Monday 30 June 2008

UK: Institutional Shareholders' Committee statement on auditor liability limitation agreements

The Institutional Shareholders' Committee has published a statement concerning auditors' liability limitation agreements. The ISC notes:
  • Agreements should be proportionate, and provide a limit for liability that is fair and reasonable.
  • Companies should recognise that they are not obliged to enter into agreements if they are not suitable.
  • Companies should justify to shareholders the benefits of concluding agreements in advance of putting them to a general meeting vote. 
  • When audit committees discuss these agreements with auditors, they should seek to assure themselves that audit quality will be preserved and enhanced.
  • Shareholders will not want to see their preference for proportionate liability agreed at holding company level undermined by other forms of agreement lower down the group structure.
  • Companies should use the specimen principle terms for agreements which have been laid out by the FRC. 
For further information see:
FRC guidance on auditor liability limitation agreements | ISC | ISC statement | ISC press release |

UK: Companies Act (2006) - BERR publishes guidance on accounting and reporting provisions

BERR has published guidance on the accounting and reporting provisions within the Companies Act (2006) and associated Regulations. The guidance summarises changes introduced by the Act and Regulations and explains the relevance of the Act's provisions for companies required (or opting) to prepare accounts using international accounting standards.

The Accounting Standards Board has already referred to the guidance: in a press release published today, the ASB comments on the meaning of "off-balance sheet arrangements" in Section 410A of the 2006 Act. Section 410A was inserted by Section 8 of the Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008 and requires the disclosure of off balance sheet arrangements by companies other than small companies. However, no definition of "off balance sheet arrangement" is provided - hence the ASB's guidance.

UK: FRC guidance on auditor liability limitation agreements

Sections 532 to 538 of the Companies Act (2006) provide the framework governing provisions exempting auditors from liability. Companies are permitted to enter into auditor limitation liability agreements, subject to gaining shareholder approval. Guidance on these agreements, and the framework introduced by the Act, has today been published by the Financial Reporting Council.  The guidance explains:
  • What is and is not allowed under the Act.
  • Several factors to consider when considering the case for an agreement.
  • What should be included in the agreement and provides example clauses.
  • The shareholder approval process and provides example wording for including in shareholder resolutions. 
For further information see:

UK: cooperative and credit union reform

In June 2007 the Government published  a consultation paper titled "Review of the GB cooperative and credit union legislation". A summary of the responses and the Government's proposals were published in December 2007. On June 5 of this year, the Government indicated in a parliamentary written answer that its proposals would be implemented "subject to parliamentary time". A further update has been provided today by Kitty Ussher - the Economic Secretary to HM Treasury - in a speech at the launch of the All Party Parliamentary Group on Credit Unions. The Government plans to introduce a Legislative Reform Order in order to make the following changes (quoting directly from the relevant press release):

Credit Unions:
  • liberalising membership criteria and radically changing the "common bond", so that credit unions can provide their services to a wider range of people
  • making it possible for groups, rather than just individuals, to become members
  • allowing credit unions to pay interest on members' deposits.
  • removing the statutory limit on non-qualifying members.
  • allowing credit unions to charge the market rate for services such as chequebooks and money transfers.
  • Removing the £20,000 limit on risk share capital which is transferable, but not withdrawable
Cooperatives and Credit Unions:
  • Giving societies the flexibility to choose their own accounting year-ends
  • Abolishing the requirement to have interim accounts audited.
  • Lowering the minimum age for being an officer of a society to 16
  • Bringing the fee for a copy of the society's rules up to date
  • Making it easier for members to dissolve a society, subject to safeguards.
For further information see:

Ireland: whistle blowing and Irish company law

Ireland's Office of the Director of Corporate Enforcement (ODCE) has published a discussion paper in which it proposes a whistle-blowing provision for inclusion in the new Companies Consolidated Bill. The ODCE states that its proposal "is balanced and limited in that it promotes international best practice in corporate governance while mitigating some of the difficulties which could arise with a broad whistle-blowing provision". 

The Company Law Review Group has shown little enthusiasm for the ODCE's proposals and the issue is now being considered by the Department of Enterprise Trade and Employment. The ODCE has nevertheless decided to publish its discussion paper for wider comment. In support of its proposals, the ODCE cites Principle IV.E. of the OECD Principles of Corporate Governance (2004) which provides:

Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this"

Sunday 29 June 2008

Australia: ASIC's power to continue civil proceedings

The Federal Court of Australia has given judgment in Carey v Australian Securities and Investments Commission (ASIC) [2008] FCA 963, an interesting decision concerning ASIC's powers under Section 50 of the Australian Securities and Investments Commission Act (2001). The case concerned ASIC's decision to take over proceedings for breach of directors' duites commenced by a liquidator. One of the directors against whom proceedings had been brought, Mr Carey, argued that ASIC did not have the power to continue the action under Section 50. The Federal Court agreed, however, as Finkelstein J. observed (para. 6): the circumstances of this case, the answer is somewhat academic. The parties accept that if Mr Carey’s view prevails ASIC can and will simply begin new proceedings in the name of each plaintiff. Moreover, I have pointed out to the parties that in such event, I would, most likely, make an order deeming each step taken in the existing proceedings to have been taken in the new proceedings"

This said, as Prof. Ian Ramsay has noted, there is a clear case for considering whether ASIC should be permitted to take over some proceedings, not least because of the likely cost savings. 

For further information see:

Friday 27 June 2008

UK: new version of the Combined Code published

The Financial Reporting Council has published an updated version of the Combined Code on Corporate Governance, which applies to financial reporting periods beginning on or after 29 June 2008. 

The revised Code includes the following changes, resulting from the FRC's 2007 review of the Code:
  • The removal of the restriction on an individual chairing more than one FTSE 100 company
  • For listed companies outside the FTSE 350, allowing the company chairman to sit on the audit committee where he or she was considered independent on appointment.

UK: comply or explain and corporate governance statements

The Financial Services Authority has today published a policy statement in which it announces a change to the "comply or explain" statement required by listed companies with regard to their compliance with the Combined Code on Corporate Governance. The FSA is modifying Listing Rule 9.8.6R(5) so that listed companies will be required to report on how they have applied "the main principles" set out in Section 1 of the Combined Code. This change will come into force on 29 June 2008 for financial reporting periods beginning on or after this date. At present, rule 9.8.6R(5) requires companies to state how they have applied "the principles" in Section 1. With regard to this change, the FSA explains:

Where a company has applied the Code’s Main Principles by complying with the associated provisions it should be sufficient for the company simply to report that it has done so. However, where a company has taken additional actions to apply the principles or otherwise improve its governance, it would be helpful to shareholders to describe these in the annual report. We do not expect this to have any cost implications, and modification will benefit smaller companies by cutting back the amount of boiler-plate"

This change is one of many being made as part of the FSA's implementation of the Statutory Audit Directive (2006/43/EC) and the Company Reporting Directive (2006/46/EC). The latter requires companies whose securities are admitted to trading on a regulated market to produce a corporate governance statement in their annual reports. This statement must explain which corporate governance code the company has followed and the extent to which it has complied with the code. The UK rules governing the corporate governance statement will be introduced in new rule DTR 7 within the FSA Handbook and will come into force on 29 June 2008 for financial reporting periods beginning on or after this date. 

South Africa: Companies Bill introduced into the National Assembly

As part of the reform of company law in South Africa, a Companies Bill has been introduced into the National Assembly. This will make significant changes to South African company law and is the most important legislation in this area for 30 years.  

Clause 76 of the Bill - titled "Standards of directors conduct" - is of particular interest and in subsection (2)(b) provides that a director must:

"communicate to the board at the earliest practicable opportunity any information that comes to the director’s attention, unless the director— 
  (i) reasonably believes that the information is—
    (aa) immaterial to the company; or
    (bb) generally available to the public, or known
           to the other directors; or
  (ii) is bound not to disclose that information by a legal or ethical obligation of confidentiality"

What will be regarded as an ethical obligation of confidentiality?

For further information see:
Copy of the Bill (at 27 June 2008) | Government policy document - "company law for the 21st century" (2004) | Parliamentary Monitoring Group | The influence of English company law in South Africa is considered here

Postscript (30 June 2008): It has been reported that a third edition of the King Report on Corporate Governance will be published later this year. 

Update (15 October 2008): Click here for the latest version of the Bill. 

UK: the Equalities Bill and company reporting

Yesterday the Government's Equalities Office published "Framework for a Fairer Future - The Equality Bill" (Cm. 7431). The paper explains that the purpose of the Government's proposed Bill is "to strengthen protection, advance equality and declutter the law". In this regard a role is recognised for company reporting (at p. 25):
Businesses increasingly recognise the advantages they can gain from improving their performance on equality, so that they can attract and retain talent from the widest possible pool and tap into new markets. We therefore expect that performance on equality will increasingly be a matter which companies choose to report to their shareholders and stakeholders. We are confident that business will want to make progress in this area, and that this will lead to the delivery of improved equality outcomes. We will review progress on transparency and its contribution to the achievement of equality outcomes and, in the light of this, consider, over the next five years, using existing legislation for greater transparency in company reporting on equality".

UK: BERR business plan for 2008-2011 published

The UK's Department for Business, Enterprise and Regulatory Reform (BERR) has published its business plan for 2008-2011. One of BERR's strategic objectives is "free and fair markets" and in this regard a number of specific proposals are made including:
  • Implement the EU Services Directive by the end of 2009, to make it easier for service providers to set up business, or provide services, in another Member State
  • Implement the Companies Act 2006 by October 2009, to ensure that company law reflects the modern business world
  • Reduce the administrative burdens of regulations imposed by BERR, mainly from employment, company and consumer law, by 25% by May 2010 
In one important respect the business plan is disappointing: there is little discussion of the concepts of the free and fair market. What does fairness mean in this context?

Further information is available here:

Thursday 26 June 2008

Hong Kong: company law reform - third consultation paper published

The Financial Services and the Treasury Bureau has published a third consultation paper as part of its review of the company ordinances in Hong Kong.  The third consultation paper deals with share capital, capital maintenance and amalgamations. Amongst the proposals are:
  • The introduction of a mandatory no-par value share regime for all companies
  • The removal of the requirement for authorised capital
  • The retention of the current capital maintenance regime
  • The introduction of a court-free statutory amalgamation procedure
For further information see:
press release | third consultation paper | third consultation paper executive summary | earlier consultation papers | reform homepage

UK: ASB publishes FRED 'Improvements to Financial Reporting Standards'

The UK's Accounting Standards Board has published a Financial Reporting Exposure Draft (FRED) titled "Improvements to Financial Reporting Standards". In the accompanying press release, the following explanation is provided:

The amendments proposed in the FRED arise as a consequence of the International Accounting Standards Board’s (IASB) annual improvements process. In May 2008 the IASB issued an International Financial Reporting Standard, ‘Improvements to IFRSs’, which made amendments to a number of International Financial Reporting Standards (IFRS).

The ASB is issuing this FRED which seeks to maintain the existing levels of convergence between UK and International Financial Reporting Standards. The proposals set out in the FRED include the same improvements to UK FRS as those made to IFRS where the UK standard is based on its international equivalent.

In addition to the improvements arising from the IASB’s annual improvements process the ASB has taken this opportunity to propose improvements to UK FRS which have been brought to its attention; to update UK IFRS-based FRS where the equivalent IFRS has been amended or updated; and finally to update UK FRS for editorial changes. The ASB is inviting comments on its proposals by 27 September 2008.

For further information see:
ASB press release | Copy of the FRED | Earlier IASB post

Wednesday 25 June 2008

Europe: Commission publishes European Private Company (SPE) proposals

The European Commission has published its proposals for the European Private Company Statute. The European Private Company - or SPE, after its latin name Societas Privata Europaea - will be a new European legal form designed for small and medium sized enterprises. The Statute, which will take the form of a Regulation, will contain a set of uniform company law rules applicable to SPEs across the Member States, including such matters as shareholder rights and creditor protection. 

With regard to capital protection, the proposal departs from the view that a high minimum level of capital is required to protect creditors. The minimum capital requirement is €1. This reflects the position that it should be easy to from a SPE.

The proposal, in Article 18, provides shareholders with an exit right where the SPE's activities cause them serious harm as a result of several actions including a substantial change in the activities of the SPE or the non payment of a dividend for at least 3 years in circumstances where the SPE's financial position would have permitted such a distribution. 

The proposal makes clear that directors' duties are owed to the SPE and Article 31 provides that "[a] director shall have a duty to act in the best interests of the SPE. He shall act with
the care and skill that can reasonably be required in the conduct of the business".

The proposed SPE Regulation will only come into force after unanimous adoption by the Council of Ministers and the approval of the European Parliament. If this happens, the Commission intends that the Regulation will come into force on 1 July 2010.  

Choose a link for further information: 

UK: the audit of credit unions - Auditing Practices Board issues draft practice note

The Auditing Practices Board has issued in draft form (for the purposes of consultation) Practice Note 27: The Audit of Credit Unions in the United Kingdom. In addition to providing guidance on the application of International Standards on Auditing (UK and Ireland), the Practice Note also provides useful guidance on the legal and regulatory framework within which credit unions operate. Further information is available in the accompanying press release. The consultation period ends on 25 September 2008.

USA: SEC launches 21st century disclosure initiative

The US Securities and Exchange Commission has launched a review of the way in which it collects and discloses information about regulated entities.  The SEC's Chairman, Christopher Cox, stated:
On the 75th anniversary of the SEC, with so much new technology available to improve the quality of information for investors as well as the way investors acquire it, we're initiating a broad, introspective look at our business model. What hasn't changed in 75 years is the importance of full disclosure — sunlight remains the best disinfectant for problems in our capital markets. We'll be examining how to improve the way disclosure works, including tapping the full potential of today's technology and integrating it seamlessly into our regulatory approach. That could mean fewer confusing forms, and more useful information at investors' fingertips in a form they can really use"

For further information, click here

NB: The UK's Financial Services Authority embarked on a similar enquiry last month with the publication of a discussion paper titled Transparency as a Regulatory Tool. The purpose of the discussion paper was to start a debate about the way in which transparency can best be used to meet the FSA's regulatory objectives. For further information, click here.

Tuesday 24 June 2008

Australia: shareholder engagement and participation

On June 23, Australia's Parliamentary Joint Committee on Corporations and Financial Services published a report titled Better shareholders – Better company: Shareholder engagement and participation in Australia. The Committee considered several issues including the barriers to effective engagement by shareholders in the governance of companies, the engagement of institutional shareholders and the selection of directors. The report makes many recommendations including:
  • ASIC should establish best practice guidelines for company annual general meetings and for clear and concise company reporting.
  • The government should investigate an alternative regulatory framework for small incorporated companies and not-for-profit organisations.
  • The government should investigate the most appropriate regulatory framework for ensuring that stock lenders retain the voting rights attached to the lent shares.
  • The government should amend the Corporations Act to exclude shareholder directors from voting on their own remuneration packages either directly or by directing proxies
The Australian Government has welcomed the report: see here.

Monday 23 June 2008

UK: OFGEM, electricity companies and directors' conflicts of interests

The UK's Observer newspaper has reported that the electricity regulator - OFGEM - is investigating the conflicts of interest faced by directors. According to the news report, OFGEM: concerned that directors of leveraged utilities firms are also directors of parent companies, creating a potential conflict of interest. John Reynolds, of independent investment bank Reynolds Partners, who has researched the subject, says: 'Conflicted directors are pulled in two directions: they must ensure that the operating company provides a proper service to customers; and they must make certain that the holding company services its debts'. Ofgem director Steve Smith says: 'We are aware of the issue and are looking at it within the wider context of a review into the way utilities are run'. "

NB: English company law does not grant a corporate group a legal identity separate from those of the individual group companies. Each company has its own separate legal personality and it is to these individual companies that directors owe their legal duties.

Friday 20 June 2008

Canada: Supreme Court grants BCE's appeal

The Canadian Supreme Court has today given judgment in BCE Inc., et al. v. A Group of 1976 Debentureholders, et al. (No. 32647, June 20, 2008) (on appeal from BCE inc. (Arrangement relatif à), 2008 QCCA 935). The Court upheld BCE's appeal and stated that reasons for its judgment would be published later. For background information, see this earlier post and this post from the Wall Street Journal Law Blog. A brief report has also appeared on the website here.

UK: Companies Act (2006) - final Commencement Order published

The Department for Business, Enterprise and Regulatory Reform (BERR) has today published in draft form the Companies Act 2006 (Commencement No. 8, Transitional Provisions and Savings) Order 2008. This is the eighth (and final) Companies Act (2006) Commencement Order, the purpose of which is to bring into force on 1 October 2009 the remaining provisions of the 2006 Act. Click here to view the draft Order and associated consultative document. The latter contains a summary of the provisions being brought into force on 1 October 2009 and an annex identifying those provisions of the Companies Act (1985), Companies Act (1989) and Companies (Audit, Investigations and Community Enterprise) Act (2004) which will remain in force after 1 October 2009.

Thursday 19 June 2008

UK: the Bank of England and banking regulation

The Chancellor, Alistair Darling, has written to the Treasury Select Committee explaining his proposals for banking regulation reform and the governance of the Bank of England. In his letter, the Chancellor explains that financial stability will become a statutory objective of the Bank of England. The Bank's role in this regard will be overseen by a new Committee of the Bank's Court of Directors. Changes to the Court are also proposed: its size will be limited to a maximum of 12 members, the majority of whom will be non-executive.

Europe: companies and the European Convention on Human Rights

A good illustration of the way in which the European Convention for the Protection of Human Rights and Fundamental Freedoms can be relied upon by companies is provided by a recent decision of the European Court of Human Rights. In Meltex Ltd v Armenia [2008] ECHR 531, a company complained that its freedom of expression under Article 10 of the Convention had been violated by the refusal of the Armenian authorities to grant it broadcasting licences. Article 10 provides:
Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. This article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises"

The Court held that the refusals constituted interferences with the company's freedom to impart information and ideas. In the course of the opinion some interesting points were made with regard to the separate legal personality of the company. The Court observed:
... a person cannot complain about a violation of his or her rights in proceedings to which he or she was not a party, even if he or she was a shareholder and/or executive director of the company which was party to the proceedings ... Furthermore, while in certain circumstances the sole owner of a company can claim to be a “victim” within the meaning of Article 34 of the Convention in so far as the impugned measures taken with regard to his or her company are concerned ..., when that is not the case the disregarding of an applicant company's legal personality can be justified only in exceptional circumstances, in particular where it is clearly established that it is impossible for the company to apply to the Convention institutions through the organs set up under its articles of incorporation or – in the event of liquidation – through its liquidators".

Wednesday 18 June 2008

UK: the FSA flexes its muscles - part 2 - enforcement strategies

The UK's Financial Services Authority's Director of Enforcement, Margaret Cole, delivered a speech today which highlights further the approach now being taken by the FSA with regard to enforcement. The following extracts illustrate this point:
We have frequently stressed the importance of senior management responsibility and oversight. But, some of you might think that we haven’t matched our words with decisive action. Well, a recent study by Deloitte for the OFT confirmed what we already suspected, that action against individuals has a lot greater impact in terms of deterrence than action against firms ... you can expect to see more Supervision and Enforcement focus on individuals ... We’ve made a strategic decision to investigate more individuals

... this year we have brought 3 criminal prosecutions for insider dealing and we have more in the pipeline ... We feel that the threat of civil fines hasn’t worked as well as we would have liked. We’re convinced that the threat of a custodial sentence is a much more significant deterrent"

Note also this earlier post concerning market abuse.

UK: the FSA flexes its muscles - part 1 - rights issues and short selling

The UK's Financial Services Authority believes that in the current market conditions there is increased potential for market abuse through the short-selling of shares during rights issues. Such is the FSA's concern that new disclosure rules will come into force this Friday. These require the disclosure of short positions (0.25% or more) in shares admitted to trading on prescribed markets where a rights issue is taking place. FAQs concerning these rules have been published here. The rules have caused much disquiet, as reported here, not least because they were introduced without consultation.

Australia: corporate governance disclosure in annual reports

The Australian Securities Exchange (ASX) has published its yearly analysis of corporate governance disclosure in respect of companies' 2007 annual reports.  ASX reviewed the annual reports of over 1,200 listed companies and found:
Overall reporting levels – the aggregate of adoption of recommended practices and of ‘if not, why not’ reporting – rose slightly in 2007 to 90.5%, up from 90% last year. This is the highest level since ASX began the annual review in 2004. For the top-500 listed entities the overall reporting level was 94%. The overall reporting level for listed trusts was 93%, up from 85% last year".

For an overview click here and for the full report click here.

Tuesday 17 June 2008

UN Principles for Responsible Investment - Progress report

The UN Principles for Responsible Investment report for 2008 has been published here.  In the accompanying press release (issued today) it is stated:

The Principles for Responsible Investment (PRI) Initiative, a partnership between global investors and two UN agencies surpassed a new milestone today. At an official ceremony in Seoul it was announced that the number of signatories more than doubled in 2008 to 381, representing USD 14 trillion in assets under management.

At the same time, a comprehensive survey from the PRI shows some of the world’s largest institutional investors are making significant progress in integrating environmental, social and governance (ESG) issues into their day-to-day business. Though there is also still much to do".

USA: Corporate Library publications available free of charge

The Corporate Library has announced that all of its research reports published before 30 June 2007 can now be downloaded free of charge from its online shop.

Canada: BCE, takeovers and directors' duties - Supreme Court reserves judgment

A panel of seven judges sitting in Canada's Supreme Court today heard argument in the appeal from the Quebec Court of Appeal's decision in BCE inc. (Arrangement relatif à), 2008 QCCA 935. Those hoping (optimistically) for judgment to be given quickly at the end of the hearing will be disappointed: judgment has been reserved (see this Reuters report and this report in the Financial Times). Some of the questions asked by the judges have been noted here. For background information, see this earlier post.

Monday 16 June 2008

Europe: credit rating agencies - regulation proposed by the Internal Market Commissioner

The European Internal Market Commissioner, Charlie McCreevy, has today delivered a speech titled "Regulating in a Global Market". This speech is important because Mr McCreevy indicates his intention to regulate credit rating agencies. He also indicates - in typically forthright fashion - his view on the IOSCO Code published last month:

I said before that I would not wait indefinitely for the credit rating agencies to come forward with meaningful proposals to put their houses in order. And I mean what I say. The IOSCO Code of Conduct to which the rating agencies signed up has been shown to be a toothless wonder. The fact is that despite the checks on compliance with the IOSCO Code, no supervisor appears to have got as much as a sniff of the rot at the heart of the structured finance rating process before it all blew up. I am deeply sceptical that the appropriate response lies in building on and strengthening the IOSCO code: While external oversight of rating agencies is important it is not sufficient to adequately address the issues. Many of the recent IOSCO task force recommendations do not appear enforceable in a meaningful way and I am now convinced that limited but mandatory, well targeted and robust internal governance reforms are going to be imperative to complement stronger external oversight of rating agencies. While some of the additional steps that the main rating agencies have announced are welcome, they are insufficient. I know some would be willing to do more but I can quite understand why they are reluctant to move forward with more ambitious proposals if there isn't going to be a level playing field. This is one of many reasons why I have concluded that a regulatory solution at European level is now necessary to deal with some of the core issues"

Reform in this area is not confined to Europe. In the USA, for example, the Securities and Exchange Commission has proposed changes designed to increase the transparency of the credit rating process - click here for further information.

Canada: the Canada Not-For-Profit Corporations Act

The Canada Not-for-Profit Corporations Bill (C-62) received its first reading in Canada's House of Commons on June 13. According to a press release issued by Industry Canada (the relevant Government department):

The proposed Canada Not-For-Profit Corporations Act will enable organizations to incorporate faster and improve their financial accountability, clarify the roles and responsibilities of directors and officers, and enhance the protection of members' rights ... [It] will allow for the repeal of the outdated Canada Corporations Act. It will also move share capital corporations created by Special Acts of Parliament into the Canada Business Corporations Act, which will provide a modern, efficient corporate governance regime for the affected companies".

Background information is available here and the Bill's progress can be followed here.

Friday 13 June 2008

European Business Organization Law Review

The March 2008 issue of the European Business Organization Law Review is currently available to view free of charge on the publisher's website.  The majority of the articles concern corporate law and governance topics, including one on the European Private Company by Robert Drury and another by Ulrich Noack and Michael Beurskens considering the modernisation of the German GmBH.

Executive pay

Several recent posts on this blog (here and here, for example) have highlighted the debate about executive pay in America and Europe. This debate is considered in a couple of articles in this week's Economist. In the first, "Let the fight begin", it is argued that shareholder "say on pay" votes should become the norm and are preferable to Government intervention (it would be surprising if The Economist argued otherwise). In the second, "Pay attention", there is discussion of the debate about executive pay in Europe and the development of "say on pay" rules within the European Member States. The article notes:
By law in the Netherlands, Sweden and Norway, shareholders get a binding vote on compensation packages; in Britain they get a non-binding vote. Some Spanish and Swiss firms are voluntarily starting to offer shareholders a vote".

UK: FSA fines Woolworths plc - what is inside information?

The decision of the FSA to fine Woolworths plc £350,000 has been widely reported (see, for example, this report in the Financial Times). The case concerned Woolworths' delay in disclosing information (a variation in a subsidiary's contract with a supplier which would reduce profits by £8 million) about which it became aware of on 20 December 2005.  Disclosure was made on 18 January 2006, when Woolworths provided a Christmas trading update. On this day the company's shares fell from 36.75p to 32.25p (a fall o just over 12%).  

The FSA argued that Woolworths' failure to disclose before 18 January 2006 breached Disclosure Rule 2.2.1 and Listing Principle 4. Rule 2.2.1 requires the issuer of listed securities to disclose inside information as soon as possible on a Regulated Information Service. Listing Principle 4 requires the communication of information by a listed company to those holding its securities (and potential holders) in order to avoid the creation or continuation of a false market in the securities. 

The FSA's Decision Notice is well worth reading because there is discussion of the definition of inside information. An important part of this definition is the requirement that if the information were generally available, it would "be likely to have a significant effect on the price of the qualifying investments or on the price of related investments" (emphasis added). Woolworths argued that the information about the contract did not satisfy this part of the definition because a share price fall of at least 10% is needed for there to be a significant effect and that when determining whether information is inside information, reference should be made to what caused the share price movement.  Woolworths contended that news about the contract variation explained less than half of the share price fall on 18 January and for this reason it was not inside information.  

The FSA rightly rejected these arguments and observed: is the wrong approach to seek to analyse the amount of an actual fall that might be attributed to a particular piece of information in order to determine whether it was 'inside information'. Indeed it is an unworkable test if the relevant piece of information was not in fact disclosed".

"The FSA is satisfied that the Variation resulted in a profit reduction of more than 10% and that this is, on any view, information of a type that a reasonable investor would be likely to use as part of his investment decisions".

Thursday 12 June 2008

England and Wales: law reform - corporate criminal liability and company charges

The Law Commission has published its 10th Programme of Law Reform. There is some very brief discussion of the law relating to corporate criminal liability, about which the Law Commission states it will publish a consultation paper in October 2009. The Commission also notes that its proposals on company charges have not yet been accepted in principle by the Government.

UK: revised edition of FRSSE published by ASB

In this earlier post, changes to the Accounting Standards Board's Financial Reporting Standard for Smaller Entities (FRSSE) were noted. A revised copy of FRSSE has now been published and is available here. The revised FRSSE applies to accounting periods beginning on or after April 6 2008. Early adoption is not permitted.

Implementing the OECD Principles: some personal reflections

The OECD has published a report titled "Using the OECD Principles of Corporate Governance: A Boardroom Perspective". The following extract explains well the purpose of the report and the insights it provides:

Chapter VI of the OECD PrinciplesThe Responsibilities of the Board is underpinned by the notion that the board directs the affairs of the company. The concept on paper is sound. We wanted to find out what happens in practice, in the imperfect world beyond compliance with  guidelines. To that end, we contacted chairpersons, CEOs, directors, general counsels, corporate secretaries and other practitioners from different sectors, regions, corporations and business cultures ... we asked contributors to provide their personal reflections upon what Chapter VI of the OECD Principles – The Responsibilities of the Board actually requires from a director. We encouraged them to share their thoughts about what they believe are the key challenges faced by directors where the law ends and individual discretion begins, and how they managed the challenges. A number of strong, common themes emerged from the interviews and we found that our own thinking was challenged in various ways".

Wednesday 11 June 2008

England and Wales: the financial ombudsman and English law

Today the Court of Appeal delivered an important decision concerning the operation of the Financial Ombudsman Scheme (FOS). In Heather Moor & Edgecomb Ltd, R (on the application of) v Financial Ombudsman Service & Anor [2008] EWCA Civ 642 the court considered, inter alia, the operation of Section 228(2) of the Financial Services and Markets Act (2000). Section 228(2) provides that "[a] complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case".  One of the arguments made was that Section 228 required the Ombudsman to determine complaints in accordance with English law.  The Court of Appeal rejected this argument; Stanley Burnton LJ observed (para. [36]):

If I confine myself to the wording of section 228 and the other relevant provisions of the 2000 Act, in my judgment they do not require the Ombudsman to determine a complaint in accordance with the common law. If section 228 had simply provided that a complaint is to be determined by the ombudsman, it would have been implicit that it was to be determined in accordance with the law apart from that section. But Parliament did not so provide. The words "by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case" in section 228 are inappropriate and unnecessary if what Parliament intended was a determination in accordance with the law apart from section 228".

Of interest, too, is what Rix LJ said with regard to the operation of the FOS (at para. [87]-[88]): is possible to see in the "fair and reasonable" jurisdiction of the ombudsman the source not merely of an alternative dispute resolution service but of an important new source of law. That "fair and reasonable" jurisdiction may be flexible and (subject to judicial review) for the ombudsman and not for the courts to discern: nevertheless, these are concepts long familiar to English law, and, given the legal and industry background to which the scheme rules bid the ombudsman to have regard, it is hard to think that the parties to complaints submitted to the ombudsman's jurisdiction will find themselves in unrecognised country".

USA: McCain supports mandatory say on (CEO) pay

Corporate governance issues continue to feature in the race for the presidency of the United States of America. Republican Senator John McCain has joined the debate concerning executive pay in a speech delivered yesterday at the NFIB & eBay 2008 National Small Business Summit held in Washington, D.C. Senator McCain observed:

In times of hardship and distress, we should be more vigilant than ever in holding corporate abuses to account, as in the case of the housing market. Americans are right to be offended when the extravagant salaries and severance deals of CEO's -- in some cases, the very same CEO's who helped to bring on these market troubles -- bear no relation to the success of the company or the wishes of shareholders. Something is seriously wrong when the American people are left to bear the consequences of reckless corporate conduct, while the offenders themselves are packed off with another forty - or fifty million for the road. If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO's pay, including any severance arrangements, must be approved by shareholders"

UK: Climate Change Bill receives Second Reading in the Commons

[Update (28 November): see here]. The Climate Change Bill received its Second Reading in the House of Commons yesterday and will now proceed to the Committee stage, where individual clauses will be considered. The Second Reading provided the opportunity for general debate (that is its purpose) and several comments were made concerning companies' environmental reporting and Clause 80 of the Bill (see this earlier post for further background information). It is not clear whether the Government intends to retain Clause 80. The Government minister (Joan Ruddock MP) introducing the Bill observed (HC Hansard, 9 Jun, col 124):

The Companies Act 2006 provides for reporting on environmental issues by listed companies, but it is too early to say how well they are reporting and what they are reporting on. When Lord Rooker accepted the amendment [clause 80] in the House of Lords, he said that the Government would have to consider the matter further, and that is what we will do"

UK: financial services regulation - future direction outlined by FSA chairman

Yesterday the Financial Services Authority chairman, Sir Callum McCarthy, delivered a speech titled "Financial Services Regulation in the UK". Sir Callum provided a strong defence of the regulatory structure governing financial services in the UK and observed:

The principles which have underpinned the regulatory framework in the UK for the last decade remain good principles, which we would depart from at our peril and to our cost"

He nevertheless identified areas in which the FSA needs to improve, including the better application of the principles in practice and greater attention being given to firms' incentive structures (although Sir Callum explained that the FSA has "no part to play in assessing or influencing individual bonuses or individual remuneration"). Sir Callum also made clear that the FSA would press ahead with changes to the UK liquidity regime and noted that "unless there is a step change in the speed with which the Basel Committee progresses international agreement, regulators will be forced to deal with this on a national level".

Tuesday 10 June 2008

Canada: gender diversity and corporate boards

Catalyst has published a report titled 2007 Census of Women Board Directors of the FP500: Voices From the Boardroom. In the accompanying press release, the following summary is provided:
The report found that women’s representation on corporate boards in Canada remains remarkably low. Women held 13.0 percent of board seats in the FP500, up only one percentage point since 2005. In 2007, just over 40 percent of FP500 companies in Canada still had no women board directors ... Census interviewees suggested several reasons why the overall representation of women on corporate boards remains frustratingly low. They said the positions, opportunities, and networks that had been so vital to their own success are still not available or accessible to most women in corporate Canada. Interviewees stressed that reliance on informal “old boys’ networks” continues to be a significant factor in how new board directors are recruited".

Corporate governance and information technology

The International Organisation for Standardisation (ISO) has published a new standard: ISO/IEC 38500, Corporate Governance of Information Technology. According to the ISO, this new standard:
is applicable to organizations from all sizes, including public and private companies, government entities, and not-for-profit organizations. This standard provides a framework for effective governance of IT to assist those at the highest level of organizations to understand and fulfill their legal, regulatory, and ethical obligations in respect of their organizations’ use of IT. The framework comprises definitions, principles and a model. It sets out six principles for good corporate governance of IT that express preferred behavior to guide decision making: responsibility, strategy, acquisition, performance, conformance, human behavior".

For further information click here. A copy of the standard is not available to view free of charge.

Monday 9 June 2008

UK: the Combined Code - recommendations from the Conservative Party Working Group on Responsible Business

The Conservative Party Working Group on Responsible Business has proposed some changes to the Combined Code in its (reasonably) recent report "A light but effective touch". The Working Group stated:

Clearly it is one of the roles of company boards to help define the standards and values of the company. The Combined Code on Corporate Governance does contain a reference to the board’s role in setting the company’s values and standards (Code A.1 The Board). However, we suggest that this is insufficiently clear and requires further serious thought. Further, the tick-box mentality of some companies and investors has led to this clause being overlooked in practice. While the Turnbull Inquiry, a forerunner of the Combined Code, does mention corporate responsibility as a concept, the Combined Code does not make sufficient mention of this. The Working Group believes the Combined Code should make recommendations about incentives, training and corporate responsibility strategy"

UK: the super equivalence of the market abuse rules

In February this year, HM Treasury launched a consultation concerning the definition of market abuse within the Financial Services and Markets Act (2000). The FSMA definition is wider than that found in the European Market Abuse Directive (2003/6/EC) (it includes, for example, behaviour based on a wider set of information than the Directive).  For this reason HM Treasury sought views on the desirability of this position of "super equivalence".  HM Treasury's response to the consultation has now been published; to quote directly from the response document (para. 1.2):

Having an effective set of tools to tackle market abuse is crucial. This is a shared objective at the EU level and we are therefore keen that the EU review of the Market Abuse Directive should ultimately deliver an outcome that we consider fully satisfactory for combating market abuse. Pending this work we have decided to retain the areas in which we are superequivalent to the EU’s Market Abuse Directive until December 2009 to enable a wider consideration of their benefits for addressing identified issues with the EU regime and to minimise transition costs for industry".

For further information about the European Market Abuse Directive, see here and for discussion see Siems, M."The EU Market Abuse Directive: A Case-Based Analysis", 2007, available on SSRN here.

Postscript (11 June 2008): The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2008, which will extend the super equivalent provisions until 31 December 2009, have been published and come into force on 30 June 2008. 

Sunday 8 June 2008

Europe: Commission Recommendation on limiting auditors' liability

The European Commission has issued a Recommendation concerning the limitation of auditors' liability in respect of the statutory audit of the accounts of a company which is registered in a Member State and the securities of which are admitted to trading on a regulated market in a Member State. The Recommendation provides:
  • The civil liability of statutory auditors and of audit firms arising from a breach of their professional duties should be limited except in cases of intentional breach of duties by the auditor. 
  • The limitation of liability should apply against the company audited and any third party entitled under national law to bring a claim for compensation. 
  • Any limitation of civil liability should not prevent injured parties from being fairly compensated. 
The Recommendation provides that any of the following methods can be used by Member States:
  • establishing a maximum financial amount (or a formula for the calculation of such an amount).
  • establishing principles by virtue of which the auditor is not liable beyond its actual contribution to the loss suffered and is accordingly not jointly and severally liable with other wrongdoers.
  • permitting the auditor and company being audited to determine a limitation on liability through agreement.
For further information see the following documents published by the Commission: executive summaryimpact assessment, press release and frequently asked questions

NB: In the UK, Section 534 of the Companies Act (2006) permits auditors to enter into a "liability limitation agreement".  This is an agreement "that purports to limit the liability owed to a company by its auditor in respect of any negligence, default, breach of duty or breach of trust, occurring in the course of the audit of accounts, of which the auditor may be guilty in relation to the company".  To be valid, such agreements must comply with Section 535 and must be authorised by the company's shareholders under Section 536

Saturday 7 June 2008

UK: limiting the size of the company's board

The UK Companies Act (2006) does not impose an upper limit on the number of directors that can be appointed to a company board. Section 154 of the Act does, however, set a minimum number of directors: two for a public company and one for a private company. Moreover, Section 155 (which comes into force on 1 October 2008) provides that all companies must have at least one director who is a natural person.  

Companies can, if they wish, set a maximum number of directors in their articles of association. Marks and Spencer plc is planning to adopt such a provision. In the Notice for its forthcoming AGM, M&S explains its proposal to include in its articles a new term which will limit the size of its board to 20 directors. M&S says that this reflects "current best practice". What is this best practice to which M&S refers?  The Combined Code does not impose a limit on board size but it does state that "[the] board should not be so large as to be unwieldy" (A.3). Sir Adrian Cadbury has provided a further insight: in his book Corporate Governance and Chairmanship: A Personal View (Oxford: OUP, 2002) he observed that a limit of 10 was "an admirable starting point for any consideration of board size" (p. 51).

Postscript (8 June 2008): 

Interestingly, Tesco plc, at its forthcoming AGM, will be seeking shareholder approval for the removal of a cap on the number of directors in its articles. The company states that this will provide "more flexibility". Tesco's existing articles set a limit of 16.  See this Notice for further information.  

Another FTSE100 company - Centrica - has altered its articles this year and has included a cap of 20 directors on the board. The company has explained why in the Notice sent to shareholders: "Following guidance from the Association of British Insurers, published since the current Articles were brought into force, the Company has decided to insert a provision into the New Articles to allow for a maximum number of twenty Directors of the Company".

Friday 6 June 2008

UK: publishing the annual report and accounts - listed companies missing the new deadline

Under Disclosure and Transparency Rule (DTR) 4.1 listed companies are required to publish their annual report and accounts within 4 months of their financial year end. This rule implements Article 4(1) of the European Transparency Directive (2004/109/EC) and applies to companies with year ends after 20 January 2008. According to the FSA (acting as the UK Listing Authority):

Our recent experience, with the first issuers required to comply with these new rules, suggests that some companies have mistakenly believed that publishing Preliminary Results (required previously under the Listing Rules) within this period was enough to fulfil their obligations under DTR 4.1. This is not the case. We would remind issuers that we are able to suspend the listing of, or even take enforcement action against, companies who do not publish the required financial information within the required deadlines, and may employ this where necessary in the future".

For further information see this update

Guernsey: Companies (Guernsey) Law 2008 receives Queen's Assent

The Companies (Guernsey) Law 2008 received the assent of The Queen in Council last month (see here for the Order). It is the intention of the States of Guernsey to implement the new legislation in stages. A Commencement Ordinance - The Companies (Guernsey) Law, 2008, (Commencement) Ordinance, 2008 - has been enacted: this brings into force, on June 12, the provisions in Part XXX governing the registrar of companies and states that the entire Act will come into force on 1 July.   For background information, see this earlier post and note also the information on the Guernsey Registry website, including this overview of the dramatic changes for company incorporation resulting from the new Act.

Postscript (25 July 2008): The above link to the Companies (Guernsey) Law 2008 will take you to the latest, consolidated version on the Guernsey Registry website.  

Thursday 5 June 2008

UK: Principles of Good Practice for the Handling of Inside Information

The Financial Services Authority's Market Watch Newsletter 27, published today, contains a set of Principles of Good Practice for the Handling of Inside Information.   According to the FSA (in its press release):
The Principles, which highlight the importance of restricting access to price sensitive information, are voluntary to adopt, broad based and largely focused on the areas identified as requiring the most attention, as set out in Market Watch 21. Whilst the Principles are aimed at the unregulated community, aspects of them could also provide assistance to other market participants"

Europe: Commission begins infringement proceedings against Germany

The European Commission has begun infringement proceedings against Germany following its failure to comply with the European Court of Justice's decision in Commission of the European Communities v Federal Republic of Germany (Case C-112/05).  The European Court of Justice held that several parts of the so-called "VW law" breached the EC Treaty provisions on the free movement of capital.  Further information is available in this press release from the Commission and this report from the UK's Times newspaper

Jersey: statutory basis for the UK Takeover Panel

Takeovers in Jersey are currently governed by the UK Takeover Code and Takeover Panel but this arrangement is informal.  This will soon change: draft legislation - the Companies (Takeovers and Mergers Panel) (Jersey) Law - has been published and its purpose is to place the UK Takeover Panel's role on a statutory footing.  This will bring Jersey into line with the United Kingdom, where Part 28 of the Companies Act (2006) governs the Panel's operation.  The Panel has only recently been placed on a statutory footing in the UK, following the implementation of the European Takeover Directive (2004/25/EC).  For further information, see this press release from the Takeover Panel or this press release from the States of Jersey.