 16 per cent of companies in the FTSE 200 undertake an externally-developed or managed evaluation process.  The 2008 edition of ICSA’s annual board performance evaluation survey ... has revealed that only 32 of the UK’s top 200 companies used an external provider to assist with board performance evaluation last year. ICSA is concerned that, if companies do not benchmark internally - driven processes from time to time by using an external facilitator, then evaluations could become less valuable – or, in the worst case scenario, the equivalent of children ‘marking their own homework’.  The report also argues that several companies appear not to understand the important distinction between the chief executive reviewing the performance of executive main board directors in their capacity as members of the top management team, and the ‘entirely separate task’ of evaluating the effectiveness of each of the main board executive directors. ICSA says that the two tasks are quite distinct, and should be mutually exclusive".

Saturday, 24 May 2008

UK: the application of the Companies Act (2006) to limited liability partnerships

The Government has published its response to the consultation on the application of the Companies Act (2006) to limited liability partnerships (LLPs).  The Government proposes to apply to LLPs  those provisions of the 2006 Act which correspond to those provisions in the Companies Act (1985) that were applied to LLPs, with modifications where needed.  More detailed proposals are contained in the Government's response, including one for two sets of regulations governing the form and content of LLP accounts (one for small LLPs and another for medium and large LLPs).

Friday, 23 May 2008

Europe: freedom of establishment and the 'life and death' of companies

Yesterday, Advocate General Poiares Maduro gave his opinion in Cartesio Oktató és Szolgáltató Bt. (Case C-210/06). The case concerned a limited partnership (Cartesio) which wanted to move its headquarters from Hungary to Italy. Hungarian law prevented Cartesio transferring its headquarters to another Member State whilst retaining its status as a partnership governed by Hungarian law. The only way for Cartesio to transfer its operational headquarters was by dissolving its business in Hungary and reestablishing in Italy. Does this amount to a restriction on freedom of establishment under Articles 43 and 48 of the EC Treaty?

The Advocate General held that the Hungarian legislation, which applied to partnerships and companies, breached Articles 43 and 48 of the EC Treaty. Articles 43 and 48, in his opinion, precluded rules which make it impossible for a company or partnership formed under the national law of a Member State to transfer its operational headquarters to another Member State. In this regard, and after considering recent case law of the Court, the Advocate General observed:
... it is impossible, in my view, to argue on the basis of the current state of Community law that Member States enjoy an absolute freedom to determine the ‘life and death’ of companies constituted under their domestic law, irrespective of the consequences for the freedom of establishment. Otherwise, Member States would have carte blanche to impose a ‘death sentence’ on a company constituted under its laws just because it had decided to exercise the freedom of establishment".

The Advocate General nevertheless recognised that restrictions of the kind in the Hungarian law could be justified on grounds of general public interest including the prevention of fraudulent conduct or the protection of the interests of creditors, minority shareholders, employees or the tax authorities. The Hungarian law did not, however, contain any grounds of justification.

NB:
[1] The Advocate General's opinion is not binding on the Court but in the majority of cases such opinions are followed.

[2] In 2004 the European Commission consulted on a proposed Directive (the 14th Company Law Directive) on the right of limited companies to transfer their registered office from one Member State to another. However, in December 2007 the Internal Market Commissioner Charlie McCreevy decided that legislative action was not required (see here). In the impact assessment it was explained why:
Since the practical effect of the existing legislation on cross-border mobility (i.e. the cross-border merger directive) is not yet known and that the issue of the transfer of the registered office might be clarified by the Court of Justice in the near future, the assessment concludes that it might be more appropriate to wait until the impacts of those developments can be fully assessed and the need and scope for any EU action better defined"

Thursday, 22 May 2008

UK: The Companies Act 2006 (Commencement No. 7 and Transitional Provisions) Order - revised draft published

Today a revised draft of the Companies Act 2006 (Commencement No. 7 and Transitional Provisions) Order was published by BERR (available here as a Word document).  This replaces the draft published on 2 May. In the explanatory text (see this Word document) the Government explained the new provisions within the Order:
The new provisions in this revised draft are to commence the repeal of the bar, contained in the current legislation, on restoration of companies which were dissolved before 16 November 1969 (11 March 1971 in Northern Ireland). The bar could be retained using separate powers under the 2006 Act. However, the Government do not propose to retain the bar. Further, as it is proposed not to retain the current bar, the Government proposes to remove it without waiting for the commencement of the restoration provisions in Part 31 of the 2006 Act in October 2009. The Government therefore proposes to commence the relevant repeals together with the other commencements contained in the Seventh Commencement Order, to take effect as from 1 October 2008. These repeals are therefore provided for in Article 2 of the revised draft Order"

The following explanation was provided by the Government for repealing the bar:
The current bar means that some ex-employees or their estates are unable to press claims for compensation in respect of personal injury or fatal accident, either against the employing company, its insurers or the Financial Services Compensation Scheme, simply because the company was dissolved prior to 1969 (or 1971 in Northern Ireland). Removing the bar may therefore enable such ex-employees or their estates to receive compensation which they are currently unable to obtain. This may be relevant in particular to sufferers of so-called long-tail diseases, such as mesothelioma.

In 1998 the Law Commission and the Scottish Law Commission sought views in their consultation on the reform of the Third Parties (Rights against Insurers) Act 1930 on the case for removing the bar on restoration of companies dissolved before 1969. In publishing their recommendations (Law Commission Report No. 272, Scottish Law Commission Report No. 184) they reported that most respondents to the consultation agreed that section 651 and section 141 should be amended.

The Government further take the view that, as it is proposed not to retain the current bar, it would be desirable to remove it without waiting for the commencement of Part 31 of the 2006 Act in October 2009. "

International Financial Reporting Standards: Amendments announced

The International Accounting Standards Board (IASB) has today issued Improvements to IFRSs, a collection of amendments to International Financial Reporting Standards.   For further information, click here. These amendments are the result of the IASB's first annual improvements process.

UK: Companies House: Issue 69 of Register

Issue 69 of the Companies House newsletter Register has been published.  It contains a review of some recent cases by Prof. Brenda Hannigan, an article titled "10 Key Things You Need to Know About the Companies Act (2006)" as well as a section of FAQs concerning the 6 April 2008 implementation of various Companies Act (2006) provisions.  Back issues are available here.

Wednesday, 21 May 2008

UK: Directors' pay and bankers' bonuses

The Financial Services Authority's chief executive, Hector Sants, delivered a speech yesterday evening (at the Investment Management Association's AGM dinner) in which he considered recent market events and the FSA's response. Of particular interest are his comments concerning remuneration structures:
I feel that it is also worth taking some time here to consider the effects of incentive and remuneration structures. As I have said before, it is important for Boards to recognise that having asymmetrical structures where employees receive immediate reward and do not bear the consequences of losses is a risk to shareholders. I do, therefore, believe that firms should focus on minimising this risk by ensuring, as far as possible, the structures ensure employees and shareholders both share in the risk, in the upside and the downside.

There are various ways of achieving this goal, such as deferred compensation with claw back and the increased use of share options. None, however, is perfect, but I do believe Boards and shareholders need to carefully consider the incentive structures in place in their companies and their propensity to encourage risk. I know many of you already do this, but I ask you to increase your focus on this critical issue.

From the regulatory point of view, it is not our role to dictate the quantum of individual remuneration, that is for the market, but we do need to consider the implication of remuneration structures when judging the overall risk of individual institutions. We will do this with increased intensity.

Away from London, Royal Dutch Shell plc held its AGM yesterday. Remuneration proved a controversial issue. As reported here in the Financial Times:
One in three Royal Dutch Shell shareholders at the oil company's annual meeting yesterday voted against plans to award three executives one-off bonuses worth about €1m ($1.6m) to stay in their jobs. The vote adds to a growing chorus of dissent over so-called "retention payments", in which managements at some of the UK's most venerable companies have felt the wrath of investors in recent weeks".

It should, however, be noted that many shareholders withheld their votes; the results were:
  • Votes for: 1,517,884,288
  • Votes against: 706,398,270
  • Votes withheld: 776,213,431 

Monday, 19 May 2008

Europe: European Private Company Statute

In a speech delivered in Athens on 16 May, European Internal Market Commissioner McCreevy provided further information about the proposed European Private Company Statute. Commissioner McCreevy observed:
In the field of company law, we are working on the upcoming proposal for a European Private Company Statute (or SPE). It should provide small enterprises that could not benefit from the European (Public) Company Statute with a legal form specifically designed for them and allow them to carry out their business using a single company form across the EU. As you know, business has been calling for this for many years, and I now intend to present a proposal on 25 June ... As with any important proposal in the field of company law, there are many important features to this upcoming initiative, but I would particularly highlight the following elements of it to you:
  • I believe the European Private Company should be accessible to single and multiple shareholders, that is, to natural and legal persons alike, without any cross-border requirement;
  • It should be capable of being set up from scratch, by the merger of existing companies or by transformation of an existing company;
  • In accordance with the case law of the Court of Justice, a European Private Company should be free to have its headquarters in any EU Member State, regardless of its place of registration. In other words, the company could be registered in one Member State while conducting the entirety of its activity in another; it should also be able to merge and transfer its registered office cross-border;
  • Its shareholders should have the freedom to determine the internal organisation of the company; and finally,
  • Rules on employee participation in companies set up using the SPE Statute should draw as much as possible from existing solutions.
I think you will agree that this is an ambitious, and business-friendly, piece of legislation that we are about to come forward with..."

For background information, see here.

Postscript (25 June 2008): Proposals have now been published - see this post

UK: Financial reporting and the "true and fair" view

The Financial Reporting Council has today published the legal opinion of Martin Moore QC concerning the "true and fair" view. By way of background, the FRC states:
The ‘true and fair’ concept has been a part of English law and central to accounting and auditing practice in the UK for many decades. There has been no statutory definition of ‘true and fair’. The most authoritative statements as to the meaning of ‘true and fair’ have been legal opinions written by Lord Hoffman [sic] and Dame Mary Arden in 1983 and 1984 and by Dame Mary Arden in 1993 (‘the Opinions’). Since those Opinions were written, there have been some significant changes in accounting standards and company law which have led some to question whether the views expressed in those Opinions remain applicable. In these circumstances, the FRC concluded that it would be helpful to its preparers, auditors and users of financial statements if it commissioned a further legal opinion to ascertain whether the approach to ‘true and fair’ taken in the Opinions requires to be revised. The FRC instructed Martin Moore QC and his Opinion is now published on the FRC website.

Martin Moore QC observes in his opinion (at para. 46):
...the true and fair, or fair presentation concept, remains at the heart of the preparation of financial statements. It can aptly be described as an overarching concept which should inform all decisions by the preparers of such statements.

For further information, and the earlier legal opinions of Lord Hoffmann and Lady Justice Arden, see here.

NB: Section 393 of the Companies Act (2006) provides that a company's directors must not approve accounts unless they are satisfied that they give a true and fair view of the company's assets, liabilities, financial position and profit or loss.

Question: Is Martin Moore correct to regard the "true and fair" concept as identical to the concept of "fair presentation"?

Sunday, 18 May 2008

Corporate Governance: An International Review

The January 2008 issue of Corporate Governance: An International Review is currently available to view, free of charge, here.  

Friday, 16 May 2008

Europe: Executive pay

Executive pay was discussed at this week's meeting of the European finance ministers. In a report published in International Herald Tribune it is stated:
For the first time, the finance ministers pledged to consider steps to rein in bonuses for executives that are deemed 'excessive'. Dutch Finance Minister Wouter Bos explained how his government plans to discourage such payments with a 30 percent tax for companies that shell out €500,000 (US$772,000) or more to get an executive out the door. Bos said concern was expressed by all EU finance ministers about the size of so-called 'golden parachute' payments and other executive bonuses that have been making headlines. 'There is a general commitment of us all that this is a subject that we have to take a serious look at,' Slovenian Finance Minister Andrej Bajuk, the meeting's chairman, told reporters.

The International Herald Tribune has reported on the Dutch proposals here. For further information about the European Commission's work on executive pay, see here.

NB: In 2002, the UK introduced the Directors' Remuneration Report Regulations which required quoted companies to provide shareholders with an advisory vote on the Remuneration Report (see, now, Section 439 of the Companies Act (2006)). Recent research suggests that this change has contributed to the higher sensitivity of CEO cash and total pay to negative operating performance. See: Maber, D. and Ferri, F., "Solving the Executive Compensation Problem Through Shareholder Votes? Evidence from the UK", available on SSRN here.

Japan: White paper published by ACGA

The Asian Corporate Governance Association has published a white paper in which recommendations are made for the reform of corporate governance in Japan. In the executive summary it is stated:
While a number of leading companies in Japan have made strides in corporate governance in recent years, we submit that the system of governance in most listed companies is not meeting the needs of stakeholders or the nation at large in three ways:

• By not providing for adequate supervision of corporate strategy;
• By protecting management from the discipline of the market, thus rendering the development of a healthy and efficient market in corporate control all but impossible;
• By failing to provide the returns that are vitally necessary to protect Japan’s social safety net—its pension system.

This White Paper focuses on, and makes recommendations with regard to, six key corporate governance issues".

For further information about corporate governance in Japan, including recent reforms, see: Buchanan, J. and Deakin, S., "Japan's Paradoxical Response to the New 'Global Standard' in Corporate Governance", September 2007, CLPE Research Paper No. 26/2007, available on SSRN here.

Thursday, 15 May 2008

UK: Choice in the UK audit market: FRC report and further consultation

The Financial Reporting Council has published Choice in the UK audit market: progress report and further consultation. In the associated press release, it is stated:

"The Financial Reporting Council has today published a discussion paper on the possible effects of changes to audit firm ownership rules, and a consultation on the use of audit firms from more than one network. The discussion paper and consultation form part of the FRC’s latest progress report on the recommendations of the Market Participants’ Group (MPG) on actions to enhance the efficiency of the market for audit services to large companies in the UK. The discussion paper considers a number of issues in relation to audit ownership, including:

• Ease of entry and the potential for mid-sized firms to gain market share
• The potential impact of the introduction of outside capital to audit firms on audit quality
• The impact of the introduction of outside capital on the supply of auditors with appropriate skills and personal qualities
• Possible decline in audit quality arising from conflicts of interest associated with a firm’s ownership"

For recent research looking at concentration in the UK audit market, see: Abidin, S., Beattie, V., and Goodacre, A., "Audit Market Structure and Choice: Further Evidence from the UK", January 2008, available on SSRN here.

Scotland: Directors' duties and unfair prejudice

The Court of Session has, today, declined to grant West Coast Capital (WCC) an interim interdict (injunction) which would have prevented Dobbies plc from proceeding with a rights issue.  WCC, a minority shareholder in Dobbies, presented a petition under Section 994 of the Companies Act (2006), alleging that the Dobbies directors (several of whom were officers or directors of Tesco plc and had been appointed last year when Tesco became a majority shareholder) had exercised their powers in Tesco's interests to the prejudice of the other shareholders and had failed to act fairly between Tesco and the other shareholders.  
Lord Glennie was not satisified that WCC had an arguable case.  His opinion is available here and it is important for several reasons:

[1] There is discussion of Section 171 and Section 172 of the Companies Act (2006).  Section 172 imposes a duty on company directors to promote the success of the company for the benefit of the shareholders as a whole.  In doing so, directors are required to have regard to various factors, including the impact of the company's operations on the community and the environment and the need to act fairly as between members of the company.  In Lord Glennie's view, Section 172 does "little more than set out the pre-existing law on the subject" (para. [21]).  Some may question that interpretation because Section 172 sets out, for the first time in companies legislation, certain factors that directors are required to consider. 

[2] There is the clear recognition that breaches of directors' duties can be unfairly prejudicial.  This point remains controversial.  Lord Glennie nevertheless observes: "... it is important to have in mind that fairness and unfairness (in the context of assessing whether conduct is "unfairly prejudicial") are not abstract concepts. They are used in the context of a commercial relationship, where the parties' rights and expectations are governed by contract, namely the articles of association, and, possibly, by other agreements or understandings, as well as by the fiduciary duties which directors owe to the company" (para. [19]).

The case has attracted widespread attention in the media because of the parties involved. See, e.g., The Scotsman, The Guardian and The Times.

Postscript (21 May 2008): The Guardian has reported that West Coast Capital has agreed to accept an offer from Tesco of £12 per share.

Wednesday, 14 May 2008

England and Wales: Winding-up in the public interest

Section 124A of the Insolvency Act (1986) provides the Secretary of State for Business, Enterprise and Regulatory Reform with the power to petition the court for the winding-up of a company where this is “expedient in the public interest”. In considering the Secretary of State’s application, the court must satisfy itself that it is “just and equitable” for the company to be wound-up.

In Secretary of State for Business, Enterprise and Regulatory Reform v Amway (UK) Ltd [2008] EWHC 1054 (Ch), a Section 124A petition was presented in April 2007 by the Secretary of State with regard to a company running a direct selling business. Following the petition's presentment the company made changes to its business model which were implemented in October 2007 (and reported in the press at the time: see here). The case was heard in late 2007 and judgment was given today by Norris J. His Lordship declined to grant the petition (subject to the company providing certain undertakings) and observed:
The Court has a discretion whether or not to make a winding up order. The Court may simply dismiss the petition if satisfied that past wrongs have been remedied and the management can be trusted not to permit their recurrence (even if unconstrained by any undertakings). But the Court has power to accept undertakings as to future conduct, and a discretion as to whether to make the giving of undertakings a condition of dismissing the petition. The power will not be exercised (and undertakings will be refused) if those offering them cannot be trusted. The power to accept undertakings is likely to be exercised if that course is acceptable to the Secretary of State. If the Court considers that undertakings may be acceptable, it should nonetheless be slow to accept them if the Secretary of State is not willing to dispose of the petition in that way: but whilst the course may be unusual, the Court undoubtedly has power to do so if there are countervailing factors which outweigh the Secretary of State's opposition. In the instant case I could simply dismiss the petition: but undertakings are offered and I see no need to spurn them even if the Secretary of State shows no enthusiasm for their acceptance" (para. [62]).

With regard to Section 124A, his Lordship observed:
Parliament has charged the Department with wide ranging responsibilities in relation to the affairs of companies including (under section 124A of the Insolvency Act 1986) their investigation and the formation of the view that it would be expedient in the public interest that companies should be wound up ... The Secretary of State is not a licensor of approved business models or a business design consultant and is under no obligation to approve or to police a scheme of undertakings relating to the conduct of an individual company's business" (para. [10])

NB: Under Section 27 of the Serious Crime Act (2007), a petition to wind-up a company can be presented by the Director of Public Prosecutions, the Director of HMRC and the Director of the Serious Fraud Office, where (a) the company has been convicted of an offence under section 25 in relation to a serious crime prevention order; and (b) the relevant Director considers it would be in the public interest for the company to be wound-up.

US: CalPers: Global Principles revised

The California Public Employees’ Retirement System (CalPERS) (the largest US pension fund) has revised its Global Principles of Accountable Corporate Governance. In a press release issued to explain the changes, CalPERS announced:

"The CalPERS Board today signaled the importance of environmental disclosure and diversity of corporate boards by expanding corporate governance guidelines for portfolio companies. The new guidelines will be added to the System’s Global Principles of Accountable Corporate Governance. These principles are used by CalPERS to vote proxies, engage management and boards of equity companies, and implement initiatives".

"The environmental guidelines are aimed at getting companies to disclose and act upon climate risks like carbon emissions that, if unaddressed, could diminish investment returns. The guidelines reference the 14-point "Corporate Governance Checklist" developed by Ceres, a coalition of investors, environmental groups and investment funds".

The revised Principles are available here. CalPERS has a corporate governance website: see here.

The role of public pension funds in corporate governance has recently been explored in Choi, S. and Fisch, J., "On Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance" (August 27, 2007), NYU Law and Economics Research Paper No. 07-30, available on SSRN here.

Tuesday, 13 May 2008

EU: Member States' failure to implement company law Directives

The European Commission has sent reasoned opinions (about which see here) to several countries - including Hungary, the Netherlands and Poland - concerning their failure to implement Directive 2004/109/EC on the transparency obligations of listed companies. The Commission is also bringing a case before the European Court of Justice against Italy with regard to the latter's failure to implement in full Directive 2003/58/EC on company disclosure requirements.

Further information about the above is available here and for information concerning European company law, see here. For the current position on Member States' implementation of company law directives, see here.

Monday, 12 May 2008

UK: Lib Dems - "A New Deal for the City"


The UK Liberal Democrat Party has today published a manifesto titled A New Deal for the City, which outlines proposals for the reform of financial regulation. With regard to the role of the Bank of England and the FSA, the manifesto states:

"One lesson from the past is that there has to be a clearer line of responsibility in crisis situations. We would argue that the Bank of England should have primary responsibility, ultimately accountable to Treasury Ministers, and the FSA could be a freestanding agency within and subordinate to the governance structure of the Bank".

With regard to corporate governance, the manifesto states:

"There is a need for reform in the City to stop entrepreneurs' natural animal spirits creating a culture of greed and gambling. One route is through strengthened corporate governance arrangements under which senior executive pay packages are subject to shareholder approval at AGMs (and not just scrutiny, as at present) though this approach would be helpful only for PLCs and there are many institutions which contribute to systemic risk".

England and Wales: "dog leg" claims and company directors

In Gregson v HAE Trustees Ltd & Ors [2008] EWHC 1006 (Ch) a so-called "dog-leg" claim was brought against the directors of a corporate trustee (HAE) by a trust beneficiary. It was argued that the claims of HAE against its directors for breach of duty were held on trust for the beneficiaries and were trust property. The possibility of such a claim was rejected by the trial judge (Robert Miles QC, sitting as a deputy judge of the High Court). The judge observed:

"The dog leg claim, if valid, would, for all practical purposes, circumvent the clear and established principle that no direct duty is owed by the directors to the beneficiaries. The refusal of the law to accept that directors of a trustee company owe a direct duty to safeguard the assets of a trust of which it is trustee is, I consider, a powerful reason to doubt that directors may be liable to the beneficiaries of the trust by the indirect, dog leg, route now proposed" (para. [46]).

"A further problem with the dog leg claim (as Commissioner Page pointed out in Alhamrani v Alhamrani [2007] JRC 026) is that it appears to cut across established principles of company and employment law. For instance, the members of a company may by ordinary resolution ratify or sanction what would otherwise be a breach of the duty of care of the directors. It appears to me that, were the dog leg claim to be recognised, it would no longer be possible for the members of a trustee company to do this. Again, if the dog leg claim were to succeed it would follow that the cause of action and its fruits would not form part of the estate of an insolvent trustee company. On this point, I agree with Phillips J in Young v. Murphy [1996] 1 VR 279 that the claims of an insolvent trustee company against its directors for breach of their duty of care form part of the insolvent estate" (para. [59]).

NB: The case also raised issues concerning the duties of trustees, which are noted here.

UK: Companies Act (2006): Draft Regulations published

Earlier this month, BERR published the following draft regulations:

(a) The Companies (Reduction of Share Capital) Order.
(b) The Companies Act 2006 (Commencement No. 7 and Transitional Provisions) Order.
(c) The Company Names Adjudicator Rules.
(d) The Companies (Disclosure of Address) Regulations.

Copies of the above, along with explanatory notes and impact assessments, are available here.

In addition, the following draft Regulations have been published concerning the application of the Companies Act (2006) to limited liability partnerships (these are due to come into effect for LLPs on 1 October 2008 for financial years beginning on or after that date):

(a) The Large and Medium -sized Limited Liability Partnerships (Accounts) Regulations 2008.
(b) The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006 ) Regulations 2008.
(c) The Small Limited Liability partnerships (Accounts) Regulations 2008.
(d) The Limited Liability Partnerships (Late Filing Penalties) Regulations 2008.

For copies and further information click here.

Saturday, 10 May 2008

Delaware: Corporate officers and fiduciary duties

In two recent Delaware decisions it has been accepted that corporate officers owe the same duties as directors: Midland Grange No. 27 Patrons of Husbandry v. Walls (28 Feb. 2008) and Miller v. McDonald (9 April 2008). For further discussion, see this post on the Harvard Law School Corporate Governance Blog and an article by Lyman Johnson posted here on SSRN.

UK: Ernst & Young Corporate Governance Survey

Ernst & Young has published the results of its annual corporate governance survey. According to E&Y's press release:

"The annual Ernst & Young Corporate Governance survey, conducted by Ipsos MORI among the UK’s leading 500 companies, found that 35% of respondents claimed that regulation and governance will be the number one challenge facing non executive directors in the next 12 months – followed by general economic conditions (13%) and legal challenges and accountability (13%). Environment made it onto the list of the biggest challenges faced by non executives – the first time it has been identified as a major priority for this influential group of company directors. Gerald Russell a senior partner at Ernst & Young comments, 'Environmental and social issues have been pushed up company agendas in recent years – pressure is mounting for organisations to demonstrate responsibility in such areas as climate change and ethical sourcing. Finance and business leaders are being called upon to provide oversight on this emerging area. It is encouraging to see that they are finally waking up to the need to account for sustainability'".

NB: Should we be surprised that non-executive directors are now citing environmental issues given that Section 172 of the Companies Act (2006) provides that directors must have regard to the impact of the company's operation on the environment as part of their duty to promote the success of the company for the benefit of the company's shareholders?

Friday, 9 May 2008

US: Say on pay - a first in America

The first "say on pay" vote on executive pay has taken place in America. Aflac - an insurance company - explained in its Annual Report why its board decided to provide shareholders with an advisory vote on directors' pay:

"We have a responsibility to listen to our shareholders, as they have placed their trust and financial resources in Aflac. After all, they own the company ... our shareholders have the right to know how executive compensation works, and ... we should provide a meaningful way for shareholders to give us input on our compensation practices. It’s as simple as that. Our shareholders tell us that we’re a very transparent and responsive organization, and Say-on-Pay is consistent with that approach. Our board of directors unanimously agreed. And we are proud to be the first company in the United States to adopt a resolution giving shareholders this type of advisory vote on compensation".

Over 90% of the votes cast supported the company's remuneration policy. For further information, see the following articles: The Wall Street Journal, The Financial Times, The Guardian. Senators McCain and Obama have criticised the level of directors' pay during their campaigns: see here.

Thursday, 8 May 2008

UK: Building societies and corporate governance

The Financial Services Authority's Chief Executive, Hector Sants, delivered a speech titled "The future of financial regulation" on 7 May at the Building Societies Association Conference. During his speech, Mr Sants identified areas of weakness in the governance of some building societies:

"I would like to finish with a few words about corporate governance. There are three reasons for doing this. Firstly, we have seen inadequate review, assessment and challenge of proposed new initiatives. As I have already highlighted, we have particularly found this around the liquidity and funding issues with which societies have been confronted. Some societies have been very slow to appreciate the nature and scale of the market turbulence or react prudently.

Secondly, if a building society is to survive, prosper, and bring real benefits to its members, it must have a good quality board. A board, together with the senior management team, has to lead their society through these challenging, competitive and more complex times.

And thirdly, because, as you will be aware, we have maintained the guidance that says that building societies should have regard to the Combined Code when establishing and reviewing their own corporate governance arrangements. To this point may I highlight two matters that are set out in the Combined Code: That the board should undertake a "formal and rigorous" annual evaluation of individual directors and that non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives.

I would ask you to consider whether this is a process which is well established at your society; and, in particular, is it "formal and rigorous". Do your Boards act on the results of the evaluation? In most cases there may only be behavioural changes to make. But in exceptional cases this might mean going further and questioning whether the person is still right for the role. Most societies do evaluate their executive directors, and many have processes that could be regarded as clearly demonstrating best practice, but in some cases we have seen this does not involve a structured process with, for example, agreed objectives and performance criteria against which the assessment is made. Such processes look neither "formal" nor "rigorous".

I would now like to say a few words about succession planning. This is, I am afraid, another area where we believe improvements should be made. I am sure you will agree it is vitally important for the long term health of a society that it has management depth and a credible management development and succession planning process. I am afraid that we do not believe that the practice in this area is always at the level we would expect.

Such deficiencies can carry considerable risk for a society, not least of which is the risk of stagnation and lack of focus which can result from a lengthy transitional period. May I thus use this opportunity to remind boards and non-executives in particular of their responsibilities in this area. This will be a theme we shall be returning to in the future.

In conclusion on governance, I would just like to underline the importance of boards focussing on what we say in the Building Society Regulatory Guide, namely “Society boards and management have a special responsibility to protect the interests of their members through the highest standards of corporate governance.” Public companies have the added pressure of institutional shareholders you are not subject to this additional scrutiny and thus must be extra diligent. I am sure you are all aware of this point, but I feel it bears repeating".

Saturday, 3 May 2008

US: CEO pay

The results of the Wall Street Journal & Hay Group CEO Compensation study have been published. In Hay's press release it is stated:

"The year 2007 marked a major milestone in the history of CEO pay, according to the study. For the first time, performance-based plans overtook stock options as the most popular form of long-term incentive compensation, with 129 of the companies using a performance plan, up 5% from 2006. The two more traditional equity vehicles of stock options and time-vested restricted stock showed significant declines in 2007, with options declining 7% to 128 companies, and time-vested restricted stock plans declining 14% to 63 companies. Performance plans tie the level of a CEO’s pay directly to how the company performs relative to key business goals and strategic priorities. In most plans, if the company fails to achieve a certain level of performance, the awards will be worth nothing to the CEO ... The 2007 study focused on 200 companies with more than $5 billion in annual revenue that filed their proxy statements after October 1, 2007".

Elsewhere, research has been published exploring how compensation consultants influence the level and pay-performance sensitivity of CEO pay in America. The research - by Cadman et. al. and published here on SSRN - looked at a sample of 880 firms from the S&P 1500 for the fiscal year 2006. The authors state, to quote directly from their abstract on SSRN:

"We find evidence of greater compensation in the presence of a compensation consultant, consistent with theory that these consultants facilitate rent extraction. However, we find no evidence of less pay-performance sensitivity when compensation consultants are hired. Among firms that retain consultants, we also examine whether there is greater rent extraction for clients of consultants with potentially greater conflicts of interest. Using a variety of specifications, we are unable to find widespread evidence of more lucrative CEO pay packages for clients of conflicted consultants despite anecdotal evidence to the contrary. Overall, we conclude from our findings that the potential conflict of interest between the firm and consultant is not a primary driver of excessive CEO pay."

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NB: For a survey of directors' pay within UK FTSE350 companies, see KPMG's report "Directors' Compensation 2007", available here (you may need to provide your name, postal address and e-mail address to view the report).

Friday, 2 May 2008

UK: Section 644, Companies Act (2006): commencement date brought forward

The Department for Business, Enterprise and Regulatory Reform (BERR) has announced that Section 644 of the Companies Act (2006) will now come into force on 1 October 2008 and not 1 October 2009 as previously stated. According to BERR:

"Until 2 May 2008 the publicly stated position as regards the commencement of section 644 was that it would commence in October 2009, and that between October 2008 and October 2009 matters relating to the registration of documents at Companies House would be dealt with by amendments to section 138 of the Companies Act 1985, amendments that would have simply enabled suitable changes to be made to existing forms. This approach was agreed to provide sufficient time for Companies House to implement all necessary processes and procedures to ensure the proper operation of the solvency statement route for reducing share capital. Companies House, however, is confident that it can now have in place all necessary processes and procedures to ensure the proper operation of the solvency statement route by October 2008. That being the case there is now no barrier to commencing section 644 of the 2006 Act in October 2008, and that is what we now propose to do".

For further information see here.

Thursday, 1 May 2008

England and Wales: Articles of association and implied terms

The extent to which terms can be implied into the articles of association was recently considered in Dashfield & Anor v Davidson & Ors [2008] EWHC 486 (Ch). Argument centred on a provision in a company's articles of association which required the personal representative of a deceased shareholder to transfer the deceased shareholder's shares to the company. The trial judge, Lewison J., implied a term requiring the company to take reasonable steps to procure the auditing of the company's accounts, for the last completed financial year, before the value of the deceased shareholder's shares was certified by an auditor. His Lordship observed (at para. [83]):

"... it is possible to imply a term into articles of association, but only if the term can be implied without recourse to extrinsic evidence. Such a term will therefore only be implied where it is a necessary inference, so as to give business efficacy to the obvious intention of the parties (see Tett v Phoenix Property and Investment Co Ltd [1986] BCLC 149, 159); or where it passes the officious bystander test (Tett v Phoenix Property and Investment Co Ltd [1986] BCLC 149, 160)".

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NB: The issues raised by Dashfield are not unique to English law: see, e.g., Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144.