Saturday, 30 August 2008

UK: FRC consultation - Guidance for Directors of Listed Companies on Going Concern and Financial Reporting

Listing Rule 9.8.6 requires listed companies incorporated in the UK to provide in their annual report "a statement made by the directors that the business is a going concern, together with supporting assumptions or qualifications as necessary, that has been prepared in accordance with Going Concern and Financial Reporting: Guidance for Directors of listed companies registered in the United Kingdom, published in November 1994".

The 1994 Guidance is now the subject of review: the Financial Reporting Council has published a consultation paper in which it states:

The Guidance for Directors was written by a Working Group formed under the auspices of the Cadbury Committee that reported on the Financial Aspects of Corporate Governance. The formation of the Working Group arose out of concerns that there had been several high‐profile company failures where there had been no apparent indication of the imminent problems in the previous year’s report and accounts.

The objective of the Guidance for Directors is to support good corporate reporting and, in particular, the requirements of the Listing Rules and Accounting Standards. When a company is not a going concern this does not necessarily mean that it is, or is likely to become, insolvent. The Guidance for Directors is not intended to address aspects of insolvency and, in particular, is not intended to support the requirements of the Insolvency Act 1986.

In the period since 1994 there have been substantial changes to the accounting standards applied by directors of listed companies. This is particularly the case for directors preparing consolidated accounts required to comply with International Financial Reporting Standards (IFRSs) as adopted by the EU.

The FRC observes that current economic conditions are creating particular challenges for companies. Recent developments in global debt markets have led banks to be cautious of lending to one another (the so‐called “credit crunch”). This has severely restricted liquidity which has created unexpected financial difficulties for banks and entities that depend on the availability of loans as a key source of capital. Many market commentators are now forecasting a period of reduced growth and in some cases recession, with the result that going concern questions are likely to need to be considered in more detail by Boards of Directors.

In view of these deteriorating economic conditions the FRC has concluded that this is an appropriate time to consider whether the existing Guidance for Directors is necessary and remains appropriate, or whether it can be improved.

Note: The UK's Combined Code on Corporate Governance (June 2008) provides in Section C ("Accountability and Audit") the following provision (C.1.2): "The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary".

Postscript (2 Sep 2008): For further comment see this short article in the Financial Times newspaper. 

Friday, 29 August 2008

India: company law reform moves a step closer - Companies Bill 2008 approved by Cabinet

In 2005 the Irani Report, on the reform of India's company law, was published. Legislation to replace the Companies Act 1956 has been expected for some time. Its introduction has moved a step closer: today it was announced that the Companies Bill 2008 has been approved by the Union Cabinet and will be introduced in Parliament in October. 

The Government's announcement contains an overview of the purpose of the Bill: to provide the principles for the internal governance of companies and a framework for their regulation, administered by Central Government, but with a much greater role for shareholders.  Specific proposals include:
  • The introduction of a new entity, the "one-person company".
  • The abolition of shares with differential voting rights.
  • Provision for the duties and liabilities of directors, with every company to have at least one director resident in India.
  • At least one third of board directors to be independent [it's not yet clear to which companies this rule will apply; the Irani Committee proposed that is should apply to public listed companies and those taking deposits from the public]. 
  • Insider trading by directors to be recognised as a criminal offence.
  • Auditors' rights and duties to be explained.
  • Class action suits by shareholder associations to be permitted.

UK: England and Wales: auditors' liability and the ex turpi causa principle [a belated posting]

Several months ago the Court of Appeal gave judgment in Moore Stephens (a firm) v Stone & Rolls Ltd [2008] EWCA Civ 644 and it would appear from recent reports in the legal press that an appeal to the House of Lords will be made. The case required the Court of Appeal to consider the operation of the ex turpi causa non oritur actio principle (no cause of action may be founded on an illegal act) in the context of a negligence claim brought by the liquidators of a company (Stone & Rolls) against a company's auditors (Moore Stephens). 

The liquidators argued that the auditors had failed, during the course of several audits, to identify the fraud of Mr. Stojevic (the directing mind and will of the company). Mr. Stojevic fraudulently obtained, through the company, money from various banks. One of these banks sued the company and Mr. Stojevic and was awarded damages against Mr. Stojevic and the company. The company was unable to pay and entered liquidation. The auditors denied negligence and applied for the action to be struck out on the basis that the claim was barred by the ex turpi causa principle. The first instance judge declined to strike out the claim (see [2007] EWHC 1826 (Comm)). 

The Court of Appeal held that the liquidators' claim was barred by the ex turpi causa principle and struck out the claim. The court rejected the argument that the company was the victim of fraud and attributed Mr. Stojevic's actions to the company. There was not, the court unanimously agreed, any room for discretion in the application of the ex turpi causa principle because, as Lord Goff observed in Tinsley v Milligan [1994] AC 340 at 355B: "...the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other".  The court also rejected the argument that the ex turpi causa principle did not apply where the claim was based on the commission of a fraud where the prevention of that fraud was "the very thing" that the defendants had undertaken to do. In this regard, Rimer LJ observed (at para. [109]):

There is ... no support in the authorities that we were shown for the proposition that if "the very thing" from which the defendant owed a duty to save the claimant harmless is, or includes, the commission of a criminal offence, the public policy defence based on the ex turpi causa principle will be overridden so as to enable the bringing of the claim that relies on the claimant's illegality".

Note: The case has been reported here in the Law Society Gazette.

Postscript (2 Sep 2008): The House of Lords Judicial Office informs me: "[the] petition for leave was presented on 18 July 2008 ... and we would hope to get a decision on leave before the end of November this year". 

Thursday, 28 August 2008

USA: adoption of IFRS - roadmap to be published

The SEC has announced that it will shortly publish for consultation a proposed roadmap for the adoption of International Financial Reporting Standards (IFRS) by US issuers beginning in 2014. The SEC notes in its press release:

Currently, U.S. issuers use U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the Commission. The increasing integration of the world's capital markets, which has resulted in two-thirds of U.S. investors owning securities issued by foreign companies that report their financial information using IFRS, has made the establishment of a single set of high quality accounting standards a matter of growing importance. A common accounting language around the world could give investors greater comparability and greater confidence in the transparency of financial reporting worldwide".

To watch a statement by SEC Chairman Cox, outlining the above, click here (for QuickTime) or here (for Windows Media Player). The roadmap has not yet been published on the SEC website but further information is available in this report in the Wall Street Journal


[a] A useful map, indicating those countries where IFRSs have been adopted, is available on the IASB website here

UK: DBERR consultation on the creation of a UK wide companies registry

DBERR has published a consultation paper concerning its proposal to integrate the Northern Ireland Registry of Companies with Companies House to create a single UK Registry of Companies. According to the consultation paper:

In practical terms the merger would mean that customers would be able to refer to one Register only for registration and information relating to UK companies. It would also mean that all UK customers had access to the same products and services at the same price. The system would operate in much the same way as Companies House currently works with Scotland. The Registrar for Northern Ireland would be retained, and would be an appointee of the Secretary of State for BERR, as is the case for England and Wales and for Scotland; in practice the Northern Ireland Registrar would report to the Chief Executive of Companies House. The office in Belfast would remain, but would use systems, hardware, processes and have corporate standards in common with Companies House. Registry operations in Northern Ireland would be maintained with no detrimental impact upon customers, but the existing company data would be migrated to give customers full UK information on companies. There would be a common fee structure, and customers would have the benefit of common filing and search services covering the whole of the UK. There would be an exercise to value and transfer (if applicable) relevant assets and liabilities".

Wednesday, 27 August 2008

UK: England and Wales: relieving directors from liability in respect of unlawfully paid dividends

In HMRC Commissioners v Holland (Ch.D., Deputy Judge Cawson QC, 24 June 2008) the judge had before him applications under Section 212 of the Insolvency Act (1986) relating to 42 separate companies. One of the questions considered was whether a director could be relieved from liability under Section 727 of the Companies Act (1985) in respect of the payment of unlawful dividends. In this regard, Deputy Judge Cawson QC observed:

"The headnote to Re Loquitur [Ltd., IRC v Richmond [2005] 2 BCLC 442] suggests that the case decides that there is no jurisdiction to grant relief under Section 727 CA 1985 where, as a result of directors failing to exercise proper skill and care a dividend is paid that renders the company insolvent or potentially insolvent. However, I consider  that this reads too much into Etherton J's judgment ... Whilst the Court will, necessarily, be most reluctant to grant relief under Section 727 when an officer/shareholder has benefited at the expense of the creditors by reason of the payment of the dividend, I consider that the Court does retain a discretion to relieve at least when, as in the present case, the director has not directly benefited from the payment of the dividend" (para. [224])


[1] The decision is not yet available on BAILII but a copy of the transcript is available on the Lawtel subscription service (the Lawtel staff have not yet prepared a summary). Update (29 Sept 2008): the decision is now on BAILII - click here

[2] The provision in Section 727 of the Companies Act (1985) permitting the court to grant relief is found in Section 1157 of the Companies Act (2006), which comes into force on 1 October 2008.

Denmark: corporate social responsibility reporting

Several months ago the Danish Government published its Action Plan for Corporate Social Responsibility. In the Plan the Government explained that it would make it mandatory for large businesses, institutional investors and unit trusts to report on corporate social responsibility matters (further information, in English, is available here).  The UK's Financial Times newspaper has recently reported that legislation introducing these provisions will be voted on in October. 

Tuesday, 26 August 2008

UK: directors' bonuses and gender differences

The UK's Financial Times newspaper has reported (online, 25 August), that "Female directors earn smaller performance-related bonuses than male counterparts, according to a new study that says the disparity reflects sexist attitudes. Researchers at Exeter university found that male executive directors in the best-performing companies were paid bonuses 263 per cent bigger than those working for the worst performers. For female directors the difference is a mere 4 per cent".

USA: board oversight of environmental issues

The Wall Street Journal has reported, in an article titled "Environmentalism Sprouts Up On Corporate Boards", that "About 25% of Fortune 500 companies now have a board committee overseeing the environment, compared with fewer than 10% five years ago". 

Monday, 25 August 2008

UK: the Statutory Auditors and Third Country Auditors (Amendment) (No 2) Regulations 2008

The Department for Business, Enterprise and Regulatory Reform has published a draft of the Statutory Auditors and Third Country Auditors (Amendment) (No. 2) Regulations 2008 (available here in Word format). Further information, with background information, is available in the explanatory text accompanying the draft (available here in Word format) and from where the following text is taken:

The EU’s Statutory Audit Directive (2006/43/EC) introduces the regulation of auditors from outside the EEA (“Third Country Auditors”) who audit the accounts of companies who issue securities on regulated markets in the EEA. The Directive also allows these requirements to be disapplied where third country auditors are subject to a system of regulation in their home country which is determined to be equivalent to those in the EU.

Although the Commission has not yet made proposals for determinations of equivalence, the Commission and Member States have recently agreed a decision (2008/627/EC) on transitional measures which will allow Member States to treat auditors from specified countries largely as though the regulatory regimes were equivalent. This will allow the introduction of these provisions with the minimum disruption to EU markets. 

... because of the legal approach of the Commission’s decision, some amendments are needed to the existing provisions in SI 2007/3494 [The Statutory Auditors and Third Country Auditors Regulations 2007, and this is the purpose of the new Regulations]".

South Africa: company law reform - the Companies Bill and shareholders' pre-emption rights

It has been reported that Hermes, the UK based fund manager, has criticised the provisions concerning pre-emption rights in the Companies Bill.  Hermes' concerns relate to Section 39 which provides that public company shareholders will only have pre-emption rights if this has been explicitly provided for in the company's memorandum of incorporation. Click here for further information. 

Friday, 22 August 2008

USA: California: directors' duties and corporate social responsibility

Section 309 of the California Corporations Code provides that a director must act in good faith, in the manner in which he/she believes to be in the best interests of the corporation and its shareholders. A proposal to amend Section 309 is currently before the California State Legislature. Assembly Bill 2944 , introduced by Assemblyman Mark Leno, will provide that in acting in the best interests of the corporation, the director may consider:

(1) The long-term and the short-term interests of the corporation and its shareholders.
(2) The effects that the corporation’s actions may have in the short term or in the long term upon any of the following: 
  • The prospects for potential growth, development, productivity, and profitability of the corporation.
  • The economy of the state and the nation.
  • The corporation’s employees, suppliers, customers, and creditors.
  • Community and societal considerations.
  • The environment. 
The draft Bill makes clear that the introduction of the above provision will not impose on the director any legal or equitable duties, obligations of liabilities, or create any right or cause of action against the director. According to Assemblyman Leno, the Bill "would promote socially responsible corporate conduct by authorizing boards of directors to consider the interest of the full community, the environment and employees, along with the interest of shareholders, when making official decisions on behalf of the corporation".  There has, quite predictably, been opposition. For example, the Corporations Committee of the Business Law Section of the State Bar of California has argued that the Bill would undermine director accountability to shareholders without effectively promoting interests of non-shareholder stakeholders.


[1] Progress of the Bill can be monitored here and for an overview of the legislative process in California, click here

[2] Bill 2944 does not go as far as the UK Companies Act (2006) which, in Section 172, requires the director to act:
in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: (a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others, (d) the impact of the company's operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company".

Germany: foreign investment and the Federal Government

On Wednesday of this week, Germany's Cabinet approved legislation which will, if passed, give the Federal Government the right to veto investment in a German company of 25% or more from outside of the EU or EFTA if it is believed that the investment represents a risk to national security. According to a report in the UK's Financial Times newspaper:
The bill is a reaction to concern in Berlin about the growing weight of state-controlled sovereign wealth funds, the vast investment pools created to manage the currency reserves of fast-growing economies in Asia, Russia and the Middle East. Wednesday’s endorsement by the cabinet marks a significant milestone for the controversial draft, which will now move to parliament for final approval. The decision ends almost a year of protracted work on the text to address fears that it may contravene European Union legislation on the free movement of capital".

Thursday, 21 August 2008

UK: Companies Act (2006) - the Companies (Disclosure of Address) Regulations 2008

The Department for Business, Enterprise and Regulatory Reform has published a revised draft of the Companies (Disclosure of Address) Regulations 2008 (available here in Word format).  The changes made to the draft Regulations, following a consultation period which ended last month, are explained in the Government's consultation response (available here in Word format).

Wednesday, 20 August 2008

UK: directors' liability for the company's debts - a tax deductible expense?

In small, private companies it is not unusual for directors to guarantee company debts.  In A Guarantor v HMRC Commissioners [2008] UKSPC 00703 a company's directors guaranteed the company debts and did so as a condition of a factoring agreement which the company had entered at a time of financial difficulty. One director (hereafter 'the taxpayer') resigned from office but nevertheless became liable under the guarantee. He argued that his liability was a tax deductible expense. HMRC disagreed and the taxpayer appealed: the appeal was heard in July by Special Commissioner Colin Bishopp. 

The general rule concerning the deductibility of employees' expenses is found in Section 336(1) of the Income Tax (Earnings and Pensions) Act (2003), which provides that a deduction is permitted if:

(a) the employee is obliged to incur and pay it as holder of the employment, and
(b) the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.

The taxpayer argued that conditions (a) and (b) were satisfied because he had a duty to maintain the company's solvency and, given that the company had exhausted all other possible sources of finance, his liability was incurred wholly and necessarily in the course of his employment. Special Commissioner Bishopp rejected the taxpayer's claim, agreeing with the majority of arguments advanced on behalf of HMRC including the fact that liability arose after the taxpayer's employment had ended (and was not, therefore, incurred in the performance of the employment). The Special Commissioner did, however, observe (at para. [12]): "Mr Smith's argument [on behalf of HMRC] that the payment is disqualified for relief because not every company director is obliged to give a personal guarantee for the company's debts may well overstate the position" (para. [12]). 

Jersey: The Companies (Takeovers and Mergers Panel) (Jersey) Law

The Companies (Takeovers and Mergers Panel) (Jersey) Law was adopted by the States on 16 July and now awaits the approval of the Queen in Council. For background information see this earlier post and the information available here on the States of Jersey website. 

Germany: corporate governance code - new edition published

The German Corporate Governance Code was updated earlier this year. A copy of the new version, in English, has been published here on the ECGI website. For a copy of the new version with the changes highlighted in bold, click here.

Tuesday, 19 August 2008

France: sixth edition of the AFG recommendations on corporate governance

L'Association Française de la Gestion Financière (AFG, the French Asset Management Association) has published the sixth edition (2008) of its corporate governance recommendations. A version in English has been published on the website of the European Corporate Governance Institute - see here. The edition in French is, however, authoritative.

Belgium: corporate governance code - proposed changes

Belgium's Corporate Governance Committee has proposed several changes to the Belgian Corporate Governance Code. A consultation paper is available here (in Word format) and a draft of the new code is available here (also in Word format). The proposed changes address a wide range of areas including corporate social responsibility, the gender diversity of boards, board evaluation, directors' remuneration and the remuneration report. 

Monday, 18 August 2008

UK: PwC report on non-executive directors

PwC has published the 2008 edition of its annual report Non-Executive Director Practice and Fees, which is available for purchase from PwC (see here). A summary of the main findings has, however, been provided in a press release available here. Highlights from the report include (to quote directly from the press release):

Formal review of corporate governance and board effectiveness is becoming increasingly prevalent in UK companies, with 84% of respondents conducting annual performance reviews of their board. In addition, the average [non-executive] director’s time commitment has risen from 15 days in 2003 and 20 days in 2007 to 21 days in 2008.

Fee levels – fee levels continue to be influenced by both company size and time spent doing the job. The increase in fees for directors and chairmen is less pronounced than in previous years (an increase of 15.6% for directors and 25.0% for chairmen in 2008). 

Terms of appointment – there has been little change to policy regarding non-executive director appointments since last year. Most (78%) NEDs are appointed for an initial three-year term. 

Board structure – Analysis of the percentage of non-executives on the main board indicates that a 50/50 ratio of executive/non-executive is the median practice, although larger companies have a higher proportion of non-executives to executive directors (60/40 ratio).

Outside appointments – this year the survey showed a difference of market practice between smaller and larger organisations. In companies with revenues up to £500m, over half (51%) the companies have no executives serving on another companies’ board and are less likely to encourage executives to accept a non-executive appointment. Almost two thirds (62%) of companies with revenues over £500m have executives serving on other companies’ boards. The percentage was 52% and 59% in 2007".


[1] The report is based on a survey of 155 companies and information in the most recently available annual reports of 1,500 quoted companies with year ends from September 2006 to February 2008.

An overview of the 2007 report is available here.

Singapore: restrictions on the transfer of shares

Where shareholders in a listed company agree not to sell, assign or dispose of their shares for a given period of time, does this agreement prevent them from using their shares as security? It does not according to Pacrim Investments Pte Ltd v Tan Mui Keow Claire [2008] SGCA 16, a decision of the Court of Appeal in Singapore.

The court's decision is noteworthy because the facts concerned a listed company (restrictions on the transfer of shares are more common in closely held companies) and also because it provides a good example of the approach taken by courts in many jurisdictions when interpreting provisions which purport to limit the transferability of shares. 

The court stated, with reference to the late Robert Pennington's textbook on English company law, that "[the] freedom of a shareholder to deal with his shares should generally be given a broad, rather than narrow, interpretation" and cited with approval the following principle enunciated by Lord Greene MR in the English case Greenhalgh v Mallard [1943] 2 All ER 234 at 237:

Questions of construction of this kind are always difficult, but in the case of the restriction of transfer of shares I think it is right for the court to remember that a share, being personal property, is prima facie transferable, although the conditions of the transfer are to be found in the terms laid down in the articles. If the right of transfer, which is inherent in property of this kind, is to be taken away or cut down, it seems to me that it should be done by language of sufficient clarity to make it apparent that that was the intention".

In the view of the Singapore Court of Appeal, there was no reason why this principle should not apply to agreements between the company and its shareholders made outside of the company's memorandum and articles of association.

ACCA: publication of sustainability agenda

The Association of Chartered Certified Accountants has published a document titled "Going Concern? A Sustainability Agenda for Action". This sets out recommendations for business, government and the accountancy profession, in eight areas including corporate governance. The recommendations concerning corporate governance include:
  • Businesses should make sustainability issues a core part of their strategy, and that risk identification and management should be governed at board level.
  • Organisations should report on the linkage between the sustainability issues they face and the corporate strategies they choose, including the financial implications of their most significant sustainability risks.
  • Businesses should integrate sustainability KPIs [Key Performance Indicators] within their managerial reward evaluation procedures.
  • Investors should actively require the organisations in which they invest to demonstrate that CSR and sustainability considerations are appropriately embedded in the system of corporate governance and are a central element in the strategic planning process.

Friday, 15 August 2008

UK: England and Wales: winding-up in the public interest

Section 124A of the Insolvency Act (1986) provides the Secretary of State for the Department of 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 a recent case - Re Tag World Services Ltd. and Club Labourse Travel Ltd. (Ch.D., Robert Englehart QC, 30 July 2008) - the Secretary of State petitioned for the winding-up of two companies both of which were subsidiaries of the same parent company.  The petition for one of these (Tag World) was granted (there was clear evidence of deceptive marketing practices).  It was argued for the Secretary of State that the second company (Club Labourse) should also be wound-up because it was inextricably linked with the first company and tarnished by its behaviour (although there was no evidence that it had acted wrongfully or disreputably).  The trial judge rejected this argument and observed (at para. [51]) that it would be wrong to wind-up the second company in the absence of any complaints against it. 


[1] The judgment is not yet available on BAILII but it has appeared on the Lawtel subscription service.  Update (24 September 2008): the judgment is now available on BAILII - click here

[2] For an earlier earlier post concerning Section 124A, click here.

Europe: update on company and financial services law developments

A useful update on European developments in company and financial services law has been published here by the Joint Brussels Office of the Law Societies of England and Wales, Scotland and Northern Ireland.

Thursday, 14 August 2008

Ireland: High Level Group on Business Regulation - first report published

Tánaiste and Minister for Enterprise, Trade and Employment, Mary Coughlan, T.D., has received the first report of the High Level Group on Business Regulation. This contains many suggestions including some relating to company law (see pp. 41-42) which have been addressed by the Company Law Review Group (CLRG). The report notes that new companies legislation, based on the work of the CLRG, is expected to be enacted in 2010.

UK: England and Wales: collective action recommendations

The Civil Justice Council has published a report titled "Improving Access to Justice through Collective Actions - Developing a More Efficient and Effective Procedure for Collective Actions: a Series of Recommendations to the Lord Chancellor". Amongst the recommendations - which concern civil procedure in England and Wales - are the following:
  • A generic collective action should be introduced. Individual and discrete collective actions could also properly be introduced in the wider civil context i.e., before the CAT or the Employment Tribunal to complement the generic civil collective action. 
  • Collective claims should be capable of being brought by a wide range of representative parties: individual representative claimants or defendants, designated bodies, and ad hoc bodies. 
  • No collective claim should be permitted to proceed unless it is certified by the court as being suitable to proceed as such. Certification should be subject to a strict certification procedure. 

Wednesday, 13 August 2008

UK: GC100 guidance on directors' duties

The GC100 - the Association for the General Counsel and Company Secretaries of FTSE 100 companies - has published further guidance on directors' duties under the Companies Act (2006), focusing on the provisions of the Act coming into force on 1 October 2008.

For further information see the following documents (all in MS Word format): Checklist for company secretaries | Briefing note on conflicts of interest | Questionnaire designed to identify conflicts of interest | Earlier guidance paper (January 2008) |

UK: corporate governance at Network Rail

The UK's Office of Rail Regulation has published a report it commissioned from KPMG concerning the governance of Network Rail. Network Rail is a company limited by guarantee and is responsible for the UK's rail infrastructure. The report, titled "Network Rail: Membership aspects of governance", offers suggestions for strengthening Network Rail's governance structure particularly with regard to the role of the company's members. It also contains a useful review of the governance arrangements adopted by several other non-equity based organisations.

UK: England and Wales: CPR r 71.2 and the director of a corporate director

Part 71 of the Civil Procedure Rules contains rules which, to quote from Rule 71.1, "provide for a judgment debtor to be required to attend court to provide information, for the purpose of enabling a judgment creditor to enforce a judgment or order against him". Rule 71.2 provides that a judgment creditor may apply to the court for an order requiring an officer of a company or other corporation to attend court to provide information. Where that officer is a corporate director, does Rule 71.2 apply to the directors of the corporate director? It does not according to a unanimous Court of Appeal in Masri v Consolidated Contractors International Co SAL and others (No 4) [2008] EWCA Civ 876.

In the course of his judgment, Sir Anthony Clarke MR observed (para. [20]):
[It is argued] that, unless 'officer' is construed as including a director of a corporate director of the judgment debtor, companies will ensure that, so far as possible, they have corporate entities and not natural persons as directors. I very much doubt whether such a construction would be likely to have that effect. In any event, although I can see that it might be desirable for the rule to be widened to include such a case, I am not persuaded that 'officer' of the judgment debtor in the rule in its present form can properly be construed so as to include an officer of a corporate director of the judgment debtor".

Note: One of the changes being introduced by the Companies Act (2006) is the requirement that all companies must have at least one director who is a natural person (see Section 155, which is brought into force on 1 October 2008 by the Companies Act 2006 (Commencement No. 5, Transitional Provisions and Savings) Order 2007).

Tuesday, 12 August 2008

UK: England and Wales: unfair prejudice and directors' fiduciary duties

Interim post: Allegations concerning breaches of directors' fiduciary duties are often considered in the context of the unfair prejudice remedy (Section 994 of the Companies Act (2006), formerly Section 459 of the Companies Act (1985)). The recent High Court decision O'Donnell v Shanahan [2008] EWHC 1973 (Ch) provides a good example but the case is of particular interest because of the discussion of fiduciary duties. For example, the trial judge observes (at para. [212]):

Whilst the authorities make clear that, if a breach of the no conflict rule (and also the no-profit rule) is made out, it does not matter if the company (or trust or partnership) could not of itself have proceeded with the transaction, it does appear to me permissible to take into account when determining the scope of the directors' duties and in deciding whether 'there is a real sensible possibility of conflict' the inherent likelihood in fact of the company extending its existing scope of business into areas of business which might give rise to a conflict".


[1] The judgment is not yet available on BAILII although it is available on Lawtel (for subscribers). The trial judge relied heavily upon the first instance decision Wilkinson v West Cost Capital & Ors [2005] EWHC 3009 (Ch). Update (28 August 2008): the decision is now available on BAILII - click here.

[2] The Companies Act (2006) has codified directors' fiduciary duties: see Part 10, Chapter 2 (and remember that the provisions within this Part have different implementation dates).  The O'Donnell case was concerned with the common law duties on which these codified duties are based. 

Directors' liability discharge proposals - report published

Manifest, in conjunction with Morley Fund Management, has published a report titled "Directors' liability discharge proposals: the implications for shareholders". The report, to quote directly from it: 
.... addresses what for many investors has been a largely obscure issue, namely proposals to discharge directors of liabilities that routinely appear on shareholder meetings’ agendas in many European markets. We look at 13 European markets that have resolutions of this type – Austria, Belgium, Denmark, Finland, France, Germany, Greece, Luxembourg, the Netherlands, Portugal, Spain, Sweden and Switzerland; their legal basis and practical implications for shareholders in the voting context".

Monday, 11 August 2008

IASB exposure draft - Improvements to IFRSs

The International Accounting Standards Board (IASB) has issued a proposed exposure draft titled "Improvements to IFRSs". For further information see this press release and the information here concerning the IASB's Annual Improvements programme.

UK: Pre-Emption Group issues revised Statement of Principles

The UK Pre-Emption Group has updated its Statement of Principles. The purpose of the Principles is to provide guidance to companies and investors on those factors to take into account when considering whether to disapply pre-emption rights. The revised Principles, available here, contain the following changes:
  • Clarification that convertible instruments are covered by the Principles.
  • Acknowledgement that shareholders would not normally have concerns if there was no dilution of value as a result of the proposed issue.
  • A recommendation that companies should not seek an authorization for more than a maximum of 15 months.
Further background information is available in this press release and in this monitoring report.

UK: England and Wales: members of the company?

In Southall Court v Buy your freehold Ltd & Ors [2008] EWLands LRX_124_2007 (available in PDF here), the England and Wales Land Tribunal considered a company law question: whether individuals had become members of a company in accordance with Section 22(2) of the Companies Act (1985). Section 22 - titled "definition of a member" - provides:

(1) The subscribers of a company’s memorandum are deemed to have agreed to become members of the company, and on its registration shall be entered as such in its register of members.
(2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company".

The individuals in question had agreed to become members but their names had not been entered in the register of members because no such register existed. The Tribunal held that they had not become members of the company and with reference to several cases - Nicol’s case (1885) 29 Ch D 421, Re a Company [1986] BCLC 391 and National Westminster Bank v IRC [1995] 1AC 119 at 127B - stated that the requirements of Section 22(2) are cumulative. As a result, a claim notice under Section 79(5) of the Commonhold and Leasehold Reform Act (2002) was invalid.

Note: The equivalent provision of the Companies Act (2006) - Section 112 - is due to come into force on October 1, 2009.

Friday, 8 August 2008

UK: ABI publishes rights issue discussion paper

The Association of British Insurers has published a discussion paper titled "Rights Issues and Capital Raising". This makes suggestions for improving the capital raising process whilst respecting shareholders' pre-emption rights. Further information is available in this brief letter and longer article from the UK's Financial Times newspaper. The consultation paper has been published against the background of the Government's review of the rights issue regime: see this earlier post.

Thursday, 7 August 2008

Jersey: partnership law reform

Legislation outlining the general principles of partnership law does not exist in Jersey although there are statutes dealing with particular forms of partnership (the Limited Partnerships (Jersey) Law (1994) and the Limited Liability Partnerships (Jersey) Law (1997)). This state of affairs is regarded as unsatisfactory by the Jersey Law Commission and in a consultation paper published earlier this year it is proposed that Jersey should introduce legislation, based on the UK's Partnership Act (1890), in order to make clear the basic principles of partnership law. Meanwhile, the Commission proposes that in the absence of Jersey authority, recourse should be had to English cases (which should be regarded as persuasive in the Royal Court). 

Wednesday, 6 August 2008

UK: Walker guidelines on private equity - update

The UK's Financial Times newspaper has published an interview with Sir Michael Rake, chairman of the Walker Guidelines Monitoring Group. In the course of the interview it is noted that 32 private equity firms (list here) and 55 portfolio companies (list here) have committed to comply with the Walker Recommendations. In addition, it is noted that Sir Michael: encouraged by the enthusiastic response eight months after Sir David Walker, the City grandee, unveiled the voluntary guidelines he drew up for the British Private Equity and Venture Capital Association (BVCA). Since then, about a dozen private equity firms – including Apax Partners, Terra Firma, Permira and Cinven – have published annual reviews, giving details of their senior managers, investors, strategies and portfolio companies. “The reports are worth looking at,” says Sir Michael. “They see the business benefits of doing it. There is nothing to fear from transparency and the story they have to tell is generally a good one; therefore why not tell it?” 

In addition, large portfolio companies, such as Alliance Boots, the pharmacy chain, and Gala Coral, the betting and casinos group, have published public company-style annual reports. By the end of the year, Sir Michael plans to report back on how the rules have been adopted by relevant portfolio companies".

Tuesday, 5 August 2008

USA: improving financial reporting for investors

The SEC's Advisory Committee on Improvements to Financial Reporting has published its final report. The report makes recommendations within the following five areas:
  • Increasing the usefulness of information in SEC filings
  • Enhancing the accounting standards-setting process
  • Improving the substantive design of new standards
  • Delineating authoritative interpretive guidance
  • Clarifying guidance on financial restatements and accounting judgments
For further information, including a video commentary provided by SEC Chairman Cox and Advisory Committee Chairman Pozen, click here.

Europe: consultation on credit rating agencies

The European Commission has issued a consultation document as part of its work developing proposals with regard to the regulation of credit rating agencies. According to the Commission: 
The policy response currently being developed ... is likely to involve a legislative framework for credit rating agencies comprising both a set of legal obligations to be complied with by CRAs as well as independent external oversight. Addressees of the rules proposed by the Commission will be all existing (and prospective) credit rating agencies with business operations having significant market impact in Europe. The proposed directive / regulation will aim to achieve the following
  • Appropriate management of conflicts of interest.
  • Improvements in quality of output.
  • Increased transparency of CRAs' activities.
  • Establishment of a supervisory and enforcement regime on the territory of the EU."

The consultation period ends on 5 September 2008. Further information is available here.

Monday, 4 August 2008

UK: England and Wales: conflicts of interest and joint venturers

The High Court decision Daniels v Deville [2008] EWHC 1810 (Ch) contains some interesting points on the duties of joint venturers. The trial judge, Lindsay J., held that a participant in a joint venture owed an implied duty of good faith. The judge also held that an implied duty was owed under which no joint venture vehicle (or participant) should place itself (or himself) in a position in which its (or his) duties to the other joint venturers would conflict with its (or his) own interests.  This said, the judge proceeded to hold, on the basis of the facts before him, that these duties did not preclude the participators from competing with the joint venture.  Lindsay J. also declined to imply a duty under which the participators owed a duty to disclose to each other information concerning business opportunities of which they were aware and which were suitable for exploitation by the joint venture.  Lindsay J's discussion of these points is at paras. 114-118 of the judgment.

UK: interim management statements - Deloitte survey

Deloitte has published a report titled "First IMpressionS – The first year’s interim management statements", which considers UK listed companies' publication of twice yearly interim management statements (as required by Disclosure and Transparency Rules). The report covers a sample of 130 companies and in the press release accompanying the report's publication it is stated:
In terms of strict compliance with the rules, first impressions are that companies could do better: 4% of the selected companies simply failed to issue an IMS; only 9% received a tick in all the compliance boxes; 6% of companies were late in producing their IMS. For most, the delay was only up to a week. For one, the delay was a month; and the poorest area was, perhaps surprisingly in these economic times, providing a general description of the financial position of the company.

At another level, it appears that companies, investors and the market have coped well with the new requirements. There have been no major signs that the IMS is seen as an excessive and unnecessary burden. Admittedly this may be because the IMS replaced the threat of UK companies being forced to issue detailed quarterly financial reports. While many companies voluntarily reported more often, the IMS has formalised more frequent communication by all".

UK: England and Wales: security for costs and unlimited companies

Civil Procedure Rule 25.13 provides that the court may make an order for security for costs where, inter alia, "the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so". 

Does this Rule apply to unlimited companies or is it restricted to limited companies? This question has been considered by the Court of Appeal in Jirehouse Capital & Anor v Beller & Anor [2008] EWCA Civ 908, in which it was unanimously held that Rule 25.13 applies to unlimited and limited liability companies. Arden LJ observed (para. [19]):

CPR 25.13(2)(c) provides that the court may make orders for security against "companies", without distinction ... I do not accept the argument that to include unlimited companies is unprincipled".

Friday, 1 August 2008

Isle of Man: the Company Officers Disqualification Bill 2008

Last year the Isle of Man's Financial Supervision Commission published a consultation paper proposing reforms to the law governing the disqualification of directors. A new Act is proposed which will bring together in one place all of the current grounds for disqualification. It will also introduce "disqualification undertakings" - agreements between the disqualified person and the Commission whereby that person acknowledges their unfit conduct and agrees certain restrictions with regard to the future involvement with companies. Following comments on a draft Bill a revised Company Officers Disqualification Bill 2008 has recently been published. 

For further information about other legislative changes, including amendments to companies law, click here. Information about the legal system on the Isle of Man is available here. Information about company law on the Isle of Man is available here.