Thursday 31 July 2008

UK: proposed reforms to Part 7 of the Companies Act (1989)

HM Treasury has published a consultation paper titled "Modernising the insolvency protections for the operation of financial markets – proposals to reform Part 7 of the 1989 Companies Act". In the executive summary it is stated:
Part 7 of the Companies Act 1989 modifies general insolvency law to provide systemic protection for certain financial markets in the event that one of their participants defaults. Due to the rapidly evolving nature of financial markets, the Act allows for these provisions to be updated by regulations and this consultation concerns proposals for such an update. Central counterparty clearing, which is the main focus of Part 7, is increasingly recognised as a vital element of market infrastructure, helping to guarantee transactions and produce efficiencies of risk management. In November 2004 the IOSCO (International Organization of Securities Commissions) and the Group of Ten central banks produced recommendations for the operation of central counterparties. The amendments proposed here are in accord with those recommendations, and with the recent proposal by the EU Commission to update the Settlement Finality Directive in line with latest market and regulatory developments, including the increased interoperability of systems".

Wednesday 30 July 2008

UK: the Corporate Manslaughter and Corporate Homicide Act (2007) - update on custody provisions

On 6 April 2008, the majority of the provisions of the Corporate Manslaughter and Corporate Homicide Act (2007) came into force. Section 2(1)(d) of the Act was not brought into force; this provision concerns death arising from a gross breach of the duty of care owed by a custody provider. The Government's intention is that Section 2(1)(d) should be brought into force by April 2013.  In this regard, a progress report - titled "Corporate Manslaughter and Corporate Homicide Act 2007 - Progress towards implementation of custody provisions" - has been published. An accompanying written ministerial statement is available here. It appears that Section 2(1)(d) may be brought into force before April 2013 with regard to some custody providers.  

Tuesday 29 July 2008

UK: Limited Liability Partnership Accounts Regulations published

The following Regulations have been published on the OPSI website and come into force on 1 October 2008. Their purpose is to apply to limited liability partnerships the accounting provisions of the Companies Act (2006). For further information see these FAQs prepared by BERR

[1] The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 - see here for the explanatory memorandum.

Monday 28 July 2008

Guernsey: the Companies (Guernsey) Law 2008

A consolidated version, dated 24 July 2008, of The Companies (Guernsey) Law 2008, is now available here on the Guernsey Registry website.

Friday 25 July 2008

UK: Scotland: does a dissolved partnership have a continuing legal personality?

The Scottish High Court of Justiciary, Scotland's supreme criminal court, has considered some interesting points regarding partnerships under Scots law and the Partnership Act (1890). In Balmer and others v Her Majesty's Advocate 2008 HCJAC 44, the court was required to consider whether a partnership continued to exist as a legal person after its dissolution. Lord Eassie delivered the court's opinion and held that "the dissolved partnership does not have any continuing legal personality following dissolution" (para. [83]). As a result, an indictment against a dissolved partnership was held incompetent.


[1] Section 4(2) of the Partnership Act (1890) provides that "In Scotland a firm is a legal person distinct from the partners of whom it is composed".  Under English law the general partnership does not have a separate legal personality; however, in W Stevenson & Sons (A Partnership) and Anor v R [2008] EWCA Crim 273 (noted in this earlier post), 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".

[2] The case has been reported on the BBC news website here, where the following comments of Solicitor-General Frank Mulholland QC are noted: "The prosecution of a dissolved partnership was previously unknown in Scots law. Today's decision of the Appeal Court has clarified the law in relation to the liability of a dissolved partnership for alleged crimes that occurred prior to it being dissolved. The Appeal Court has held that criminal liability does not rest with the former firm in its firm name".


UK: Companies Act (2006) - The Companies (Reduction of Share Capital) Order 2008

The Companies (Reduction of Share Capital) Order 2008 has been published on the OPSI website, together with an explanatory memorandum. The Order was made on 17th July and comes into force on 1 October 2008. It sets out the form of the solvency statement for private companies wishing to reduce their share capital in accordance with Sections 642 to 644 of the Companies Act (2006). For background information see these FAQs provided by BERR

Thursday 24 July 2008

UK: corporate governance and AIM companies

Companies listed on AIM - the London Stock Exchange's Alternative Investment Market - are not subject to the "comply or explain" regime of the Combined Code on Corporate Governance.  The LSE AIM Rules for Companies (2007) contain some provisions concerning the conduct of directors but these are not intended as a substitute for the Combined Code. The corporate governance practices of AIM companies have been explored in a recently published PwC report titled "Corporate Governance and AIM - An assessment of the governance procedures adopted by AIM companies". According to the report's executive summary:

...governance procedures adopted by AIM companies vary widely. It is apparent that good governance is not necessarily a function of size of the company or its location, and it is hard to argue that the bigger the company on AIM, the better the governance. This survey shows that the composition of the Board is a particular area of weakness for many AIM companies. The need for strong independent non-executive director representation on the board appears to be something many AIM companies have yet to recognise. Perhaps linked to this, is the fact that only a fifth of the AIM Top 100 reported that they had assessed their Board effectiveness. This fell to only 5% of the smallest AIM companies in our sample. It remains to be seen whether the current voluntary approach to governance is a sustainable model for AIM, especially when the evidence of this survey shows a relatively limited application of best governance practices, across all segments of the market".

UK: credit union and industrial and provident societies - Legislative Reform Order published

Note: The Financial Services Authority has welcomed the publication of the LRO and, in a press release issued today, states that it will publish a consultation paper in the autumn concerning changes to its rules arising from the changes proposed in the LRO.

UK: BERR annual report published

The UK Government department responsible for company law - BERR, or the Department for Business, Enterprise and Regulatory Reform - has published its annual report. Click here to view the entire report (be warned: it contains 267 pages) or here to view separate sections. For those interested in the Government's perception of its role in corporate governance there are some interesting insights. For example, the report notes (on page 55) that one of BERR's roles is to "create fair and flexible labour markets and to ensure that confident and informed shareholders and consumers drive markets".

Ghana: company law reform

Fifty years ago the Government of Ghana appointed the late Professor L.C.B. ("Jim") Gower to review its company law. Professor Gower's work resulted in the Companies Code 1963. The 1963 Code is now being reviewed as part of a wider review of business law initiated by the Ghanaian Attorney General and Ministry of Justice. See here and here for further information. 

Wednesday 23 July 2008

UK: Scotland: unfair prejudice, implied terms and the affairs of the company

An interesting judgment was handed down yesterday by Lord Glennie in Scotland's Court of Session (Outer House). The case - Gowanbrae Properties Ltd., a petition of [2008] CSOH 106 - concerned a petition presented under Section 994 of the Companies Act (2006) (the unfair prejudice remedy, formerly Section 459 of the Companies Act (1985)). The case deserves attention because of Lord Glennie's comments on the width of the remedy and also because it provides a good illustration of the difficulties associated with determining whether prejudice has been suffered by a shareholder qua shareholder.

The petitioner held redeemable preference shares in the company. At the time that the preference shares were created, the company's articles were amended to provide for the redemption of the preference shares on a specified date: the day on which a certificate of practical completion was issued in respect of the development of a property owned by the company. The company's board decided not to proceed with the development of the property. The petitioner claimed that this prevented the redeeming of its shares and that this amounted to the conduct of the company's affairs in a manner unfairly prejudicial to its interests.

In order to bring their claim within Section 994, the petitioner argued that the directors' decision ended the basis on which the parties had entered into association; it was thus unfair, the petitioner argued, for it to be bound to continue as a shareholder in the company. Lord Glennie rejected this argument and the argument that a term should be implied requiring the company to achieve practical completion. His Lordship dismissed the petition and in the course of his judgment observed (at para. [20]):

If there is no obligation on the Company in terms of the implied term contended for by the petitioner, it must follow that the Company is free to make commercial decisions in its own interests. The directors owe a fiduciary duty to the Company and complaints can be made against them if, in breach of that duty, they have regard to extraneous matters, such as a desire to benefit some other company. The court will not lightly infer from surrounding circumstances the existence of an understanding to which the Company should be held in equity and which would prevent it from making decisions in its best interests..."

Lord Glennie also made the following interesting observations with regard to the petitioner's claim and the court's jurisdiction under Section 994 (at para. [22]):

The essence of that jurisdiction [Section 994] is that the affairs of the company have been conducted in a manner which is unfairly prejudicial to the interests of the petitioner as a member of the company. The petitioner's claim, as was stressed repeatedly in argument, is based on the fact that it had an accrued right to payment ... It seems to me to be arguable that the prejudice which the petitioner has suffered, if it be prejudice, is as a seller of shares rather than as a member of the company. In response to this argument, I was referred on behalf of the petitioner to the case of Gamlestaden Fastigheter AB v Baltic Partners Limited [2007] 4 All ER 164. In that case a shareholder claimed under the Jersey equivalent of section 459 on the basis that he was a creditor, and would not have advanced sums to the company but for having been a shareholder. This, it was argued, illustrated the width of the jurisdiction. Those facts are, of course, the reverse of the present circumstances ..."

Note: For an earlier decision of Lord Glennie considering Section 994, see: West Coast Capital (Lios) Ltd. [2008] CSOH 72.

Tuesday 22 July 2008

UK: Companies Act (2006) - 7th Commencement Order published on OPSI

The Companies Act 2006 (Commencement No. 7, Transitional Provisions and Savings) Order 2008 was laid before Parliament on 17 July and has today been published on the OPSI website along with an explanatory memorandum. This Order brings into force various provisions of the Companies Act (2006) on 1 October 2008, including those relating to the reduction of capital by a private company supported by a solvency statement.

Europe: the European Private Company Statute - trade ministers supportive

As noted in this earlier post, on 25 June the European Commission published a proposal for a 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 SPE proposal has recently passed an important hurdle: on 18 July, as reported here, the European industry ministers provided their support. This said, the UK's Financial Times newspaper has reported:
Some EU countries are known to be unhappy with particular aspects of the SPE proposals. The very low minimum capital requirement, for example, has not been greeted warmly by Germany or Austria, where critics claim that this could make it too easy for fly-by-night businesses to incorporate. So there is a possibility that more referrals to national laws could get added in as the statute makes its way through the legislative process. And that leaves many observers guarded about the SPE’s usefulness at this stage".

UK: Companies Act (2006) implementation - BERR update

Yesterday BERR published an update on its Companies Act (2006) website concerning (a) statutory instruments with a 1 October 2008 commencement date, (b) the restoration to the register of companies dissolved prior to 1969, (c) the amendment of Tables A to F of the Companies Act (1985), (d) the draft Overseas Companies Regulations and (e) accounts and reports guidance.

For further information see: 

Hong Kong: first criminal conviction for insider dealing

Hong Kong has seen its first successful prosecution for insider dealing under the Securities and Futures Ordinance 2003. The case concerned a finance manager of a subsidiary of Sino Golf Holdings Ltd. In the course of her employment the manager became aware that a debtor of the subsidiary company had filed for Chapter 11 bankruptcy protection in the US. She sold her holding of 180,000 shares in Sino Golf before the market became aware of the debtor's financial difficulties and its impact on the subsidiary.

The Securities and Futures Commission (SFC) argued that by selling her shares at this time she avoided a loss of HK$63,333. This argument was upheld by the the Eastern Magistracy. The Principal Magistrate sentenced the employee to six months' imprisonment (suspended for two years), fined her HK$200,000 and ordered her to pay $20,253 in costs to the SFC.

For further information see:

Monday 21 July 2008

UK: delayed disclosure of liquidity support - FSA consultation

The UK's Financial Services Authority has published a consultation paper in which it proposes amending the Disclosure and Transparency Rules (DTR) in order to clarify that, in a limited set of circumstances, financial institutions admitted to trading on a regulated market and in receipt of liquidity support from the Bank of England can delay disclosure of this fact.

There is unlikely to be unanimous support for this proposal, not least because of the argument that the proposal (which is clearly designed to support financial stability) undermines the transparency of the market. The FSA nevertheless states in its consultation paper that its proposal is consistent with Article 3 of the European Market Abuse Directive (2003/124/EC) which recognises certain circumstances in which delayed disclosure can be justified. These circumstances are reflected in the current version of DTR 2.5

For further information see:

ICGN Newsletter published - sovereign wealth funds and Swedish corporate governance

The June 2008 issue of the International Corporate Governance Network Newsletter has been published. The leading article concerns sovereign wealth funds and there is also a short piece on corporate governance in Sweden. The latter highlights some important differences between the Swedish model and the approach taken in other countries.

Note: On 1 July 2008, a new version of the Swedish Corporate Governance Code came into force - see here. For background information, including a comparison between the new Code and its predecessor, see here.

Europe: cross border private placement - Commission finds prima facie case for action at EU level

The European Commission has published an impact assessment in which it considers whether action is needed at European level in order to facilitate cross border private placements.  In its assessment the Commission notes the problems with cross-border private placements and finds that an EU private placement regime - not necessarily a legal framework - could help overcome the problems. The Commission has considered a number of options with regard to such a regime but its analysis has revealed that there is insufficient data and information to reach firm recommendations at this stage. It will therefore be continuing its impact assessment work.

UK: Takeover Panel consultations - electronic communications and miscellaneous amendments

The UK's Takeover Panel has published two consultation papers, for which responses are invited by 17 October:

[1] Miscellaneous Code Amendments (2008/2) - the Panel proposes amending Rules 2, 8, 9, 35 and 28. These amendments are intended to clarify the application of existing Code provisions or to codify existing practice in relation to matters which are not currently covered by the Code.

[2] Electronic Communications, Websites and Information Rights (2008/3) - the Panel proposes that the Code should be amended to:
  • enable electronic forms of communication to be used to send documents and information to shareholders and certain other relevant persons;
  • facilitate and require a wider use of websites by parties to offers; and
  • ensure that persons nominated to enjoy “information rights” receive the same information as shareholders. 

Friday 18 July 2008

USA: Delaware - Supreme Court opinion in CA Inc v AFSCME

The Delaware Supreme Court has given its opinion in CA Inc. v AFSCME Employees Pension Plan (No. 329, 2008). The opinion has been keenly anticipated because of the issues it raises about the management of companies and the role of the directors and shareholders.  AFSCME, a stockholder in CA Inc. ("the company"), submitted a bylaw for inclusion in the company's proxy materials for its 2008 annual stockholder meeting. The bylaw, if accepted, would require the board of directors to reimburse a stockholder (or group of stockholders) the reasonable expenses incurred in nominating one or more candidates in a contested election of the board of directors. 

The company's board decided to exclude the proposed bylaw from the proxy materials. The SEC was informed and a request was made for a "no action" letter (one indicating that enforcement action would not be taken against the company for its exclusion of the proposed bylaw). The company argued that the proposed bylaw was not a proper subject for a stockholder action and if implemented would breach Delaware General Corporation Law (DGCL). The AFSCME obtained legal advice taking the opposition position. The SEC decided to ask the Delaware Supreme Court for its opinion - the first time it has done so under new clarification rules in the Delaware Constitution (Article IV, §11(8), about which see here) - and posed two questions.

The first question was whether the AFSCME proposal was a proper subject for action by shareholders under Delaware law. The court held that it was and observed:

The shareholders of a Delaware corporation have the right “to participate in selecting the contestants” for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election. The Bylaw would accomplish that by committing the corporation to reimburse the election expenses of shareholders whose candidates are successfully elected. That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action".

The second question for the court was whether the AFSCME Proposal, if adopted, would cause the company to violate any Delaware law to which it was subject. The court held that it would. In reaching this decision, the court considered the proposed bylaw in the abstract and stated that it had to consider:

... any possible circumstance under which a board of directors might be required to act. Under at least one such hypothetical, the board of directors would breach their fiduciary duties if they complied with the Bylaw. Accordingly, we conclude that the Bylaw, as drafted, would violate the prohibition, which our decisions have derived from Section 141(a), against contractual arrangements that commit the board of directors to a course of action that would preclude them from fully discharging their fiduciary duties to the corporation and its shareholders".

Unsurprisingly commentators have been quick to describe the decision as a further example of the director-centric nature of Delaware law but the court's opinion is rather more nuanced than this description suggests.  For further discussion see:

UK: confidence in corporate reporting and governance - FRC warning continues

The UK's Financial Reporting Council held its Annual Open Meeting this week. The FRC's chief executive delivered a series of remarks concerning the on going work of the FRC and concluded with this warning:
In December of last year we issued a statement noting that the risks to confidence in corporate reporting and governance were higher than they had been for some years and that this needed to be matched by additional diligence on the part of preparers of accounts, audit committees and auditors. Eight months on our warning remains in place and the text of our statement and the key questions which we suggested that audit committees should consider is worth re-reading".

Europe: Spain - free movement of capital and freedom of establishment

On July 17 the European Court of Justice gave its opinion in Commission v Spain (Case C-207/07). The case concerned the requirement, for those acquiring shareholdings in certain energy sector companies, to seek the prior authorisation of the National Energy Commission (the Spanish regulatory body with responsibility for the operation of energy systems).  The European Commission took the view that this requirement breached Community law and instigated infringement proceedings against the Spanish Government. The ECJ has agreed. Its opinion is not yet available in English but a press release in English has been published in which it is stated:

The system constitutes a restriction on the free movement of capital inasmuch as it is capable of deterring investors established in other Member States other than Spain from acquiring shareholdings in Spanish undertakings operating in the energy sector and is therefore liable to prevent or limit the acquisition of shareholdings in those undertakings. Furthermore, this new system entails a restriction on the freedom of establishment. However, a system which entails such restrictions may be justified by reasons laid down in the EC Treaty or by overriding reasons in the public interest, such as public safety. To that end, the system has to satisfy certain conditions: that it is suitable for securing the attainment of the objective pursued and is proportionate to that objective".

It is also noted:

... Spain has not shown that the system of prior authorisation which has been established is a measure that is suitable for securing the attainment of the objective sought by the Spanish legislature, that is, security of energy supply. In any event, the Court considers that the Spanish system of prior authorisation is not proportionate to the objective of ensuring security of energy supply. First, the system does not limit the NEC’s power to refuse to allow the acquisition of shareholdings or assets referred to above or to make subject them to certain conditions on the sole ground of securing the objective of security of energy supply ... Secondly, the Court finds that Spain has not demonstrated that the objective pursued may not be attained by less restrictive measures, in particular by a system of ex post declarations".

UK: issuer liability - Government response to the Davies review

Section 1270 of the Companies Act (2006) inserted Section 90A of the Financial Services and Markets Act (2000) and established a statutory civil liability regime for issuer misstatements to the market. A review of this regime was conducted by Professor Paul Davies FBA QC - the Davies review - and recommendations published in June 2007.  The Government has published its response in "Extension of the statutory regime for issuer liability", in which it outlines its proposals which include the following:
  • There is to be no change to the current basis of liability (which is based on fraud).
  • The liability regime should apply to [a] issuers of all securities admitted to trading on a UK regulated market or multilateral trading facility and [b] issuers of securities admitted to trading on an EEA regulated market or multilateral trading facility, where the UK is the home state for the issuer under the Transparency Directive (2004/109/EC) or the issuer has its registered office in the UK.
  • The regime should apply to "transferable securities" as defined in Section 102A(3) of the Financial Services and Markets Act (2000).
A draft statutory instrument - The Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2008 - has been included in the Government's response document.

For further information see:

Thursday 17 July 2008

UK: Takeover Panel - annual report published

Yesterday the UK's Takeover Panel published its annual report for the year to 31 March 2008. The report provides a summary of statements issued by the Panel as well as statistics concerning resolved takeover and merger proposals. The report also refers to the High Court's decision in Re Expro International Group Plc [2008] EWHC 1543 (Ch) - noted in this post - and states:

In the recent High Court judgment in relation to the offer for Expro International Group Plc, which was effected through a scheme, it was noted that it was not considered desirable for Court procedure to introduce a level of uncertainty into offers which the provisions of the Code had successfully eliminated. On this evidence, it does not appear that there is any current likelihood of the Courts playing a more active role in determining the outcome of offers".

Wednesday 16 July 2008

UK: England and Wales: directors' liability for inaction

The High Court has today given judgment in Lexi Holdings v Luqman & Anor [2008] EWHC 1639 (Ch). The case concerned allegations of breach of duty made against several directors. It was argued that the inaction of these directors - including their failure to disclose to the board information known to them - had caused the losses resulting from the misappropriation of the company's assets by the managing director. The trial judge (Briggs J.) rejected this argument because causation could not be established but he nevertheless made some interesting points with regard to directors' duties.  In evaluating the claims Briggs J. considered the duties of directors (under the law before the codification of directors' duties in the Companies Act (2006)) and held that that the standard of care expected of directors is assessed using a dual objective/subject test. In this regard, Briggs J. observed (paras. [37] and [38]):

The objective test sets the basic standard. It is no excuse for a director to say that, in fact, she did not have the general knowledge, skill or experience reasonably to be expected of a person carrying out her appointed functions. The subjective test potentially raises the standard by reference to any greater general knowledge, skill or experience which the particular director actually has. To that analysis may be added the principle, established for example in Re City Equitable Fire Insurance Company Limited [1925] Ch 407 that, because of the essentially fiduciary nature of the office, a director is expected to apply to the management and custodianship of the company's property that same degree of care as she might reasonably be expected to apply in the management and custodianship of her own property".

Briggs J. then proceeded to consider the proper course of action for a director resigning from his/her position in circumstances where he/she is concerned about the conduct of the other directors.  The comments of Briggs J. in this regard are of particular interest because he recognised that resignation alone may not be a sufficient response (at para. [39]):

The fiduciary nature of the office also affects the question whether, and if so when, resignation may be an appropriate response by a director to circumstances coming to her attention. Prima facie a director who no longer wishes to perform her duties, or who finds it impossible to do so, may properly resign; see Re Galeforce Pleating Co Ltd [1999] 2 BCLC 704, at 716 c-d. But a director who wishes to retire may nonetheless be required to take steps to deal before departure with a pressing matter calling for attention, or to put her continuing colleagues on the board in possession of information known to her relevant to the matter in question, so as to enable them to deal with it. Exceptionally, a director may upon departure be obliged to put relevant information in the hands of the company's shareholders or other stakeholders, if not satisfied that continuing colleagues on the board have the inclination or the ability to deal with a matter of concern".

Tuesday 15 July 2008

UK: Conservatives propose Chapter 11 style insolvency regime

In a wide-ranging speech delivered today, the leader of the Conservative Party suggests that it may be appropriate to adopt elements of the American Chapter 11 regime. The Rt Hon David Cameron MP stated:

Just as we took action for banks - so too should we take the appropriate action to help all businesses in these difficult times. We want to make sure sound companies don't go into liquidation unnecessarily. Because we all know what liquidation normally means - closure. This isn't good for the companies, many of which are actually fundamentally sound. This isn't good for the banks, who lend these companies money. And it's not good for employees - who face being laid off. So what can we do? I can announce today that we will consult on taking the best aspects of the American Chapter 11 system and give good companies breathing space to allow them to rescue or restructure the business in the face of the credit crunch. This change will ensure that fewer good companies end up in liquidation - and fewer people lose their jobs through no fault of their own. But of course, we cannot - and should not save all companies that fail".

The Liberal Democrats' Treasury Spokesman, Vince Cable MP, has already offered criticism; in his view (published here):

Chapter 11 allows people who have mismanaged their companies to continue to run them free from their debt and pensions obligations. Chapter 11 not only rewards failure, but as the debacle of the US airline industry showed, it distorts the market and can be used as a cynical ploy for executives to weasel their way out of paying the pensions owed to their employees"

These comments do, of course, assume a great deal about the eventual form of any proposals developed by the Conservatives. The Financial Times newspaper reports that the Conservative Party's advisors

...have focused on three areas: an "automatic stay of enforcement" of debt by creditors, granted for a renewable period of a few months, while management stays and tries to negotiate a restructuring; priority funding for distressed companies, to whom lenders could give money in exchange for "super priority" over other unsecured creditors; and binding measures agreed by court and a majority of creditors to stop "unscrupulous" creditors from vetoing desirable restructurings".

UK: Companies Act (2006) - Overseas Companies Regulations 2008

A revised draft of the Overseas Companies Regulations 2008 has been published and is available here (in Word format). The revised draft has been published following a consultation in December 2007. In its response to this consultation (available here in Word format), the Government notes:

In line with the wider Companies Act 2006 (the 2006 Act) implementation timetable, the overseas companies regulations (including the accounting provisions) will be commenced on 1 October 2009. These regulations are intended for use by both overseas companies with an existing UK branch or UK place of business, and overseas companies that register a UK establishment on or after 1 October 2009.

The regulations apply to overseas companies as defined in the 2006 Act. The Government’s approach to these companies remains the same as it was in December 2007 and the regulations have continued to be developed with the intention of minimising obligations on overseas companies while complying with European legislation, as well as ensuring that UK creditors will have access to transparent information about the business of such companies. This is particularly the case with regard to accounting provisions within the draft regulations, which we have developed further in response to comments received in light of the consultation".

UK: materiality in financial reporting - ICAEW technical release 03/08

The ICAEW has updated its guidance (published earlier in Tech 32/96) on the concept of materiality in financial reporting. According to the ICAEW the guidance has been updated "to take account of the latest UK literature and IFRS, and to make sure that its principles remain in line with the latest thinking on materiality. This will help to minimise divergent practices in the application of materiality judgements in the preparation of financial statements".  The revised guidance - Tech 03/08 - is available here and in the introduction it is stated:

This guidance refers primarily to the financial statements of commercial entities reporting in compliance with companies legislation and therefore intended to give a true and fair view. However, its principles can be applied more generally to financial statements prepared by other organisations (eg, charities, pension schemes, government departments, local authorities and public sector businesses), although the assessment of users’ needs may vary ... The principles set out in this guidance may also be relevant to other information, such as that provided in an operating and financial review, a business review, a half-yearly report, interim management statements, information about post balance sheet events or in corporate governance disclosures".

Monday 14 July 2008

UK: Government reviews - raising equity and rights issues

The Government has today announced the formation of a working party to review the efficiency of the UK's capital raising process. The party will be chaired by the FSA chief executive Hector Sants and Economic Secretary to HM Treasury Kitty Ussher and will be considering whether changes are need to UK company law, market practices or regulatory requirements in order to make the raising of equity capital more efficient and orderly. The relationship between this new working party and the recently formed Rights Issue Review Group is not entirely clear, although both groups are chaired by Sants and Ussher. 

We have been here before (albeit under different market conditions). In 2005, Paul Myners CBE produced a report for the Government in which he considered the impact of pre-emption rights on companies' ability to raise new capital and proposed changes to the current regime.  It is not clear whether Myners' proposals were seriously considered by the Government.  Mr. Myners has, however, commented on the current debate in a recent article in the UK's Daily Telegraph newspaper - see here - which begins: 

The principle of pre-emption has been a cornerstone of capital raising under UK company law for nearly 200 years. Shareholders need to know that they are protected from any unwelcome dilution in value or control of their investments. But public companies also need to be able to raise new equity cheaply and efficiently when it is required. Are the two now in conflict?

The UK's concept of pre-emption is one of the things which differentiates the UK equity market from many other jurisdictions, including the US. It is a source of strength, not weakness. But the outdated, complex, and lengthy processes of rights issues are seeing this approach to capital raising placed under attack, particularly from US investment banks".

UK: FSA quarterly consultation - sponsor regime changes proposed

In its July 2008 quarterly consultation the UK's Financial Services Authority outlined proposed changes to the FSA Handbook including the following changes to the Listing Rules with regard to the sponsor regime:
  • Requiring an issuer to appoint a sponsor satisfying the requirement to be independent.
  • Giving the UKLA the ability to require a sponsor to disclose information to the UKLA that it reasonably requires.
  • Making the appointment of an independent sponsor an approval condition for a circular. 
For further information see:
Consultation paper | Newsletter | FSA Handbook | Listing Rules | Sponsors

UK: Companies House - appeals against late filing penalties

The Companies House adjudicator, Dame Elizabeth Neville DBE QPM, has published her first report (for the period 1 August 2007 - 31 March 2008). One of the roles of the adjudicator is to hear appeals against late filing penalties imposed by Companies House (and upheld, internally, by the Senior Appeals Manager). In this regard, the following extracts from Dame Elizabeth's report are of interest (paras. 2.8 and 2.16):

There were seven cases where directors experienced some serious problem which delayed the submission of the accounts. These included bereavement, and illness. However, in none of these cases was the individual a sole director. All directors have equal responsibility to ensure that accounts are submitted on time. Where one director has primary responsibility for submitting accounts and some catastrophe overwhelms him or her, other directors must be prepared to step into the breach. It is apparent that some directors are that in name only, and are either unable or unwilling to act when it becomes necessary. 

I upheld one appeal. In this case, property developers had been the directors of a property management company. They had managed it so badly that Companies House had dissolved it. The residents of the property development were obliged to apply for the company to be reinstated because of restrictive covenants on their properties, incurring the late filing penalties of the previous directors. Whilst supporting the policy of Companies House that outstanding late filing penalties must stand when a dissolved company is reinstated, notwithstanding a change of directors, I considered the circumstances of this case to be exceptional as the residents had no choice but to reinstate the company, had been ill treated by the property developer, and had already incurred considerable expense".


[1] The directors' duty to file accounts with the registrar of companies is imposed by Section 441 of the Companies Act (2006). Note also Part 35 - "The Registrar of Companies" - of the Act. 

[2] In July 2008, Companies House published revised guidance on late filing penalty appeals: see here

[3] All limited companies in England, Wales and Scotland are registered at Companies House, an executive agency of the Department for Business, Enterprise and Regulatory Reform. There are over 2,000,000 registered companies. There is a Registrar for England and Wales and another for Scotland. For information about incorporating a company, see here

Friday 11 July 2008

UK: the Data Sharing Review and corporate governance

The Data Sharing Review Report was published today. It contains many recommendations but the first two are of particular importance within the field of corporate governance:

Recommendation 1: As a matter of good practice, all organisations handling or sharing significant amounts of personal information should clarify in their corporate governance arrangements where ownership and accountability lie for the handling of personal information. This should normally be at senior executive level, giving a designated individual explicit responsibility for ensuring that the organisation handles personal information in a way that meets all legal and good-practice requirements. Audit committees should monitor the arrangements and their operation in practice.

Recommendation 2: As a matter of best practice, companies should review at least annually their systems of internal controls over using and sharing personal information; and they should report to shareholders that they have done so. The Combined Code on Corporate Governance requires all listed companies to review ‘all material controls, including financial, operational and compliance controls and risk management systems’ ... It would be surprising and worrying not to see information risks addressed explicitly in the Statements of Internal Control for such companies. We hope that bodies such as the Confederation of British Industry will develop guidance to help companies ensure their controls and disclosures are adequate. If approaches on these lines are not successful in improving high-level accountability for giving assurance on information risks, we would expect the Financial Reporting Council to intervene.

For background information click here.

Thursday 10 July 2008

Germany: corporate governance developments

A the end of June, at the 7th German Corporate Governance Code Conference, Dr. Gerhard Cromme delivered his final speech as chairman of the Government Commission on the German Corporate Governance Code. In his speech, Dr Cromme discussed the development of the Code - widely known as the Cromme Code - and reflected on the German two-tier board model and issues associated with the transparency of business decisions and executive pay.  Regarding the latter, Dr Cromme observed:

In connection with cases of excessive severance payments, there were calls to shorten the term of management board contracts from five years to, say, three years. This would have limited the amount of potential several payments without introducing a severance payment cap. However, we came to the conclusion that the five-year term of office is the greater good - for reasons of planning and reliability alone, but also in the interest of a long-term corporate strategy. Only first time appointments should generally be made for a shorter term. Instead of shortening management board contracts, we introduced suggestions on the severance payment cap in 2007. At the start of this month we took this a logical stage further and upgraded the suggestions to recommendations. This means that non-compliance with this rule has to be disclosed in the annual declaration of conformity. This is transparency which will bear fruit in the long-term and change patterns of behaviour".

Further information about the recommendation on severance pay is available here and a video of the conference is available here. Interestingly, the UK's Financial Times newspaper has reported, in a piece titled "Berlin plans to curb excessive executive pay" (online edition, July 10):

Berlin is poised to crack down on what it considers 'excessive' executive pay in a move that could curtail the use of stock options in Germany. The Christian Democratic Union of Chancellor Angela Merkel has set up a working group that will start work in September on concrete proposals. These are likely to include a tightening of corporate governance rules and corporate taxation possibly as soon as the end of this year. The proposals, to be finalised in the autumn, are likely to make it into law since the CDU has the support of its coalition partner the Social Democratic party. The CDU initiative is intended to target DAX-listed companies, but would also affect executives of foreign companies who live in Germany".


[1] In the UK, under Section 188 of the Companies Act (2006), directors' service contracts exceeding 2 years (or those with any fixed or rolling notice period exceeding 2 years) require shareholder approval. This provision applies to all companies.

[2] The UK Combined Code on Corporate Governance (June 2008) provides:

B.1.6 Notice or contract periods should be set at one year or less. If it is necessary to offer longer notice or contract periods to new directors recruited from outside, such periods should reduce to one year or less after the initial period.

The 2008 Charkham lecture

The second Charkham lecture, titled "Corporate governance in an era of multiple capital suppliers and exotic capital instruments", was delivered in London yesterday by Professor Ira M Millstein (Senior Associate Dean for Corporate Governance at the Yale School of Management). A transcript is available here. The lecture was hosted by the UK's Financial Reporting Council and is held annually in honour of the late Jonathan Charkham.

Prof. Millstein's lecture surveyed the development of corporate governance over the past 20 years and explained several governance issues arising from the structure of today's capital markets. In his view, we are on the threshold of unfamiliar territory.


The first Charkham lecture was delivered by Sir Christopher Hogg and is available here.

Wednesday 9 July 2008

UK: the Climate Change Bill and company reporting - goodbye to clause 80

[Update (28 November): see here]. In early June, when the Climate Change Bill received its Second Reading in the House of Commons, the Government indicated (see HC Hansard, 9 June, col 124) that it was still considering whether to retain Clause 80. Clause 80 would require those companies publishing a Business Review to report on their level of greenhouse gas emissions; it had been inserted into the Bill in the House of Lords.

The Bill has now reached the Committee stage in the House of Commons and earlier this week Clause 80 was debated and then removed from the Bill.  Government Minister Phil Woolas MP gave two main reasons for the removal of clause 80:
  • the power of the Government to impose new reporting requirements already exists in Section 416(4) or 468 of the Companies Act (2006)
  • clause 80 lacked sufficient guidance on the manner in which greenhouse gas emissions should be reported
This is not, however, where the story ends because the Government has inserted two new clauses into the Bill the purpose of which is provide guidance on the measurement of greenhouse gas emissions. The possibility remains, therefore, that additional reporting requirements may be introduced. These two new clauses appear below. It should also be pointed out that under Section 417 of the Companies Act (2006), quoted companies are required, "to the extent necessary for an understanding of the development, performance or position of the company's business" to include within their Business Review "information concerning "environmental matters (including the impact of the company's business on the environment)". For further information about the Bill, including the official record of debates, see here.  Update (29 October 2008): further changes have taken place - see here.

New clause 6 - Guidance on reporting

(1) The Secretary of State must publish guidance on the measurement or calculation of greenhouse gas emissions to assist the reporting by persons on such emissions from activities for which they are responsible.
(2) The guidance must be published not later than 1st October 2009.
(3) The Secretary of State may from time to time publish revisions to guidance under this section or revised guidance.
(4) Before publishing guidance under this section or revisions to it, the Secretary of State must consult the other national authorities.
(5) Guidance under this section and revisions to it may be published in such manner as the Secretary of State thinks fit.

New Clause 7 - Report on contribution of reporting to climate change objectives

(1) The Secretary of State must—
(a) review the contribution that reporting on greenhouse gas emissions may make to the achievement of the objectives of Her Majesty’s Government in the United Kingdom in relation to climate change, and 
(b) lay a report before Parliament setting out the conclusions of that review.
(2) The report must be laid before Parliament not later than 1st December 2011.
(3) In complying with this section the Secretary of State must consult the other national authorities.

USA: credit rating agencies - SEC report

Some more on credit rating agencies, following the developments noted in the previous post. The USA's Securities and Exchange Commission has published a "Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies". In the associated press release the SEC noted:
The SEC staff's examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. The examinations uncovered that none of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs. Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately"

For further information see:
SEC Report | SEC press release | SEC proposals: June 11 and July 1 |

Tuesday 8 July 2008

Europe: European Council supports proposal for credit rating agency regulation

European Internal Market Commissioner McCreevy's proposals for the regulation of credit rating agencies were noted earlier today (see here). The likelihood of these proposals becoming law has increased following endorsement by the Council of the European Union. In a press release published today, the Council stated:

The Council welcomes the revision by IOSCO of its Code of Conduct at the international level, and CESR's and ESME's reports on rating agencies. The Council considers that the revisions to the IOSCO Code of Conduct provide a minimum benchmark for the actions that credit rating agencies should take to address concerns about their activities in the market for structured products. In this context, the Council takes note of the additional steps undertaken in this field by the rating agencies to better address the governance concerns and improve transparency concerning the value and limitations of the ratings.

However, the Council shares the Commission view that the current initiatives do not fully address the challenges posed, that further steps, are needed and that regulatory changes might be necessary. The Council supports the objective of introducing a strengthened oversight regime for rating agencies and notes in this regard the preliminary views by the Commission as well as the proposals by CESR and ESME. The Council supports an enhanced European approach and the objective of strengthening international cooperation to ensure a stringent implementation of internationally approved principles. To this end, and without prejudice to consideration of its practical application, the Council supports the principle envisaged by the Commission that the rating agencies should be subject to an EU registration system.

The Council would also welcome intensified competition by entry into the market of new players". 

For comment, see this article in the Financial Times newspaper.

UK: the complexity and relevance of corporate reporting - FRC review

The Financial Reporting Council has embarked on a review considering the complexity and relevance of current UK corporate reporting requirements. According to the FRC:

The complexity project will consider whether corporate reporting requirements are disproportionate to their intended benefits and whether there are opportunities for improvement. It will address the risk that these requirements, and related influential guidance, are contributing to the increasing complexity of corporate reports without making them more useful or understandable. The project will focus primarily on the ongoing mandatory corporate reporting requirements for UK listed companies. This includes the financial and narrative aspects of all interim, half-yearly and annual reports, but not offer documents. There is also acknowledgement of the need to keep an eye on voluntary reporting such as preliminary announcements and annual reviews to ensure the project is comprehensive in its analysis and findings"

Further information about the review is available here.

Europe: McCreevy on the regulation of credit rating agencies

Further information concerning the shape of the European Commission's proposals for the regulation of credit rating agencies was provided by Internal Market Commissioner McCreevy in a speech titled "Regulation and Supervision after the Credit Crunch" delivered in Dublin on July 4. McCreevy stated:

There is the issue of the need to review the role and use of credit ratings. CRAs significantly contributed to the market turmoil by greatly underestimating the credit risk of structured credit products. I requested the advice of the Committee of European Securities Regulators (CESR) and the European Securities Markets Expert Group (ESME) on the various aspects of CRAs' activity and their role in the financial markets.

The IOSCO Code of Conduct to which the rating agencies signed up has not produced the desired effects. I am certainly not persuaded that the appropriate response lies in strengthening the voluntary framework established by the IOSCO code. International convergence is desirable if it can be achieved – but per se, this is not enough. And let me make it clear, I do not believe that Europe should be in the passenger seat on this issue. We need to drive things forward and set the pace.

While some of the additional steps that the main rating agencies have announced are welcome, they are insufficient. 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.

It is my intention to propose in October a registration and external oversight regime for rating agencies, whereby European regulators will supervise the policies and procedures followed by the CRAs. Reforms to the corporate and internal governance of rating agencies will form a part as well. I will also try to strengthen competition by encouraging entry into the market by new players. The European Securities Markets Expert Group stressed the importance not just of governance of rating agencies, but also the importance of having an appropriate corporate culture as well.

In the proposals I will bring forward on credit rating agencies, I also want to ensure that supervisors who will have responsibility for oversight will have at their disposal sufficient resources and expertise to keep up with financial innovation and to challenge the CRAs in the right areas, on the right issues, at the right time".

Finland: draft Corporate Governance Code published

A draft of the Finnish Corporate Governance Code for Listed Companies has been published. This will replace the Corporate Governance Recommendation for Listed Companies issued in 2003. The draft Code has been produced by the Corporate Governance Working Group appointed by the Board of the Finnish Securities Market Association.

UK: KPMG audit committee survey

KPMG has published the results of a survey of public company audit committee members. The views of just under 150 audit committee members were obtained and the following findings emerged:
  • Risk management was seen as the top oversight priority for the year ahead.
  • Nearly half of respondents said that the committee reported to the full board.
  • One in four respondents said that their committee did not have a formal process in place to evaluate the external auditor.
  • Over half of respondents expressed concern that the committee had been assigned (or had assumed) too much responsibility for risk oversight beyond financial reporting risk.
The results are available here (you may need to provide personal information in order to gain access).

Monday 7 July 2008

UK: schemes of arrangement, certainty and the Takeover Code

In Re Expro International Group plc [2008] EWHC 1543 (Ch), the High Court considered an application for sanction of a scheme of arrangement under Part 26 of the Companies Act (2006).  The scheme's purpose was a takeover. The UK Takeover Code provides, in appendix 7, that its provisions "apply to an offer effected by means of a scheme of arrangement in the same way as they apply to an offer effected by means of a contractual offer".  Re Expro is an important case because of the trial judge's observations regarding the application of the Takeover Code and the role of the Panel in takeovers effected through a scheme of arrangement.  The trial judge, David Richards J., observed (at para. [55]):

I have approached this application by the shareholders ... entirely on its own merits and in accordance with the established principles applicable to the consideration of schemes of arrangement. I nonetheless should say that I have concern that there should, if possible, be a common approach to the conduct of bids, whether they are structured as an offer or as a scheme. I would not think it desirable that the court procedure involved in a scheme should allow in an undesirable level of uncertainty which the provisions of the Code have successfully reduced or eliminated in the case of ordinary offers" 


[a] The judgment has not yet been published on BAILII although it is available on Lawtel (a subscription service).  Update (10 July 2008): the decision is now available on BAILII - see here

[b] The decision has been widely reported in the business press: see here and here