Friday, 30 January 2009

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

Yesterday the Court of Appeal gave judgment in Secretary of State for Business, Enterprise and Regulatory Reform v Amway (UK) Ltd [2009] EWCA Civ 32. The case concerned an application for the winding-up of a company under Section 124A of the Insolvency Act (1986) by the Secretary of State for the Department for Business, Enterprise and Regulatory Reform. Section 124A provides the Secretary of State with the power to petition for the winding-up of a company where this is "expedient in the public interest"; the court must be satisfied that it is "just and equitable" for the company to be wound-up. 

At first instance, the trial judge refused to grant the petition sought by the Secretary of State (see [2008] EWHC 1054 (Ch)). The Secretary of State appealed, submitting that the trial judge had "fundamentally misunderstood his jurisdiction" by declining to grant the winding-up where he found that the company's old business model commercially unacceptable. The company had, however, changed its business model and the trial judge also accepted undertakings about future conduct. 

The trial judge's approach was endorsed by the Court of Appeal. Rix LJ (with whom Rimer and Toulson LJJ concurred) held that previous decisions did not prevent the court from accepting undertakings. His Lordship also held that counsel for the Secretary of State had not identified any error of law or principle in the judgment at first instance. Moreover, Rix LJ concluded (para. [82]):

I would repeat that this is an unusual, indeed exceptional case. A review of the factual histories of the other authorities placed before us in the bundle shows that that is so. They also show the dangers and difficulties of trying to put into any single straightjacket the philosophy of section 124A petitions. Of course, the Secretary of State seeks to act in the public interest: and the court will continue to be conscious of the need to maintain and vindicate appropriate business standards, to deter other wrongdoers, and to express its disapproval of dishonesty and other misconduct which would make it just and equitable to wind up companies, and to do so despite late and inadequate protestations of change from unreliable and untrustworthy owners, directors and managers. However, in my judgment the judge's solution in this case has not been in breach of that jurisprudence, but in fulfilment of it. I would therefore dismiss this appeal on the merits".

Thursday, 29 January 2009

Canada: CCGG executive compensation principles

The Canadian Coalition for Good Governance (an organisation representing the interests of institutional investors) has published for comment draft executive compensation principles. Of interest is the (perhaps surprising) position taken by the CCGG with regard to shareholder advisory votes on remuneration:

CCGG does not, for the time being, support regulatory changes to mandate advisory shareholder votes on compensation reports. CCGG and its members believe that constructive engagement with boards and compensation committees to explain the shareholders’ perspective on compensation practices and disclosure is preferable to a 'Yes' or 'No' advisory vote".

Australia: shareholder claims against insolvent companies

In Sons of Gwalia Ltd v Margaretic [2007] HCA 1, the High Court held (by majority of 6 to 1) that a claim by a shareholder in respect of a loss caused by a company's misrepresentation or defective market disclosure which induced the purchase of shares ranked alongside the claims of unsecured creditors. This proved controversial because it was widely believed that such a claim would rank below the unsecured creditors because it was a claim by the shareholder as a member of the company (in accordance with Section 563A of the Corporations Act 2001).

The Government referred the matter to the Corporations and Markets Advisory Committee (CAMAC).  A discussion paper was published in 2007. The Committee's final report has now been published along with a summary of responses. The Committee has recommended no change in the position established by Sons of Gwalia. In doing so, it noted:

...the issue has arisen in the context of a significant shift in Australian corporate regulation. The provision to shareholders and others over recent years of direct rights of action in respect of corporate misconduct, and the strengthening of the regime for timely and reliable corporate reporting, reflect clear legislative objectives ... Any move to curtail the rights of recourse of aggrieved shareholders where a company is financially distressed could be seen as undermining the apparent legislative intent to empower shareholders".

Wednesday, 28 January 2009

USA: Is Delaware superior?

A recent post on the excellent Delaware Corporate and Commercial Litigation Blog brought to my attention several articles in the University of Illinois Law Review, volume 2009, issue 1, which explore the reasons for Delaware being the most popular state for company incorporation. According to the State of Delaware website, over half of all US publicly traded companies and 63% of the Fortune 500 are incorporated in Delaware.

Issue 1 begins with an article by Professors William J. Carney and George B. Shepherd, titled "The Mystery of Delaware Law's Continuing Success", which challenges the view that Delaware's popularity is explained by its superiority. A response is provided by William B. Chandler III (the Chancellor of the Delaware Court of Chancery) and Anthony A. Rickey. Other articles explore: Delaware law with regard to limited partnerships; the balance between state and federal law; and role of independent directors.

Tuesday, 27 January 2009

Germany: Hermes calls for say on pay

It is reported in today's Financial Times that Hermes is calling for Germany to provide shareholders with an advisory vote over directors' remuneration. The report also notes concerns over the pay of supervisory board members at Siemens and the company's lack of consultation with shareholders. Siemens' annual meeting takes place today. The proposed pay for supervisory board members, outlined in the meeting notice, has proved controversial because it includes a variable element linked to the company's performance. 

Canada: directors' duties and the oppression remedy - Supreme Court judgment in BCE

The Canadian Supreme Court published its reasons in BCE Inc. v. 1976 Debentureholders 2008 SCC 69 a few days before Christmas; its decision was given in June last year. The Supreme Court's decision is one of the most important recent Canadian cases concerning directors' duties and the oppression remedy (Section 241 of the Canadian Business Corporations Act, R.S.C. 1985, c. C-44).

The case concerned an allegation by debentureholders that the directors had acted oppressively, contrary to Section 241, when they approved the sale of the company. This claim required the court to consider the duties of directors in circumstances where their decision would benefit some but not all of the company's stakeholders. A unanimous court rejected the debentureholders' claims that they had a reasonable expectation that the directors would protect their economic interests through maintaining the trading value of the debentures. The court also found that the directors' had considered the interests of the debentureholders and stated that if the debentureholders required greater protection this could have been achieved contractually. With regard to directors' fiduciary duties, the court unanimously observed (paras. [38], [40] and [66]):

The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation. The content of this duty varies with the situation at hand. At a minimum, it requires the directors to ensure that the corporation meets its statutory obligations. But, depending on the context, there may also be other requirements. In any event, the fiduciary duty owed by directors is mandatory; directors must look to what is in the best interests of the corporation.

In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule.

Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen".

With regard to Section 241 and oppression (paras. [81] to [84]):

As discussed, conflicts may arise between the interests of corporate stakeholders inter se and between stakeholders and the corporation. Where the conflict involves the interests of the corporation, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation, viewed as a good corporate citizen.

The cases on oppression, taken as a whole, confirm that the duty of the directors to act in the best interests of the corporation comprehends a duty to treat individual stakeholders affected by corporate actions equitably and fairly. There are no absolute rules. In each case, the question is whether, in all the circumstances, the directors acted in the best interests of the corporation, having regard to all relevant considerations, including, but not confined to, the need to treat affected stakeholders in a fair manner, commensurate with the corporation’s duties as a responsible corporate citizen.

Directors may find themselves in a situation where it is impossible to please all stakeholders ... There is no principle that one set of interests — for example the interests of shareholders — should prevail over another set of interests. Everything depends on the particular situation faced by the directors and whether, having regard to that situation, they exercised business judgment in a responsible way.

Monday, 26 January 2009

The IFC Family Business Governance Handbook

The IFC has published online a copy of its Family Business Governance Handbook. The Handbook identifies the governance issues that arise in family businesses and suggests ways in which these can be addressed. 

UK: January LIST! published

The Financial Services Authority, as UK Listing Authority, has published the January edition of its newsletter LIST!

India: Satyam auditors arrested

The UK's Financial Times newspaper has reported that two auditors from PwC, Satyam's former auditors, have been arrested. The report states that they have been arrested for "fraud and criminal breach of trust" as part of the police investigations into Satyam. Elsewhere, India's President - Smt. Pratibha Devisingh Patil - has recognised the need for stronger corporate governance in her speech to the nation on the eve of the 60th republic day of India (although she did not refer directly to Satyam).

UK: ICSA guidance note on access to company registers

ICSA - the Institute of Chartered Secretaries and Administrators - has published an updated guidance note concerning access to companies' register of members. Under the 2006 Act, access is subject to a proper purpose test (see Sections 116 and 117). What constitutes a proper purpose is not defined; ICSA's guidance note provides suggestions. 

Friday, 23 January 2009

UK: auditor liability limitation agreements - GC100 guidance note

The Association of General Counsel and Company Secretaries of the FTSE 100 - also known as the GC100 - has published a guidance note on auditor liability limitation agreements (ALLAs) - see here. Whilst Section 532 of the Companies Act (2006) renders void provisions exempting an auditor from liability, the Act provides an exception with regard to ALLAs in Sections 534 to 536. The GC100's guidance note explains the issues which boards should take into account when deciding whether to enter into an ALLA. 

For further information see:
FRC guidance on ALLAs | Institutional Shareholders' Committee statement on ALLAs | GC100 publications

USA: say on pay

US quoted companies are not required to provide shareholders with an advisory vote on directors' remuneration. Such a vote is mandatory in the UK (see Section 439 of the Companies Act 2006). Some American companies are, however, providing shareholders with an advisory vote. Hewlett-Packard has recently announced that at its 2010 annual meeting a proposal will be tabled for the adoption of an annual advisory vote on executive compensation and procedures. If this is accepted, the advisory vote will commence in 2011. The company also stated that it supports the introduction through legislation of a mandatory advisory vote, a proposal that President Obama supported during his presidential campaign. 

Thursday, 22 January 2009

UK: the financial crisis and financial regulation

The chairman of the Financial Services Authority, Lord Turner, yesterday delivered the Economist's inaugural city lecture. The title of the lecture was "The Financial Crisis and the Future of Financial Regulation". Lord Turner outlined three regulatory proposals which will bring about major changes:

  • Adopting new approaches to capital adequacy, entailing more capital held against risky trading strategies and counter-cyclical capital requirements to build up adequate buffers during good economic times, which can be drawn on in bad.
  • A new liquidity regime focused not just on individual firms’ liquidity but also on market-wide risk.
  • Ensuring that financial activity is regulated according to its economic substance not its legal form.

Lord Turner was interviewed this morning on BBC Radio 4's Today programme: the interview is available here.

Wednesday, 21 January 2009

Singapore: unfairness and section 216 of the Companies Act

In Over & Over Ltd v Bonvests Holdings Ltd and Another [2008] SGHC 226 - a decision of the Singapore High Court handed down last month - there is some interesting discussion of Section 216 of the Companies Act (Cap 50, 2006 Rev Ed) and comparisons with (what is now) Section 994 of the UK's Companies Act (2006). These sections provide minority shareholders with important protection. Section 216(1) provides (emphasis added):

(1) Any member or holder of a debenture of a company or, in the case of a declared company under Part IX, the Minister may apply to the Court for an order under this section on the ground —
(a) that the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or holders of debentures including himself or in disregard of his or their interests as members, shareholders or holders of debentures of the company; or
(b) that some act of the company has been done or is threatened or that some resolution of the members, holders of debentures or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or holders of debentures (including himself).

In interpreting Section 216(1), the trial judge agreed (see paras. 66-68) with the following approach adopted by Margaret Chew in Minority Shareholders' Rights and Remedies (Butterworths Asia, 2000, pp. 119-120): 

...rather than distinguishing one ground from the other in section 216, the four grounds set out therein ought to be looked at as a compound one, the purpose of which is to identify conduct which offends the standards of commercial fairness and is deserving of intervention by the courts. To this end, the combined language of section 216 is suggestive, descriptive and evocative.

Section 216 of the Companies Act was conceived and passed with the objective of protecting minority shareholders from majority abuse. In order to offer effective and comprehensive protection, section 216 confers on the courts a flexible jurisdiction to do justice and to address unfairness and inequity in corporate affairs… The discretionary power of the courts under section 216 is notoriously wide. Thus, in determining the scope of section 216, rather than deciphering the precise nuance of each of the expressions ‘oppression’, disregard of interests’, ‘unfair discrimination’ and ‘prejudice’, a compendious interpretative approach, with an emphasis on the rationale and purpose of section 216, is hereby advocated"

The trial judge also considered and rejected the argument that prejudice is required by Section 216 (it is required by Section 994). In the judge's view (para. 76): "...prejudice is a factor, and perhaps, a very important one in the overall assessment, but I do not think that it is an essential element". 

Tuesday, 20 January 2009

UK: FSA publishes financial crime perception survey results

The Financial Services and Markets Act (2000) gives the Financial Services Authority several regulatory objectives, including the reduction of financial crime: see Section 2 and Section 6. One criticism that has been made of this objective concerns accountability: by what measure or measures is it possible to determine whether the FSA has been successful in reducing financial crime? How is the extent of financial crime measured? One way in which the FSA attempts to answer this question is through a survey of regulated firms' perceptions of the scale of financial crime. The FSA's most recent survey of industry perceptions of financial crime was published this week. The survey found, inter alia, that 59% of large firms and 44% of small firms believe that financial crime is increasing.

India: FT interview with India's minister of corporate affairs

The UK's Financial Times newspaper carries an interview with Prem Chand Gupta, India’s minister of corporate affairs. In the aftermath of Satyam, the interview reveals that the role of non-executive directors is under examination. It also appears that there may be changes to the Companies Bill that was introduced in Parliament last year. 

Monday, 19 January 2009

UK: Bellway shareholders reject remuneration report

Last Friday, at the Bellway plc annual general meeting, a majority of shareholders voted against the company's remuneration report (see pp. 34-41 of the company's annual report and accounts). It is highly unusual for a company to lose such a vote. The cause of the shareholders' concern was the company's lack of consultation regarding directors' bonuses and the vagueness over future policy. After the meeting, the board published this statement expressing contrition:

The Board has noted shareholders' views on the Report of the Board on Directors' Remuneration and believes it was wrong in not consulting with major shareholders earlier. It therefore proposes to review future policy on this matter, in consultation with them, in the coming months".


[1] The UK's Combined Code on Corporate Governance stresses the importance of discussion with shareholders. Main Principle D1 provides:

There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place"

[2] Quoted companies are required to provide shareholders with the opportunity to vote on the contents of the remuneration report (see Section 439 of the Companies Act 2006). The vote is advisory and does not effect the validity of the company's remuneration arrangements. 

[3] The Association of British Insurer's Director of Investment Affairs, Peter Montagnon, provided the following comments in a statement issued after the AGM:

This is a very clear message that there must be a proper link between reward and performance, even in a sharp economic downturn. It is right that Bellway should consult with shareholders on its policy review. More broadly, shareholders expect all companies to be sensitive to the need for bonuses to be paid only if stretching targets are met. Remuneration consultants, who advise companies, should be particularly alert to the views of shareholders in this regard.”

UK: PIRC makes public its shareholder voting recommendations

PIRC - the governance advisory service - has begun disclosing publicly its shareholder voting recommendations: see here. Recommendations are only published after the relevant company meeting although some get reported beforehand in the media.

PIRC makes recommendations in connection with approximately 1,000 companies and appears to be the first governance advisory service to disclose publicly this information.  It takes the position that "all organizations that have responsibility for decisions on shareholder voting should be transparent, as there is a clear public interest in the exercise of ownership rights".

Friday, 16 January 2009

China: enhancing corporate governance

According to a report in Asian Investor, the China Securities Regulatory Commission has published proposals to strengthen corporate governance. The proposals have not yet been published in English on the CSRC website but according to the report these include increasing the disclosure of information including non-executive directors' attendance.

Hong Kong: corporate governance practices

Grant Thornton Hong Kong has published its third annual review of corporate governance practices of companies in the Hang Seng Composite Index. According to the report, compliance with the Code on Corporate Governance Practices is improving but there are areas where transparency is lacking. For example, few companies provided information about non-executive director independence. The report also notes that 19% of companies had remuneration committees consisting of only independent non-executive directors. The Hong Kong Stock Exchange published similar research in early 2008: see here

UK: Companies House - issue 70 of Register published

Issue 70 of the Companies House newsletter Register has been published. This contains, inter alia, information on recent changes introduced by the Companies Act (2006). Back issues are available here.

Thursday, 15 January 2009

UK: the FSA's power to grant immunity

Yesterday the Coroners and Justice Bill received its first reading in the House of Commons. Amongst many other things, the Bill will provide the Financial Services Authority with the power to grant immunity from prosecution, subject to the consent of the Attorney General: see clause 96 ("Powers in respect of offenders who assist investigations and prosecutions") which will amend section 71 of the Serious Organised Crime and Police Act 2005. The FSA has long demanded this power, which it believes will enable it to secure more prosecutions for offences such as market abuse. Clause 96 also extends the power to the Secretary of State for DBERR acting personally. 

Explanatory notes have been published: see here (HTML) or here (PDF). A related FSA press release is available here

USA: recommendations for the reform of the financial regulatory structure

The Committee on Capital Market Regulation - an independent research organisation dedicated to improving US capital market regulation - has published recommendations for the reform of the federal financial regulatory structure. 

The Committee proposes that the US should have no more than three independent regulatory bodies overseeing the financial system, including: the Federal Reserve Bank, a newly created independent United States Financial Services Authority and, possibly, an agency responsible for investor and consumer protection. The Committee notes:

The United States occupies a distinct place in the world, and any decision regarding U.S. regulatory structure must be uniquely tailored to the needs of the United States. However, it bears noting that the vast majority of other leading financial center countries have moved towards more consolidated financial oversight ... [The] overwhelming trend is towards a more consolidated regulatory structure, whether of the three regulator model employed in Australia and the Netherlands (where, in addition to the central bank, one regulator is responsible for prudential regulation, while a second regulator focuses on business conduct in the financial sector) or the more consolidated model employed in Japan and the United Kingdom (where there is a single regulator in addition to the central bank). A rapidly dwindling share of the world’s financial markets are supervised under the fragmented, sectoral model still employed by the United States".

Wednesday, 14 January 2009

UK: ICAEW technical releases - profits, losses and distributions under the Companies Act 2006

Towards the end of 2008, the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland issued a couple of technical releases: Technical release 07/08 provides draft guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006 and is an updated version of Technical Release 01/08. The differences between Technical Releases 07/08 and 01/08 are highlighted in Technical release 08/08.

Tuesday, 13 January 2009

UK: the Aberdeen corporate governance principles

Aberdeen Asset Management has published its corporate governance principles, known as the Aberdeen corporate governance principles. According to AAM:

The Aberdeen Corporate Governance Principles provide a framework for investment analysis, shareholder engagement and proxy voting for companies worldwide. The Principles aim to combine international best practices with an understanding of the economic, legal and cultural context of each company. They are not intended either as a set of prerequisites for investment nor as an exhaustive list of proxy voting intentions, but rather as an outline of Aberdeen’s views across all aspects of corporate governance. The main text of the Principles is supplemented with specific examples from around the world that further illustrate many of the most important or topical issues".

UK: Walker Guidelines compliance report

The Walker Guidelines Monitoring Group has published its first report. This sets out the actions taken by the Group and the performance of the private equity industry in complying with the Walker Guidelines. In the report it is noted:

"There has been a high level of support for, and commitment to, the Guidelines from the industry and a substantial majority of the portfolio companies reviewed have made good or acceptable disclosures with only a limited number of exceptions. Nevertheless, as one might expect in the first year, the nature of disclosure varies significantly".

An interview with Sir Michael Rake, the chair of the Guidelines Monitoring Group, has appeared in the Financial Times: see here

India: after the scandal, a review

In 1998, the Confederation of Indian Industry published "Desirable corporate governance: a code". Following events at Satyam, the CII has announced a review of its code. At Satyam, the Government appointed board of directors has had its first meeting: a report is available here

Monday, 12 January 2009

UK: shortening the rights issue subscription period - FSA proposal published

The Financial Services Authority has today published a consultation paper in which it sets out its proposals for reducing the minimum subscription period for companies undertaking a rights issue to either 14 calendar days or 10 business days. This follows a recommendation from the Rights Issue Review Group in its report published last year. Further information is available in the FSA's press release and newsletter

UK: institutional investors and bankers' pay - Myners interview

An important theme in the development of the UK's Combined Code on Corporate Governance is the role of institutional investors. The Cadbury Committee observed in the Cadbury Report, which provided the foundation for the Combined Code (para 6.16): 

Because of the importance of their collective stake, we look to the institutions in particular, with the backing of the Institutional Shareholders’ Committee, to use their influence as owners to ensure that the companies in which they have invested comply with the Code".

The importance attached to institutional investors continues to be made in the Combined Code. Main Principle E.1. provides that institutional investors "should enter into a dialogue with companies based on the mutual understanding of objectives". A supporting principle provides that institutions should apply the principles set out in the Institutional Shareholders' Committee's The Responsibilities of Institutional Shareholders and Agents – Statement of Principles.

In an interview with yesterday's Observer newspaper, Lord Myners - the Financial Services Secretary - suggests that institutional investors should have done more to challenge the remuneration structures adopted by UK banks. Myners observes: 

"I'm disappointed there's not more evidence that institutional investors have been seized by the challenge of addressing the shortcomings that have emerged in corporate governance as a result of this crisis ...Institutional shareholders need to be asking themselves: were they appropriately engaged in asking questions about the risk appetite of our banks? Were they asking sufficient questions about competency of directors, and were they appropriately engaged in examining and approving compensation cultures?"

Europe: Prospectus Directive - Commission consultation

The European Commission has published a consultation paper in which it sets out proposals for the reform of the Prospectus Directive 2003/71/EC. One of the proposals being considered is the introduction of an exemption from producing a prospectus for non-listed companies in the context of employee share schemes. Further information about the Prospectus Directive, including a study of its impact on financial markets, is available here.

Sunday, 11 January 2009

India: Satyam update

The Indian Government has replaced the board at Satyam Computer Services. The company's former chairman and chief executive are under arrest. Further information is available here (from the Financial Times) and here (from the Wall Street Journal).

Friday, 9 January 2009

UK: using shares as security - FSA clarification

The Financial Services Authority has today issued a statement in which it clarifies the operation of Disclosure and Transparency Rule 3.1 and the Model Code with regard to using shares as security. The operation of these rules has proved controversial, following the resignation in December 2008 of David Ross, deputy chairman of Carphone Warehouse Group plc, for his failure to disclose (see here and here). 

DTR 3.1 requires persons discharging managerial responsibilities (e.g., directors) to disclose transactions conducted on their own account in shares of the issuer, or derivatives or any other financial instrument relating to those shares. With regard to this rule, the FSA states that it includes grants of security over shares (e.g., pledges, mortgages and charges). The FSA nevertheless notes:

"we recognise that we are implementing a European regime [the Market Abusive Directive 2004/72/EC] and it has become clear that there are differing approaches in some other Member States, based in part on local practices and structures or procedures for granting security over shares, including the circumstances in which legal title to shares transfers. We are therefore seeking to reach a common understanding on the detail of the MAD requirements in this area with the European Commission and our counterparts in the Committee of European Securities Regulators".

In the statement, the FSA also reminds listed companies of their obligations under the Model Code (Annex 1 to Chapter 9 of the Listing Rules) and, in particular, the obligation on directors to obtain clearance (in accordance with paragraph 4 of the Code) before using the issuer's shares as security. In this regard, the FSA warns:

"... we can see no basis on which a director could have a legitimate excuse for not seeking clearance in advance where the company’s securities are to be used as collateral for a financing transaction. We expect listed issuers to deal with Model Code breaches by their directors".

Thursday, 8 January 2009

India: India's Enron?

This week's Economist has an article exploring some of the lessons to be learned from the Satyam scandal in India. A useful events timeline has been produced by the Financial Times newspaper and there is further background information in this report from The Times and this overview of press reaction provided by the BBC.

Wednesday, 7 January 2009

UK: updated ABI guidance - directors' powers to allot shares and disapply pre-emption rights + articles of association

In December, the Association of British Insurers published updated guidance regarding: [1] Directors' powers to allot share capital and disapply shareholders' pre-emption rights and [2] articles of association. The former outlines the ABI's change of position following the recommendation of the Rights Issue Review Group that the overall allotment headroom that shareholders should normally be invited to approve be increased from one third to two thirds of the issuer's issued share capital. For further information, see the ABI's press release and this report from The Financial Times

The ABI's articles of association guidance states that "[a] company's Articles of Association are a key element of corporate governance and consequently of considerable interest to investors" and sets out the ABI's expectations with regard to various matters including directors' conflicts of interest, auditor liability limitation agreements and political expenditure. With regard to dispute resolution clauses, the guidance document explains:

Some companies believe that it is appropriate to provide for a dispute resolution procedure and governing law in their Articles. In general terms these provide that arbitration should be in accordance with the Rules of Arbitration of the International Chamber of Commerce. Where a court determines that arbitration cannot be used in a particular dispute, or where a derivative claim is being brought under the Companies Act 2006, the courts of England and Wales would have exclusive jurisdiction. However, ABI members remain concerned about such dispute resolution provisions being codified in the articles of association. If a Company considers that such provision may be appropriate in their case, it is advised that careful consultation with shareholders is necessary".

Tuesday, 6 January 2009

UK: England and Wales: accounting practice and company law - the tail wagging the dog?

In February 2008, Peter Smith J. held that there were circumstances where money advanced to a company, prior to a resolution or agreement to allot shares, could be regarded as a contribution to the capital of the company (see Blackburn v HMRC [2008] EWHC 266 (Ch)). In late December, a unanimous Court of Appeal endorsed this approach, relying on Kellar v Stanley Williams (Turks and Caicos Islands) [2000] UKPC 4: see Revenue and Customs v Alan Blackburn Sports Ltd & Anor [2008] EWCA Civ 1454.
The case concerned a taxpayer's entitlement to Enterprise Investment Scheme relief under the Taxation of Chargeable Gains Act (1992). However, it is of wider interest because of Lord Neuberger's comments on the significance of accounting practice in determining whether money received by a company could be regarded as a contribution to share capital (Lord Neuberger delivered the only reasoned opinion; Sedley and Wilson LJJ concurred).  His Lordship observed (at paras. [29] - [30]):

It was suggested that a limited company cannot effectively accept capital contributions other than in the form of loan capital or share capital. Even if that suggestion was, in general, correct, I cannot accept that it would extend so as to prevent a company from accepting and holding money on the basis that it is bound (or at least entitled) as against the payer, to allot shares to him in return for the payment (with the possibility of having to repay the money if the shares are not then allotted).

In any event, I severely doubt that there is any reason in terms of principle, authority or practice for accepting that suggestion. In practical terms, I find it impossible to see, for instance, why a company should not be able to treat a gift as a contribution to its capital. As to authority, far from there being any case which confirms the suggestion, the Privy Council in Kellar [2000] 2 BCLC 390, 395e-f indicated precisely the opposite. Lord Mackay of Clashfern, giving the judgment of the Committee (which included Lord Browne-Wilkinson and Lord Millett) said that "there was nothing in the law of the Turks and Caicos Islands or in the company law of England" which prevented giving effect to an agreement between "the shareholders of a company … to increase its capital without a formal allocation of shares". In such an event, he said, such capital would "become like share premium part of the owner's equity". So far as principle is concerned, I do not see why the fact that accountancy convention may make it difficult to decide how to record a particular type of payment in the Company's accounts means that, as a matter of law, the payment cannot be characterised as being of that type. While accountancy convention has an important part to play in some areas of tax law and company law, this would, I think, be a case of the tail wagging the dog".


[1] A summary of the decision has been produced by Maitland Chambers: see here. A report has also been published in The Times: see here (this report will be available for a limited period of time).

[2] For information about the current operation of EIS relief, see here

UK: FSA announces changes to the temporary short-selling regime

The Financial Services Authority has announced that it is lifting its ban on the short-selling of shares in certain UK financial sector companies. The FSA is, however, proposing to extend until 30 June 2009 its short-selling disclosure regime subject to one modification in respect of the disclosure required in respect of changes in net short positions. 

The FSA's consultation paper is of interest because it contains an attempt to quantify the costs and benefits of the disclosure regime. More detailed discussion can be expected in a further consultation paper, to be published within the next month, in which the FSA will set out its long-term proposals for the short-selling regime. 

Monday, 5 January 2009

UK: FRC quarterly progress and planning report

The Financial Reporting Council has published the January 2009 edition of its quarterly progress and planning report. The report highlights FRC activities in the past quarter and indicates that the FRC has no major projects or activities concerning corporate governance planned for the next quarter. Activities are, however, planned with regard to corporate reporting, auditing and actuarial practice. The FRC also states that it will soon publish the outcome of its Accountancy Scheme Review and consultation including final proposals and a full draft of the revised Accountancy Scheme. 

UK: listed companies: calling general meetings after 3 August 2009

The UK's implementation of the Shareholder Rights Directive (2007/36/EC) will require several changes to the Companies Act (2006) with regard to the calling of general meetings by listed companies. The Department for Business, Enterprise and Regulatory Reform is currently consulting on the implementation of the Directive and the amendments it will make to the 2006 Act - see the DBERR consultation paper for further information; the consultation period ends on 30 January. The deadline for implementing the Directive is 3 August.

The Directive requires a minimum of 21 days for annual general meetings (this is the current requirement for public companies under Section 307 of the Companies Act (2006)). Article 5 of the Directive provides that Member States may permit other general meetings (i.e., extraordinary general meetings) to be called with 14 days' notice providing the following criteria are met:

[1] the shareholders have approved the holding of general meetings on 14 clear days’ notice by passing an appropriate resolution at an AGM; and
[2] that the company offers "the facility for shareholders to vote by electronic means accessible to all shareholders".

The Directive requires the approval required in [1] to be by no-less than a two-thirds majority. DBERR is consulting on whether this should be a 75% majority in order that it is the same as that required for a special resolution (see Section 283 of the Companies Act (2006)). Until the outcome of the consultation is known, DBERR has recommended that listed companies consider passing a special resolution at their next AGM in order that they are able to call general meetings on 14 days' notice after 3 August 2009. This resolution would need to be passed at each subsequent AGM. 

With regard to the requirement in [2] that electronic voting "accessible to all shareholders" is offered, it is noted in the DBERR consultation paper (at para. 3.16):

It is not entirely clear in this context what this final phrase covers in terms of accessibility and the circumstances when accessibility is required. For example it may mean that companies must offer the facility for members to vote electronically (eg. via the company’s website) at all times; or it might mean that any method available to vote electronically (eg. via certificate acceptable and that shareholders should use such facilities.

PwC World watch - 2008 issue 3 published

The third issue for 2008 of PwC's World watch newsletter has been published. The newsletter provides an excellent overview of recent developments - from across the world - concerning corporate governance and corporate reporting. Amongst the items reported is the publication by the Institute of International Finance of Principles of Conduct on Compensation Policies. The principles can be found in the IIF's report on market best practices

Elsewhere in issue 3 there is a note concerning the joint work of the IASB and FASB with regard to the development of a conceptual framework for financial reporting. Issue 3 of World watch was, however, published before the publication by the IASB and FASB of a discussion paper setting out a joint approach to the recognition of revenue.

Friday, 2 January 2009

UK: England and Wales: more Morshead Mansions litigation

The recent Court of Appeal decision Morshead Mansions Ltd v Di Marco [2008] EWCA Civ 1371 illustrates the interaction between company law principles and property law. The company (Morshead) was formed to manage a block of flats in London (or, to quote from the company's website, "perhaps the premier mansion block in Maida Vale"). The lessees of the flats were shareholders in Morshead, which owned the freehold.

The company's articles of association gave the directors the power to establish reserves and funds, to which members were obliged to contribute in terms decided by an ordinary resolution of the members in general meeting. Under this provision the company claimed over £ 4,000 from Mr Di Marco. Mr Di Marco claimed that this was a service charge within S. 18 of the Landlord and Tenant Act 1985 and therefore subject to statutory limitations. 

The Court of Appeal held that the company was entitled to claim the sum demanded, although it was not required to consider the S. 18 arguments raised by Mr Di Marco. Mummery LJ stated that it was important to remember the important legal distinction between a tenant’s liability to the landlord under a lease and the tenant’s liability qua member of a company. There were two relationships, giving rise to different legal obligations, and a defence to one claim would not necessarily be available as a defence to another legally separate claim.


[1] The decision has been noted by the ICLR as part of its WLR(D) service: see here (this summary will be removed should the ICLR report the decision in one of its series of reports). 

[2] There has been much litigation concerning Morshead Mansions, which the trial judge noted in Mactra Properties Ltd. v Morshead Mansions Ltd. [2008] EWHC 2843 (Ch) had been described as "too horrific to record in detail". 

Thursday, 1 January 2009

Europe: update on company law and financial services reform

The Joint Brussels Office of the Law Societies of England and Wales, Scotland and Northern Ireland has published the December edition of its very useful EU financial services and company law reform update. 

ICGN: statement and guidance on non-financial business reporting

The International Corporate Governance Network has published a statement and guidance on non-financial business reporting. The aim of the statement and guidance is set out in the document's preamble as follows:

to emphasise [the importance of non-financial reporting] within the overall context of company reporting and promote better understanding by setting out disclosure criteria that will assist companies in meeting the expectations of investors. As such, the ICGN Statement and Guidance aims to generate substantive dialogue between investors and company boards about the content and timing of non-financial business reporting".

The ICGN identifies several qualities of non-financial business reporting, including:
  • be genuinely informative and include forward-looking elements where this will enhance understanding;
  • be material, relevant and timely;
  • describe the company’s strategy, and associated risks and opportunities, and explain the board’s role in assessing and overseeing strategy and the management of risks and opportunities;
  • be accessible and appropriately integrated with other information that enables investors to obtain a whole picture of the company;
  • use key performance indicators that are linked to strategy and facilitate comparisons;
  • use objective metrics where they apply and evidence-based estimates where they do not;
  • be strengthened where possible by independent assurance that is carried out having regard to established disclosure standards applicable to non-financial business reporting, such as those issued by the IASB.