Friday 27 February 2009

UK: England and Wales: directors' liability for inaction

Yesterday the Court of Appeal gave judgment in Lexi Holdings Plc v Luqman & Ors [2009] EWCA Civ 117, a case concerning the liability of directors for inaction. The Court of Appeal found the directors' liability more extensive than the judge at first instance ([2008] EWHC 1639 (Ch)). A more complete summary will be posted soon...

Europe: the 'micro entity' and financial reporting - Commission consultation

The European Commission has published a proposal for a Directive amending Directive 78/660/EEC (the Fourth Company Law Directive). The proposed Directive will provide Member States with the option to create a 'micro entity' category of company that will be exempt from the accounting requirements of the Fourth Company Law Directive. The proposal defines a micro entity as one which meets two of the following criteria:
  • A balance sheet total of not more than EUR 500,000;
  • A net turnover of not more than EUR 1, 000,000;
  • Not more than ten as average number of employees during the financial year.
For further information see: press release | FAQs | citizens' summary | impact assessment |

The Commission is also undertaking a wider review of the Fourth and Seventh Company Law Directives: see here for further information. 

Thursday 26 February 2009

UK: FSA publishes draft code of practice on remuneration policies

The Financial Services Authority has today published a draft code of practice on remuneration policies, relevant to all FSA regulated firms. The aim of the code is to ensure that firms adopt remuneration policies which are consistent with sound risk management and which do not expose them to excessive risk. In the accompanying press release it is stated that the FSA will consult on the draft code and further proposals for remuneration policy in March.

South Africa: the King III Report on Corporate Governance

South Africa's Institute of Directors has published in draft the third edition of the King Report on Corporate Governance and Code (King III). Comments are invited by 25 April 2009. 

OECD report - corporate governance lessons from the financial crisis

It is turning into a month for reports. The OECD has published a report titled Corporate Governance Lessons from the Financial Crisis. This examines governance issues across countries, drawing upon company investigations, parliamentary enquiries and other regulatory reports. The report concludes:

... the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements. When they were put to a test, corporate governance routines did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies. A number of weaknesses have been apparent. The risk management systems have failed in many cases due to corporate governance procedures rather than the inadequacy of computer models alone ... In other cases, boards had approved strategy but then did not establish suitable metrics to monitor its implementation ... Accounting standards and regulatory requirements have also proved insufficient in some areas ... Last but not least, remuneration systems have in a number of cases not been closely related to the strategy and risk appetite of the company and its longer term interests".

Europe: financial supervision in the European Union - the de Larosière report

The European High Level Group on Financial Supervision in the European Union, chaired by Jacques de Larosière, was formed in October 2008 to consider reforms to the European financial regulation and supervision framework (click here for its full mandate). The Group's report was published yesterday; it is wide ranging and contains many recommendations. 

The report states that corporate governance "is one of the most important failures of the present crisis" (p. 29; see also paras. 23 and 24 in chapter one) and notes that "the financial system at large did not carry out its tasks with enough consideration for the long-term interest of its stakeholders" (p. 30). Two recommendations are made which deal specifically with corporate governance:

Recommendation 11: ... compensation incentives must be better aligned with shareholder interests and long-term firm-wide profitability by basing the structure of financial sector compensation schemes on the following principles: [a] the assessment of bonuses should be set in a multi-year framework, spreading bonus payments over the cycle; [b] the same principles should apply to proprietary traders and asset managers; [c] bonuses should reflect actual performance and not be guaranteed in advance. Supervisors should oversee the suitability of financial institutions' compensation policies, require changes where compensation policies encourage excessive risk-taking and, where necessary, impose additional capital requirements under pillar 2 of Basel 2 in case no adequate remedial action is being taken.

Recommendation 12: With respect to internal risk management, the Group recommends that: [a] the risk management function within financial institutions must be made independent and responsible for effective, independent stress testing; [b] senior risk officers should hold a very high rank in the company hierarchy, and [c] internal risk assessment and proper due diligence must not be neglected by over-reliance on external ratings. Supervisors are called upon to frequently inspect financial institutions' internal risk management systems.

These matters are already being considered by the UK's Financial Services Authority. Last year the FSA began work exploring remuneration and today published a draft code on remuneration policies. The proposal that senior risk officers should hold "a very high rank in the company" may suggest a board role or, perhaps, greater prominence for board risk committees. The role of bank board risk director is common. But it is important to remember that the board has collective responsibility for the company. Indeed, the Combined Code provides the following principle (section A.1):

"The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed".

Wednesday 25 February 2009

UK: a regulatory revolution beckons

The chairman of the Financial Services Authority, Lord Turner, appeared before the House of Commons Treasury Select Committee today. He promised fundamental changes in the way in which the FSA operates (to be published next month) and strongly criticised the regulatory philosophy which had guided the FSA's operation. In fact he promised more: a revolution in approach by the FSA.

Lord Turner stated that the FSA had operated under a "particular philosophy of the way you do regulation which I think in retrospect was wrong". He also stated that it was not seen as part of the FSA's role to ask questions about banks' strategy. This approach, he stated, existed within "a political philosophy where all the pressure on the FSA was not to say 'are you looking more closely at these business models?' but to say 'why are you being so heavy and intrusive, can't you make your regulation a bit more light touch?". 

The FSA's chief executive, Hector Sants, also appeared before the Committee. He explained some of the changes that the FSA has recently made with regard to its assessment of the suitability of bank directors. The Committee's proceedings can be watched here; they have been reported widely: see, for example, The Guardian, The Financial Times and BBC News

UK: the corporate governance framework - FRC chief executive speech

The chief executive of the Financial Reporting Council, Paul Boyle, today delivered the keynote speech at the London Stock Exchange's corporate governance conference. In his speech, titled "Current corporate governance developments - the regulator's perspective", Mr Boyle said that it was too early to decide what changes, if any, should be made to the UK system of corporate governance in response to the financial crisis. He instead used his speech to address the following matters: [1] the purposes of corporate governance; [2] the UK regulatory approach to corporate governance; [3] preliminary thoughts on the governance aspects of the financial market crisis; and [4] corporate governance of audit firms. 

Of interest are Mr Boyle's comments on the argument that the current model of market based enforcement should be replaced by regulatory monitoring and enforcement. In response to this point, My Boyle observed:

We at the FRC have considered this option on several occasions in recent years but have always come to the same conclusion. We ... have not thus far identified an alternative which could be more effective in improving the practice of corporate governance in a manner that would be consistent with the better regulation principles that regulatory actions must be targeted and proportionate. Our minds remain open on this question but we do think that those who recommend greater regulatory intervention need to take on the challenge of specifying how it would work in practice and how it would lead to improvements in decision-making by boards and behaviour of individual directors. Making regulatory judgements about whether a set of financial statements complies with accounting standards is one thing; making regulatory judgements about the quality of board decision-making is quite another".

Malta: corporate governance statements + the Maltese Code

The Malta Financial Services Authority has issued a consultation paper concerning changes to its Listing Rules with regard to the requirement, under the Fourth Company Law Directive (as amended by Directive 2006/46/EC), for certain companies to include a corporate governance statement in their annual report. The deadline for implementation of the Directive by Member States was 5 September 2008. 

Companies with securities traded on regulated markets are required to provide the corporate governance statement (in the UK, this requirement is found in DTR 7.2 of the FSA Handbook). This must state, inter alia, the Code to which the company is subject and/or the code which the company has adopted. The relevant Code in Malta is the Code of Principles of Good Corporate Governance, which is included in the Listing Rules as an appendix (number 8.1). This Code has many similarities with the UK's Combined Code but it is interesting to note that it contains much greater guidance with regard to boards. There is, for example, a separate section titled "Board Meetings" and this explains:

Notice of the dates of the forthcoming meetings together with the  supporting material should be circulated well in advance to the Directors so that they have ample opportunity to appropriately consider the information prior to the next scheduled board meeting. Advance notice should be given of ad hoc meetings of the board to allow all Directors sufficient time to re-arrange their commitments in order to be able to participate".

There is also a section in the Code dealing with corporate social responsibility and Principle 12 of the Code states: "Directors should seek to adhere to accepted principles of corporate social responsibility in their day-to-day management practices of their company". In this regard the Code explains:

Corporate Social Responsibility is the continuing commitment by business entities to behave ethically and contribute to economic development while improving the quality of life of the work force and their families as well as of the local community and society at large. Being socially responsible means not only fulfilling legal expectations but also going beyond compliance and investing “more” into human capital, the environment and the relations with stakeholders".

Europe: update on company and financial services law reform

The Joint Brussels Office of the Law Societies of England and Wales, Scotland and Northern Ireland has published the January 2009 edition of its very useful EU financial services and company law reform update.

Tuesday 24 February 2009

UK: bankers, criminals and corporate governance

A trio of letters appears in today's Times newspaper under the heading Bankers, criminals and corporate governance. The letters respond to an article published in yesterday's Times by the former Director of Public Prosecutions (Ken Macdonald QC) titled Give us laws that the City will respect and fear. One of the letters, written by Professor Bob Garratt from Cass Business School, states:

The UK is in a paradoxical position. We have an acknowledged world-class corporate governance system yet with no resources or political will to enforce it. The 2006 Companies Act has given us a firm basis to avert future problems through its clear focus on the director’s duties of skill, care, diligence and the avoidance of conflicts of interest.

The 2006 Combined Code on Corporate Governance is used as a model for private and public sector organisations internationally. Yet it is mandatory only to a tiny minority — listed companies in the UK — and so misses most private businesses and the rise of public sector businesses (eg, the growing number, currently 114, of NHS foundation trusts that will each often have annual budgets of half a billion pounds). What is lacking is a powerful regulator with enforcement capability for all businesses. It is currently assumed by many that this must be the job of the Financial Reporting Council. The FRC has six oversight boards within it. All of these focus on financial aspects. There is no corporate governance oversight board. If these are the FRC’s priorities, and as corporate governance goes well beyond the financial aspects of board competence, do we need a national corporate governance regulator now?

Several points can be made.  First, has the case for a "powerful regulator with enforcement capability for all businesses" been made? What lessons can we learn from the Financial Services Authority's performance as the single regulator for financial services? Second, would arguments in support of a national corporate governance regulator be made if the Financial Services Authority had more fully scrutinised bank governance? Third, how will the codified directors' duty to exercise reasonable skill, care and diligence provide a "firm basis to avert future problems"? This duty is not new. Fourth, the Combined Code on Corporate Governance is based firmly on market regulation and a clear role is envisaged for institutional investors. The Code reflects best practice. Changes in the manner of its enforcement would clearly require a review of the Code's structure and principles. A move away from best practice towards minimum standards of conduct may have undesirable consequences including an increase in 'box ticking' compliance. Finally, contrary to what Professor Garratt suggests, a code of governance for NHS foundation trusts exists. It is based on the Combined Code and was published several years ago by Monitor (the independent regulator of NHS foundation trusts) - a copy is available here.

Monday 23 February 2009

UK: Community Interest Companies - BERR consultation

The Department for Business, Enterprise and Regulatory Reform has published a consultation paper in which it sets out changes to the Companies (Audit, Investigations and Community Enterprise) Act 2004 and the Community Interest Company Regulations 2005. Amongst the changes being proposed is the clarification of the community interest test. The consultation paper includes a draft of the Community Interest Company (Amendment) Regulations 2009. Further information about community interest companies is available here

Hong Kong: company law reform update

The Financial Services and the Treasury Bureau has published conclusions in response to its second and third company law reform consultation papers. With regard to share capital and capital maintenance, the relevant conclusions document notes, inter alia, that the current requirement for authorised share capital will be removed. Companies will, however, be able to specify the maximum number of shares that can be issued in their Articles of Association. 

In the published conclusions for the second consultation, a partial codification of directors' duties is proposed. In order to clarify the law, a provision similar to Section 174 of the UK's Companies Act (2006) will be adopted with regard to directors' skill and care. A more complete codification, introducing an enlightened shareholder approach of the kind included in the UK's Companies Act (2006) by Section 172, was rejected. The document notes:

The consultation indicates that the idea of codifying the directors’ general duties remains highly controversial. Responses are highly divided save as the issue regarding the proposal to incorporate the 'enlightened shareholder value' concept into the duties of directors, which has received only limited support. It would be premature to go down the route of comprehensive codification at this stage. Nevertheless, we see some merit in clarifying the directors’ standard of care, skill and diligence as proposed by some respondents".

USA: New York: Parmalat, Deloitte and vicarious liability

The United States District Court for the Southern District of New York has given its opinion in Re Parmalat Securities Litigation. The case concerned the claim that Deloitte Touche Tohmatsu (DTT), a Swiss verein with headquarters in New York, was vicariously liable for the actions of Deloitte Italy, Parmalat's auditor. DTT sought summary judgment dismissing the claim: the trial judge declined and observed (p. 19):

In all the circumstances, the totality of the evidence – including evidence concerning the structure and internal relationships of Deloitte generally, DTT’s authority over the professional practices of the member firms, and DTT’s exercise of that authority in connection with the Parmalat engagement – raises a genuine issue of material fact as to whether Deloitte Italy was an agent of DTT with respect to the Parmalat engagement".

For background information, click here.

Friday 20 February 2009

UK: ICSA's annual review of board performance evaluation

Main Principle A.6 of the Combined Code on Corporate Governance provides that "[the] board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors". The Institute of Charterted Secretaries and Administrators has published its annual review of board performance evaluation, based on company reports for the 2008 reporting season. The report considers how the UK's largest 200 listed companies have carried out performance evaluation. 

UK: the Banking Act 2009 - Commencement Order made

The great majority of provisions within the Banking Act 2009 will come into force on 21 February by virtue of the Banking Act 2009 (Commencement No. 1) Order 2009, made on 16 February 2009 and published today on OPSI

Other Orders have also been published in connection with the 2009 Act, some of which modify earlier legislation including the Companies Act (2006) and Financial Services and Markets Act (2000): see here

UK: the Banking Act 2009 - explanatory notes published

Explanatory notes for the Banking Act 2009 have been published today on the OPSI website: see here (PDF) and here (HTML). 

USA: boards and the financial crisis - SEC enquiry

The Washington Post newspaper reports that the new chairman of the Securities and Exchange Commission, Mary Schapiro, will soon instigate a review of bank governance. This is likely to form part of a wider enquiry in which the SEC seeks to bring about greater board accountability with regard to director appointments and remuneration. Indeed, in a speech delivered earlier this month, chairman Schapiro stated:

... there needs to be a new era of responsibility on Wall Street and throughout our markets to ensure that wrongs don't occur in the first place. The sooner that Wall Street works to repair its own problems, the sooner investors will once again find the confidence to invest in what should be the finest markets in the world. There is much we can do to accelerate that process, including giving shareholders a greater say on who serves on corporate boards, and how company executives are paid".

Thursday 19 February 2009

UK: England and Wales: winding-up of a LLP - the right to appear in court proceedings

The ICLR, as part of its excellent WLR(D) service, has noted Vermillion International Investments Ltd v Charit-Email Technology Partnership LLP [2009] WLR (D) 57, a High Court decision not yet available on BAILII. The ICLR's summary of the case begins:

Although the interests and liabilities of a member of a limited liability partnership were different from those of a contributory to a limited company and those differences might lead to some changes in practice so far as petitions to wind them up were concerned, a person seeking to exercise a right to appear and be heard in court proceedings, whether as creditor or contributory, should at least claim to be a member of the class on whom that right was conferred".

Update (9 March 2009): the decision is now available on BAILII - see here.

Wednesday 18 February 2009

UK: Scotland: reduced profits and unfair prejudice

Lord Glennie, sitting in the Outer House of the Court of Session, has given his opinion in Robertson, Re Order Under Section 459 Of The Companies Act 1985 [2009] CSOH23. His opinion is of interest because of one of the grounds on which he found that the company's affairs had been conducted in a manner unfairly prejudicial to the interests of the petitioner under Section 459: the decision by two directors (who held 50% of the company's shares) to stockpile rather than sell unprocessed non-ferrous materials, the result of which was to reduce the company's profitability. 


[3] Lord Glennie was appointed the Principal Commercial Judge in January 2008.

Europe: European Statute for a European Foundation - Commission consultation

The European Commission has launched a consultation in which it seeks views on the need for a new legal form: the European Foundation. It has also published a feasibility study, commissioned in 2007 and completed jointly by the Max Planck Institute for Comparative and International Private Law and the University of Heidelberg. The authors of the feasibility study, in Annex G, explore the foundation concept and state that it has the following characteristics:

  • Non membership-based organization based on an original deed.
  • Private (i.e., separate from Government).
  • Self-governing.
  • Non profit distributing.
  • Serving a public purpose.

UK: Regulations published on OPSI

A couple of recent additions to the OPSI website: the Companies (Trading Disclosures) (Amendment) Regulations 2009 [see explanatory memorandum] and the Companies (Disclosure of Address) Regulations 2009 [see explanatory memorandum]. Both come into force on 1 October 2009.

Tuesday 17 February 2009

UK: England and Wales: agents' fiduciary duties - a reminder from the Court of Appeal

In Boston Deep Sea Fishing v Ansell (1888) 39 Ch. D. 339, a company director secretly received commission from shipbuilders with whom an order had been placed on the company's behalf. The Court of Appeal found him in breach of fiduciary duty. More recently, in Imageview Management Ltd v Jack [2009] EWCA Civ 63, the Court of Appeal reiterated the strictness of the fiduciary duties to which agents are subject in a case concerning a football agent. The agent was liable for a payment he received from a football club. The payment was received without the knowledge of the agent's client (the footballer). One of the judges, Mummery LJ, expressed a regret (at para. [65]): 

... that it is still necessary, in the 21st century, to remind agents of what was said by the greatest of all the judges, Bowen LJ in Boston Deep Sea Fishing at pages 362-363, about conflicts of duty and interest and the necessity for transparency in the dealings of agents, if confidence in them is to continue. In our age it is more important than it ever was for the courts to hold the precise and firm line drawn between payments openly, and therefore honestly, received by agents, and undeclared payments received by agents secretly, and therefore justly liable to all the legal consequences flowing from breaches of an agent's fiduciary obligations".

Note: Section 176 of the Companies Act (2006) provides that a director must not accept a benefit from a third party conferred by reason of his being a director or his doing (or not doing) anything as a director. 

Update (17 February 2009): the case has been reported by the ICLR as part of its WLR(D) service: see here

Monday 16 February 2009

New corporate governance blog

Bob Tricker and Christine Mallin have a launched a corporate governance blog. There are a couple of posts at the moment, exploring the corporate governance issues raised by events in the financial markets.

UK: the Banking Act 2009

The Banking Act 2009 received Royal Assent on 12 February and is available here (HTML) and here (PDF). The accompanying explanatory memorandum has not yet been published. Background information, and parliamentary debate, is available here

The Act introduces a new statutory regime to deal with failing banks, including new insolvency and administration procedures. It also makes changes to the governance of the Bank of England and places on a statutory footing the Bank of England's responsibility for financial stability. The Bank of England's oversight of payment systems is also formalised. 

Section 263 of the Act sets out commencement information and explains that all of the provisions within the Act will be brought into force by Treasury Order. There is, however, one exception: Section 254, which abolishes the funds attached rule with regard to cheques in Scotland, comes into force 2 months after the date of Royal Assent. 

Update (20 February 2009): the explanatory notes have been published on OPSI: see here (PDF). 

Europe: the European Private Company - UK Government response + further developments

The UK's Department for Business, Enterprise and Regulatory Reform has published a response to its recent consultation on the proposal for a European Council Regulation on the Statute for a European private company (SPE).

The Government notes that the SPE is unlikely to be significantly more attractive than the UK private company but it nevertheless recognises that it may be useful for some enterprises. With regard to share capital, the Government endorses the 1 Euro minimum, stating that anything much higher would reduce the SPE's attractiveness. The Government also states that directors' duties should be left to national law because Member States "have widely varying and well-established regimes ... and the UK has, as part of the Companies Act, put directors' duties on a statutory footing".

Last month, the draft SPE Regulation was approved (and amended) by the European Parliament's Legal Affairs Committee: see here. It will now be considered by the European Parliament on March 9 (along with a motion for a resolution on the cross border transfer of companies' registered offices). Changes made by the Legal Affairs Committee include the requirement that the SPE should have a "cross-border component" (e.g., founding members in different Member States or business activities covering more than one State), which must be verified two years after the SPE's incorporation. The Committee also added the requirement for a "solvency certificate" stating that the SPE is able to pay its debts. Where this is not provided, the minimum share capital becomes 8,000 Euros. 

Friday 13 February 2009

UK: Scotland: leave granted for petitioner to bring derivative proceedings

Lord Glennie, sitting in the Outer House of the Court of Session, has granted leave under Section 266 of the Companies Act (2006) for derivative proceedings to be brought: see Wishart, for an order under s.266 of the Companies Act (2006) [2009] CSOH 20. His Lordship's decision is the first reported in Scotland to consider the substantive issues and procedural difficulties associated with the new derivative proceedings regime introduced by the 2006 Act. Lord Glennie also considered the concept of good faith within Section 268(2)(a) and rejected the argument that the Scottish courts were unable to order that the company should pay the petitioner's legal expenses in derivative proceedings.

Note: Chapter 1, Part 11, of the Companies Act (2006), sets out the framework for the bringing of a derivative action in England and Wales or Northern Ireland. For discussion, see: Mission Capital Plc v. Sinclair [2008] EWHC 1339 and Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch). Leave was not given to continue proceedings in either of these cases. 

Update (21 July 2009): the Court of Session, Inner House, has given its opinion in the appeal from the Lord Ordinary's decision in Wishart: see here for further information.

Thursday 12 February 2009

UK: England and Wales: fraudulent trading - on what day does the cause of action arise?

The ICLR has noted, as part of its WLR(D) service, the High Court decision Goldfarb v Higgins [2008] WLR(D) 49. The headnote for the case, which has not yet been published on BAILII, is: "The cause of action for fraudulent trading under s 213 of the Insolvency Act 1986 arose on the day the winding up order was made and not when either the petition was presented or the provisional liquidator appointed".

Romania: updated Code published by Bucharest Stock Exchange

The Bucharest Stock Exchange has published an updated edition of its Corporate Governance Code. A copy, in English, has been added to the codes directory maintained by the European Corporate Governance Institute: see here. The Code adopts the comply or explain approach and contains principles and recommendations. Of interest is Principle XI which makes clear that the company's remuneration policy should be compatible with the company's long-term interests.

Isle of Man: the disclosure of information by the UK Takeover Panel

Part 28 of the Companies Act (2006), which placed the Takeover Panel and Takeover Code on a statutory footing, was extended to the Isle of Man by the Companies Act 2006 (Extension of Takeover Panel Provisions) (Isle of Man) Order 2008, which comes into force on 1 March 2009.

Section 948 of the 2006 Act imposes restrictions on the Takeover Panel with regard to its disclosure of information relating to the private affairs of an individual or a business. Such information cannot be disclosed without the consent of the individual or the person carrying on business. However, consent is not required where disclosure is made to a person listed in Part 1 of Schedule 2 in the 2006 Act. This list is to be updated by the Companies Act 2006 (Amendment of Schedule 2) Order 2009 to include, inter alia, the Isle of Man Treasury, the Attorney General of the Isle of Man and the Financial Supervision Commission. The Order comes into force on 1 March 2009.

Wednesday 11 February 2009

UK: England and Wales: companies, harassment and attribution

Yesterday the Court of Appeal gave judgment in Ferguson v British Gas [2008] EWCA Civ 46. Jacob LJ began his judgment with the memorable line: "It is one of the glories of this country that every now and then one of its citizens is prepared to take a stand against the big battalions of government or industry" (para. [1]). This case is of interest because it concerned a company and the circumstances in which a company could be guilty of unlawful harassment contrary to the Protection from Harassment Act (1997)

Ms Ferguson brought a claim against British Gas Trading Ltd. ("BG") for unlawful harassment contrary to Sections 1 and 2 of the 1997 Act. She ceased to be a customer of BG in May 2006 but between August 2006 and January 2007 was sent bills and letters threatening to cut off her gas supply, take court action and report her to credit reference agencies. Letters to the chairman of BG went unanswered and she spent many hours and suffered anxiety trying to resolve matters. She argued that BG's course of conduct represented unlawful harassment. British Gas argued that the claim should be struck out because it disclosed no reasonable grounds for bringing it. This is the question that the court had to determine; there was not, therefore, a full trial of the issues.

A unanimous court (Sedley, Jacob and Lloyd LJJ) refused to strike out the claim and rejected the argument put for BG that its actions were not of the gravity required successfully to establish unlawful harassment. The court held that there was a strongly arguable case that its actions did amount to unlawful harassment. 

The issue of corporate liability was raised by counsel for BG: with reference to Tesco v Nattrass [1972] AC 153 it was argued that the claim was bound to fail because Ms Ferguson had failed to plead that the course of conduct was either [a] directed by someone who would be regarded as the "directing mind" of the company or [b] the responsibility of an individual employee for whose acts the company would be vicariously liable. This argument was not subject to detailed discussion or analysis because there had been incomplete citation of relevant authorities. Nevertheless, Sedley LJ observed (para. [51]):

One excuse which has formed part of British Gas's legal argument for striking out the claim, and which has been advanced as incontestable and decisive, is that a large corporation such as British Gas cannot be legally responsible for mistakes made either by its computerised debt recovery system or by the personnel responsible for programming and operating it. The short answer is that it can be ... It would be remarkable if it could not: it would mean that the privilege of incorporation not only shielded its shareholders and directors from personal liability for its debts but protected the company itself from legal liabilities which a natural person cannot evade. That is not what legal personality means".

Note: issues of attribution have been considered recently by the Judicial Committee of the Privy Council in Lebon & Anor v. Aqua Salt Co Ltd (Mauritius) [2009] UKPC 2.

Tuesday 10 February 2009

Denmark: updated Recommendations for Corporate Governance

Towards the end of last year, the Danish Committee on Corporate Governance made several changes to its Recommendations for Corporate Governance (2005) concerning board diversity. An updated copy of the Recommendations, in English, is available here

Section III (Transparency) and Section V (Composition of the Supervisory Board) have been revised. One change in Section III concerns the annual report. It continues to be recommended that the supervisory board should decide whether it is expedient for the company to publish non-financial information in circumstances where this is not required by law or relevant accounting standards. However, a new example of such disclosure is provided: "diversity, among other things in relation to gender and age, within the supervisory board, the executive board and the company in general". In Section V, it is now recommended that the diversity of the supervisory board is considered by the board when it evaluates its competence.

UK: rights issue subscription periods

The Financial Services Authority has announced an amendment to the Listing Rules that will reduce the minimum length of the rights issue subscription period from 21 days to 10 business days. The change will be made by the Listing Rules Sourcebook (Rights Issue Subscription Period) Instrument 2009, which comes into force today. This change applies to non-statutory rights issues in circumstances where shareholders have voted to disapply their pre-emption rights. 

For further information see: 

Monday 9 February 2009

UK: the Walker review of bank corporate governance

HM Treasury has today announced the terms of reference for the independent review of bank corporate governance which will be led by Sir David Walker. The terms of reference are:

To examine corporate governance in the UK banking industry and make recommendations, including in the following areas:

[a] the effectiveness of risk management at board level, including the incentives in remuneration policy to manage risk effectively;
[b] the balance of skills, experience and independence required on the boards of UK banking institutions;
[c] the effectiveness of board practices and the performance of audit, risk, remuneration and nomination committees;
[d] the role of institutional shareholders in engaging effectively with companies and monitoring of boards; and
[e] whether the UK approach is consistent with international practice and how national and international best practice can be promulgated;

For further information see here.

UK: England and Wales: unfair prejudice and the company's affairs

Last week judgment in Oak Investment Partners XII, Ltd. Partnership v Boughtwood & Ors [2009] EWHC 176 (Ch) was given by Mr Justice Sales sitting in the Chancery Division of the High Court. The case concerned Section 994 of the Companies Act (2006), which provides that a shareholder may petition the court for relief where the company's affairs are being, or have been, conducted in a manner unfairly prejudicial to the interests of the shareholders or some of the shareholders including himself.

There is no statutory definition of the company's affairs. Whether particular acts and omissions fall within or outside the company's affairs has often troubled the courts. It has, for example, been accepted that acts occurring within a subsidiary company can be regarded as falling within the parent company for the purposes of Section 994 (see Re City Branch Group Ltd [2004] EWCA Civ 815 and note also Hawkes v Cuddy & Ors [2007] EWHC 2999 (Ch)).

The Oak case is important because of the trial judge's broad interpretation of the concept of the company's affairs. The legal framework established by Section 994 and developed by the courts was set out by Mr Justice Sales in paragraphs [8] to [16]. With regard to the company's affairs, his Lordship observed (at paras. [14] an [15]):

The precise distribution of management decision-making authority in any particular company may be a matter of chance. In some companies, the board itself may take a wider range of day-to-day management decisions than in others, where greater scope is left to the directors or employed managers acting alone. It is difficult to see why the application of section 994 should turn upon such fortuitous matters: the jurisdiction under that provision is above all a jurisdiction concerned with substance rather than form. In my view, conduct of a shareholder/director who acted in breach of fiduciary duty in the carrying on of his company's affairs (but not through use of any company organ) would be conduct capable, in principle, of attracting relief under section 994. There is often a very fine line between duties of employees engaged as senior managers of a company and the fiduciary duty of skill and care owed by a director of a company carrying out similar tasks. I can see no reason in principle why, in an appropriate case, conduct by a person employed as a senior manager in a business, even if not a director, should not be relevant to the grant of relief under section 994. Moreover, the cases on mismanagement of a company's affairs ... contemplate that complaint may be made under section 994 even if the mismanagement is not the product of business decisions taken by the board of a company, but by individual directors or others.

[Counsel] submitted that there is a distinction between conduct of the affairs of a company falling within section 994 and conduct "dehors the company", which does not. He referred to an example given by Harman J of a director who steals from a safe, in Re a Company (1761 of 1986) [1987] BCLC 141, at 148. In broad terms, I accept the distinction (although I would wish to reserve my position in relation to the particular example given by Harman J; it seems to me a great deal may depend on the facts: if mismanagement by a director in breach of his duty of skill and care may found a petition under section 994, I have difficulty in seeing why a director's theft from his company in breach of his fiduciary duty may not). Conduct of anyone involved in a company may be so far removed from actually carrying on the affairs of the company that it does not amount to the conduct of the company's affairs for the purposes of section 994. But in my view, section 994 is concerned with the practical reality which obtains on the ground in relation to the conduct of a company's affairs, and there is no sound reason to exclude the possibility that what someone does in exercising or purporting to exercise managerial powers as a director or senior employee should not in principle qualify as conduct of the affairs of a company for the purposes of that provision".

Update (10 February 2009): The judgment has been reported by the ICLR as part of its WLR(D) service: see here. This summary will be removed from the ICLR website should the case be reported in one of the ICLR's series of law reports.

Sunday 8 February 2009

UK: the governance of banks - Government review announced

Today's Sunday Telegraph newspaper contains an article written by the Chancellor, Rt. Hon. Alistair Darling MP. The Chancellor uses the article to announce the launch of a review of bank governance:

The Financial Services Authority is already looking at how regulation can be tightened. And I will publish plans on how to improve the system of financial regulation later in the spring. But I think we need to go further. That is why I am now setting up a review which will examine how banks are managed. Bank boards have a duty to ask more searching questions of their executives – when times are good as well as when they turn bad. I expect the review to make recommendations about the effectiveness of risk-management by banks' boards, including how pay affects risk-taking. It will also look at how boards operate, at the balance of skills, the role of institutional investors and whether our approach is consistent with international best practice".

Further information about the review is expected to be provided tomorrow. Update (9 Feb 2008): HM Treasury has announced the terms of reference for the review, which will be led by Sir David Walker - see here.

Saturday 7 February 2009

UK: separate corporate governance statements and the Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009

A draft copy of the Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009 has been published on the OPSI website. The Regulations will, inter alia, insert new sections into the Companies Act 2006 with regard to corporate governance statements which are not included as part of the directors' report (so-called separate corporate governance statements). These new sections will require the filing of the separate corporate governance statement with the registrar of companies and they also set out the auditor's obligations with regard to the statement. Update (16 February 2009): an explanatory memorandum has been published on OPSI - see here

UK: FSA proposes introduction of a general short selling disclosure requirement

The Financial Services Authority has published a discussion paper in which it proposes the introduction of a short selling disclosure requirement for all UK listed shares. This would be wider in scope that the current disclosure regime which applies only to certain financial stocks

In its discussion paper, which provides a good overview of short-selling practices, the FSA reasserts the so-called market failure thesis by stating that regulation is justified "on the basis of identified market failures and if it is expected to deliver net benefits to the market" (para. 3.1). The FSA notes the controversial nature of short selling but nevertheless restates its position that short selling is a legitimate investment technique in normal market conditions. Empirical evidence is provided which, in the FSA's view, "tends to confirm, with some qualifications, the theoretical proposition that short selling allows negative expectations about share price developments to feed more directly into the actual share price and thus contributes to efficient pricing" (Annex 1, p3). 

The principal justifications offered in support of public disclosure are: [1] it has the potential to restrain what the FSA calls "aggressive large-scale short selling" which can lead to disorderly markets; [2] it can further enhance the informational efficiency of the market. 

For further information see:
Press release | Newsletter | Discussion paper | Online response form | Short selling instruments and related material

Friday 6 February 2009

UK: auditor liability limitation agreements - a dead duck?

An interesting development has been reported by Robert Bruce in the Financial Times: the likely reluctance of listed companies, during the forthcoming AGM season, to seek shareholder approval for auditor liability limitation agreements (ALLAs). Whilst Section 532 of the Companies Act (2006) renders void provisions exempting an auditor from liability, the Act provides an exception with regard to ALLAs in Sections 534 to 536. Shareholder authorisation is required. 

Bruce offers several suggestions for companies' lack of enthusiasm for ALLAs, including the fact that other issues are regarded as more important, and quotes the view of Deloitte's managing director for audit (Vince Niblett) that ALLAs are a "dead duck". Niblett is quoted as saying: "Audit committee chairmen will roll their eyes ... [they] are not going to want to have an argument at the AGM with a shareholder who has got the wrong end of the stick".

Thursday 5 February 2009

India: the shape of governance reforms?

The chairman of the Securities and Exchange Board of India (SEBI), Mr C B Bhave, has given a good indication of the likely shape of governance reforms in India following Satyam. His comments were made at a governance summit held in Mumbai earlier this month. In a press release published by the Confederation of Indian Industry, one of the organisers of the summit, it is reported:

Speaking on the issues raised by the ongoing Satyam case which required an open public debate, Mr Bhave highlighted that desirability of rotational auditors; need for an external agency to conduct internal audit in a listed company; role of non promoter shareholders especially the institutional shareholders forming part of non promoter shareholders and maintaining an appropriate balance between required and necessary legislative intervention are being actively considered by SEBI".

Wednesday 4 February 2009

USA: Bankers' pay - cap announced by President Obama

President Obama has announced that a salary cap of $500,000 will be imposed on executives of banks receiving "extraordinary help". Additional compensation is permissible in the form of shares but ownership in these shares will not pass until the federal aid has been repaid. 

The President indicated that further reforms are being considered; he stated: "We're going to be taking a look at broader reforms so that executives are compensated for sound risk management, and rewarded for growth measured over years, not just days or weeks."

The President's speech can be watched below and read here.  A summary of the recommendations is available here. For comment on the proposals, see this op-ed piece written by Professor Lucian Bebchuk which appeared in the Wall Street Journal. An interesting question is what impact the cap will have on bankers' pay in the UK and elsewhere (a cap was introduced in Germany last year). The current approach in the UK focuses on the structure of remuneration rather than the total amount paid. The FSA has published preliminary guidance on good remuneration and UK Financial Investments Ltd will, according to Government Minister Ian Pearson, "work to ensure management incentivisation based on long-term value maximization, which attracts and retains high quality management and which minimizes the potential for rewarding failure" (HC Hansard, 28 Jan 2009, col 582W).

UK: bank boardroom culture needs to change says Chancellor

The Chancellor was interviewed yesterday by the House of Lords Economic Affairs Committee. A video of the interview is available here. The Chancellor made clear that bank boardroom culture needs to change and cited the role of non-executive directors and institutional investor engagement (see his comments at 9m 50s).

In response to these initial comments, Lord Eatwell asked (at 30m 20s) whether the Chancellor was proposing corporate governance changes or whether he was hoping that directors would behave differently in the future. The Chancellor did not identify specific proposals but pointed to a forthcoming white paper (expected in the spring) dealing with banking supervision and regulation. 

Global Auditor Investor Dialogue - Guidelines for Enhanced Disclosure

The Global Auditor Investor Dialogue - an informal forum comprising the major global auditing networks and leading institutional investors - has published Guidelines for Enhanced Disclosure to Assist Directors, Audit Committees, Shareowners and Investors. In the accompanying press release it is stated:

At a time when the need to restore investor confidence in corporate reporting is as strong as it ever was, an independent working group of leading investors and accounting experts is publishing enhanced disclosure guidelines to assist directors, audit committees, shareowners and investors in fulfilling their responsibilities. The Guidelines, produced by the recently formed Enhanced Disclosure Working Group, address a range of topics which are critical to the exercise of effective oversight of audit, risk and control matters by boards around the world".

The topics addressed by the Guidelines, which concentrate on the audit committee, include: information flows to the audit committee; risk and internal controls; valuation of assets and liabilities; write downs and impairment provisions; securitisation, off-balance sheet and contingent liabilities; internal and external auditors; executive compensation and risk; substance not form; audit committee charter; and audit committee membership.

UK: Companies House - updated guidance booklets

Companies House has published updated versions of fifteen of its guidance booklets, including GBA1: Directors and Company Secretaries Guide, GBA10: Dormant Companies, GBW2: Strike-off, Dissolution and Restoration and GBLLP2: Limited Liability Partnership - Administration and Management.

Tuesday 3 February 2009

UK: Scotland: directors' disqualification and the requirement to give notice

Section 16(1) of the Company Directors Disqualification Act (1986) provides that a person applying for a disqualification order must give no less than ten days' notice of his intention to the person against whom the order is sought. In Secretary of State for Trade and Industry v Langridge; Re Cedac Ltd [1991] Ch 402, a majority in the English Court of Appeal held that the ten day requirement was not mandatory but directory. This position has been adopted in Scotland (see Secretary of State for Trade and Industry v Lovett 1996 SC 32).  More recently, in Secretary of State for Trade and Industry v Swan [2003] EWHC 1780 (Ch), Laddie J. held that "although failure to give 10 days notice does not, per se, render the disqualification proceedings a nullity, taken with other factors, including the shortness of the notice, it may do so" (para. [58]).

The operation of Section 16 was considered towards the end of 2008 in Scotland by Sheriff Principal Lockhart in Secretary of State of Business, Enterprise and Regulatory Reform v Smith and Smith (19 November 2008, conjoined cases B412/07 and B410/07). What makes this decision interesting is that it was argued that the directory status of Section 16(1) should be reconsidered given the enactment of the Human Rights Act (1998). More specifically, it was argued that the failure to regard Section 16(1) as mandatory amounted to a breach of articles 6 and 8 of schedule 1 of the 1998 Act. Sheriff Principal Lockhart rejected this argument stating that he was bound by Lovett. What was also significant was the fact that the directors had not been prejudiced by the failure to give no less than days' notice.  Indeed, the Sheriff Principal stated that where there was proof of the notice being sent, its receipt may be presumed unless evidence existed rebutting that presumption.

Monday 2 February 2009

Germany: amending the Corporate Governance Code

The German Corporate Governance Code Commission recently held an extraordinary plenary meeting at which it decided to consider making amendments to its Corporate Governance Code when it meets again in May. In the Commission's announcement, it is stated that at the extraordinary meeting:

There was a broad acceptance of creating even stronger incentives for sustainable corporate development via appropriate compensation structures for management boards, so that senior managers receive remuneration commensurate with long-term corporate success, or lack thereof. In this context, the Commission is also calling for an extension of the exercise period for equity options to to three years. Furthermore, there was consensus that senior management compensation should, be measured in relation to a company's basic compensation structure in future. Until now, yardsticks for assessing the appropriateness of board-level remuneration have included the board member's own performance, the company's economic health, and the market environment.

In addition, there was a positive response to a proposal calling for a stronger emphasis on adequate diversity when nominating supervisory boards. A greater spread of nationalities and a better representation of women are the key objectives in this respect".