Friday 28 November 2008

UK: the Climate Change Act 2008 and company reporting

The Climate Change Bill received Royal Assent on November 26: the Climate Change Act 2008 is now on the statute book and a copy has been published by OPSI and is available here in PDF and here in HMTL. With regard to companies' reporting of greenhouse gas emissions, the Act does not contain specific reporting requirements. Instead, Section 85 ("Regulations about reporting by companies") provides:

(1) The Secretary of State must, not later than 6th April 2012— 
(a) make regulations under section 416(4) of the Companies Act 2006 (c. 46) requiring the directors’ report of a company to contain such information as may be specified in the regulations about emissions of greenhouse gases from activities for which the company is responsible,
(b) lay before Parliament a report explaining why no such regulations have been made.

(2) Subsection (1)(a) is complied with if regulations are made containing provision in relation to companies, and emissions, of a description specified in the regulations.

Background information about the Act is available on the DEFRA website here. It is interesting to compare the UK legislative framework with that established in Australia under the National Greenhouse and Energy Reporting Act 2007 - see here for further information. 

UK: Companies House - updated guidance booklets published

Companies House has published updated editions of a couple of its guidance booklets:

  • GBA4: Auditors (version 17) - PDF and HTML. This booklet explains the role of the auditor and the circumstances in which an auditor need not be appointed. 
  • GBA10: Dormant companies (version 17) - PDF and HTML. This booklet explains the obligations imposed on dormant companies if they are to remain on the Register at Companies House.

UK: FRC study of going concern and liquidity risk disclosure

The Financial Reporting Council has published the results of its study exploring going concern and liquidity risk disclosures. The FRC examined the December 2007 or March 2008 annual reports of 30 UK listed companies (including AIM). Companies were chosen if they had issued a profits warning, announced a rescue rights issue or announced funding difficulties during the first half of 2008. The following findings, inter alia, were made (to quote directly from the report):

The study found that information about going concern and liquidity risk was included in many different places in the annual reports reviewed. This made it difficult to develop a coherent and comprehensive picture of how liquidity concerns were relevant to the businesses. Disclosures were sometimes to be found in the chairman’s statement, chief executive’s report, Directors’ Report as well as in the notes to the accounts.

The study concluded that it would be particularly helpful if all of these disclosures could be brought together into a single section of a company’s annual report and accounts as this would facilitate a better understanding. If this is not practical, it would be helpful if the key disclosures are brought together by way of a note including cross references to other disclosures to help readers of financial statements find all of the relevant pieces of information.

UK: FRC publishes guidance for audit committees - key questions

The Financial Reporting Council has published a document titled "Challenges for audit committees arising from current economic conditions". In the document's introduction, it is stated:

Current economic conditions provide particular challenges to all involved with annual reports and accounts. The purpose of this document is to assist audit committees by identifying key questions that that they may need to consider when preparing for the year end and in carrying out their role in relation to annual financial statements. It does not establish any new requirements".

UK: FRC update for listed company directors: going concern and liquidity risk

The Financial Reporting Council has published an update for listed company directors concerning going concern and liquidity risk. According to the FRC, the update:

...brings together the requirements on directors to comment on going concern and liquidity risk in annual reports and accounts, in the light of the significant economic difficulties that were being experienced in the latter half of 2008. The update addresses the requirements of International Financial Reporting Standards, UK Generally Accepted Accounting Principles, the Listing rules of the Financial Services Authority, the 1994 Guidance for directors, The Companies Act 2006 and its requirements about the content of a Business Review in relation to December 2008 year ends. The update may also be useful for directors of unlisted companies".

Thursday 27 November 2008

USA: Council of Institutional Investors - revised corporate governance policies

The Council of Institutional Investors has amended its Corporate Governance Policies. The amendments include additions in respect of severance pay, proxy solicitation and shareholder rights to call special meetings. An updated edition of the Policies document is available here. The Policies set standards, or recommend practices, that CII members believe companies and boards of directors should adopt to promote accountability, independence, integrity, rigor and transparency.

Wednesday 26 November 2008

KPMG international survey of corporate responsibility reporting 2008

KPMG's 2008 International Survey of Corporate Responsibility Reporting has been published. The survey tracks reporting trends in the world's largest companies and has a sample size of over 2,200. The report finds that corporate responsibility reporting has become the norm with 80% of companies including it in their reporting compared with 50% three years ago.

Tuesday 25 November 2008

UK: annual elections for listed company boards?

The UK's Times newspaper recently reported that "leading institutional investors are gearing up for their biggest assault on corporate Britain by demanding the right to vote out the board of every listed company each year". This follows Barclays' announcement that its entire board will put itself up for re-election at next year's annual general meeting. 

Is such an annual vote for the entire board desirable? Will it encourage directors to act with the short-term in mind? How does it promote and encourage appropriate succession planning? What will be the impact on directors' remuneration? Would an advisory vote concerning the directors' performance be a better alternative?

UK: Lord Mandelson reflects on the Government's role in business

At yesterday's CBI conference in London, the Secretary of State for Business, Enterprise and Regulatory Reform - Lord Mandelson - delivered a speech in which he reflected on the Government's role in business and indicated that he would have more to say soon:

New Labour orthodoxy ... has made the government rightly suspicious of ministerial entanglement in markets. We learnt from past experience the perils of Ministers substituting their judgement for company boards. Getting too involved in market decisions, we believe, will tend to lead to worse decisions. And in 1997, quite honestly, when we came to office, governing was easier then, in simpler economic conditions than we know now. Put in place stability, as we did, strengthen the supply side and the rest will look after itself. And actually, in the main, it did. It's a good time to reflect further. Not because we want the government micromanaging our economy, but because we need to rethink the frameworks that government puts in place within which the private sector is then free to take its decisions. I intend to say more about this in a lecture in a few week's time".

Monday 24 November 2008

UK: Rights Issue Review Group report and recommendations

Amongst the documents published today, as part of the Government's pre-budget report, is the report of the Rights Issues Review Group. The Government has agreed with the Group's recommendations, which include the following short-term objectives (to quote directly from the report):
  • The FSA and BERR to consult on reducing the rights issue subscription period from 21 to 14 days.
  • BERR to take forward the practical transposition of the Shareholder Rights Directive to maintain the option of a 14 day notice period for companies’ general meetings.
  • The Association of British Insurers (ABI) to review its guidance on the ceiling on allotments in light of the Group’s recommendation that it be increased from one-third to two-thirds of an issuer’s issued share capital.
  • The FSA to continue to maintain oversight of the conflict of interest regimes with a view to reinforcing transparency between issuers and underwriters.
  • The FSA to facilitate the development by market participants of non-prescriptive guidance on the issues that an issuer could usefully consider when embarking on a capital raising by way of a rights issue.
  • The FSA to take forward consultation on a new form of open offer which will provide compensation and which may be run over a 14 day period in conjunction with a general meeting notice period. 
Several medium term objectives are identified, including:
  • Working at the EU level for the adoption of a short form prospectus for rights issues.
  • The possible increased use of shelf registration for equity issuance.
  • The FSA to consider further a basis for conditional dealing in rights issues to allow the general meeting notice period and the rights issue subscription period to be run in parallel.
  • The FSA to undertake further informal discussions on the usefulness of progressing with further work to introduce more accelerated rights issue models including for this purpose the Australian RAPIDS [Renounceable Accelerated Pro-rata Issue with Dual-bookbuild] model.
  • The FSA market consultation on a more permanent position on short selling in rights issues.

UK: Pre-budget report - no action on income shifting

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

The Government subsequently announced that legislation would be introduced to remove the tax benefits of "income shifting" (sometimes called "income splitting") and a consultation paper was published at the end of last year. In the March 2008 budget, the Government announced that legislation would be brought forward in the Finance Act 2009 (see paragraph 4.69 of the budget report). However, in today's Pre-Budget Report, the Government has announced (para 5.103): is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax, known as income shifting. The Government has consulted on this issue but, given the current economic challenges, the Government is deferring action and will not bring forward legislation at Finance Bill 2009. The Government will instead keep this issue under review".

UK: FTSE100 companies and female directors

The International Centre for Women Leaders at Cranfield University's School of Management has published the 2008 edition of its Female FTSE report. This is the tenth report published by the centre. The findings reported include (to quote directly from the report):
  • There was an increase in women CEOs to five in the FTSE 100, with an additional three more divisional or regional CEO posts held by women, an all-time high. There are now two female Chairman of FTSE 100 companies. The total number of female executive directors is 17.
  • The number of female directorships -131 - held by women on FTSE 100 boards is currently up to 11.7% of the total. In 1999 there were only 79 female directorships, 6.9% of the total.
  • Both market capitalisation and board size are significantly and consistently higher for companies with female directors when compared with those of all-male boards. 
  • Female directors are three years younger than their male counterparts on FTSE 100 boards, with an average age of 53.9 years. The female directors also had significantly shorter tenure.
  • There are still 22 companies in the FTSE 100 that have exclusively all-male boards.
  • Ethnic minorities are still underrepresented among the female FTSE 100 directors.
  • Of the 149 new appointees to the FTSE 100, only 16, a mere 10.7% were women.

UK: the Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009

The Department for Business, Enterprise and Regulatory Reform has published a draft of the Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009. In the accompanying consultation paper, BERR explains that the Regulations are required to implement the requirements of Directive 2006/46/EC in respect of corporate governance statements which are published separately from the directors' report. 

The Regulations deal with the publication and auditing of such corporate governance statements. They also make changes to Part 15 (Accounts and Reports) of the Companies Act (2006) in order to correct several minor errors. 

Friday 21 November 2008

UK: England and Wales: directors' duties and nominee directors

Judgment was given yesterday in Cobden Investments Ltd. v RWM Langport Ltd & Ors [2008] EWHC 2810 (Ch). There is much of interest in the case (a petition for unfair prejudice relief under Section 994 of the Companies Act 2006). Two points are particularly noteworthy with regard to directors' duties.

The first concerns the codification of directors' duties within Part 10 of the Companies Act 2006. The trial judge (Warren J) observed that the common law duty to act bona fide in the best interests of the company is "the same thing" as the duty in Section 172 to "promote the success of the company for the benefit of its members as a whole". His Lordship added, however, that he was not required to consider whether the statutory duties differ from the common law and equitable duties on which they are based (many of the allegations before him arose prior to the coming into force of the new statutory duties). Some would argue, nevertheless, that Section 172 goes further than the common law duty by requiring directors to consider various interests (employees, the community and environment) in promoting the success of the company. 

The second point concerns the duties of nominee directors. Warren J articulated seven principles regarding the duties of a nominee director, as follows (to quote directly, with minor changes, from para. [67]):
  • He owes the same duties to the company as any other director.
  • He owes his duties as a director to the company alone.
  • The company is entitled to expect from the director his best independent judgment.
  • These duties can be qualified in the case of a nominee director just as they can be qualified in the case of any other director. In particular, such duties (except perhaps for certain core duties) can be qualified by the unanimous assent of the shareholders.
  • It is doubtful whether, as a matter of English law, it is possible to release a director from his general duty to act in the best interests of the company.
  • Even if it is possible to do so, it would require strong evidence to demonstrate that that had been done, ideally an express written agreement signed by all of the shareholders. The onus must lie on those saying that the general rule has been attenuated or, to use another word, relaxed, as a result of unanimous shareholder approval to demonstrate that such approval has been given. And, I must add, they must show the extent to which the general rule has been relaxed.
  • However, I see no reason in principle why in relation to specific areas of interest, a director should not be released from his fiduciary duty to give his best independent judgment to the company. In particular, if a director is charged with negotiating on behalf of his appointor an agreement with the company where the interests of his appointor and the company are opposed, the shareholders can unanimously agree that he may conduct such negotiation without regard to the interests of the company. But if that were to be done, it might be expected that the director concerned would, by the same agreement, be precluded from discussions of the board relating to the negotiations and certainly from voting on the issue.
These principles raise several questions. First, is it correct to refer to the director's duty to act in the best interests of the company as a fiduciary duty (and indeed to refer to a fiduciary duty to give best independent judgment)? Second, why insist on shareholders' unanimous approval for a director to act in the interests of another? Is this easy to obtain where, for example, there is dispersed ownership? Why not, say, 75%?  What about provisions in the articles of association? 

Thursday 20 November 2008

UK: England and Wales: new corporate bribery offence proposed

The Law Commission for England and Wales has today published its final report Reforming Bribery. Major reform is proposed. Amongst the proposals is one for the introduction of a new corporate offence: negligently failing to prevent bribery by an employee or agent. There is a defence to this crime: having in place adequate systems to prevent bribery. The Government has welcomed the Commission's report and has stated that a draft Bill will be brought forward in the next session of Parliament. 

For further information see:

Wednesday 19 November 2008

USA: SEC publishes roadmap for adoption of IFRS by US issuers

The move towards global accounting standards has moved closer. The Securities and Exchange Commission has published a Roadmap for the potential use of financial statements prepared in accordance with IFRS by US issuers. The roadmap provides several milestones which, if met, could lead to the use of IFRS by US issuers in 2014 providing the SEC is satisfied that this would be in the public interest. The SEC is, however, proposing making amendments which would permit the earlier use of IFRS by a limited number of issuers where this would enhance the comparability of financial information.

UK: England and Wales: disqualification of directors - a successful appeal against length of disqualification period

In R v Randhawa & Anor [2008] EWCA Crim 2599, two directors successfully argued before the Court of Appeal that the length of disqualification periods imposed on them should be reduced.

The directors gave undertakings (under Section 1A of the Company Directors Disqualification Act 1986) that ran for ten years from 2003. They were disqualified for twelve years, running from 2007. The combined effect of the undertakings and disqualification orders was to preclude them from acting as directors for 16 years (i.e., 2003-2019). It was argued on their behalf that twelve years was too long a period of disqualification. Evidence of their recognising the gravity of their offences was advanced to support this claim. Leveson LJ, delivering the opinion of the court, observed (paras. [26] - [27]):

It is obviously important that the disqualifications imposed for these serious breaches of the law reflect the gravity of the criminality. Equally, however, in our judgment it is appropriate to recognise the appellants' acceptance of the position, the sensible abandonment of the applications to appeal against conviction [for being involved in the management of a company whilst undischarged bankrupts], and the way in which the appellants now present themselves to this court.

It would be wrong to impose a disqualification which did not extend beyond the present undertakings. In the circumstances we are prepared to make limited reductions to the orders made without in any sense criticising the decisions of the learned judge in relation to either".

The disqualification order for one director was reduced by two years to ten years; the other director's disqualification period was reduced by four years to eight years. It's worth noting that the maximum period for which a director can be disqualified is 15 years.

Tuesday 18 November 2008

Europe: Commission consultation on control structures in audit firms and their consequences on the audit market

The European Commission has published a consultation paper concerning control structures in audit firms and their consequences on the audit market. The purpose of the consultation is to identify ways by which the audit market can be opened up. In this regard, comments are sought on two proposals:
  • modifying Article 3(4) of the Statutory Audit Directive 2006/43/EC, in order to deregulate the rules on audit firms' capital structure and ownership.  
  • focusing on wider barriers including reputation, quality and expertise of staff and low client switching rates. 
In a press release, announcing the opening of the consultation, Internal Market Commissioner McCreevy stated:

We all need to think of how to bring new capital into the audit profession. Some have suggested that we should do away with ownership restrictions in audit firms and allow other players – not only audit partners – to invest in an audit firm. Audit firms fear that such relaxation could reduce the quality of audits and pose a risk to auditor independence. I want to hear more about both sides of the argument. I encourage all those who have a view or experience in this field to share it with us."

Comments can be submitted here. The Commission's 2007 study on the ownership rules of audit firms is available here.

UK: The Myners Principles - new framework

In March 2000, Paul Myners was commissioned by HM Treasury to conduct a review of institutional investment in the UK. Myners' report "Institutional Investment in the United Kingdom: A Review" was published in 2001 and it contained several principles for institutional investment decision making: the "Myners Principles". These were last reviewed in 2004. Earlier this year, HM Treasury held a consultation to consider whether the principles required updating. 

The Government's response has now been published and reforms are underway. An independent Investment Governance Group has being formed under the chairmanship of the Pensions Regulator. The Group will take responsibility for the content and implementation of the revised principles, associated guidance and best practice

Note: Paul Myners was ennobled earlier this year and, as Lord Myners, is Financial Services Secretary to HM Treasury.

Monday 17 November 2008

G20 issue declaration and action plan

The G20 countries published a declaration at their summit on financial markets and the world economy held in Washington on November 15. The declaration contains an action plan which adopts the following principles for reform: strengthening transparency and accountability, enhancing sound regulation, promoting integrity in financial markets, reinforcing international cooperation and reforming international financial institutions. 

Amongst the proposals for immediate action are the following:

  • Regulators should develop enhanced guidance to strengthen banks' risk management practices, in line with international best practices, and should encourage financial firms to reexamine their internal controls and implement strengthened policies for sound risk management. 
  • Supervisors should collaborate to establish supervisory colleges for all major cross-border financial institutions, as part of efforts to strengthen the surveillance of cross-border firms. Major global banks should meet regularly with their supervisory college for comprehensive discussions of the firm's activities and assessment of the risks it faces.
  • The IMF, expanded FSF, and other regulators and bodies should develop recommendations to mitigate pro-cyclicality, including the review of how valuation and leverage, bank capital, executive compensation, and provisioning practices may exacerbate cyclical trends.
  • Regulators should take steps to ensure that credit rating agencies meet the highest standards of the international organization of securities regulators and that they avoid conflicts of interest, provide greater disclosure to investors and to issuers, and differentiate ratings for complex products. 
  • The international organization of securities regulators should review credit rating agencies' adoption of the standards and mechanisms for monitoring compliance.
Several of the medium-term objectives concern accounting and in this regard the action plan states:
  • The key global accounting standards bodies should work intensively toward the objective of creating a single high-quality global standard.
  • Regulators, supervisors, and accounting standard setters, as appropriate, should work with each other and the private sector on an ongoing basis to ensure consistent application and enforcement of high-quality accounting standards.

Sunday 16 November 2008

UAE: Dubai: DIFC publishes draft Companies Law 2008

The Dubai International Financial Centre has published for consultation a draft of the Companies Law 2008, which will replace the Companies Law 2006

The content of the Companies Law 2008 is not that dissimilar from the UK Companies Act (2006) although it is much shorter. Both contain provisions concerning directors' duties and relief for shareholders in respect of unfairly prejudicial conduct. With regard to the former, the draft Companies Law 2008 states in Article 53 that:

A Director or other officer of a Company, in exercising his powers and discharging his duties, shall: 
(a) act honestly, in good faith and lawfully, with a view to the best interests of the Company; and
(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances". 

There is, however, no indication of how "best interests of the Company" is to be interpreted. Moreover, part (b) might be better written to indicate whether it sets only an objective standard. Where a director's skills exceed those of the reasonable person in comparable circumstances, and he fails to exercise those skills, will there be a breach of Article 53?

Note: for further information about the DIFC, which has the authority to legislate in civil and commercial law matters, see here.

Saturday 15 November 2008

Finland: updated Corporate Governance Code

An updated version of the Finnish Corporate Governance Code for Listed Companies has been published. The Code has been produced by the Corporate Governance Working Group appointed by the Board of the Finnish Securities Market Association. An unofficial translation has been published in English on the FSMA's website - see here

Friday 14 November 2008

Australia: review of credit rating agencies + regulatory changes

The Australian Treasury and the Australian Securities and Investments Commission have published a joint report titled "Review of credit rating agencies and research houses". The report describes the current regulatory framework for CRAs in Australia and notes international developments. It highlights how law and regulation my be able to address the regulatory issues identified concerning CRAs.  

Regulatory changes have been announced by Treasury Minister Nick Sherry: CRAs and research houses will be required to hold an Australian Financial Services Licence and CRAs will be obliged to produce an annual report explaining their compliance with the International Organisation of Securities Commissions (IOSCO) Code of Conduct Fundamentals for CRAs.

Europe: Commission adopts proposal for credit rating agency Regulation

The European Commission has adopted a proposal for a Regulation governing credit rating agencies (CRAs). The proposed Regulation sets out the following objectives (to quote directly from it):
  • to ensure that credit rating agencies avoid conflicts of interest in the rating process or at least manage them adequately;
  • to improve the quality of the methodologies used by credit rating agencies and the  quality of ratings;
  • to increase transparency by setting disclosure obligations for credit rating agencies; 
  • to ensure an efficient registration and surveillance framework, avoiding ‘forum shopping’ and regulatory arbitrage between EU jurisdictions. 
In order to achieve these objectives, the Regulation contains prescriptions with regard, inter alia, to CRAs internal governance and the appointment of non-executive directors. Of interest are the rules set out with regard to the operation of the board and the role of the non-executive director. These are found in Annex I (Independence and avoidance of conflicts of interest), Schedule A (organisational requirements), of the Regulation; to quote directly from this Schedule:

The administrative or supervisory board of a credit rating agency shall include at least three non-executive members who shall be are independent. The remuneration of the independent members of administrative or supervisory board shall not be linked to the business performance of the credit rating agency and shall be arranged so as to ensure the independence of their judgement. The term of office of the independent members of the administrative or supervisory board shall be for a pre-agreed fixed period not exceeding five years and shall not be renewable. The dismissal of independent members of the administrative or supervisory board shall only take place in case of misconduct or professional underperformance.

The majority of members of the administrative or supervisory board, including all independent members, shall have sufficient expertise in financial services. At least one independent member of this board should have in-depth knowledge and experience at a senior level of the structured credit and securitisation markets".

UK: IoD suggestions for improving corporate governance

The UK's Institute of Directors has published a policy briefing titled "The UK Model of Corporate Governance: An Assessment from the Midst of a Financial Crisis", in which it identifies eight areas where improvements can be made to the UK's model of corporate governance. These include establishing a code of responsibilities for institutional investors and more meaningful interpretation of "comply or explain" by companies.

Thursday 13 November 2008

UK: implementation of the Companies Act (2006) - eighth commencement order published

The Companies Act 2006 (Commencement No. 8, Transitional Provisions and Savings) Order 2008 has been published on OPSI: see here (HTML) and here (PDF). An explanatory memorandum has also been published: see here.

Wednesday 12 November 2008

Canada: "Board Games 2008" corporate governance survey published

Global and Mail's annual corporate governance survey - Board Games 2008 - has been published. In an accompanying article it is reported:

The faces around Canada's board tables are changing as top-tier companies become more willing to add new directors to their ranks who have never held corporate board seats, new research by consultancy Spencer Stuart shows. Spencer Stuart reviewed the profiles of all new directors who joined the boards of 100 of Canada's largest companies over the past eight years. A total of 619 new board positions were filled in the period. One of the greatest shifts during the period was in the willingness of boards to appoint so-called "first-timers" - defined as directors who have not previously sat on the board of a significant public company.

Between 2001 and 2004, 16 per cent of new directors were first-timers on a corporate board, the Spencer Stuart research shows, climbing to 21 per cent in the period from 2005 to 2008. In 2008 alone, 23 per cent of newcomers were first-time directors.The inclusion of more women on boards is also one of the factors driving the growing number of first-timers, the survey found. Between 2006 and 2008, women accounted for 21 per cent of new directors added to top-100 company boards. From 2002 to 2005, in contrast, about 14 per cent of new directors were women. In 2008 alone, 26 per cent of newly appointed directors were women, the survey found".

Tuesday 11 November 2008

Germany: major changes to company law - the entrepreneurial company with limited liability

At the start of November, major changes in German company law were introduced by the Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (MoMiG – Law for the Modernization of the GmbH and to Stop its Misuse).

MoMiG introduces, inter alia, a new corporate form - the Unternehmergesellschaft (haftungsbeschränkt), or entrepreneurial company with limited liability - which can be formed with as little as one euro. There are, however, restrictions on the amount of profits that can be distributed to shareholders and such companies must trade using the designation Unternehmergesellschaft (haftungsbeschränkt) or the abbreviation UG (haftungsbeschränkt).
For discussion (in English) of the changes see the September 2008 issue of the German Law Journal.

UK: The Companies (Trading Disclosures) (Amendment) Regulations 2008

A draft of the Companies (Trading Disclosures) (Amendment) Regulations 2008 has been laid before Parliament. The purpose of the Regulations, which will amend the Companies (Trading Disclosures) Regulations 2008 (SI 2008/495), is to introduce two exceptions to the requirement for each company to display its registered name at all its premises: insolvency and the protection of sensitive locations.

Updated FAQs with regard to trading disclosures have been published by the DBERR here and an explanatory memorandum for the Regulations has been published (see here, in PDF).

Monday 10 November 2008

Turkey: EU membership and company law reform

The European Commission has provided an update with regard to Turkey's preparations for EU membership. The progress report notes (pp. 44-45) that there has been no substantial progress with regard to company law, little progress concerning accounting and no progress regarding auditing. A major reason for this lack of progress is the failure of Turkey to bring into force its new Commercial Code (which will make major changes to company law and corporate governance). The progress report notes, however, that the Turkish Accounting Standards Board has adopted and published several interpretations and revisions of international accounting standards.

Friday 7 November 2008

UK: implementation of the Companies Act (2006) - update

The minister for company law, Dr Ian Pearson, has explained - in a written ministerial statement available here - that several provisions within the Companies Act (2006) will not be brought into force: sections 327(2)(c), 330(6)(c), 1175 (as it applies to Northern Ireland) and Part 2 of Schedule 9. The reasons for not implementing these provisions are given in the ministerial statement. The minister has also laid before Parliament the eighth commencement order, a copy of which will, very shortly, be published here. This will bring into force the remaining provisions of the 2006 Act on 1 October 2009. An updated commencement timetable has also been published: see here. Update (12 November 2008): a copy of the eighth commencement order is available here (HTML) and here (PDF). An exaplanatory memorandum is available here.

Switzerland: directors' remuneration and company law

The Swiss Government has announced measures to strengthen its financial system. Included within these is a proposal to introduce new rules governing directors' remuneration in the current reform of company law. It's not clear, from the announcement, what these rules will contain.  

UK: the application of the Companies Act (2006) to LLPs - draft Regulations published

The Department for Business, Enterprise and Regulatory Reform has published a draft version of The Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009. The draft is accompanied by a regulatory impact assessment and a document explaining the purpose of the Regulations. The latter explains that the purpose of the Regulations is to complete the application of relevant provisions of the Companies Act (2006) to LLPs. Relevant accounting and audit provisions of the 2006 Act already apply to LLPs (see this post).

For background information concerning the application of the Companies Act (2006) to LLPs, see here.

Thursday 6 November 2008

Europe: Commission adoption of consolidated text of international accounting standards applicable in the EU

In a press release published yesterday, the European Commission announced its adoption of a consolidated text of all international accounting standards in force in the European Union. The consolidated text replaces 18 earlier Regulations and includes all IFRS endorsed from 29 September 2003 to 15 October 2008.

Wednesday 5 November 2008

Australia: the director's duty to act in the best interests of the company and the meaning of corporate governance

Judgment has been given in The Bell Group Ltd. (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, something that the trial judge (Owen J.) thought might not happen. There were, in his words, "occasions on which I thought the task of completing this case might be sempiternal" (para. 9,761). It is not difficult to see why: litigation was protracted and Owen J's judgment falls just short of 10,000 paragraphs.

Owen J's judgment (delivered in the highest court in the State of Western Australia: the Supreme Court) is important because of the depth of analysis provided with regard to the director's duty to act in the best interests of the company and the operation of this duty where the company is insolvent or near insolvent. The decision also contains discussion of the concept of corporate governance and considers whether the director's duty to act in the best interests of the company should be regarded as a fiduciary duty. It also provides a good illustration of the manner in which corporate governance code principles are assimilated into the legal system. For these reasons, inter alia, the judgment will be of interest beyond Australia. Several extracts follow (but these invariably fail to do full justice to the decision).

With regard to the duty to act in the best interests of the company, Owen J. observed (paras 4,395 - 4,396) :

It is ... incorrect to read the phrases 'acting in the best interests of the company' and 'acting in the best interests of the shareholders' as if they meant exactly the same thing. To do so is to misconceive the true nature of the fiduciary relationship between a director and the company. And it ignores the range of other interests that might (again, depending on the circumstances of the company and the nature of the power to be exercised) legitimately be considered. On the other hand, it is almost axiomatic to say that that the content of the duty may (and usually will) include a consideration of the interests of shareholders. But it does not follow that in determining the content of the duty to act in the interests of the company, the concerns of shareholders are the only ones to which attention need be directed or that the legitimate interests of other groups can safely be ignored".

In my view ... when a company is in an insolvency context, the directors must 'take into account' the interests of creditors. It does not necessarily follow from this that the interests of creditors are determinative. When directors are deciding what is in the best interests of the company one of the things that they must consider is the interests of creditors. But it would be going too far to state, as a general and all-embracing principle, that when a company is in straitened financial circumstances, the directors must act in the interests of creditors, or they must treat the creditors' interests as paramount, to the exclusion of other interests. To do so would come perilously close to substituting for the duty to act in the interests of the company, a duty to act in the interests of creditors".

With regard to corporate governance, Owen J. observed (extracts taken from paras. 4362 - 4,367):

There are no hard and fast rules that constitute 'corporate governance'. But there are some basic underlying principles that help to explain the guidelines and legal principles that have developed over time and now dictate how a director is expected to carry out her or his responsibilities.

One of the 'in' phrases in modern commercial life is corporate governance. At the risk of appearing thrasonical, it will be convenient to repeat some of what I said about corporate governance in The Failure of HIH Insurance, Report of the Royal Commission, (2003), Ch 6. At its broadest, the governance of corporate entities comprehends the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It includes the practices by which that exercise and control of authority is in fact effected.

There are various organs that influence the decision-making processes of a corporation and which are involved in corporate governance. But primary governance responsibility lies with the board of directors. In formal terms the directors are appointed by, and are accountable to, the body of shareholders ... The power to manage the business of the company has been delegated to the directors. The delegation arises as part of, or by virtue of, the contract between the shareholders and the company represented by the Articles of association.

With the power to manage a business comes (necessarily) an element of control over the assets that are employed in the operation. When a corporation that conducts a business acquires assets, those assets belong to it. They do not belong to those (such as directors) who manage the corporation. Yet the individuals who manage the corporation have effective control over those assets and can affect the interests of the corporation by the way in which they use the assets. The individuals who manage the corporation are, in a real sense, stewards of those assets on behalf of the corporation and, in an indirect sense, other persons or entities (such as shareholders) who have a legitimate interest in the affairs of the corporation.

In my view the notion of stewardship is a key factor in understanding the role of directors. This is borne out by what was said in the Cadbury Report, produced by a specialist corporate committee in the United Kingdom during the early 1990s. It emphasised the trinity of 'openness, integrity and accountability' as prerequisites for sound financial reporting. In my view, those principles are not confined to financial reporting. They apply to corporate governance generally and, consequently, to the role of directors".

Sweden: revised corporate governance code now in force

The codes directory maintained by The European Corporate Governance Institute has been updated to include a copy of the Swedish Corporate Governance Code which came into force on 1 July 2008. Produced by the Swedish Corporate Governance Board, the Code's application has been widened to include all Swedish limited companies whose shares are traded on regulated markets in Sweden. In the Code it is noted that:

Such an extension of the Code requires it to be adapted to the circumstances of smaller listed companies. The Board has therefore reviewed the Code with the aim of shortening and simplifying it as much as possible without relaxing the criteria for good corporate governance in Swedish listed companies. The Board has also focused on eliminating weaknesses that have come to light in the application of the Code so far and on preparing the Code for continued discussions on harmonising corporate governance norms in the Nordic countries. The revised Code is a result of this review".

For a comparison between the new Code and its predecessor, see here. Further background information is available in the Board's annual report for 2008, available here.

UK: ICAEW Technical Release 06/08: directors' duties and responsibilities regarding financial and accounting matters

The ICAEW has published a new technical release: number 06/08, titled "Guidance on directors' duties and responsibilities of a financial or accounting nature". In the introduction it is stated:

This statement was issued in October 2008 by the Institute of Chartered Accountants in England and Wales, principally concerning the main duties and responsibilities of a financial or accounting nature owed by directors to their company and its shareholders and others, but also including an overview of more general duties and responsibilities. It sets out, where appropriate, what is considered to be good practice rather than what may be acceptable as the legal minimum required. It is hoped that the statement will be useful to members acting as directors and to members generally in conveying to directors the extent of these responsibilities. It is stressed, however, that the statement is not intended to cover other aspects, however important, of a director’s position".

English counsel have confirmed that this statement is consistent with the English law as at 1 October 2008 had the 2006 Act been fully implemented as at that date".

Tuesday 4 November 2008

UK: Audit Firm Governance Code - consultation paper published

The ICAEW's Audit Firm Governance Working Group has published a consultation paper as part of work which will lead to the publication of an Audit Firm Governance Code for auditors of public interest entities (mainly listed companies). The Code is being developed as a result of a recommendation by the Financial Reporting Council's Market Participants Group in the report "Choice in the UK Audit Market".

The consultation paper asks twenty questions including: 
  • Which stakeholders should the Code primarily serve?
  • What approach should the Code adopt to risk management and internal control?
  • Should the Code support the appointment of independent non-executives by the firms? If so, what should it say with regard to the number or proportion of non-executives and their position, role and responsibilities in a firm’s governance structure?
The deadline for responses is 31 January 2009. 

UK: Insolvency Practitioners Association publishes Code of Ethics

The UK's Insolvency Practitioners Association has published a revised Code of Ethics for its members. The new Code come into force on 1 January 2009 and all IPA members must comply with it. According to the IPA:

The Code is intended to assist insolvency practitioners meet the obligations expected of them by providing professional and ethical guidance. The purpose of the Code is to provide a high standard of professional and ethical guidance amongst insolvency practitioners".

For further information see the background information published by the IPA. 

Japan: takeover defences

In 2005 the Ministry of Economy, Trade and Industry and the Ministry of Justice published “Guidelines Regarding Takeover Defense for the Purposes of Protection and Enhancement of Corporate Value and Shareholders’ Common Interests”. The Guidelines explain (at p. 2):

... in Japan, there is no common code of conduct in the business community with regard to what constitutes a non-abusive takeover and what constitutes a reasonable defensive measure, partly because Japan has had less experience with hostile takeovers unlike the United States and EU. Defensive measures against hostile takeovers, if they are used properly, can help enhance corporate value and shareholders’ common interests. But at the same time, there is a risk that defensive measures, if they are improperly structured, may be used to entrench corporate management, preserving intact inefficient management. Therefore, if left as is, this absence of rules could encourage repeated surprise attacks and excessive defensive tactics, making it difficult for takeovers to fully demonstrate their effectiveness as a mechanism to enhance corporate value. The purpose of the Guidelines is to promote the establishment of fair rules concerning takeovers by proposing legitimate, reasonable takeover defense measures".

A report considering the Guidelines and recent case law was published in Japanese earlier this year. Titled "Takeover Defense Measures in Light of Recent Environmental Changes", a copy is now available in English: see here.  The report notes that since the publication of the Guidelines, over 500 Japanese companies have adopted takeover defenses.

Monday 3 November 2008

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

In Re Abacrombie & Co Ltd. [2008] EWHC 2520 (Ch), David Richards J. granted an application for the winding-up of a company presented under Section 124A of the Insolvency Act (1986) by the Secretary of State for the Department for Business, Enterprise and Regulatory Reform.  Section 124A provides the Secretary of State with the power to petition for the winding-up of a company where this is "expedient in the public interest"; the court must be satisfied that it is "just and equitable" for the company to be wound-up. 

Section 124A cases are of interest because they provide an insight into Government and judicial perceptions regarding the acceptable purposes for which the corporate form can be used. In Abacrombie, the Secretary of State advanced several grounds why the company should be wound-up. David Richards J. accepted all of these but stated that winding-up would have been granted on a single ground: that the company's activities did not benefit its clients. Indeed, the company's activities were said to subvert the proper functioning of the law and procedures of bankruptcy.  

Note: For further cases concerning Section 124A, from earlier this year, see here and here

Sunday 2 November 2008

UK: executive pay - the Government's position

Following his letter published in The Times newspaper last week, Lord Wedderburn, Emeritus Professor of commercial law at the London School of Economics, has raised the issue of executive pay in the House of Lords. Lord Wedderburn asked the deputy chief whip, Lord Davies of Oldham, what advice the Government had given to companies in the private sector on pay increases and what controls they proposed to introduce. The following are amongst the comments Lord Davies made in reply to Lord Wedderburn and others (HL Hansard, 30 October, col 1683):

... pay levels in private sector companies are a matter for those companies. The Government have consistently made it clear that there should be effective linkage between pay and performance and that exceptional rewards for mediocre performance are not in the interests of companies, their shareholders or the United Kingdom as a whole. 

... On the more general issue of companies, from 6 April next year, a new provision will require quoted companies to report in their directors’ remuneration report on how they have taken pay and employment conditions into account when setting directors’ pay. Directors’ pay should be set only by non-executive directors, not by those who benefit from it themselves".

The new provision referred to by Lord Davies was introduced by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. Regulation 11 requires the remuneration reports of quoted companies to contain certain information set out in Schedule 8 and including (at paragraph 4):

Statement of consideration of conditions elsewhere in company and group

The directors’ remuneration report must contain a statement of how pay and employment conditions of employees of the company and of other undertakings within the same group as the company were taken into account when determining directors’ remuneration for the relevant financial year".

Regulation 2 provides that the foregoing statement is required in respect of remuneration reports for financial years beginning on or after April 6, 2009. 

UK: the Bank of England (Amendment) Bill

The Conservative peer Lord Saatchi has introduced a Private Members' Bill in the House of Lords. The purpose of his Bank of England (Amendment) Bill (HL) 2007-08 is to amend the Bank's role with regard to monetary policy by reducing the importance the Bank must attach to price stability.  It does this by removing the words "subject to that" which currently appear, as follows, in Section 11(b) of the Bank of England Act (1998):

In relation to monetary policy, the objectives of the Bank of England shall be—
(a) to maintain price stability, and
(b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment".

The Bill stands very little chance of becoming law, not least because the Government is pursuing its own proposals through the Banking Bill.  It's also not clear whether Lord Saatchi has the support of the Conservative Party front bench: we shall see when his Bill is debated at Second Reading (the date for which is not yet timetabled).