Friday 31 July 2009

UK: Treasury Committee publishes banking crisis fourth report

The House of Commons Treasury Committee, as part of its banking crisis inquiry, has today published its fourth report: Banking Crisis: regulation and supervision. The report makes wide-ranging recommendations and describes as a "muddle" the manner in which responsibility for financial stability will be shared amongst the Bank of England, Financial Services Authority, HM Treasury, new Council for Financial Stability and the Bank of England's Financial Stability Committee.

With regard to bank directors, the Committee recommends that the Financial Services Authority should assess whether they possess relevant qualifications. The Committee's view is that banking qualifications should become one of the core indicators against which the FSA assesses a candidate’s competence for acting as a bank director. The Committee notes, however, a potential risk that may arise from greater FSA oversight of bank directors: the crowding out of due diligence by others. 

Europe: update on financial services and company law reform

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

UK: reforming corporate governance and pay in the City - responses to Treasury Committee report

In May this year the Treasury Committee published its report Banking crisis: reforming corporate governance and pay in the City. The responses of the Government, Financial Services Authority and UK Financial Investments Ltd., have now been published: see here.

UK: House of Lords - auditors succeed in having neligence claim struck out

The House of Lords gave judgment in Moore Stephens (a firm) v Stone Rolls Limited [2009] UKHL 39 yesterday. By a 3:2 majority, their Lordships held that a claim for breach of duty (in contract and tort) brought by a company in liquidation (Stone & Rolls Ltd.) against its auditors (Moore Stephens) should be struck out. The claim concerned the auditor's failure to detect the fraud of the company's controller, Mr Stojevic.

For the purpose of the proceedings it was accepted that the auditors were in breach of the duty to exercise reasonable care in relation to the auditing of the accounts of Stone & Rolls Ltd. The question was whether a claim for this breach of duty was precluded by the public policy defence of ex turpi causa non oritur actio (no cause of action may be founded on an illegal act). The majority (Lords Phillips, Walker and Brown) agreed that it was. The minority (Lords Mance and Scott) disagreed. 

Reasoned opinions were provided by all five judges and a proper analysis of these will take some time. It is clear, nevertheless, that auditors are now well placed to defend negligence claims where companies are controlled by a single individual and that individual commits fraud that goes undetected. The irony is, of course, that the auditor's role is critical in such companies.  Indeed, as Lord Mance observed in his dissent (para. [206]):

The world has sufficient experience of Ponzi schemes operated by individuals owning “one man” companies for it to be questionable policy to relieve from all responsibility auditors negligently failing in their duty to check and report on such companies’ activities".

Several opinions discuss auditors' duties. Lord Walker observed (para. [179]):

Checking for fraud is part of an auditor’s task, but it is not his sole or primary task (for a reputable auditor to discover that the client company’s business is wholly fraudulent and criminal must be quite unusual).

Lord Phillips observed (para. [19]):

The leading authority is Caparo Industries Plc v Dickman [1990] 2 AC 603. The duties of an auditor are founded in contract and the extent of the duties undertaken by contract must be interpreted in the light of the relevant statutory provisions and the relevant Auditing Standards. The duties are duties of reasonable care in carrying out the audit of the company’s accounts. They are owed to the company in the interests of its shareholders. No duty is owed directly to the individual shareholders. This is because the shareholders’ interests are protected by the duty owed to the company. No duty is owed to creditors – Al Saudi Banque v Clarke Pixley [1990] Ch 313. The Auditing Standards require auditors who have reason to suspect that the directors of a company are behaving fraudulently to draw this to the attention of the proper authority. The scope of the duty ... is unquestionably imposed in the interests of, at least, the shareholders of the company".

Lord Mance stated (para. [217] - [218]):

[Auditing Standard] SAS 110.12 [issued January 1995] (para. 52) provides that:

'When a suspected or actual instance of fraud casts doubt on the integrity of the directors auditors should make a report direct to a proper authority in the public interest without delay and without informing the directors in advance'.

The text at paragraph 56 explains that matters to be taken into account when considering whether disclosure is justified in the public interest may include 'the extent to which the suspected or actual fraud is likely to affect members of the public'. Plainly, one situation in which members of the public would be affected is where the fraud conceals or risks bringing about the company’s insolvency. The viability of a company as a going concern is always a matter of audit importance.

The relationship of company and auditor is not therefore a simple two-party relationship. The company cannot in the audit context be equated with its board of directors or management. The company’s shareholders are – at least while the company is solvent - the main focus of an auditor’s activity and duties. The auditor, in undertaking the statutory role and contractual and tortious duties, is 'acting antagonistically to the directors' ".

: a summary of the decision has been provided here by the ICLR as part of its WLR Daily service (the summary will be removed when the decision is reported in one of the ICLR's series of law reports). 

Thursday 30 July 2009

UK: introducing a protected cell regime for OEICs - HM Treasury consultation

HM Treasury have published a consultation paper containing proposals for the introduction of a protected cell regime for open-ended investment companies (OEICs). These changes were suggested in 2007 in a consultation on better regulation measures for the asset management sector. In the consultation paper published this week, which contains a draft of the Open-Ended Investment Companies (Amendment) (No. 2) Regulations 2009, HM Treasury explains (paras. 2.1 and 2.1): 

OEICs are investment funds structured as bodies corporate. Large fund managers generally operate a small number of OEIC umbrella companies with a large number of sub-funds within each umbrella, allowing them to operate a large range of funds more efficiently. The sub-funds do not have a separate legal personality, but are separately managed, charged, accounted for and assessed for tax. Under current law there is no segregation of liabilities between different sub-funds. For example, if an umbrella fund contained one cautious UK bond fund and one high-risk Far-east equity fund and the Far-East equity fund collapsed with liabilities exceeding its assets, creditors could have a claim on the assets of the UK bond fund. Investors in the cautious fund therefore bear some of the risk of the riskier fund.

In practice the probability of an OEIC collapse is small, as OEICs must comply with borrowing limits imposed by the FSA, but not zero. Current FSA rules require disclosure of the contagion risk in the fund prospectus and periodic reports, although there is a danger that some OEIC investors do not fully understand it. Thus, provided adequate protection of existing creditors can also be achieved, segregating liabilities so that the liabilities of any one sub-fund could only be met out of the assets of that sub-fund appeared desirable".

India: the Companies Bill 2009

Last year the Companies Bill 2008 was introduced in the Lok Sabha but did not become law. The Corporate Affairs Minister (Shri Salman Khurshid) has announced, in response to a question in the Lok Sabha, that the Bill will be reintroduced in Parliament as the Companies Bill 2009. A report in the Economic Times suggests that this will happen this week and that changes will be made to the Bill following events at Satyam

A copy of the Bill will be available here. The Bill will make wide ranging changes. For background information, see this Government announcement which explained the purpose of the 2008 Bill (a copy of which, as introduced, is available here). The Bill is being introduced following recommendations in the 2005 Irani Report on company law

UK: ICSA guidance note on the Shareholder Rights Directive and its implementation

The Institute of Chartered Secretaries and Administrators has published a guidance note on the Shareholder Rights Directive (2007/36/EC) and its implementation in the UK through the Companies (Shareholders’ Rights) Regulations 2009. The guidance note is available here (you will need to provide the following information prior to download: name, company, position, e-mail address). 

For further information see:

UK: the Community Interest Company (Amendment) Regulations 2009

The Community Interest Company (Amendment) Regulations 2009 were made on 21 July and come into force on 1 October 2009. They have been published on OPSI: see here (html) and here (pdf). An explanatory memorandum, which provides a short overview of the changes being introduced by the Regulations, is available here

Wednesday 29 July 2009

UK: FRRP annual review and recommendations published

The Financial Reporting Review Panel - part of the Financial Reporting Council - has published, earlier than expected, its 2009 annual review and recommendations. The report is based on the Panel's review of 326 sets of accounts with year ends mainly falling between December 2007 and June 2008. The Panel concludes that the current standard of corporate reporting in the UK remains good but highlights concerns regarding the adequacy of disclosure by some companies in respect of:
  • Principal risk and uncertainties in the business review (see p. 6)
  • Liquidity (see p. 22)
  • Management judgements and key estimation uncertainties (see p.15)
  • Capital (see p. 16)

UK: the Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009

The Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009 was made on 21 July and comes into force on 1 October 2009. It has been published on OPSI: see here (html) and here (pdf). An explanatory memorandum is available here (pdf) and this explains:

The Companies Act 2006 received Royal Assent in November 2006 and is being implemented in stages. Many provisions of this Act have already come into force and consequential amendments were made on 6 April and 1 October 2008 using the Companies Act 2006 (Consequential Amendments etc) Order 2008 to deal with most of the earlier implementation, although some of the earlier Commencement Orders contained limited consequential amendments. Virtually all the remaining provisions will come into force on 1 October 2009. The main purpose of this Order is to make consequential amendments to legislation which contains references to earlier Companies Acts, and to the definitions and concepts found in those Acts".

Tuesday 28 July 2009

UK: FRC review of the Combined Code - progress report published

The Financial Reporting Council has today published a progress report and second consultation document as part of its review of the Combined Code. The report provides a summary of the FRC's recent consultation and research and invites views on various aspects of the Combined Code and its application. It also sets outs the following guiding principles on which the FRC seeks views (to quote directly from the report):
  • Where there is a demonstrable need for best practice to be clarified or strengthened, this will be addressed either through amendments to the Code or additional, non-binding guidance.
  • Where not constrained by regulatory requirements, we will seek to rationalise disclosure requirements in the Code to encourage more informative disclosure on the issues of most importance to investors and to discourage boiler-plating and box ticking.
  • We will seek to avoid an increase in the overall level of prescription in the Code and to preserve its principles-based style. 
Amongst the issues identified for further consideration are the following (to quote directly from the report):
  • Whether it would be helpful to give further clarification of the role, key responsibilities and expected behaviours of the chairman, the senior independent director and/or the non-executive directors, either in the Code or in non-binding guidance.
  • Whether it would be helpful to provide further guidance on the time commitment expected of the chairman, senior independent director and/or non-executive directors. 
  • Whether more guidance is needed, in the Code or elsewhere, on succession planning and the need to ensure that board composition is aligned with the present and future needs of the business. 
  • Whether changes to voting would increase accountability to shareholders and which, if any, of the following options they would support as recommendations for possible inclusion in the Code: [a] Annual re-election of the company chairman, [b] Annual re-election of the chairs of the main board committees, [c] Annual re-election of all directors, [d] Binding or advisory votes on specific issues, or on the corporate governance statement as a whole.
  • Whether the board’s responsibility for strategic risks and setting risk appetite – as set out in the Turnbull Guidance - should be made more explicit in the Code, and whether the current balance between the Code and the Guidance is the right one.
  • Whether there is a need for all or parts of the Turnbull Guidance to be reviewed. 
  • To what extent the particular mechanisms recommended for banks and financial institutions would also be appropriate for other listed companies. For example, there were mixed views among commentators about whether separate risk committees were necessary for companies with less complex business models 
  • Whether shareholders should be given a more direct role in setting remuneration and, if so, how this might be achieved.
  • Whether it would be appropriate for the FRC or the FSA to undertake greater monitoring and enforcement of “comply or explain” statements, and if so what form this might take.
  • What role, if any, it would be appropriate for the FRC to play in encouraging collective engagement.
  • Whether further guidance on best practice for companies, investors or proxy voting services would be helpful, either in the Combined Code or elsewhere, and whether the practices currently recommended in Sections D and E of the Code continue to represent best practice.
  • What other steps might be taken, by the FRC or others, to encourage both companies and investors to be more proactive about regular engagement and with a longer term focus than the annual results presentations.

UK: FSA postpones clarification of the role of non-executive directors but extends reach of the approved persons regime

Yesterday the Financial Services Authority published a policy statement setting out feedback and final rules following its approved persons regime (significant influence function) review. Directors - executive and non-executive - of FSA authorised firms fall within the approved persons regime because they exercise controlled functions. The FSA proposed, as part of the review, amending the Statements of Principle and Code of Practice for Approved Persons within the FSA Handbook in order to clarify the role and expectations placed upon non-executive directors. This has been postponed because the FSA wishes to consider the Walker Review recommendations and those that the Financial Reporting Council may make following its review of the Combined Code (the FRC published a progress report today).

In its review, the FSA also proposed extending controlled functions CF1 (director) and CF2 (non-executive director) to those exercising significant influence over authorised firms. This was intended to bring within the approved persons regime those individuals (e.g., directors, non-executive directors and senior managers) who had significant influence over the authorised firm but who were, e.g., employed by the authorised firm's parent undertaking or holding company and potentially outside of the FSA regulatory ambit. The FSA will be implementing this proposal by amending the director and non-executive director controlled function definitions. The definition of the director function will be amended to include a person:

(a) who is a director, partner, officer, member (if the parent undertaking or holding company is a limited liability partnership), senior manager, or employee (other than a non-executive director) of a parent undertaking or holding company (except where that parent undertaking or holding company is an EEA firm); and
(b) whose decisions or actions are regularly taken into account by the governing body of the [authorised] firm".

The definition of the non-executive director function in respect of an authorised firm will also be amended to include a:

non-executive director of a parent undertaking or holding company (except where that parent undertaking or holding company is an EEA firm) whose decisions, or actions are regularly taken into account by the governing body of the [authorised] firm".

Monday 27 July 2009

UK: proposed amendments to the Takeover Code

The Takeover Panel has published a consultation paper setting out proposed amendments to the Takeover Code. These are wide ranging, particularly regarding management incentivisation arrangements which, the Code Committee notes, demand a more consistent regulatory approach. The Committee therefore recommends that such arrangements should be regulated by the Code where made in connection with an offer, regardless of whether the person incentivised will acquire an interest in the securities of the offeror company.

UK: the Companies (Share Capital and Acquisition by Company of its Own Shares) Regulations 2009

The Companies (Share Capital and Acquisition by Company of its Own Shares) Regulations 2009 were made on 21 July and come into force on 1 October 2009. They have been published on OPSI: see here (html) and here (pdf). An explanatory memorandum is available here

The Regulations amend the Companies Act (2006) in respect of its provisions concerning: rights issues; the reduction of capital; the acquisition by the company of its own shares; and treasury shares. With regard to rights issues, the Regulations amend Section 562(5) of the Companies Act (2006) to reduce from 21 days to 14 days the minimum period during which a pre-emption offer may be accepted. This reduction is being made following recommendations of the Rights Issue Review Group in a report published last year. 

Friday 24 July 2009

UK: judgment in auditor liability case next week

It has been announced that the House of Lords will give judgment in Moore Stephens (a firm) v Stone Rolls Limited (in liquidation) next Thursday. This is an important case considering auditor liability and the attribution of knowledge to the company. 

Thursday 23 July 2009

UAE: codes from the Central Bank and from the Emirates Securities and Commodities Authority

The codes directory maintained by the European Corporate Governance Institute has been updated to include a copy of the corporate governance code for joint stock companies published by the Emirates Securities and Commodities Authority. Also, last month the Central Bank of the United Arab Emirates published a revised draft of its corporate governance guidelines for bank directors.

Wednesday 22 July 2009

UK: England and Wales: reasserting the strictness of directors' fiduciary duties

The Court of Appeal has given judgment today in O'Donnell v Shanahan & Anor [2009] EWCA Civ 751, one of the most important recent decisions concerning directors' fiduciary duties. The case concerned a petition under Section 459 of the Companies Act (1985) - now Section 994 of the Companies Act (2006) - in which it was alleged that breaches of fiduciary duty were unfairly prejudicial under Section 459. The company's business was the provision of financial and business advice and assistance. Two of its directors bought an investment property of which they became aware whilst acting as directors. They did this through another company in which they together held half the shares. 

At first instance - see [2008] EWHC 1873 (Ch) - the judge held that the acquisition of properties for investment was not within the scope of the company's business and that, as such, the directors did not breach the fiduciary no-conflict rule where such properties were acquired. There was, the trial judge observed, no real sensible possibility of conflict (para. [208]). Moreover, the trial judge held that notwithstanding that the opportunity came to the directors' attention in their capacity as directors of the company, because it was outside of the scope of the company's business their exploitation of the opportunity did not breach the no-profit rule.

A unanimous Court of Appeal has disagreed with the trial judge's findings. Rimer LJ, delivering the only reasoned opinion (with which Waller and Aikens LJJ agreed) held that the directors had breached the no-profit and no-conflict rules and, in a judgment stressing the strictness of directors' fiduciary duties, his Lordship observed (para. [55]):

The authorities relating to trustees' and directors' duties to account for profit earned in consequence of a breach of the 'no profit' rule are legion, they all appear to me to point to the same conclusion and none appears to qualify the liability to account by reference to whether the impugned transaction was (in the case of an alleged breach by a director) within or without the scope of the company's business ... the rationale of the 'no conflict' and 'no profit' rules is to underpin the fiduciary's duty of undivided loyalty to his beneficiary. If an opportunity comes to him in his capacity as a fiduciary, his principal is entitled to know about it. The director cannot be left to make the decision as to whether he is allowed to help himself to its benefit".

Update (24 July 2009): Some comment to follow in the next few days. Meanwhile, a summary of the decision has been provided here by the ICLR as part of its WLR(D) service

UK: Finance Act 2009 published

A copy of the Finance Act 2009 has been published on OPSI: see here (html) and here (pdf). As noted yesterday, the Act - through Section 93 and Schedule 46 - will impose a new duty on the senior accounting officer (or officers) of qualifying companies to take reasonable steps to ensure that the company establishes and maintains appropriate tax accounting arrangements. This applies to financial years beginning on or after the day on which the Act received Royal Assent (21 July 2009). 

Update (3 August 2009): explanatory notes for the Act have been published on OPSI: see here (html) and here (pdf). 

UK: the Overseas Companies (Execution of Documents and Registration of Charges) Regulations 2009

The Overseas Companies (Execution of Documents and Registration of Charges) Regulations 2009 were made on 16 July, laid before Parliament a day later, and are scheduled to come into force on 1 October 2009. The Regulations were published on OPSI yesterday: see here (html) and here (pdf). The accompanying explanatory memorandum explains the purpose of the Regulations as follows:
  • to provide for the formalities of doing business under UK law by companies incorporated outside the United Kingdom; and
  • to ensure that the public record for every overseas company that is registered with Companies House includes essential information about the company’s use of its property in the United Kingdom as security for borrowing. 

Tuesday 21 July 2009

UK: Finance Bill receives Royal Assent

The Finance Bill received Royal Assent today and becomes known as the Finance Act 2009. A copy of the Act will soon be published on OPSI and the Statute Law Database. The Act - through Section 93 and Schedule 46 - will impose a new duty on the senior accounting officer (or officers) of qualifying companies to take reasonable steps to ensure that the company establishes and maintains appropriate tax accounting arrangements.

Update (22 July 2009): a copy of the Act has been published on OPSI: see here (pdf).

UK: Scotland: court agrees that leave in derivative proceedings should be granted

Judgment was given today in Wishart v Castlecroft Securities Ltd. [2009] CSIH 65. This is an important decision of the Court of Session (Inner House) exploring the operation in Scotland of the statutory derivative action introduced by Sections 265 to 269 of the Companies Act (2006). It is the first time the new regime has been considered at appellate level in Scotland. Indeed, the equivalent English proceedings - Sections 260 to 264 - have thus far been considered only at first instance (see, e.g., Mission Capital Plc v. Sinclair [2008] EWHC 1339 (Ch), Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch) and Stimpson v Southern Landlords Association (21/5/2009, ChD)). 

Lord Reed delivered the opinion of the court in Wishart and, whilst agreeing with the Lord Ordinary (in [2009] CSOH 20) that leave should be granted, found that the Lord Ordinary's approach to the granting of leave to raise derivative proceedings was, in some respects, erroneous. 

Wishart is, I believe, the first decision in Scotland and England in which leave has been granted. For further discussion see this post on the Edinburgh Centre for Commercial Law Blog

USA: 'say on pay' and compensation committee independence legislation published

The US Treasury has published a draft of the legislation that will introduce [1] a non-binding vote on executive compensation for shareholders in all publicly traded companies and [2] new independence requirements for compensation committee members. Two factsheets have been published - TG218 (compensation committee independence) and TG219 (say on pay) - explaining these changes. TG219 make reference to the UK's experience of 'say on pay' in order to address some of the criticisms that have been made concerning the introduction of advisory votes in the USA.

UK: Professional Oversight Board report

The Professional Oversight Board (POB) has published its report to the Secretary of State for Business, Innovation and Skills for the year to 31 March 2009. The POB chairman, Dame Barbara Mills DBE QC, notes in her foreword:

Overall, our work in 2008/09 continues to support the view that the quality of auditing in the UK is fundamentally sound and that the firms have generally made good progress in implementing prior year recommendations. The economic downturn has given rise to increased challenges to auditors and we report on the emerging findings from this work in Section Five, though the full results and the public reports on each firm will be published towards the end of this year.

Our assessment of the actions taken by the major audit firms at a firm-wide level since late 2007 to respond to increasing turmoil in financial markets and the onset of the economic downturn is generally positive. However, we have noted variations in the extent to which audit procedures have been enhanced in practice, both between firms and between individual audit teams, though any issues are only likely to emerge from our 2009/10 inspection cycle".

Monday 20 July 2009

UK: the FSA remuneration code of practice - update

An update on the remuneration code of practice being developed by the Financial Services Authority has been provided in a letter written by chief executive Hector Sants. In his "Dear CEO" letter, published today, Mr Sants writes:

You are, I know, aware of our determination to align remuneration policies, procedures and practices to ensure they are consistent with and promote effective risk management. The Consultation Paper that we published in March set out our proposal to incorporate this fundamental requirement into a general rule with a set of evidential provisions that outline how banks and broker-dealers could meet the general rule ... 

The consultation period for this paper has now closed, and we will shortly be putting our proposals to the FSA Board for adoption. Although our Board still needs to make a final determination, we envisage that the FSA may well adopt a rule along the lines originally proposed, together with updated supporting principles that take account of consultation responses and that this will be effective from 1 January 2010.

In particular, I would draw your attention to the fact that guaranteed bonuses which run for a period of more than one year may be inconsistent with effective risk management. Moreover, we are not proposing to extend grandfathering arrangements to obligations entered into after publication of our consultation paper on 18 March 2009. It is essential that the market should not revert to remuneration practices that would be incompatible with our intended outcomes if the rule and code become effective next year".

UK: the Conservative Party's banking regulation white paper

The Conservative Party has today launched a policy white paper - From Crisis to Confidence - Plan for Sound Banking - which builds on the review of the tripartite system of regulation published earlier this year by Sir James Sassoon. The white paper advocates the abolition of the tripartite system of regulation and argues for a central and expanded role for the Bank of England in the regulation of banks and financial firms (including firms' pay structures, riskiness, complexity and size). The paper proposes the abolition of the Financial Services Authority, replacing it with a new Consumer Protection Agency. 

The Liberal Democrat Party proposals for banking regulation reform are expected to be outlined later today in a speech by Dr Vince Cable at the London Stock Exchange.

France: Association Française des Entreprises Privées/MEDEF - code of governance for listed companies

The codes directory maintained by the European Corporate Governance Institute has recently been updated to include a copy, in English, of the Association Française des Entreprises Privées/MEDEF code of governance for listed companies: see here.

Friday 17 July 2009

UK: 'comply or explain' should be strengthened says FRC chief executive

The Financial Reporting Council held its annual open meeting yesterday. Paul Boyle, the FRC's chief executive, delivered a speech reflecting on the work of the FRC and current issues. Mr Boyle spent some time arguing against the use of accounting as a public policy tool to reduce pro-cyclicality. Mr Boyle also stated that the FRC would soon publish a progress report regarding its review of the Combined Code and, in this regard, observed:

The UK system of corporate governance is well-respected but our sense is that application of the “comply or explain” approach which underpins it needs to be strengthened. The continued viability of the “comply or explain” approach depends on the willingness of a sufficient number of institutional investors to play an active role in monitoring the corporate governance practices of the companies in which they invest".

Thursday 16 July 2009

UK: Walker review of bank governance - Sir David speaks on Channel 4 news

Sir David Walker was interviewed in a report appearing on this evening's Channel 4 News: the video report should be embedded below (if not try here).

UK: the Walker Review consultation paper on bank corporate governance

Sir David Walker's consultation paper reviewing corporate governance in UK banks and other financial industry entities was published this morning: see here (pdf). A press release is available here.

The report contains 39 recommendations covering the following areas:
  • board size, composition and qualification;
  • functioning of the board and evaluation of performance;
  • the role of institutional shareholders: communication and engagement;
  • governance of risk;
  • remuneration.
Notable recommendations include:
  • annual re-election of the chairman [the report rightly stresses the paramount role of the chairman in board effectiveness and notes that the role should involve a "priority of commitment that will leave little time for other business activity"];
  • the formation of a risk committee separate from the audit committee;
  • greater disclosure of pay beneath board level and the extension of the remuneration committee's responsibility for remuneration across the whole organisation;
  • the chairman of the remuneration committee should stand for re-election in the following year where, in the advisory vote on the remuneration report, less than 75% of the votes cast are in support;
  • a minimum expectation set with regard to non-executive directors' time commitment;
  • extending the remit of the Financial Reporting Council to cover the development and encouragement of adherence to principles of best practice in stewardship by institutional investors and fund managers.  

Wednesday 15 July 2009

Europe: audit firm control structures - Commission consultation

Towards the end of last year the European Commission launched a consultation exploring control structures in audit firms and their consequences on the audit market. The Commission has today published a summary of responses as well as those individual responses authorised for publication. In the accompanying press release the following overview of the responses is provided:

90% of respondents believe that the Commission should strive to reduce all potential barriers to the entry, growth and survival of audit firms in the international audit market. However, most of the respondents consider that lack of access to external financial capital is not the most important barrier preventing emergence of new players. It would not, therefore, be sufficient simply to change the current rules on the control of audit firms; a comprehensive analysis on a greater number of priorities would be needed. Nevertheless, some respondents do believe that allowing external investment in audit firms can help. For others, however, the risks linked to the external investor model exceed any potential benefits.

Contrary to what has been widely claimed, stakeholders consider that the current rules are not indispensable in order to retain human capital. However, they are important to protect independence of auditors. If these rules were changed, additional safeguards on independence of auditors would therefore be needed.

Respondents identify other barriers to increasing the number of audit firms operating on the international market. Stakeholders are unhappy about the lack of harmonisation of regulatory requirements, in particular on independence rules for auditors and professional qualifications requirements. The impossibility of providing cross-border services without multiple registration, as well as lack of harmonisation of liability limitations for auditors, are also important barriers.

Some respondents would favour introducing governance rules for audit firms, as well as measures to address the lack of recognition of the actual audit capabilities of firms other than the four largest networks. More frequent and transparent tender procedures, and the involvement of companies' audit committees and of shareholders in the tendering process, would be helpful in this respect.

Respondents underline the need for action at the EU level, but any action should also take into account the global dimension of the issues.

See here for further information about the Commission's work in this area.

UK: Takeover Panel publishes annual report

The Takeover Panel has published its annual report for the year ending 31 March 2009: see here (pdf). In the chairman's statement an indication of the issues with which the Panel has had to deal over the past year is given:

The year to 31 March 2009 was characterised above all by the global financial crisis catalysed by the collapse of Lehman Brothers in September 2008. Public merger and acquisition activity was materially affected by the crisis and by the collapse in valuations and confidence in the equity markets. These events produced a rather different set of issues for the operation of the Code to those experienced in more normal times. It has been necessary to be responsive during offer periods to fast moving events and dramatically changing circumstances, and to find the right balance between flexibility and certainty. I believe that the Panel’s principles-based regime has stood up well to the challenges posed in these conditions and has been able to safeguard shareholders’ interests without compromising the principles and rules of the Code".

The report notes that there were no appeals to the Takeover Appeal Board during the year. It also notes that the Takeover Panel Executive issued eight letters of private criticism during the year and no statements of public criticism. See here for further information about compliance with the Code. See here for all of the Panel's earlier annual reports. 

UK: the Companies Act 2006 (Consequential Amendments) (Taxes and National Insurance) Order 2009

The Companies Act 2006 (Consequential Amendments) (Taxes and National Insurance) Order 2009 was made yesterday and published on OPSI today: see here (pdf). An explanatory memorandum is available here. The purpose of the Order is to amend tax and national insurance legislation so that it will refer, from 1 October 2009, to the Companies Act (2006) and regulations made under the 2006 Act.

UK: the Companies Act 2006 (Consequential Amendments) (Uncertificated Securities) Order 2009

The Companies Act 2006 (Consequential Amendments) (Uncertificated Securities) Order 2009 was made yesterday and published on OPSI today: see here (pdf). An explanatory memorandum is available here. The Order comes into force on 1 October 2009 and will amend the Uncertificated Securities Regulations 2001 to reflect the changes made to as part of final implementation of the Companies Act 2006 on 1 October. 

UK: the Corporate Manslaughter and Corporate Homicide Act 2007 - custody provisions - second progress report

The Ministry of Justice has published a second report explaining the progress made towards implementation of the custody provisions in the Corporate Manslaughter and Corporate Homicide Act 2007. Publication was accompanied by a written statement in Parliament on July 13 by the Parliamentary Under-Secretary of State for Justice (Claire Ward).

Section 2(1)(d) of the 2007 Act provides that the duty of care owed by a custody provider to a person in custody is a relevant duty for the purposes of the 2007 Act. This provision is not, however, in force and custody providers - including prisons, young offenders institutions as well as courts and police stations with custody areas - are therefore currently not subject to the Act.

The report states that it is most likely that the custody provisions will be brought into force by April 2011. It also notes the Government's intention to bring within the Act the detention and custody facilities of HMRC and the Ministry of Defence. For further information about the Act see here.

UK: Companies House publishes Companies Act (2006) draft forms and guidance

Companies House has published draft forms and draft guidance in preparation for the completion of implementation of the Companies Act (2006) on 1 October 2009.

Tuesday 14 July 2009

UK: the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009

The Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 have been published on OPSI: see here (html) and here (pdf). An explanatory memorandum is available here. The Regulations were made on 8 July: some are already in force with the remainder coming into force on 1 October 2009 (see here for further information).  The explanatory memorandum explains that the purpose of the Regulations is to:

... complete the application of the Companies Act 2006 (“the 2006 Act”) to limited liability partnerships (“LLPs”). The accounts and audit provisions of the 2006 Act have already been applied to LLPs with effect from 1st October 2008. These Regulations apply as appropriate (with modification) the remaining provisions of the 2006 Act".

: the Regulations contain a mistake: in error they repeal the application to limited liability partnerships of Part 18 of the Companies Act 1985 regarding floating charges under Scots law. This has been corrected by the Limited Liability Partnerships (Amendment) Regulations 2009 - available here (html) and here (pdf) - the effect of which will be to maintain the application of Part 18.

UK: England and Wales: company vicariously liable for director's harassment of a debtor

Yesterday, in S & D Property Investments Ltd v Nisbet [2009] EWHC 1726 (Ch), the trial judge held a company vicariously liable for harassment under the Protection from Harassment Act (1997) in respect of violent threats made by a director to a debtor. The trial judge stated (at paras. [119] and [122]):

The House of Lords held in Majrowski that an employer could be vicariously liable for the harassment of its employee. It was not disputed in the present case that [the company] could be vicariously liable for the harassment of [the director] if he acted as the company's agent and within the scope of his authority.

I conclude that [the director] was the agent of [the company] for the purpose of taking steps to recover the debt. Plainly, it was left to his judgment as to how this should be done. His harassment of [the debtor] was part and parcel of his attempts to do just that. Accordingly, I find that his harassment was within the scope of his actual authority. [The company] is vicariously liable for his tort".

Australia: corporate governance standards and reporting

The Australian Stock Exchange has published an analysis of corporate governance disclosures in annual reports for the year ended 30 June 2008. The analysis is based on a review of 1,510 annual reports of entities listed on the Australian Stock Exchange on 30 June 2007 and considers disclosure and compliance with the ASX Corporate Governance Council's original 10 principles of good corporate governance and 28 best practice recommendations (published in March 2003). In the media release included with the analysis, it is reported:

Overall reporting levels – the aggregate of adoption of recommended practices and of ‘if not, why not’ reporting – rose to 96.3% in 2008, up from 90.5% last year. This is the highest level since ASX began the annual review in 2004. The overall reporting level for the top-500 listed entities also increased, rising to 97.6% in 2008, up from 94% in 2007. The number of Recommendations with overall reporting levels greater than 90% (ie over 90% of listed entities adopted the recommended practice or provided an ‘if not, why not’ explanation) increased to 25 out of 28 Recommendations (17 out of 28 in 2007). Among top-500 listed entities, 27 out of 28 Recommendations achieved reporting levels of at least 90% (24 out of 28 in 2007)".

UK: the Companies Remuneration Reports Bill

The Companies' Remuneration Reports Bill received its third reading yesterday in the House of Lords. No amendments were made. The Bill now proceeds to the House of Commons. Parliament rises for the summer recess on 21 July and returns on 12 October 2009. This does not leave much time for the Bill to complete all stages in the Commons before prorogation and the start of the new session of Parliament.

Monday 13 July 2009

UK: the Overseas Companies Regulations 2009

The Overseas Companies Regulations 2009 were published today on OPSI: see here (html) and here (pdf). An explanatory memorandum is available here and this explains the purpose of the Regulations as follows: 

Every company incorporated in a country outside the United Kingdom (an overseas company) that operates its business in the United Kingdom through at least one establishment (that is to say either a branch or a place of business that is not a branch) and is not a UK-incorporated subsidiary company, must register its particulars with the Registrar of Companies. The Overseas Companies Regulations 2009, made under the Companies Act 2006 ... set out the UK company law filing requirements for this type of company, which come into effect on 1 October 2009".

Update (17 August 2009): the Regulations were republished by OPSI today: see here.

UK: draft of the audit firm governance code published

The ICAEW's Audit Firm Governance Working Group has published a second consultation paper containing a draft of the Audit Firm Governance Code for auditors of public interest entities. The Code is being developed as a result of a recommendation by the Financial Reporting Council's Market Participants Group in the report Choice in the UK Audit Market. The Code has the following features (to quote directly from the consultation paper):
  • It follows the transparency reporting definition of public interest entities as listed companies;
  • It is targeted at shareholders in listed companies and contains principles related to their dialogue with audit firms;
  • It contains a recommendation that the Code should not be implemented through regulation and that only firms that audit more than 20 listed companies should be expected to report on their application of the Code. Based on analysis published in 2009 by the UK Professional Oversight Board (POB) and reproduced in Appendix 4 [of the consultation paper], the Code will initially apply to eight firms;
  • It is a cousin of the Combined Code, rather than its offspring. It follows the structure of principles and provisions, the philosophy of comply or explain, and the wording of the Combined Code in a limited number of areas. However, it recognises that a Combined Code designed for listed companies is of limited applicability to owner-managed firms;
  • It recognises the qualities that audit firms are expected to demonstrate as regulated professional practices and summarises these qualities so that they can be more widely appreciated;
  • It sets out a very specific role for independent non-executives of audit firms in addressing threats that the firms face in spite of their strengths as owner-managed and highly regulated professional practices. This includes being a ‘witness’ to how a firm is run, a ‘safeguard’ of a firm’s reputation especially in unregulated areas of its business, and a ‘channel’ for dialogue with stakeholders; and
  • It envisages that firms will make Code-related disclosures in transparency reports.
For further information see: first consultation paper | responses to the first consultation paper | Financial Reporting Council audit choice project

UK: the future of UK generally accepted accounting principles

The Financial Times newspaper reports that the Accounting Standards Board will meet later this week to finalise plans for a discussion paper proposing the adoption of the International Accounting Standards Board's IFRS for SMEs. This discussion paper is likely to be published later this month according to the ASB's Inside Track 59 newsletter. The report in the Financial Times states: 

Sweeping accounting changes could be forced on small companies and even sizeable subsidiaries of larger ones under proposals to be discussed this week. The UK Accounting Standards Board (ASB) meets on Wednesday to put finishing touches to plans that could see Britain drop the generally accepted accounting principles, the rules followed by non-listed companies, in favour of an international standard designed for smaller companies. Under Europe-wide changes introduced in 2005, listed UK companies shifted from local rules to international financial reporting standards. But private companies and subsidiaries of listed groups have until now generally continued to follow UK Gaap. Last week, the International Accounting Standards Board released its new standard for small and medium-sized enterprises. It is not expected to be adopted into European law like other IASB rules, but countries will be free to follow it if they want. The ASB is expected to propose the UK makes the change and it will publish a paper for consultation this month. Providing the plans win backing, UK Gaap could all but disappear in 2012 or 2013".

UK: the Walker Review of bank corporate governance

Sir David Walker's consultation paper will be published this Thursday. Speculation is mounting in the press about what may be proposed. Yesterday's Sunday Telegraph reported that the annual re-election of bank directors would be suggested whilst the Observer noted that Sir David would "call for far more responsibility to be placed on chairmen to rein in aggressive CEOs". Few will be surprised by these suggestions. However, more interestingly, today's Times reports

Sir David Walker is set to call this week for the creation of a new body to act as a rallying point for institutional shareholders wanting to challenge the governance of company boards ... One proposal is for a powerful 'standing secretariat', which would put forward shareholders’ views to a company if there were a disagreement about strategy or people".

UK: the Registrar of Companies and Applications for Striking Off Regulations 2009

The Registrar of Companies and Applications for Striking Off Regulations 2009 were made on 8 July and come into force on 1 October 2009. They have been published on OPSI: see here (html) and here (pdf). An explanatory memorandum is available here. The Regulations provide, inter alia, the Registrar of Companies with the power to annotate the Register and they introduce a procedure whereby an application can be made to rectify information on the Register.

UK: the Companies Act 2006 (Part 35) (Consequential Amendments, Transitional Provisions and Savings) Order 2009

The Companies Act 2006 (Part 35) (Consequential Amendments, Transitional Provisions and Savings) Order 2009 was made on 8 July and comes into force on 1 October 2009. It has been published on OPSI: see here (html) and here (pdf). An explanatory memorandum is available here. The Order makes amendments to Part 35 ("The Registrar of Companies") of the Companies Act (2006) and the Companies Act 2006 (Commencement No. 8, Transitional Provisions and Savings) Order 2008 (S.I. 2008/2860).

Friday 10 July 2009

UK: the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2009

The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2009 was laid before Parliament on 2 June; a copy was published on OPSI last week: see here (html) and here (pdf). An explanatory memorandum is available here. The purpose of the Order is to extend the scope of the Financial Service Authority's regulatory ambit to include sale and rent back agreements. Some of the Order's provisions are already in force; others come into force on 30 June 2010: see here. For further information see here (HM Treasury) and here (FSA).

UK: Companies House - adjudicator's annual report published

The Companies House adjudicator's report for the year ending 31 March 2009 has been published. The adjudicator - Dame Elizabeth Neville - hears appeals against late filing penalties imposed by Companies House and investigates complaints about the way Companies House has dealt with complaints. The report provides an overview of the appeals heard and those (few) that were upheld. It also makes several recommendations including one concerning the development of policies and procedures in respect of the powers that the Registrar will have, from 1 October 2009, to annotate the Register and remove information from it. 

Note: Part 35 of the Companies Act (2006) sets out the framework governing the Registrar and will be supplemented by Regulations. A draft of the Registrar of Companies and Applications for Striking Off Regulations 2009 was published in May: see here (html) and here (pdf).

Update (12 July 2009): The Registrar of Companies and Applications for Striking Off Regulations 2009 were made on 8 July and come into force on 1 October 2009. They have been published on OPSI: see here (html) and here (pdf). An explanatory memorandum is available here.

IASB publishes IFRS for SMEs

The International Accounting Standards Board has published an International Financial Reporting Standard designed for use by small and medium-sized entities. In the accompanying press release it is stated:

The IFRS for SMEs is a self-contained standard of about 230 pages tailored for the needs and capabilities of smaller businesses. Many of the principles in full IFRSs for recognising and measuring assets, liabilities, income and expenses have been simplified, topics not relevant to SMEs have been omitted, and the number of required disclosures has been significantly reduced. To further reduce the reporting burden for SMEs revisions to the IFRS will be limited to once every three years".

The new standard is available for free download here (registration is required) and a fact sheet is available here

Thursday 9 July 2009

UK: the Companies (Shareholders’ Rights) Regulations 2009

The Companies (Shareholders’ Rights) Regulations 2009 were made on 2 July and laid before Parliament a day later: see here (html) and here (pdf). The Regulations, which amend the Companies Act (2006), come into force on 3 August and apply in relation to meetings of which notice is given, or first given, on or after this date. Some of the provisions in the Regulations apply to all companies; others apply to traded companies (defined here). In the accompanying explanatory memorandum the purpose of the Regulations is explained and the policy background provided:

This instrument implements Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies (the “Directive”) by amending Part 13 of the Companies Act 2006. The Directive is intended to help facilitate the exercise of basic shareholders' rights and solve problems in the cross-border exercise of such rights, particularly voting rights, in respect of companies traded on regulated markets.

The UK has a large and prestigious equity market with a dispersed shareholder structure. Consequently the regime of shareholder rights is well-developed. Shareholder participation in company meetings and the conduct of those meetings in listed companies is governed by a mixture of statutory provision – chiefly the Companies Act 2006 Parts 9 and 13, companies’ articles of association, the Financial Reporting Council’s “Combined Code on Corporate Governance” – and case law. As a result the UK framework for shareholder rights already meets the majority of the requirements in the Directive. Our approach to implementation is to build on that existing framework by amending the Companies Act 2006 in a way which will minimise any new burdens on business".

Note: the Department for Business, Innovation and Skills has updated its Shareholder Rights FAQs and has also published the Government's response to the consultation concerning implementation of the Directive. The explanatory memorandum also states:

Guidance will be issued subject to further consultation with stakeholders.  The key changes to Part 13 will be highlighted on the Department for Business, Innovation and Skills website".