Sunday 30 March 2008

England and Wales: Controlling shareholders as employees

It is well established that a controlling shareholder can be regarded as an employee of the company. The Privy Council, in an appeal from New Zealand, confirmed this position in Lee v Lee's Air Farming [1961] AC 12 (about which see the London University External LLB company law guide (2006), available here).

In Clark v Clark Construction Initiatives Ltd. [2008] UKEAT 0225_07_2902, Elias J. (the president of the Employment Appeal Tribunal) identified three circumstances where it may be legitimate not to give effect to an alleged contract of employment between a company and a controlling shareholder:

(1) where the company is a sham;
(2) where the contract is entered for an ulterior purpose (e.g., to secure a statutory payment from the Secretary of State); and
(3) where the parties do not in fact conduct their relationship in accordance with the contract.

Elias J. also identified, at para. [98], eight (non-exhaustive) factors for Tribunals to consider when determining whether to give effect to a contract of employment.

New Zealand: Company boards and gender inequality

The New Zealand Human Rights Commission has published its Census of Women's Participation 2008. The report indicates that women account for 8.65% of the directors of the largest 100 companies listed on the New Zealand Stock Exchange. 60 of these 100 companies have no female directors. The proportion of female directors of companies listed on the New Zealand Alternative Market has fallen from 16.39% in 2004 to 5.07 in 2008. The report contains international comparisons and it also indicates that female representation is much higher in other professions. For example, over a quarter of New Zealand judges are female.

Thursday 20 March 2008

England and Wales: The meaning of 'de facto' director

In Gemma Ltd (in liquidation) v Davies and another [2008] EWHC 546 (Ch), [2008] WLR (D) 89, the High Court explored the circumstances in which an individual would be regarded as a de facto director for the purposes of Section 212 of the Insolvency Act (1986). The judgment, which has not yet been published on BAILII, contains a useful overview of the authorities. The trial judge outlined several principles:

(1) It must be proved that the alleged de facto director performed functions that could only be discharged by a director.

(2) There is no need to prove that a de facto director was held out as a director.

(3) The director must have participated on an equal footing with the other directors and not in a subordinate role.

NB: The Companies Act (2006) does not contain a specific definition for de facto director. Section 250 does, however, define the term "director" (in such a way as to include de facto directors) and Section 251 defines the term "shadow director".

Sunday 16 March 2008

Canada: Ontario: The Relationship between the Oppression Remedy and Derivative Action

Many jurisdictions provide shareholders with the right (a) to seek relief in respect of oppressive or unfairly prejudicial conduct, and (b) to instigate legal action on the company's behalf where the company has suffered harm (often described as a derivative action). In Canada, Part XVII of the Business Corporations Act, R.S.O. 1990 (c. B.16) provides shareholders with relief in respect of oppression (Section 248) and the ability to instigate a derivative action (Section 246). The Ontario Court of Appeal in Malata Group (HK) Limited v. Jung, 2008 ONCA 111 has recently considered the relationship and differences between these two remedies, against the background of the English decision Foss v Harbottle (1843) 2 Hare 461 (available here and discussed here). Armstrong JA (with whom MacPherson JA and Epstein JA agreed) observed (paras. [34] - [35]):

"In my view, allowing s. 248 oppression claims to proceed where there is harm to the corporation would not nullify s. 246, because the two sections involve different threshold tests. Section 246 simply requires a violation of the corporation’s legal rights. On the other hand, s. 248 requires, in the case of harm to the corporation, a violation of corporate legal rights that is oppressive or unfairly prejudicial, or that unfairly disregards the complainant’s interests"

"It is perhaps worth noting that another relevant difference between the derivative action and the oppression remedy relates to costs. Subsection 247(d) explicitly allows a court to order the corporation to pay the legal fees or other costs reasonably incurred in connection with a derivative action. The oppression remedy section of the Act, though it invests courts with broad remedial authority, contains no such provision".

India: New Companies Legislation

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. It has now been reported that a Companies Bill will soon be forthcoming. Corporate Affairs Minister Prem Chand Gupta has been reported as saying:

"[A] Draft of the new Company Law Bill is being given final touches. The new law will promote shareholders' democracy, replace approval-based system with responsible disclosures, promote good corporate governance and effective protection of investors".

Robert ("Bob") Pennington

The UK's Times newspaper has published an obituary for Robert ("Bob") Pennington. Professor Pennington was one of several academics, including the late Prof L.C.B. ("Jim") Gower, whose work provided the foundation for the teaching and study of company law as a scholarly subject. The place of company law in the university curriculum is now well established. It was not always so; some regarded company law as dry, technical and inappropriate for academic study. Away from Pennington's considerable academic achievements, The Times obituary recounts the following colourful incident:

"On one occasion, calling in at his local bank, [Pennington] found himself in the middle of an armed robbery. A gun was pointed at his head. Drawing on his knowledge of military history, he peered down the barrel and said in his stentorian tones that the gun was only a replica. The robber fled. Not wishing to miss the lecture that he was on his way to give, he left the bank immediately and later found time to speak to the police between lectures".

Postscript (30 March 2008): The weekly higher education magazine THE published an obituary for Professor Pennington in its 27 March edition.

Pioneers in Law and Economics: Manne, Easterbrook and Fischel

Edward Elgar will soon be publishing a collection of essays titled "Pioneers in Law and Economics", edited by Lloyd Cohen and Joshua Wright. There are chapters dedicated to several scholars whose work over the past 40 years has been highly influential throughout the world within the fields of corporate law and corporate governance. Larry Ribstein has written a chapter considering Henry Manne and Kate Litvak has considered the contribution of Frank Easterbrook and Daniel Fischel.

Saturday 15 March 2008

UK: Corporate governance, M&S style

The UK's Combined Code on Corporate Governance, provides: "The roles of chairman and chief executive should not be exercised by the same individual". Companies can decide otherwise, providing disclosure is made: this is the principle of "comply or explain" which underpins the Code.

Against this background, strong disquiet has followed Marks and Spencer's recent announcement that Sir Stuart Rose will become executive chairman of the company, in breach of the Code. M&S's institutional investors are reported to be divided on this change in board structure and, surprisingly, M&S appears to have mishandled the way in which institutional investors were consulted and advised. The Times newspaper reported that M&S's second largest shareholder, Legal and General, was given an hour's notice of the change.

UK: Budget 2008: Income shifting

Many people have formed companies in order to reduce the tax that would otherwise have been paid if another business structure were used. In Jones v Garnett [2007] UKHL 35, the House of Lords considered whether the tax anti-avoidance provisions within Part XV of the Income and Corporation Taxes Act 1988 applied to the arrangements made by two taxpayers, Mr and Mrs Jones, with regard to the distribution of income from a company (Arctic Systems Ltd.) in which they were equal shareholders. The company had been formed as the vehicle through which Mr Jones' services as a computer consultant would be provided; his wife, Mrs Jones, provided administrative support. Mr and Mrs Jones received modest salaries and received the majority of their income from the company in the form of dividends. This minimised their total tax liability. The House of Lords held that these arrangements did not breach the anti-avoidance provisions.

The Government subsequently announced that legislation would be introduced to remove the tax benefits of "income shifting" (sometimes called "income splitting") and a consultation paper was published at the end of last year. It was expected that legislation would be introduced later this year in the Finance Act 2008. In this week's budget the Government has, however, announced that legislation will now be brought forward in the Finance Act 2009 (see paragraph 4.69 of the budget report).

The Government's proposals have been widely criticised. In its response to the Government's consultation, the UK's Chartered Institute of Taxation described the draft legislation as "unworkable, impractical and lacking certainty". In its response, the Institute of Chartered Accountants in England and Wales described the legislation as "too widely drafted to be workable" and stated:

"We deplore the growing practice of relatively brief legislation that then has to be supplemented by lengthy HMRC guidance because the primary legislation is not adequately drafted. This guidance will have no legal authority, but is merely an indication of HMRC’s view of particular arrangements. It can also be changed in the future without Parliamentary approval".

Tuesday 11 March 2008

UK: The FRC and cost effective regulation

The UK's Financial Reporting Council has issued a discussion paper the purpose of which is to explore ways of increasing the cost effectiveness of its operations. Amongst the proposals in the paper is one suggesting a review of the relevance and complexity of corporate reporting. With regard to corporate governance, for which the FRC is responsible, the discussion paper states (pp. 11-12):

"We believe that the UK approach combines high standards of corporate governance with relatively low associated costs. Studies consistently show that the UK outperforms other countries in terms of governance standards, and that standards within the UK continue to rise. Reports published in 2005 by the FTSE ISS Corporate Governance Index and Governance Metrics International both put the UK at the top of the list of countries by average corporate governance score. A survey carried out by the National Association of Pension Funds in the same year found that 94% of large UK pension funds believed that corporate governance standards in UK companies had improved. Compliance costs in the UK are considered to be lower than in other countries with comparable standards. A study published in June 2006 by Oxera on behalf of the London Stock Exchange found that the corporate governance requirements were seen by some companies as one of the main factors influencing the choice between a UK and US listing (to the advantage of the UK)".

Monday 10 March 2008

Guernsey: New Companies Legislation

New companies legislation is being introduced in Guernsey. The January 2008 Billet D'√Čtat (the order paper for Guernsey's Parliament) included the draft text of the new Act, titled the Companies (Guernsey) Law 2008. The Act was published in volumes two and three of the legislation Billet D'√Čtat. The Act does not become law until it has received the approval of The Queen in Council. This is likely to take place within the next few months in order that the Act can come into force in July.

Consultation on the new Act began in 2005, when a green paper was published. The new Act updates the Companies (Guernsey) Laws 1994 to 1996 and in content it borrows from other jurisdictions including New Zealand, the Cayman Islands, the UK, Scotland and Jersey. For further information, click here.

Company law reform is proving popular in the Crown dependencies. The Isle of Man introduced a new Companies Act in 2006 (about which see: overview and the Act).

Postscript: On 7 May, the Companies (Guernsey) Law 2008 was approved by the Queen in Council (see here).

Postscript 2: See this post for a further update (June 2008) and a link to the most recent consolidated version of the legislation.

Saturday 8 March 2008

England and Wales: Partnerships: a separate entity for the purposes of criminal liability?

Under English law, partnerships do not have a separate legal personality. This raises many interesting academic and practical questions, one of which the English and Scottish Law Commissions referred to in their 2003 report on the law of partnership (para. 4.43):

"Whether a partnership governed by English law can commit a criminal offence is rather obscure. There are some judicial dicta which indicate that it cannot. On the other hand, our researches have revealed some old statutes which show or appear to show an intention or assumption that a partnership can commit an offence under the statutes in question. The courts have not explored the matter in recent years and we are not aware of any modern prosecutions of a partnership in England and Wales".

Against this background a recent Court of Appeal decision is of particular interest. One of the questions considered in W Stevenson & Sons (A Partnership) and Anor v R [2008] EWCA Crim 273, The Times Law Reports, March 5, 2008, was whether it was possible for legislation to render a partnership criminally liable as a separate entity from the individual partners. Phillips LCJ stated (para. [30]):

"In as much as business activities are conducted in the name of a partnership and the partnership has identifiable assets that are distinct from the personal assets of each partner there is no reason why a partnership should not be treated for the purposes of the criminal law as a separate entity from the partners who are members of it".

The Law Commissions recommended that "except so far as is provided by or under any enactment, whether expressly or by necessary implication, a partnership should not be capable of committing an offence" (para. 4.47). The Government declined, however, to implement the Commissions' recommendations concerning general partnership law (see the ministerial statement).

UK: Audit Committees: Smith Guidance: Proposed Changes

The FRC has issued a consultation paper which proposes changes to the Combined Code and Smith Guidance on Audit Committees. The recommendations include:

(a) Company boards to provide information to shareholders relevant to their auditor selection decision.
(b) Company boards to disclose any contractual obligations (such as loan agreements) to appoint certain types of audit firms.
(c) Large companies to consider the need to include the risk of the withdrawal of their auditor from the market in their risk evaluation and planning.
(d) Sections of the Smith Guidance dealing with auditor independence to be reviewed for consistency with the relevant ethical standards for auditors.

The FRC's press release is available here.

Some useful background information on the role of audit committees can be found in a guide published by Deloitte titled "Catch the Current".

Thursday 6 March 2008

UK: Relationship between good governance and company performance

The ABI has published a report titled "Governance and performance in corporate Britain" in which, to quote directly from the report, it seeks to answer the following questions:

"...does good governance lead to stronger operating performance, and does it lead to higher share price returns? Our findings suggest the answer is yes. We use the ABI’s Institutional Voting Information Service (IVIS) to assess the quality of company governance over a four-year period. It is the first time we have used the data in this way. We set this against data on company performance and shareholder returns generated by Thomson Financial. The studied companies are in the FTSE All-Share Index".

The authors conclude (to quote directly from the report):

(a) Over a five-year period, the shares of well-governed companies deliver an extra return of 37 basis points a month industry-adjusted.

(b) The volatility of share-price returns is also lower for portfolios of well-governed companies. In addition, well-governed companies deliver higher returns when you adjust for risk.

(c) The overall balance of the board is important. More Non-Executive Directors (NEDs) on a board improves performance, but too great an increase in the percentage of NEDs on a board is associated with a decrease in profitability. The key is balance. This suggests that the Combined Code model of balanced boards, or of at least two independent NEDs at sub-FTSE 350 companies, is preferable to the US model that appears to favour boards with a vast majority of NEDs.

UK: Auditing: Code of Best Practice Governance for Accountancy firms auditing public interest entities

Last year the FRC's Market Participants Group recommended that every firm auditing a public interest entity should comply with a best practice governance code similar in style to the UK’s Combined Code. As part of this effort, the FRC and ICAEW have announced that Norman Murray will chair the Audit Firm Governance Working Group, which will develop this new code. For further information click here.

UK: Companies Act 2006: Financial Reporting Regulations

The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 have been made and come into force on 6 April 2008. The Regulations set out the detailed format and content for the accounts of large and medium sized companies, as part of the reforms introduced by the Companies Act (2006). For the explanatory memorandum, click here.

The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 were made on 19 February and come into force on 6 April 2008. Click here for the explanatory memorandum.

The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 were laid before Parliament on 27 February and come into force on 6 April 2008. These Regulations replace the existing Companies (Disclosure of Auditor Remuneration) Regulations 2005 (SI 2005/2417). There is further information here.

The Companies (Summary Financial Statement) Regulations 2008 were laid before Parliament on 1 February and come into force on 6 April 2008. These Regulations explain in what circumstances summary financial statements can be published by companies. There is further information here.

UK: Corporate Manslaughter and Homicide Act 2007: Implementation

The Corporate Manslaughter and Corporate Homicide Act 2007 (Commencement No.1) Order 2008 was made on 14 February. This brings into force, from 6 April 2008, the majority of the provisions in the Corporate Manslaughter and Corporate Homicide Act 2007. The Order does not, however, bring into force one of the controversial parts of the Act: its application to deaths in custody. This part of the Act should be in force by 6 April 2013.

UK: Directors' contracts and severance pay: ABI and NAPF revised guidance

The ABI and NAPF joint guidance on directors' contracts and severance pay has been revised. The revised guidance contains eight principles and it is interesting to note here what is said with regard to notice periods:

"The Combined Code states that under normal circumstances directors should be retained on contracts of one year or less. However we believe that a one year notice period should not be seen as a floor, and we strongly encourage boards to consider contracts with shorter notice periods. Compensation for risks run by executive directors is already implicit in the absolute level of remuneration, which mitigates the need for substantial contractual protection"..

The guidance is available here.

England & Wales: Case law: Directors' disqualification: acquiescence in corporate governance system

In Official Receiver v Watson & Anor [2008] EWHC 64 (Ch), a finance director was found unfit to be involved in the management of a company (the length of his disqualification period was left for a later hearing). The case against the director was based on his acquiescence in the system of corporate governance adopted by the other directors, which involved breaches of company law.

England & Wales: Case Law: Corporate group: liability towards employee

In David Newton-Sealey v Armorgroup Services Ltd. [2008] EWHC 233 (QB), at issue was the potential liability of corporate group members towards an employee of one of the group companies. The employee had a contract with one of the group companies based in Jersey but the companies were run as a group, and distinctions between them were often blurred. Cranston J. held that there was a real prospect of the employee establishing that the other group members owed him a duty of care.

UK: Disclosure and transparency rules: Deloitte report

Deloitte has published a report – titled “Half a story” – in which it considers the impact of the Disclosure and Transparency Rules (contained within the FSA Handbook) on half-yearly financial reports. The report finds:

(a) 72 of the 289 companies surveyed did not present a responsibility statement in their half-yearly financial reports.

(b) Most companies published their half-yearly financial report within the two months’ reporting deadline and took on average 51 days to report. Only four companies (1%) failed to meet the shorter new deadline, publishing their half-yearly financial reports up to seven days late.

The report is available here and the Disclosure and Transparency Rules are available here.

UK: Sovereign wealth funds: governance and transparency

On 3 March, the UK Treasury Select Committee published its report “Financial Stability and Transparency”, which explores events in the capital markets since August 2007 and makes various recommendations regarding the role of the UK’s tripartite authorities. Also of interest is the following observation concerning Sovereign wealth funds (p. 14):

“We recognise the important role that Sovereign wealth funds have played in helping to stabilise the financial system through their investments in financial services firms in 2007. However, the increasing prominence of such funds as institutional investors does raise valid public policy questions about governance, transparency and reciprocity. We intend to examine the role of Sovereign wealth funds as part of our ongoing work on financial stability and transparency”.

Postscript (added 9 March): in late February, the BBC Radio 4 programme File on 4 considered sovereign wealth funds in two programmes broadcast under the title "Sovereign Funds: The New Wealth Of Nations".

Liquidator's duties: Privy Council Opinion

In Hague v Nam Tai Electronics (British Virgin Islands) [2008] UKPC 13, the Privy Council held that a liquidator’s negligence, which diminished the value of the fund available to creditors, did not a breach of duty owed to each creditor individually.

Ireland: Directors' duties: executive and non-executive directors

In Kavanagh v Delaney & ors [2008] IESC1, the Irish Supreme Court considered the duties of executive and non-executive directors. Hardiman J. (with whom the other judges concurred) referred to the English decision Re Barings (No 5) [1999] 1 BCLC 433 and observed:

“In my view, apart from any general amplification of the words of Shanley J. [in Re La Moselle Clothing [1998] 2 ILRM 345], there is a yet unmet need to make authoritative findings after full debate, as to the respective duties of an Executive and a non-executive director and, perhaps, a non-executive director appointed (as the appellant was) for a particular and specific purpose. But this has yet to occur. I would not be prepared simply to apply the Baring’s criteria, without such argument, to all these classes of director, or to assume that their common law duties are identical. I am slightly uneasy that, in this case, there may have been an assimilation in particular of the position of a non-executive director to that of an executive one. Such an approach might derive some support from the judgment of Roderick Murphy J. in Vechicle Imports Ltd (in liquidation) (Unreported, High Court, 23rd November 2000), but it is not explicit and in any event there does not appear to have been argument on the topic of the duties of the different classes of director, mentioned above. I do not consider that this case, or that of Vehicle Imports, mandates the assimilation of the position of a non-executive director to that of an executive in terms of their common law duties. The position of a highly paid executive director of a vast Bank may be of limited use in considering the common law duties of a non-executive director … a small company”.

Europe: European Commission: Small Business Act proposal

In December 2007 the European Council welcomed the European Commission’s proposal for a European Small Business Act. The Commission intends to publish its plan in June 2008. Meanwhile, an online consultation is taking place here and background information is available here.

Europe: European Commission: Alternative capital maintenance regime

Several years ago the European Commission began to consider the feasibility of establishing an alternative to the current capital maintenance regime established by the Second Company Law Directive (77/91/EEC). In October 2006, KPMG was commissioned to undertake a study exploring the main features of the current regime (including the costs imposed) as well as that in Australia, Canada, New Zealand, California and Delaware. KPMG also considered four academic proposals for alternative regimes to the current capital maintenance rules. The KPMG study has now been published and is available here. Background information is available here.

Australia: Sovereign funds: enhanced transparency

The Australian Government has published six principles designed to enhance the transparency of its foreign investment screening regime. The Hon. Wayne Swan MP, Treasurer, observed:

“The principles set out the main factors that are considered in determining, on a case-by-case basis, whether particular investments by foreign governments and their agencies are consistent with Australia's national interest. Assessing the national interest in any given case requires a balanced view of the proposal against these principles. The principles set out the additional factors that need to be considered in relation to investment proposals by foreign governments and their agencies over and above those that apply to normal private sector proposals”.

The Treasurer’s statement and principles are available here and further background information is available here.

Australia: Company boards and directors: corporate social responsibility

The UTS Centre for Corporate Governance has published the results of a three year study of the role and responsibilities of company boards and directors. The project was funded by the Australian Research Council and Dibbs Abbott Stillman Lawyers. The report is generally supportive of the Australian corporate governance framework but in one respect it reports an area of concern:

“The one field in which Australian business appears to be falling behind the performance of other countries is in the reporting of corporate social responsibility and sustainability. The research discovered many examples of extensive commitment to corporate social responsibility and sustainability in both large corporations and in small enterprises. Though the balance of opinion remains in favour of voluntary rather than mandatory reporting, the lack of a framework for reporting and greater impetus to use this, suggests businesses here will not be reporting as comprehensively as in the UK, Europe and Japan”..

The report is available here.

Australia: Non-voting shares: ASX consultation

The Australian Securities Exchange (ASX) has issued a public consultation paper on a proposal to allow listed companies to issue non-voting ordinary shares. The paper is available here.

Hungary: Corporate Governance Guidelines

An English version of the Budapest Stock Exchange's "Corporate Governance Guidelines" (2007) has been published on the ECGI website here.

Austria: Revised Corporate Governance Code

A revised version, in English, of the Austrian Code of Corporate Governance (2007) has been published on the ECGI website here.

South Africa: Company Law Reform

In December 2007, the Corporate Laws Amendment Act (Act Number 24 of 2006) came into force. This Act makes a number of important changes to company law in South Africa, including statutory endorsement of accounting standards and a relaxation of the rules governing financial assistance provided by a company for the purchase of its own shares. For further information click here.

Update: See this post for further information on company law reform in South Africa. 

US: SEC News

The SEC has launched “Financial Explorer”, which, according to SEC Chairman Cox, will “help investors quickly and easily analyze financial results of public companies. Financial Explorer paints the picture of corporate financial performance with diagrams and charts, using financial information provided to the SEC as “interactive data” in eXtensible Business Reporting Language (XBRL)”. For further information click here.

SEC has voted to bring forward amendments to modernize foreign company disclosure requirements, including the elimination of paper submissions. Chairman Cox observed: “The proposed amendments would bring our foreign company disclosure requirements into the 21st Century by eliminating any requirement for paper, and by giving investors instant access to foreign company disclosure documents electronically, in English, on the Internet”. For further information, click here.

SEC Commissioner Kathleen Casey delivered the opening speech at the ALI-ABA Conference on "Corporate Governance: The Changing Environment" (Washington, D.C., February 21). Commissioner Casey spoke about those areas of corporate governance on which the SEC is focusing: internal controls, proxy rules and executive compensation. The speech is available here.

US: Delaware: Can a company company director bring a derivative action?

In Schoon v Smith (No 554, 2006, 12 February 2008) it was argued that equity and public policy support the argument that a company director should be able to bring a derivative action in respect of wrongdoing by the company’s other directors. The Delaware Supreme Court rejected this argument; the court’s opinion contains some very interesting discussion of the equitable principles governing the derivative action in Delaware.