Jersey: Royal Court considers shareholder remedies

I note, a little belatedly, an important judgment of the Royal Court (Samedi division) on shareholder remedies from earlier this year: Financial Technology Ventures II (Q) LP and Ors v ETFS Capital Limited and Tuckwell [2021] JRC025.  The judgment contains a detailed exposition of the principles concerning the unfair prejudice remedy (Article 141(1) of the Companies (Jersey) Law 1991) and winding-up on just and equitable grounds (Article 155(1)), drawing heavily on (non-binding) English authorities.

The court (Deputy Bailiff MacRae and Jurats Olsen and Christensen) accepted that the company's affairs had been conducted in an unfairly prejudicial manner in respect of the actions taken by the company's founder and chairman, who held (directly or indirectly with his wife) 58% of the company's issued share capital. These actions - described by the court as being part of a scheme designed to drive the plaintiffs out of the company - included those designed to secure the removal of independent directors and unilaterally changing the business of the company.

Australia: the role, responsibilities and duties of the company chairman

Judgment was delivered today by Beach J, sitting in the Federal Court, in Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098: see here or here (pdf). I note the decision because of the important and lengthy discussion it contains (relative to other Commonwealth decisions) concerning the role, responsibilities and duties of the chairman of the board of directors (see, in particular, paras. [1398] to [1429]).

UK: England and Wales: conduct of general meetings and the role of the chairman

Judgment was given yesterday by Deputy High Court Judge Lance Ashworth QC in Kaye v Oxford House (Wimbledon) Management Company Ltd [2019] EWHC 2181 (Ch). The decision is an important and interesting one exploring the operation of general meetings and, in particular, the role of the chairman in conducting the business and in closing the meeting. It would also appear to be the first authority to consider the operation of section 303(5) of the Companies Act 2006, which provides that a resolution may be moved at a meeting unless (to quote directly): (a) it would, if passed be ineffective (whether by reason of inconsistency with any enactment or the company's constitution or otherwise), (b) it is defamatory of any person, or (c) it is frivolous or vexatious.

Here is an extract:

It is the duty and function of the chairman to preserve order and to take care that the proceedings are conducted in a proper manner and that the sense of the meeting is properly ascertained with regard to any question which is properly before the meeting. However, he does not have power to stop the meeting at his own will and pleasure ... the chairman is not running the general meeting for his own benefit, but for the benefit of the company as a whole. The chairman must therefore act at all times in good faith and for proper purposes, remembering at all times that the authority to preside over the meeting does not confer dictatorial power" (para. [106]).  

UK: What is the principal role of the board?

An answer can be found, alongside further reflections on governance including the role of non-executive directors, in a speech delivered by Martin Taylor (an external member of the Financial Policy Committee) earlier this month: see here (pdf). Here is an extract:

At the heart of the private sector board is a contradiction which amounts to a glaring structural weakness.  The directors are supposed both to contribute to the formation of the company’s strategy and to judge those who execute it. As a result, their relation to executive management is at once collaborative and adversarial.  Most of what goes wrong on boards arises from a failure to balance these opposing requirements – often an understandable failure, since they do not sit easily side by side.  Boards have the power of appointing and removing the business leadership, a power which they seem to exercise very frequently, as if afraid it might be taken from them, rather as ramblers zealously hack their way through brambles to preserve Rights of Way.  My own view formed over many decades is that the corporate board should principally play a defensive role; it exists above all to prevent catastrophic outcomes. Good governance, and there is plenty of it, passes largely unnoticed, while a board in the wake of a company failure looks like a collection of idiots. In the financial sector, with which the FPC is principally concerned, it is inescapably clear that most boards in the early part of this century did an absolutely shocking job".

Hong Kong: HKEX review of listed issuers' corporate governance practice disclosures

HKEX has published the latest edition of its review of listed issuers' corporate governance practice disclosures: see here (pdf). The review surveyed 400 randomly selected issuers, exploring the extent of compliance with the provisions of the Corporate Governance Code. It is interesting to see that the provision of the Code with the lowest compliance rate - 64% - was A.2.1 which provides that the roles of chairman and chief executive should not be held by the same person.

UK: women on FTSE100 boards

The Department for Business, Energy and Industrial Strategy has today - International Women's Day - published data on the proportion of women on FTSE100 boards: see here. The headlines include: there are 309 women on FTSE100 boards; a quarter of FTSE350 board positions are occupied by women; and FTSE100 companies are on track to have a third of board positions occupied by women by 2020.

Hong Kong: HKEX analysis of issuers' corporate governance disclosures

HKEX has published its analysis of listed companies' corporate governance disclosures in respect of the HKEX Corporate Governance Code: see here (pdf). The analysis looked at the annual reports of 1,428 issuers with a financial year end of 31 December 2016, representing 72% of the issuers listed on this date. 34% of these issuers reported compliance with all of the Code's provisions.

It is interesting to note those provisions of the Code that have the lowest compliance rates. One such provision is A.2.1 on the separation of the roles of chief executive and chairman: 63% of issuers report that they comply with this provision. HKEX's analysis reports that the most common reason given for non-compliance with A.2.1 is the view that one person occupying these two positions "can provide strong and consistent leadership and can enable more effective planning and better executive of long-term strategies".

UK: consultation on new charity sector governance code for England and Wales

A consultation began earlier this month in respect of proposed changes to the code of governance for the voluntary and community sector: see here. It is proposed that the code should be renamed the "Charity Governance Code" (it is currently titled "Good Governance: a Code for the Voluntary and Community Sector"). A copy of the proposed new code, which will operate on the basis of 'apply or explain', is available here (pdf, English) and here (pdf, Welsh). Other changes are designed to place greater emphasis on board diversity and the role of the chair in promoting good governance.

UK: corporate culture and the external auditor

In a speech delivered a couple of days ago at Deloitte’s annual Risk, Regulatory and Public Policy Forum, the chairman of the Financial Reporting Council - Sir Win Bischoff - spoke about corporate culture, the FRC's work in this area, and the role that external auditors can play: see here. In particular, he observed (perhaps a little controversially):

Nobody is in a position to develop a better feel for the culture of an organisation than its auditor. I suggest that you are able – more than anyone- to draw the attention of the Chairman or the Board as a whole, or its CEO, to shortcomings and potential failures as you become aware of them. This is not a duty specifically prescribed in any auditing manual, but is a responsibility you may well agree you have towards investors. Perhaps even towards what is broadly considered the broader public interest".

Ireland: Banking Inquiry - final report published - governance recommendations

Somewhat belatedly, I note the publication of the final report of the Committee of Inquiry into the Banking Crisis, a joint committee of the Houses of the Oireachtas, at the end of last month: see here.

The Committee made a number of governance related recommendations, including: all board members should undergo compulsory continuing professional development appropriate to banking, risk and governance; banks' governance structures should ensure that the risk function has an independent, senior position in the management structure with direct access to the chairman and board; risk appetite in banks should be clearly defined at board level; and regular reviews of the internal audit function in banks should be strengthened to ensure conformity with best practice.

UK: BDO's review of board composition

Towards the end of last year, BDO published the results of its analysis of the board composition of over 1,700 quoted companies (including those within the FTSE100, FTSE250, FTSE Small Cap, Fledgling and AIM markets): see here (pdf).

The analysis considered the age, gender and tenure of executive and non-executive directors. Amongst the findings were these: age diversity is greatest on AIM, where directors’ ages ranged from the mid-20s to 94; in FTSE 100 companies, chairmen are most likely to be appointed from within their own boards.

Board member nomination and election - OECD report published

The OECD has published a report titled Board member nomination and election which provides information for 26 jurisdictions and more detailed coverage of Indonesia, Korea, the Netherlands and the United States of America: see here.

UK: annual reports, the chairman's statement and the role and effectiveness of the board

Grant Thornton has published the findings of research looking at governance related disclosures in the chairman's statement within 242 annual reports: see here (pdf). The research found, amongst other things, that a quarter of the reports did not include any comment by the chairman on governance. The preface to the UK Corporate Governance Code 2010, in paragraph 7, states: "Chairmen are encouraged to report personally in their annual statements how the principles relating to the role and effectiveness of the board (in Sections A and B of the new Code) have been applied".

Grant Thornton's research forms part of its FTSE 350 Corporate Governance Review 2012 which will be published in December 2012.

Australia: FSC publishes draft superannuation fund governance standard

The Financial Services Council has published for consultation a draft standard on superannuation fund governance policy: see here (docx). A brief overview of the proposed standard is available here. The standard requires, amongst other things, the majority of board directors to be independent and the board to be chaired by an independent director.

UK: APPCGG report on the role of the company secretary

Last month the All Party Parliamentary Corporate Governance Group published a report titled Elevating the Role of the Company Secretary: Lessons from the FTSE All Share: see here (pdf). The report draws upon the results of questionnaires and interviews conducted with 27 chief executives, 55 executive directors, 27 chairmen, 143 non executive directors and 166 company secretaries. The research found, amongst other things, that the company secretary's role varied noticeably between companies, with there being an increasing tendency for it to be combined with another position (e.g., General Counsel or Head of Legal). Many respondents recognised the importance of the company secretary's role although amongst some directors the role was not well regarded. The research also found that most company secretaries reported to the chief executive.

UK: England and Wales: managing director lacked authority to remove the company chairman

The Court of Appeal gave judgment yesterday in Smith v Butler [2012] EWCA Civ 314. The case concerned a company with two shareholders: Mr Butler and Mr Smith, owning, respectively, 31.2% and 68.8% of the shares. Mr Butler was the managing director and Mr Smith was chairman. Relying on his authority as managing director, Mr Butler suspended Mr Smith as chairman. Mr Smith then applied to the court for a declaration that Mr Butler had acted outside his powers as managing director and for an order under section 306 of the Companies Act 2006 convening a shareholders meeting in order to remove Mr Butler under section 178 of the 2006 Act.

At first instance ([2011] EWHC 2301 (Ch)), the trial judge granted Mr Smith's applications, holding, amongst other things, that Mr Butler's implied powers as managing director did not extend to the suspension of the company's chairman, Mr Smith. The Court of Appeal agreed, Arden LJ observing (paras. [30] to [31]):

The holder of the office of managing director might today more usually be called a chief executive officer in (at least) a public company. He or she has generally to work on the basis that his appointment does not supplant that of the role of the board and that he will have to refer back to the board for authority on matters on which the board has not clearly laid out the company's strategy. He or she would thus be expected to work within the strategy the board had actually set.

In this case, however, it was clear that the strategy of the board was that Mr Smith should be executive chairman. Therefore, his suspension was clearly a matter for the board, and not for Mr Butler acting alone. To my mind it is inconceivable that Mr Butler did not need the instructions of the board on the question of the suspension of the chairman of the board. The fact that Mr Smith has special rights as a director and shareholder under the quorum provisions in the Company's articles reinforces this conclusion, but my conclusion does not rest on those provisions".

UK: ABI publishes board effectiveness report and updated remuneration principles

The Association of British Insurers yesterday published a report on boardroom effectiveness (see here, pdf) and an updated edition of its remuneration principles (see here or here, pdf).

UK: gender diversity of FTSE350 boards - institutional investors write to chairmen

Today's Telegraph newspaper reports that seven institutional investors have written to 250 chairmen of FTSE350 companies asking them to disclose by the end of next week, in a regulatory statement, their plans for employing more women directors: see here. It is also reported that at the start of this month only eight companies had publicly agreed to meet the targets set by Lord Davies with regard to the proportion of female directors on the board.

UK: the ICB's final report - ring-fencing of retail banking

The Independent Commission on Banking delivered its final report this morning - see here (pdf) - in which it sets out recommendations for the ring-fencing of retail banking operations. The recommendations, which the Government has welcomed, will bring result in dramatic changes to the structure of UK banks. The ring-fencing proposed by the Commission is to be achieved through the creation of UK retail subsidiaries which would be legally, economically and operationally separate from the rest of the banking groups to which they belong. These subsidiaries, the Commission states, should have different cultures and distinct governance arrangements, including a board with, normally, a majority of independent non-executive directors including the chairman. The subsidiary would also be expected to make disclosures and reports as if it were an independently listed company.

UK: England and Wales: the authority of the managing director

The High Court gave judgment last week in Smith v Butler [2011] EWHC 2301 (Ch). The case concerned a company with two shareholders: Mr Smith (the majority shareholder and chairman) and Mr Butler (the minority shareholder and managing director). Under the company's articles, two directors (one of whom must be Mr Smith) were required for a quorum at a directors' meeting. Mr Butler purported to suspend Mr Smith as chairman at a board meeting (but there was no board resolution). The trial judge held that Mr Smith's suspension was unlawful and rejected the argument that Mr Butler, as managing director, had the implied authority to suspend Mr Smith. It was, he held, for the board and not the managing director to suspend the chairman. The judge also noted that Mr Butler was not powerless: he could, potentially, bring actions under section 994 (unfair prejudice) or section 260 (derivative claims) of the Companies Act (2006).