Thursday 30 April 2009

Australia: court considers the duties of non-executive directors - a landmark in Australian corporate governance says ASIC

A decision of the New South Wales Supreme Court given last week - Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287 - has been described by the Australian Securities and Investments Commission as a "landmark ... in Australia on corporate governance". The case raised important questions about the duty of care imposed on executive and non-executive directors and the extent to which they were able in the discharge of their duties to rely on information provided by others. Of particular interest is the application of the duty of care to the non-executive directors because, as the trial judge observed, "[the] law has not yet established the extent to which the position of a non-executive director shapes the content of the duty of care" (para. 250).

At issue was the liability of the directors under Section 180(1) of the Corporations Law (now Section 180(1) of the Corporations Act 2001) in respect of their approval in February 2001 of a draft ASX announcement which contained assertions of sufficient funding. ASIC alleged that the directors could not have been satisfied, on the basis of the information before them, that there was a proper basis for the assertions of sufficient funding. Section 180(1) provides:

A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.”

ASIC has provided a summary of the judge's findings against the directors: see here. With regard to the extent to which the non-executive directors could rely on others, the trial judge stated (paras. 259-261):

All of the non-executive directors ... knew or should have known that if [the company] made the statements as to the sufficiency of funding ... in the Draft ASX Announcement there was the danger that [the company] would face legal action for publishing false or misleading or misleading or deceptive statements, its reputation would suffer and there would be a market reaction to its listed securities. This was not a matter in which a director was entitled to rely upon those of his co-directors more concerned with communications strategy to consider the Draft ASX Announcement. This was a key statement in relation to a highly significant restructure ... Management having brought the matter to the board, none of them was entitled to abdicate responsibility by delegating his or her duty to a fellow director. Nor was this a case of reliance upon management, a co-director or expert adviser. Management had sought the board’s approval and the task of approving the Draft ASX Announcement involved no more than an understanding of the English language used in the document"

The penalties to be imposed on the directors - and the application of Sections 1317S and 1318 of the Corporations Act 2001, which provide the court with the power to grant relief in respect of liability - will be decided at a later hearing.

Wednesday 29 April 2009

Europe: directors' remuneration - Commission adopts new Recommendation

The European Commission has adopted a new Recommendation concerning the remuneration of listed company directors. The Recommendation contains guidance about the structure of remuneration and the manner in which it is determined. It supplements a couple of earlier Recommendations (2004/913/EC and 2005/162/EC). Recommendations are not binding on Member States but are intended to be persuasive. 

A copy of the new Regulation will soon be available here. Meanwhile, further information is available here and frequently asked questions have been published here. The Commission has also adopted a Recommendation concerning the remuneration of risk taking staff within financial institutions, about which see here.

Ireland: the disclosure of grants of security over shares

The Financial Regulator has published a consultation paper concerning the disclosure of grants of security over listed company shares by those discharging managerial responsibilities within such companies. The paper notes that such disclosure is not currently market practice in Ireland although it appears to be required in order to comply with the spirit of the Market Abuse Directive (2003/6/EC). The paper sets out five options, one of which is favoured by the Financial Regulator: that disclosure of grants of security over shares should be required. 


[1] For further information about the Market Abuse Directive see here

[2] Earlier this year the UK's Financial Services Authority issued a statement in which it clarified the operation of Disclosure and Transparency Rule 3.1 and the Model Code with regard to the disclosure required in respect of grants of security over shares. See this earlier post for further information. 

Tuesday 28 April 2009

UK: the Equality Bill - gender pay gap reports + board diversity

Last Friday the Equality Bill was introduced in Parliament and was published yesterday. A copy of the Bill is available here. It is presented in a new and very helpful way: alongside each clause is a link which, when clicked, displays the explanatory notes for that clause. 

Clause 73 ("Gender pay gap information") has been much discussed. Its purpose is to encourage businesses with more than 250 employees to publish voluntarily information concerning the difference in pay, in percentage terms, between male and female employees. Clause 73 gives the Government the power to make regulations requiring such disclosure but the Government has indicated that it will not be exercised before April 2013.

Accompanying the Bill is a report published by the Government Equalities Office titled "A Fairer Future: the Equality Bill and other action to make equality a reality". This states that the Equality and Human Rights Commission will, over the summer, develop a set of metrics for gender pay reports. The report also refers to the gender composition of company boards - in the context of other provisions in the Bill designed to promote greater diversity in the workplace - and refers to research by Catalyst and McKinsey and Company which finds a correlation between board diversity and company performance.

Monday 27 April 2009

UK: PIRC's manifesto for corporate governance reform

Pensions Investment Research Consultants Ltd - better known as PIRC - has published "Beyond the crisis: PIRC’s manifesto for corporate governance and capital market reform". The recommendations are wide-ranging. PIRC suggests that a greater role for employees should be considered within the UK governance framework and calls on BERR to consult on this issue. PIRC also proposes, inter alia, that directors of listed companies should be elected annually; that shareholders should have a binding vote on company audit committee reports; and that legislation should be introduced to make explicit "new responsibilities of stewardship and engagement for institutional investors". 

UK: the Companies’ Remuneration Reports Bill - second reading received in the House of Lords

Last Friday the Companies’ Remuneration Reports Bill received its second reading in the House of Lords and now proceeds to the Committee stage. The written record of debate, Hansard, is available here. The proceedings can be watched here but patience is required because the video file begins with a preceding debate concerning dogs which lasts for 1 hour and 6 minutes! The Bill will introduce the following provision in the Companies Act (2006):

430A Annual accounts and report: public quoted companies

(1) Every public quoted company, as defined in sections 4(2), 385(1) and (2), shall publish on the first page of the chairman’s statement, chief executive’s statement, or directors’ report, whichever comes first in the annual accounts and report, the ratio between the total annual remuneration of the highest paid director or executive and the total annual average remuneration of the lowest paid ten per cent of the workforce".
The Bill - a Private Members' Bill - was introduced by Lord Gavron (a Labour peer) and during second reading there were contributions from, inter alios, Lords Giddens, Goodhart and Wedderburn of Charlton. All of the speeches are worth reading. Lord De Mauley, the shadow Minister for Business, Enterprise and Regulatory Reform, expressed reservations with the Bill. The Government Minister, Lord Davies of Abersoch, stated (at col. 1732) that the Government had "absolutely no problem with the principle of reporting as outlined in the Bill. Our signpost is that we will take up this cause. Our worry about the Bill is that it will distract from the wider issues".

Earlier in the day on Friday, the Bill was the subject of discussion on the BBC Radio 4 Today programme: click here to listen. Lord Gavron took part as did Miles Templeman from the Institute of Directors.

UK: APB bulletin 2009/2 published

The Auditing Practices Board has published bulletin 2009/2. The bulletin contains updates examples of unmodified and modified auditor's reports, for audits of financial statements of companies incorporated in the United Kingdom, for periods beginning on or after 6 April 2008 and ending on or after 5 April 2009. The examples reflects the requirements of ISA (UK and Ireland) 700 (Revised) - the auditor's report on financial statements and the Companies Act (2006).

Australia: directors' remuneration - Productivity Commission publishes issues paper

Last month the Australian Government asked the Productivity Commission to undertake a review of the regulation of executive and director remuneration. Earlier this month the Commission published an issues paper in which it asked questions falling within the following five areas:
  • Trends in director and executive remuneration in Australia and internationally
  • The effectiveness of the existing framework for the oversight, accountability and  transparency of director and executive remuneration practices
  • The role of institutional and retail shareholders in the development, setting, reporting and consideration of remuneration practices
  • Any mechanisms that would better align the interests of boards and executives with those of shareholders and the wider community
  • The effectiveness of the international responses to remuneration issues arising from the global financial crisis
The issues paper briefly refers to some academic research but its main purpose is to provide a framework for the Commission's more detailed future analysis. The Commission will be working quickly: a draft report is scheduled for publication in September and its final report will be available by the year's end.

Friday 24 April 2009

Europe: credit rating agencies - Parliament adopts Regulation

Yesterday the European Parliament voted by 569 votes to 47 to adopt, with amendments, the European Commission's proposal for a regulation concerning credit rating agencies. Further information is available in this press release from the European Parliament from where the following overview is taken:

The approved regulation sets up an obligation for all CRAs wishing to operate in the EU to register and comply with a set of rules. The approved provisions aim at enhancing transparency, independence and good governance of credit rating agencies, thus improving the quality and reliability of credit ratings and consumer's trust. The main objectives of the regulation are:
  • To ensure that credit rating agencies avoid conflicts of interest;
  • To increase transparency by setting disclosure obligations;
  • To ensure an efficient registration and supervision framework at EU level;
  • To improve the quality of the methodologies and the quality of ratings.
The Regulation will be directly applicable in the whole EU 20 days following its publication in the Official Journal. Member States will have six months to take the necessary measures to implement the new provisions".

A copy of the Regulation is available here (in the Word document titled Part 2) and will also be available here (hopefully in a more user friendly format). 

UK: England and Wales: company charged with corporate manslaughter

A company - Cotswold Geotechnical Holdings Ltd. - has become the first to face the charge of corporate manslaughter introduced by the Corporate Manslaughter and Homicide Act 2007. Further information about the case is available in the press release published by the Crown Prosecution Service as well as this report from the Times newspaper and this report in the Financial Times newspaper. For further information about the 2007 Act see the guidance published by the Ministry of Justice available here

UK: Walker review of bank corporate governance - terms of reference widened

In a speech delivered earlier this week at an Association of Investment Companies conference, Lord Myners (the Financial Services Secretary to the Treasury) announced that the terms of reference of the Walker review of bank corporate governance had been widened to include all financial institutions. Lord Myners also reflected on some of the issues which he hoped the Walker review would consider and expressed the view that the Combined Code should give a higher priority to shareholder engagement. With regard to remuneration he observed:

I am hoping Sir David Walker will also ask questions about the Remuneration Report to shareholders - should it continue to be advisory, or should it have some mandatory element? Should benefit consultants be solely accountable to the board, or perhaps have a duty to report to shareholders against a template agreed by shareholders that would identify critical scheme features, potential risks and provide an assessment of economic utility".

Thursday 23 April 2009

UK: budget 2009 - taxation - the accountability of the senior accounting officer

Another item related to corporate governance from yesterday's budget and one that was not expected: the Government is to introduce legislation which will require large companies' senior accounting officer to certify personally that adequate controls within the company are in place to prepare accurate tax computations.

It is proposed that this rule will apply to returns due to be made for accounting reference periods beginning on or after the date on which the Finance Bill 2009 receives Royal Assent. HMRC have published a note which provides some - but not much more - information about the new rule. Senior accounting officer is not defined but this will most likely be the company's finance director. Where the rule is breached, penalties will be imposed on the officer personally and the company.

HMRC state that the purpose of the rule is to "ensure that the accounting systems in operation within large companies liable to UK taxes and duties are adequate for the purposes of accurate tax reporting". It will only apply to large companies and large groups of companies (those not defined as small or medium sized under the Companies Act 2006). HMRC also state that "[r]esponsible companies and their senior accounting officers will already have adequate accounting systems in place and these requirements will impose no significant additional burden on those companies or their officers". However, the budget report, at page 11, reveals that the new rule is expected to raise £ 40 million in 2010/11 and £ 50 million in 2011/12. 

UK: budget 2009 - corporate governance, financial regulation and responsible shareholder engagement

More from yesterday's budget. The chancellor, in his speech, announced that he would soon publish recommendations for the wide-ranging reform of the financial system. He said that his recommendations would: 
  • reform corporate governance and remuneration at banks;
  • improve regulation of banks' capital and liquidity;
  • increase transparency;
  • ensure that all important institutions, including hedge funds, are regulated.
Interestingly, in the budget report at para. 3.53, the Government stated that "[m]easures are needed to strengthen responsible shareholder engagement". What might these look like and what is the relationship between the chancellor's forthcoming recommendations and the work of the Walker review of bank corporate governance?

UK: budget 2009 - accounting and corporation tax simplification

Tucked away in yesterday's budget is something of interest concerning the European Commission's recent proposal to give Member States the option to exempt so-called 'micro entities' from the accounting requirements of the Fourth Company Law Directive. The proposal is referred to at para. 4.53 in the budget report where the Government briefly mentioned the outcome of its recent consultation on corporation tax simplification:

responses ... a summary of which will be published shortly, indicated little support for the options outlined and the Government will not pursue these. There was greater interest in simplifying accounting requirements, and BERR will draw on these responses when considering the scope to simplify accounting rules for micro companies under European Commission proposals. HMRC will consider whether any changes create scope to make simplifications to the tax calculations for micro companies".

Wednesday 22 April 2009

UK: APB publishes exposure drafts of clarified ISAs (UK & Ireland)

Earlier this year the Auditing Practices Board announced that it would be updating it auditing standards in line with the new International Standards on Auditing issued by the International Auditing and Assurance Standards Board. Yesterday, the APB issued for comment: exposure drafts of 33 of its clarified international standards, a clarified standard on quality control and a revised statement of the scope and authority of APB pronouncements. The consultation period ends on 22 July 2009. The final standards, which will be published in the autumn, will apply to audits for periods ending on or after 15 December 2010.

For further information see:
APB press release | APB consultation paper | APB Clarified International Standards on Auditing | APB Clarified International Standard on Quality Control | APB Scope and Authority of Pronouncements (revised)International Standards on Auditing | International Auditing and Assurance Standards Board | APB consultation paper (October 2008) | APB consultation paper (October 2008) responses |

Tuesday 21 April 2009

UK: Policy Exchange proposals for bank directors' pay

Policy Exchange - an independent, non-partisan education charity with particular interests in free market solutions to public policy questions - has published recommendations for reforming bank executives' remuneration. In a document titled "The Balanced Incentive Scheme - Changing the Bonus Culture for Senior Banking Executives", two changes are advocated:
  • Introducing redeemable convertible preference shares to bonus packages, rather than relying on common equity. PE states that these provide a balanced incentive: they pay a fixed annual dividend, and are not as volatile as the underlying equity.
  • Shareholders must approve the appointment of the remuneration advisers, and their fees, at the annual general meeting, by amendment to the Combined Code. PE states that this would balance any conflict of interest between the executive directors, non-executive directors, and shareholders.

Europe: the Market Abuse Directive - call for evidence

The European Commission has published a call for evidence concerning the Market Abuse Directive (2003/6/EC). Views are sought on the scope of the Directive (e.g., should it apply beyond regulated markets and include multilateral trading facilities?) and the definition of inside information and market manipulation. The Commission also notes the different approaches taken by Member States with regard to short-selling and consultees are asked whether there is a need for a "comprehensive framework for short selling" and, if so, whether this should be addressed within the Market Abuse Directive.

Friday 17 April 2009

Ireland: corporate governance reform - Labour Party proposals

One of Ireland's opposition parties, the Labour Party, has published far reaching proposals for the reform of corporate governance including replacing the current 'comply or explain' approach with a binding governance code. A bill - the Corporate Governance (Code of Practice) Bill - will be laid before the Dáil later this year and, according to the policy document "Never Again", it will:
  • Provide for the drawing up of a binding code of practice for corporate governance
  • End the practice of cross-directorships
  • Limit the number of boards on which a non-executive director may sit
  • Prohibit the positions of chairman and chief executive of a company being held by the same person
  • Prohibit a former chief executive from being elected chairman
  • Prohibit non-executive directors from serving on a board for more than seven consecutive years
  • Require companies to establish independent auditing committees, comprised of members with relevant expertise
  • Require the chairman and chief executive to assume direct responsibility for ensuring good corporate governance and transparency in corporate reporting
  • Require non-executive directors to demonstrate the time and skills necessary to contribute effectively to the board
  • Regulate the appointment of non-executive directors who are connected to the company’s bank or auditors
Note: Irish listed companies are required, under rule 6.8.3 of the Irish Stock Exchange Listing Rules, to state the extent of their compliance with the UK's Combined Code on Corporate Governance.  

Thursday 16 April 2009

Europe: CESR member measures concerning short selling

The Committee of European Securities Regulators has updated its very useful summary of the measures taken by members with regard to short selling. 

Wednesday 15 April 2009

South Africa: the Companies Act 2008

The Parliamentary Monitoring Group has published a copy of the Companies Act 2008. According to the PMG the Act became law earlier this month but it's not yet clear when its various provisions will be brought into force. 

The following provisions have caught my eye. Section 76 sets out the core duties of directors. Section 163 provides shareholders with a remedy in respect of unfairly prejudicial conduct. A statutory derivative action is introduced by Section 165, replacing the shareholder's common law right to bring an action on behalf of the company. 

The requirement for auditor rotation is in Section 92, which provides that "[the] same individual may not serve as the auditor or designated auditor of a company for more than five consecutive financial years". Section 72, titled "Board committees", provides the Government with the power to require certain companies to establish a social and ethics committee. 

Note: earlier this year the South African Institute of Directors published a draft of the King III code of corporate governance - see here.

Update (16 April 2009): for further information about the Act, see the press release issued today by the Department for Trade and Industry.

Tuesday 14 April 2009

Ireland: the Companies (Amendment) Bill 2009

Earlier this year the Irish Government nationalised Anglo Irish Bank. In explaining its decision to nationalise the bank, the Government cited the bank's weak funding position and the reputational damage suffered by it in respect of "unacceptable corporate governance practices". These practices included the removal of directors' loans from the company's books for several weeks each year in order to avoid disclosure to the company's shareholders. 

Reform is underway. At the end of last week, Ireland's Tánaiste and Minister for Enterprise, Trade and Employment Ms. Mary Coughlan T.D. announced the publication of the Companies (Amendment) Bill 2009. The Bill has three broad purposes as explained in the accompanying press release:
  • To improve the transparency of loans made by companies that are banks to their directors and to persons connected with them.
  • To support the Director of Corporate Enforcement in his efforts to enforce compliance with company law whether the company being investigated is a bank or not.
  • To amend some existing provisions relating to Irish registered non-resident companies to meet EU Commission concerns.

[1] Ireland's Financial Regulator published a report last month setting out the results of its examination of the disclosure of loans to directors by Allied Irish Banks p.l.c., Bank of Ireland, EBS Building Society, Irish Life and Permanent plc, Irish Nationwide Building Society and Postbank Ireland Limited. No evidence was found of the reduction or removal of directors' loans at the year end in order to avoid disclosure but some errors were found in the published financial statements.

[2] The nationalisation of Anglo Irish Bank was effected by the Anglo Irish Bank Corporation Act 2009.

Friday 10 April 2009

UK: FRC publishes latest progress and planning report

The Financial Reporting Council has published its latest quarterly strategic progress and planning report. The report summarises developments in the first three months of 2009. It also outlines anticipated developments for the next three months including: 
  • the Auditing Practices Board will publish an exposure draft of the clarity versions of International Standards on Auditing (UK and Ireland) (about which see here). 

Thursday 9 April 2009

UK: the Overseas Companies (Company Contracts and Registration of Charges) Regulations 2009 - draft published

The Department for Business, Enterprise and Regulatory Reform has published a draft of the Overseas Companies (Company Contracts and Registration of Charges) Regulations 2009, available in Word format here. The draft Regulations replace Part 6 and Chapter 5 of Part 9 of the draft Overseas Companies Regulations that were published by BERR on its website in June 2008. Also published is an impact assessment (PDF) and a brief explanatory note (Word) which sets out the differences between these new Regulations and those published in 2008. The note also explains:
The [Companies Act] 2006 Act has a single regime under which an overseas company must be registered at Companies House if it has an establishment in the UK. This is a new concept. The revised draft Regulations provide that the requirement to register charges apply to an overseas company only if it has complied with the requirement to register an establishment (and has not subsequently closed all of its UK establishments). Third parties can discover whether an overseas company has registered an establishment by checking the register at Companies House".

Isle of Man: auditor oversight - consultation on draft rules

The Financial Supervision Commission has published a consultation paper regarding regulations to be made under the Companies (Amendment) Bill 2008 (which is awaiting Royal Assent). The purpose of the regulations is to establish a framework which will permit Manx auditors to audit firms listed on regulated markets within the EU in accordance with the EU Statutory Audit Directive (2006/43/EC). This will be achieved by the Isle of Man assuming public oversight of auditors but delegating this to the UK Financial Reporting Council's Professional Oversight Board and the Institute of Chartered Accountants in England and Wales. An identical approach is being adopted by the other Crown Dependencies (i.e., Jersey and Guernsey). 

UK: community interest companies - review of the dividend and performance related interest caps

The Regulator of Community Interest Companies has announced a review of the dividend caps and the performance related interest cap under the Community Interest Company Regulations 2005. The regulator's consultation paper is available here

Wednesday 8 April 2009

Ireland: financial regulation reform

Many countries are examining the manner in which their financial markets - and banking sectors in particular - are regulated. In yesterday's supplementary (i.e. emergency) budget the Minister for Finance, Mr Brian Lenihan T.D.announced changes in the regulatory structure of the financial system in Ireland. To quote directly from Mr Lenihan's announcement:

The role of the Central Bank of Ireland will be reformed to place it at the centre of financial supervision and financial stability oversight, providing for full integration and co-ordination of the prudential supervision and stability of individual financial institutions with that of the financial system as a whole. The Central Bank of Ireland will in the future be headed by a Commission, chaired by the Governor.

... I have asked the former Deputy Governor of the Bank of England and former member of the UK Monetary Policy Committee, Sir Andrew Large, to advise on the process to select a new Head of Financial Regulation within the new institutional structure".

Tuesday 7 April 2009

UK: England and Wales: directors' conflicts of interest

A quick post: a copy of Peter Smith J's judgment in D Wetherspoon Plc v Van De Berg & Co Ltd & Ors [2009] EWHC 639 (Ch), handed down at the end of March, has been published on BAILII. Amongst the issues for consideration were directors' breaches of fiduciary duty. A preliminary reading of the judgment does not reveal anything startling with regard to legal principle. More interesting, perhaps, is the judge's postscript in which he comments on the length of the trial and the manner in which it was conducted. 

UK: directors, integrity, ethics and regulatory compliance

The Financial Services and Markets Tribunal has given its opinion in Vukelic v Financial Services Authority [2009] UKFSM FSM067. The Tribunal supported the FSA's decision to make an order against a former director prohibiting him from performing any function in relation to any regulated activity carried on by any authorised or exempt person or exempt professional firm. The Tribunal found that the director was not fit and proper within Section 56 of the Financial Services and Markets Act (2000).

The case concerned three financial reinsurance transactions which involved no real reinsurance risk and which were entered to disguise losses and/or misrepresent financial accounts. The director, Mr Vukelic, was responsibe for overseeing and structuring these transactions and knew that they could be used to mislead the clients' auditors. Two of the three client insurance companies collapsed. The Tribunal found that Mr Vukelic had (paras. 119 and 122):

"...turned a blind eye to what was obvious and failed to follow up obviously suspicious signs ... he chose not to exercise his power of veto to stop what should have been seen to be an obviously questionable deal from going ahead. ... We find that he must have appreciated that the deals would probably founder if they were fairly and fully described to auditors and others with a right to know. His conduct in relation to these transactions lacked integrity ... In terms of the consequences for creditors, investors and shareholders, it made little difference whether Mr Vukelic was dishonest or merely reckless"

Also of interest is the Tribunal's clear warning concerning regulatory compliance (para 123):

Anyone who promotes financial products on the basis that a clear potential for abuse is not their problem because primary responsibility for disclosure to auditors, regulators or others rests with the client, is, as we see it, acting unethically and can expect appropriate regulatory sanctions".

UK: 'radical' thinking from Lord Myners?

Yesterday's Financial Times newspaper contained an article titled "Myners urges 'radical' shake-up of boards". The article reported Lord Myners' comments last week before the House of Lords Economic Affairs Committee and, in particular, his calls for the Walker and FRC reviews of corporate governance to consider "radical" ideas. Lord Myners' radical thinking included providing non-executive directors with greater support including staff to provide independent information. He also suggested the adoption of independent "secretariats" to serve non-executive directors.

Are these suggestions particularly radical? Do they go beyond what is already envisaged by the current Combined Code on Corporate Governance? Whilst the Code does not specifically state that non-executive directors should be supported by an independent secretariat, it does provide, in provision A.5.2:

The board should ensure that directors, especially non-executive directors, have access to independent professional advice at the company’s expense where they judge it necessary to discharge their responsibilities as directors. Committees should be provided with sufficient resources to undertake their duties".

Lord Myners' appearance before the Committee can be watched here.

Monday 6 April 2009

USA: shareholders and executive pay

The Wall Street Journal has reported, in an article titled "Companies Seek Shareholder Input on Pay Practices", an interesting development: Amgen has asked its shareholders, prior to a shareholder meeting in May, to complete a 10 question online survey concerning executive pay. The WSJ states that the survey is "one of the first of its kind" and, more generally, notes:

Shareholders at roughly 400 companies that accepted federal aid will conduct advisory votes this year on those companies' compensation plans. Congress later this year may require such "say-on-pay" votes at all companies".

UK: the limitations of accounting models and their impact on decisions - speech by FRC chief executive

Paul Boyle, the chief executive of the Financial Reporting Council, delivered a speech last week in which he set out his personal views on several matters including: [a] the purpose of accounting and the scale of the accounting challenge, [b] do we need accounting standards and who should set them? [c] the impact of accounting on decisions and [d] accounting aspects of the current financial crisis.

My Boyle observed that "there are widespread concerns about the complexity and relevance of financial statements" and explained that as part of the FRC's Complexity Project a consultation paper setting out the nature of the problem and providing potential solutions would be published later this month.

UK: the Co-operative and Community Benefit Societies and Credit Unions Bill

A copy of the Co-operative and Community Benefit Societies and Credit Unions Bill was published last week. The Bill is a Private Members' Bill - its clauses were, however, prepared by the Government - and was introduced in the House of Commons on 21 January 2009 by Malcolm Wicks MP. The Bill is due to receive its second reading on 24 April. Its purpose, as explained in the explanatory note prepared by HM Treasury (with the consent of Malcolm Wicks) is:
  • to require new industrial and provident societies (other than credit unions) to be registered as co-operative or community benefit societies
  • to re-name the Industrial and Provident Societies Acts
  • to apply the Company Directors Disqualification Act 1986 to industrial and provident societies
  • to give the Treasury powers to apply to industrial and provident societies, with appropriate modifications, company law on investigation of companies, company names and dissolution and restoration to the register (Parts 14 and 15 of the Companies Act 1985 and Parts 5 and 31 of the Companies Act 2006)
  • to give the Treasury powers to make provisions for credit unions corresponding to any provisions applying to building societies
Some of these proposals, including those relating to disqualification, were considered a year or two ago by the Government in its review of the Great Britain co-operative and credit union legislation.

Sunday 5 April 2009

UK: a couple of new blogs

Two new blogs have caught my eye. The Edinburgh Centre for Commercial Law Blog has several objectives one of which is to provide members of the Centre with the opportunity to comment on recent cases, developments and research related ideas in Scots commercial law. A couple of recent posts are of particular interest. In the first, Gillian Black describes a recent talk at the Centre concerning derivative actions/claims (known as derivative proceedings in Scotland) under the Companies Act (2006). Her post notes - very usefully - that Lord Glennie's decision in Wishart, Re An Order Under S.266 Of The Companies Act 2006 [2009] CSOH20 is to be the subject of an appeal before the Inner House next month. In the second post, Scott Wortley highlights a Scottish quirk concerning the meaning of "prior floating charge holder" in the context of administration.

The second blog - Bankruptcy, Insolvency and Corporate Rescue - has been created by John Tribe, the KPMG lecturer in restructuring at Kingston Law School. John comments on recent developments but a particular strength of his blog is the wealth of historical material and insights he provides. Issues concerning the duties of directors often arise in the context of insolvency, as a recent post on John's blog concerning fraudulent trading demonstrates.

Friday 3 April 2009

The G20 communique and declaration on strengthening the financial system

The G20 countries' communique contains some fine words. Translating these into actions will be more difficult. The communique is accompanied by a declaration on strengthening the financial system. This declaration has a section concerning the scope of regulation and compensation. It is stated that hedge funds or their managers will need to be registered and will be subject to disclosure obligations. 

With regard to remuneration, the declaration endorses the Principles for Sound Compensation Practices published yesterday by the Financial Stability Forum. These Principles are organised under the following headings: [1] governance of compensation, [2] alignment of compensation with prudent risk taking and [3] supervisory oversight and engagement by stakeholders. The communique describes the FSF's Principles as "tough" (para. 15) although they are not particularly surprising. Few would, for example, disagree with Principle 1:

The firm’s board of directors must actively oversee the compensation system’s design and operation. The compensation system should not be primarily controlled by the chief executive officer and management team. Relevant board members and employees must have independence and expertise in risk management and compensation".

The Principles do not insist on particular forms of remuneration or compensation. Indeed, in the introduction it is stated:

The Principles are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes. They are not intended to prescribe particular designs or levels of individual compensation. One size does not fit all – financial firms differ in goals, activities and culture, as do jobs within a firm. However, any compensation system must work in concert with other management tools in pursuit of prudent risk taking".

UK: England and Wales: nominee directors + the section 996 discretion

Judgment was given yesterday by the Court of Appeal in Hawkes v Cuddy [2009] EWCA Civ 291. This is an important case concerning the duty of a nominee director towards his nominator as well as the scope of the court's discretion under Section 996 of the Companies Act (2006) in respect of unfairly prejudicial conduct under Section 994

The leading and only reasoned opinion was delivered by Stanley Burnton LJ (Moore-Bick LJ and Blackburne J concurring). With regard to the duty of a nominee director towards his nominator, his Lordship observed (at para. [32] and [33]):

...the fact that a director of a company has been nominated to that office by a shareholder does not, of itself, impose any duty on the director owed to his nominator. The director may owe duties to his nominator if he is an employee or officer of the nominator, or by reason of a formal or informal agreement with his nominator, but such duties do not arise out of his nomination, but out of a separate agreement or office. Such duties cannot however, detract from his duty to the company of which he is a director when he is acting as such ... an appointed director, without being in breach of his duties to the company, may take the interests of his nominator into account, provided that his decisions as a director are in what he genuinely considers to be the best interests of the company; but that is a very different thing from his being under a duty to his nominator by reason of his appointment by it"

Section 996 provides that if a petition under Section 994 is well founded the court "may make such order as it thinks fit for giving relief in respect of the matters complained of". Stanley Burnton LJ endorsed the wide scope of Section 996 through his rejection of the following arguments: [1] that only the interests of the shareholders could be considered in deciding what form of relief to provide and [2] the court could only provide the relief which had been sought by the petitioner. 

Note: the duties of nominee directors were considered last year by Warren J. in Cobden Investments Ltd. v RWM Langport Ltd & Ors [2008] EWHC 2810 (Ch).

Thursday 2 April 2009

UK: England and Wales: shareholders as employees - guidance provided by the Court of Appeal

The Court of Appeal has today given judgment in Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld & Anor [2009] EWCA Civ 280. This decision has been keenly awaited because of the guidance it provides about the circumstances in which a shareholder can be regarded as an employee of a company for the purposes of Section 182 of the Employment Rights Act 1996. It is the leading case in this area. Rimer LJ, delivering the court's opinion, outlined various principles beginning with the following (at para. [80]):

There is no reason in principle why someone who is a shareholder and director of a company cannot also be an employee of the company under a contract of employment. There is also no reason in principle why someone whose shareholding in the company gives him control of it – even total control (as in Lee's case) – cannot be an employee. In short, a person whose economic interest in a company and its business means that he is in practice properly to be regarded as their "owner" can also be an employee of the company. It will, in particular, be no answer to his claim to be such an employee to argue that: (i) the extent of his control of the company means that the control condition of a contract of employment cannot be satisfied; or (ii) that the practical control he has over his own destiny – including that he cannot be dismissed from his employment except with his consent – has the effect in law that he cannot be an employee at all. Point (i) is answered by Lee's case [Lee v. Lee's Air Farming Ltd [1961] AC 12], which decided that the relevant control is in the company; point (ii) is answered by this court's rejection in Bottrill of the reasoning in Buchan".

Update (3 April 2009): The ICLR, as part of its WLR(D) service, has provided a summary of Neufeld - click here.

UK: leadership, governance and the company chairman

In the keynote address he delivered last month at the ICSA corporate governance conference, the FRC's chairman - Sir Christopher Hogg - reflected on the role of the board chairman within the UK's corporate governance framework (he also, as noted here, announced a review of the UK's Combined Code). With regard to board chairs, Sir Christopher observed:

The most important point about reappraising corporate governance is that Chairs should Chair. This is a crisis; little happens without leadership; and the Chair is the leader of the Board and the person who, for above all other Board members, can make or break a Board’s effectiveness ... I think it is Chairs who will determine over the long run whether the system as we now know it recovers from its battering and remains relevant and flexible".

It is difficult to disagree. The role of the chair should not be underestimated because he/she sets the tone for the way in which the board is conducted and functions. More specifically, the Combined Code provides the following supporting principle:

The chairman is responsible for leadership of the board, ensuring its effectiveness on all aspects of its role and setting its agenda. The chairman is also responsible for ensuring that the directors receive accurate, timely and clear information. The chairman should ensure effective communication with shareholders. The chairman should also facilitate the effective contribution of non-executive directors in particular and ensure constructive relations between executive and non-executive directors".

Wednesday 1 April 2009

UK: limited partnership reform - where now?

Last year the Department for Business, Enterprise and Regulatory Reform published a consultation paper in which it set out proposals for the reform of the law governing limited partnerships (including the repeal of the Limited Partnerships Act 1907). The consultation paper contained a draft of The Legislative Reform (Limited Partnerships) Order 2009. Following consultation - which included opposition from Scottish landowning interests in respect of some proposals - DBERR has announced that the proposed Reform Order will not be brought into force on 1 October 2009. In its response to consultees' views, DBERR states: 

... it is apparent that we are not in a position to proceed with the draft Legislative Reform Order in its current form. There is however broad support for many of the key proposals. The Government wishes to proceed with these proposals, and will be discussing with consultees how to take these forward".

UK: Scotland: can a director represent a company in court proceedings?

In Secretary of State for Business, Enterprise and Regulatory Reform v UK Bankruptcy Ltd. [2009] CSOH 50, Lord Hodge had before him an application by the Secretary of State for the winding-up of a company on the grounds that it was in the public interest to do so within Section 124A of the Insolvency Act (1986). An interesting question arose: was a director of the company subject to the winding-up application entitled to represent the company in court proceedings?

The director advanced several arguments to support his position that he was entitled to represent the company in the proceedings, including the contention that under Article 6 of the European Convention on Human Rights the company had an inalienable right to be represented in court by one of its directors. With regard to this argument, Lord Hodge stated (paras. [9] and [10]):

Article 6 of the European Convention on Human Rights gives everyone a right to a fair trial. That right includes, in most circumstances, the right to attend a court hearing and participate effectively in the proceedings. Companies and other non-natural persons can be victims in terms of the Convention. But that does not necessarily mean that in relation to representation in court a company should be treated in precisely the same way as a party litigant. A company as a legal person is not the same as a natural person. Where a person chooses to obtain the benefits of limited liability by trading through the medium of a registered company, he has also to accept the disadvantages to which separate legal personality gives rise. Thus as a general rule I see no incompatibility between Article 6 and the requirement that a company be represented in court not by a director but by a suitably qualified legal representative who has responsibilities to the court and who is subject to professional discipline.

I consider, nonetheless, that exceptional circumstances may arise in which the court has to take steps to allow a company or corporation to be represented in court in order to ensure a fair hearing under Article 6. The Rules of Court do not provide for such a circumstance but the court has an inherent power to regulate its own procedures which it can use in this context. It appears to me that there needs to be careful consideration of the circumstances in which the court may authorise a person who is not a lawyer with rights of audience to represent a company or corporation. Parties have not addressed me on this issue. It is likely to require the court to hear well thought out submissions from interested parties. I have therefore decided to report this issue to the Inner House for its opinion.