Sweden: revised corporate governance code

The Swedish Corporate Governance Board has announced that the Swedish Corporate Governance Code has been revised to take into account the European Commission's recommendation on directors' remuneration in listed companies (C (2009) 3177, 30 April 2009) and changes in Swedish legislation. The new Code comes into force on 1 February 2010 and is available here (in Swedish); a copy in English will be published here shortly.

Europe: update on company and financial services law reform

The Joint Brussels Office of the Law Societies of England and Wales, Scotland and Northern Ireland has published the December 2009 edition of its very useful EU financial services and company law reform update. Previous updates are available here. With regard to the proposal for a European Private Company statute, the December update notes:

Despite a revised Presidency compromise agreement, the Competitiveness Council failed to reach agreement on the proposed regulation on a statute for a European Private Company at its meeting of 3 and 4 December. Member States still have concerns regarding the seat of the European Private Company and employee participation in management".

India: voluntary corporate governance and social responsibility guidelines published

The Ministry of Corporate Affairs has, for the first time, published voluntary corporate governance guidelines: see here (pdf). Based on 'comply or explain', the guidelines are directed at public companies and are divided into six sections: the board of directors; responsibilities of the board; audit committee of the board; auditors; secretarial audit; and whistle blowing. 

The Ministry has also published voluntary corporate social responsibility guidelines: see here (pdf). 

Japan: corporate governance reform - ACGA statement

The Asian Corporate Governance Association has published a statement setting out its position on various governance issues. The statement provides a useful overview of recent business and government agency publications in the governance area. The ACGA recommends, inter alia, a greater role for independent directors and that Japan should adopt a national corporate governance code.

Australia: Productivity Commission report on executive remuneration

The Productivity Commission has announced that it has submitted its final report on executive remuneration to the Government. The Government will decide when the report is published. 

Update (4 Jan 2010): the report has been released: see here. 

UK: England and Wales: unfair prejudice and just and equitable winding-up

Earlier this year, in Hawkes v Cuddy [2009] EWCA Civ 261, the Court of Appeal declined to follow the position, adopted in Re Guidezone [2000] 2 BCLC 321 by Jonathan Parker J., that conduct which is not sufficient to found an unfair prejudice petition is necessarily insufficient to found a winding-up petition based on the "just and equitable" ground (see, in particular, para. [107]). 

Last Friday judgment was given in Amin v Amin [2009] EWHC 3356 (Ch), in which the trial judge, Warren J., considered the Court of Appeal's decision and the relationship between the unfair prejudice remedy (Section 994 of the Companies Act (2006)) and just and equitable winding-up (Section 122(1)(g) of the Insolvency Act (1986)). 

Warren J. found the petitioners' allegations of unfair prejudice unfounded but nevertheless recognised that the circumstances may well have founded a successful petition for just and equitable winding-up, although the petitioners had not sought this (see para. [613]). Interestingly, Warren J. also observed, obiter, at para. [584]:

"If the facts are such that a winding up petition on the "just and equitable" ground would succeed but the majority refuse to agree to a winding-up out of court, that conduct might amount to unfair prejudice, the unfairness being to compel the minority to continue to participate in the company when the court would, on this hypothesis, wind it up".

USA: facilitating shareholder nominated directors - SEC extends consultation

The Securities and Exchange Commission has extended the consultation period in respect of its proposed changes to the federal proxy rules to facilitate shareholder nominated directors. Submissions so far received have been published here.

UK: proposed changes to the Combined Code - guidance for boards

Deloitte have prepared a short document summarising the main recommendations in the FRC's recent report on amending the UK's Combined Code on Corporate Governance (to be renamed the UK Corporate Governance Code) and highlighting the actions that boards should take: see here (pdf). 

UK: FRC consults on its priorities for 2010/11

The Financial Reporting Council has published, for consultation, its priorities for 2010/11: see its draft plan (pdf). Major activities include implementing changes to the Combined Code (to become known as the the UK Corporate Governance Code); supporting the introduction of a Stewardship Code for institutional investors; considering whether the need remains for updated guidance for directors and audit committees arising from the financial crisis; and continuing work to improve narrative reporting, including disclosures concerning business models.

UK: England and Wales: client money and CASS7

Judgment was given earlier this week in Lehman Brothers International (Europe) (in administration) v CRC Credit Fund Ltd [2009] EWHC 3228 (Ch). A summary  of the decision has been published here by the ICLR as part of its WLR Daily service, the headnote for which reads: 

The statutory trust created by Chap 7 of the Clients Assets Sourcebook (“CASS 7”) issued by the Financial Services Authority (“FSA”) took effect upon the receipt, rather than upon the segregation, of client money. Pending segregation of client money, a firm was obliged to take reasonable steps to ensure that, in relation to client money mixed in its house account with the firm’s own money, clients’ rights in relation to that client money were not put at risk, and the client money was not used for the firm’s own purposes. Client money outside the firm’s segregated accounts did not form part of the client money pool ..."

UK: the Punch Taverns plc AGM - shareholders reject remuneration report

Punch Taverns plc held its annual general meeting earlier this week. The voting results are available here. Resolution 3 - to approve the company's remuneration report - was not passed: 55.44% of votes were cast against. The company's board responded by issuing a statement in which it explained that a "full review of remuneration policy and its future implementation" would be conducted in consultation with shareholders. Perhaps the shareholders should have been consulted earlier, not least because at the company's last annual general meeting, in January of this year, disquiet over remuneration was evident: approximately one third of votes were cast against the remuneration report. 

Strengthening the resilience of the banking sector - Basel Committee consultation paper

The Basel Committee has published a consultation paper containing significant reforms to the international regulatory framework governing banks, the purpose of which is to raise the quality, consistency and transparency of the regulatory capital base. Amongst the proposals is one dealing with capital conservation: the introduction of capital distribution constraints in a 'buffer range' above the regulatory minimum capital requirement. Distributions in this context include dividends and discretionary bonus payments. The Committee justifies this approach to capital conservation thus (p. 69):

... at the onset of the financial crisis, some banks continued to pay out dividends even though their individual financial condition and the outlook for the sector were deteriorating. Much of this activity was driven by a sense that discretionary reductions in distributions could be seen as a sign of weakness. These actions made individual banks and the sector as a whole weaker. More recently, a number of banks have been quick to reinstate dividends and discretionary bonus payments while the banking sector remains in a fragile state, reducing the resilience of individual banks and the sector as a whole if the recovery falters. To ensure that best practice is adopted by the banking sector as a whole, and to remove the temptation for banks to distribute more in an attempt to signal strength, whilst their financial condition has weakened, the Basel Committee has developed a proposal for capital conservation standards".

Hong Kong: draft Companies Bill - first phase consultation launched

The first phase of consultation for the draft Companies Bill began today and will last until 16 March 2010. A consultation paper has been published along with parts of the draft Companies Bill. The remaining parts of the Bill will be published early next year. 

Chapter 2 of the consultation paper is titled "enhancing corporate governance" and this sets out, inter alia, proposals for the codification of the director's duty of care, skill and diligence and the requirement that every private company should have at least one natural person as a director. Chapter 9 seeks views on whether the common law derivative action should be abolished, given the availability of a statutory derivative action.

UK: AIM Rules amendments - remuneration disclosure and electronic communication

The London Stock Exchange has published AIM Notice 35, in which amendments to the AIM Rules are proposed. It is proposed to amend AIM Rule 19 to require AIM companies to provide disclosure of directors’ remuneration in their annual audited accounts (coming into force for financial years ending on and after 31 March 2010). It is also proposed to amend the guidance notes to AIM Rules 14 and 19 to provide all AIM companies with the option to use electronic communications to send accounts and admission documents to shareholders. 

Australia: ASX Corporate Governance Principles and Recommendations - proposed changes

The Australian Stock Exchange has published a communique in which it sets out a proposal to amend the Corporate Governance Principles and Recommendations to require listed companies, on a comply or explain basis, to adopt and disclose a diversity policy which includes measurable objectives relating to gender. This will require, inter alia, companies to disclose the number of women employees in the whole company, in senior management and on the board. 

USA: SEC adopts enhanced disclosure rules

The Securities and Exchange Commission yesterday approved amendments which will require public companies to make greater disclosure regarding: remuneration policies and practices that present material risks to the company; stock and option awards of executives and directors; director and nominee qualifications; board structure; the board’s role in risk oversight; and potential conflicts of interest of remuneration consultants advising companies and their boards.

The amendments will apply to proxy and information statements, annual reports and registration statements under the Securities Exchange Act (1934) and registration statements under the Securities Act (1933) as well as the Investment Company Act (1940). The new rules will be effective from 28 February 2010. See here for a more detailed overview of the new rules.

UK: Scotland: Law Commission report on unincorporated associations

The Scottish Law Commission has published its report on unincorporated associations: see here (pdf) or here (html). The Commission has recommended, inter alia, that unincorporated associations meeting certain conditions should have legal personality attributed to them unless they elect otherwise. The Commission takes the view that its proposals require legislative action by the UK Parliament and a draft of the Unincorporated Associations (Scotland) Bill is included in its report.

UK: ABI revised guidelines on executive remuneration

The Association of British Insurers has published revised guidelines on executive remuneration: see here (html) or here (pdf). The guidelines are principally intended for listed companies and cover the following: remuneration committees and their responsibilities; base pay, bonuses, pensions and contracts and severance; and share-based incentive schemes.

UK: Walker Guidelines Monitoring Group publishes second report

The Guidelines Monitoring Group has published its second report concerning compliance with the Walker Guidelines on transparency within the private equity industry: see here (pdf). The Group found the following (to quote directly from the report):

There continues to be a high level of commitment to the Guidelines from the private equity industry. In particular, the disclosures made by the private equity firms themselves have improved significantly and all private equity firms covered by the Guidelines met all the requirements without exception. A substantial majority of the portfolio companies reviewed this year made good or acceptable disclosures with only a limited number of exceptions. Overall, the quality of the disclosures made by the sample of portfolio companies reviewed this year is similar to the quality of disclosure found in last year’s review. Similar to last year, the quality of the disclosures varies significantly within the sample with some firms going much further than the requirements".

ECGI research newsletter: winter 2009

The latest edition of the ECGI research newsletter has been published: see here (pdf). The newsletter focuses on 'Government in Corporate Governance' and draws heavily on material from the recent Transatlantic Corporate Governance Dialogue Conference at the Securities and Exchange Commission in Washington DC (video recordings from the conference sessions are available here). 

Japan: international financial reporting standards

Japan's Financial Services Agency has announced that certain companies will have the option to prepare their consolidated financial statements, for fiscal years ending on or after 31 March 2010, using international financial reporting standards. Further information is available here (pdf). 

The ICGN Global Corporate Governance Principles - revised edition published

The International Corporate Governance Network has published a revised edition of its Global Corporate Governance Principles. These are the ICGN's overarching Principles which are intended to be of general application around the world and reflect the ICGN's position on the standards of corporate governance to which all companies should aspire. 

A full version of the Principles is not available online but an extract is available here (pdf). Access to to the full version can be obtained by e-mailing Audrey Hart at the ICGN (audrey.hart@icgn.org).

Update (12 January 2010: a full version of the Principles is available here. 

UK: developments in corporate governance affecting the responsibilities of auditors of UK companies

The Auditing Practices Board has today published Bulletin 2009/4: Developments in Corporate Governance Affecting the Responsibilities of Auditors of UK Companies: see here (pdf). The bulletin considers the directors' statement on going concern, the corporate governance statement required by the Disclosure Rules and Transparency Rules, and changes to the structure of the listing regime.

UK: England and Wales: disqualification, directors' duties and regulatory responsibilities

Mrs Justice Proudman, sitting in the High Court, gave judgment last week in Secretary of State for Business, Innovation and Skills v Aaron & Ors [2009] EWHC 3263 (Ch). The case concerned a successful application by the Secretary of State for the disqualification of two directors under Section 7 of the Company Directors Disqualification Act (1986). 

It was argued on the directors' behalf that disqualification would be unfair because their breaches of FSA rules - on which the Secretary of State based his case - were unrelated to the general management of the company. The trial judge rejected this argument, observing (at paras. [102] - [103], italics in the original):

The fact that he [the director] has not shown himself unfit to manage any business, or to undertake a different management role, is, like the likelihood or otherwise of offending again ... a matter which goes to leave to be concerned in the management of a company under s. 17 CDDA and to length of disqualification. It is not a matter which goes to disqualification itself. Secondly, there is the simple fact that the abnegation of responsibility by a director is a matter affecting the ability to conduct ordinary corporate governance. A director's failure to ensure that he was sufficiently concerned with relevant responsibilities is a grass roots failure".

Mrs Justice Proudman also accepted the submission, made on behalf of the Secretary of State, that: 

... in the case of a FSMA authorised company a director's duty to that company to exercise reasonable care skill and diligence extends to taking all reasonable steps to ensure that the company complies with its regulatory obligations" (para. [9]).

UK: Scotland: application for late registration of a charge declined

Lord Hodge, sitting in the Court of Session, Outer House, has declined an application for late registration of a charge under Section 420 of the Companies Act (1985): see Salvesen, Re Companies Act [2009] CSOH 161. The application had been made after the company had entered administration. In rejecting the application, Lord Hodge observed (para. [12]):

The onset of formal insolvency, as a general rule, fixes the position of creditors, who are ranked on the insolvent estate in accordance with their strict legal rights. From then on, the insolvency practitioner holds the company's assets for the benefit of the creditors in accordance with the rights which the general law gives them as to ranking. For the court thereafter to interfere with that ranking would be a serious step. I do not exclude the possibility in exceptional circumstances of the court allowing the late registration of a charge after formal insolvency had commenced, for example where a creditor had been the victim of fraud and especially if the perpetrator stood to gain in the insolvency through the invalidity of the charge. But in the absence of exceptional circumstances, I do not consider that it is just and equitable to interfere with the statutory ranking of creditors on insolvency".

UK: the Bribery Bill - the failure to prevent bribery by a commercial organisation

The Bribery Bill received its second reading in the House of Lords earlier this week (read the debate here). The Bill will, inter alia, introduce a new offence: failure by a "relevant commercial organisation" (e.g., a company) to prevent bribery (see clause 7). A defence is available where the organisation can show that it had in place "adequate procedures" to prevent bribery (clause 7(2)). With regard to this defence, Lord Bach, the Parliamentary Under-Secretary of State at the Ministry of Justice, stated during debate (at col. 1087):

We recognise that there has been considerable debate about what constitutes "adequate procedures" for these purposes. As we indicated in our response to the Joint Committee, the Government agree that guidance should be made available to commercial organisations. We propose that such guidance should be available well in advance of the new offences coming into force. Over the coming months we will develop appropriate guidance, drawing on the expertise of business representatives, Transparency International and others. Among other things, we envisage that the guidance will provide illustrative good practice examples of adequate procedures. While guidance will be in place to assist business, the message from the Bill is clear. The payment of bribes, including facilitation payments, is unlawful. If companies pay them in order to gain a business advantage they run the risk of prosecution. Bribery on any scale cannot and should not be tolerated or condoned".

There is, however no duty on the Government to provide such guidance, a point made by Lord Goodhart during debate (see col. 1091). Lord Henley, the shadow justice minister, offered support for the Bill but stated (at col. 1120):

We have concerns about how the Bill is framed and we will probe, for example how Clause 7 will work in practice. An offence of omission is being created for companies that do not prevent bribery. The defence is vague. We will probe what is meant by 'adequate procedures'. One of the core aims of this legislation must be that it is clear and unambiguous. We have heard representations from businesses that seek assurances that they are not going to be left in difficulties because of the change in the law. A great deal may hinge on what sort of guidance is put in place, rather than on the wording of the Bill, and we will certainly be looking at putting down amendments to elicit more information from the Government on this".

Singapore: Stock Exchange proposes measures to strengthen corporate governance

The Singapore Stock Exchange has published a short consultation paper in which it makes proposals to strengthen the corporate governance framework for listed companies. These include, for example, a new rule which will give the Stock Exchange the power to require newly listed companies to appoint a governance adviser. 

UK: the Companies Act 2006 (Substitution of Section 1201) Regulations 2009

The Companies Act 2006 (Substitution of Section 1201) Regulations 2009 have been published on OPSI: see here (html) or here (pdf). The Regulations, which come into force on 28 December, substitute in the Companies Act (2006) a new Section 1201. This is being done because, in the opinion of the Department for Business, Innovation and Skills, the section as currently enacted may infringe the EC Services Directive (2006/123/EC) by indirectly discriminating against persons established in other Member States who do not have a place of business in the UK. Further information is available in the explanatory memorandum available here (pdf). 

UK: AIU publishes overview of audit quality inspections

The Audit Inspection Unit - part of the Financial Reporting Council - has published an overview of its 2008/09 audit quality inspections: see here (pdf). The AIU notes (on p. 2): 

The AIU considers the overall quality of major public company audit work to be fundamentally sound. For each major firm the AIU has recommended to the relevant Audit Registration Committee that the firm’s registration to conduct audit work be continued. The AIU was generally satisfied with the basis on which significant audit judgments were made on the individual audits reviewed at the firms. It considered that audit procedures had generally been performed to a good or acceptable standard. However, the AIU identified certain areas at each major firm where improvements were in its view needed in order to enhance audit quality".

UK: proposed building society governance code - BSA response

The Building Societies Association has provided this short response to the announcement, in today's pre-budget report, of the Government's proposal for a governance code for building societies:

We see this as building on the annotated Combined Code which the BSA already publishes for building societies - and with which there is a high level of compliance".

UK: the pre-budget report: tax, stock lending and a governance code for building societies

The chancellor delivered his pre-budget report (PBR) today and, as expected, announced the introduction of a temporary bank payroll tax of 50% on discretionary bonus payments over £ 25,000: see here for HMRC guidance and the draft legislation. The Government offered several justifications for the new tax: it was necessary until remuneration practices change as a result of corporate governance and regulatory reforms; evidence that some banks are proposing bonuses that are not consistent with a prudent approach to risk; and fairness: the tax representing a quid pro quo for taxpayer support of the banking sector. 

Of particular interest elsewhere in the report are the following announcements (at paras. 3.39 and 3.58):

The FSA has been reviewing the governance and risk management of stock lending in the market. The Government welcomes this work and will work with the FSA and market participants as necessary to help develop thinking in this area.

Following the Walker Review, and the subsequent Financial Reporting Council (FRC) consultation on the Combined Code, the Government proposes the introduction of a specific governance code for building societies and other financial mutuals. The Government will also consider the introduction of a regular independent review of building societies (and other financial mutuals) adherence to the Code".

UK: FSA decides not to extend its remuneration code

The Financial Services Authority has today announced that its remuneration code - which comes into force for large banks, building societies and broker dealers on 1 January 2010 - will not be extended to other FSA authorised firms. For further information, see here. 

Europe: corporate governance in the Member States

The study report commissioned by the European Commission on corporate governance monitoring and enforcement practices within the Member States has been published: see here (pdf). The study was commissioned to describe within each Member State: the relationship between legislation and codes; the existing monitoring and enforcement mechanisms for codes and their effectiveness; companies' perceptions of the codes; the quality of companies' disclosure regarding governance principles and 'comply or explain'.

The study found widespread support amongst regulators and institutional shareholders for the 'comply or explain' approach but identified clear scope for improving its operation with regard to the quality of information disclosed and enforcement. A greater role for regulators and statutory auditors is advocated as well as the adoption of a 'comply or explain' code for institutional shareholders regarding the exercise of their voting rights. 

The report is accompanied by three appendices: [1] legal analysis by Member State [2] survey on company perceptions of governance codes and [3] methodology. Appendix one contains much useful information and provides a reasonable starting point for further research. However, the UK section is over simplified in places and is, therefore, potentially misleading. For example, the short summary on p. 421 is misleading to the extent that it suggests that all UK incorporated companies are subject to the Combined Code. Moreover, on p. 423, it is stated that that the consent of at least 75% of the shareholders is required to amend the articles of association: this should be at least 75% of votes cast at the relevant shareholders' meeting (see Sections 21 and 283 of the Companies Act 2006). Finally, is it correct to assert, as is done in the conclusion presented on p. 421, that the UK corporate governance framework "ensures that basic standards of corporate governance are maintained throughout all companies incorporated in the UK"?

Norway: Code of Practice for Corporate Governance - revised edition published

The codes directory maintained by the European Corporate Governance Institute has been updated to include a copy of the Norwegian Code of Practice for Corporate Governance issued in October by the Norwegian Corporate Governance Board. The new edition is a revised version of the Code issued in December 2007; a summary of the changes is available here.

Europe: new supervisory authorities for financial services - Council agreement

The Council of the European Union yesterday reached agreement in general terms regarding the formation of three new supervisory authorities for financial services - a Banking Authority, an Insurance and Occupational Pensions Authority and a Securities and Markets Authority - which will form part of a European System of Financial Supervisors. 

These new authorities will replace three existing committees of supervisors (CEBS, CEIPOS and CESR) and will comprise representatives from Member States' supervisory authorities. The day to day supervision of individual firms will remain the responsibility of Member States' regulators.

For further information see here (pdf).

France: gender equality on listed company boards

A report in the UK's Guardian newspaper states: "In a bill submitted to the French parliament this week, all companies listed on the Paris stock exchange would have to ensure female employees made up 50% of their board members by 2015. If passed, a gradual implementation of the law would see businesses obliged to have women in 20% of board seats within 18 months, and 40% within four years".

UK: the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2009

The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2009 were made on 30 November, laid before Parliament yesterday and come into force on 31 December 2009. The Regulations have been published on OPSI: see here (html) or here (pdf). In the accompanying explanatory memorandum their purpose is explained (paras. 7.1 to 7.3): 

The United Kingdom currently has a wider definition of market abuse than that established in the EU’s 2003 Market Abuse Directive. When the Treasury transposed the Directive, the main challenge was to decide how much change was appropriate to the civil market abuse regime that had been put in place as part of Financial Services and Markets Act (FSMA) in 2000. The FSMA regime and the Market Abuse Directive cover similar ground but adopt a slightly different approach to prohibiting abusive behaviour. The original FSMA regime defined market abuse in fairly broad terms and then qualified it by the requirement that behaviour is only abusive if it is likely to be regarded as such by a ‘regular user’ of the market. The Directive set out more specific descriptions of the type of behaviour that is to be prohibited.

On balance, it was decided to retain the scope of the existing market abuse prohibitions to the extent that these go beyond the prohibitions in the Directive (the new sections 118(4) and 118(8) of FSMA) but to make them subject to a sunset clause whereby the provisions would expire after a period of three years pending the outcome of a review by HM Treasury to assess whether they remain justified.

It was initially decided to extend the sunset clauses until 31 December 2009 until the outcome of the EU’s review of the Market Abuse Directive became known. This was done in the 2008 Regulations. The EU’s review of the Market Abuse Directive was subsequently delayed. The call for evidence was only launched on 20 April 2009, and the Commission has not yet published proposals to amend the Directive. It has therefore been decided to extend the sunset clauses further until 31 December 2011".

UK: the Financial Services Bill - second reading

The Financial Services Bill received its second reading on Monday and now proceeds to Committee stage: read the debate here. In the course of debate, the Chancellor referred to the recommendations within Sir David Walker's report on bank governance concerning the disclosure of pay within banks and stated (Hansard, 30 Nov, col 883):

Sir David made a number of recommendations, but I think that we go further than he suggested. We want to consult on regulations for narrower disclosure bands than he proposed, starting with salary packages below the £1 million floor that he suggested. We will consult on that idea, but most people are convinced that far more disclosure is important, because they will then be able to see precise remuneration practices".

UK: FRC consultation on changes to the Combined Code

The Financial Reporting Council has today published a final report following its review of the Combined Code on Corporate Governance. A consultation paper has also been published setting out proposed changes to the structure and content of the Combined Code, including the recommendation that it should be renamed the UK Corporate Governance Code. 

A copy of the proposed new Code is included in the consultation paper. It contains new sections on leadership and accountability and a greater emphasis is given to the long-term success of the company. For example, the recast preamble/introductory section begins:

The purpose of corporate governance, supported by the Code, is to facilitate efficient, effective and entrepreneurial management that can deliver growth in shareholder value over the longer term".

Amongst the FRC's other proposals are:

• the annual re-election of the chairman or the entire board
• new principles concerning leadership by the chairman and the role, skills and independence of the non-executive directors (including their time commitment)
• board evaluation reviews should be externally facilitated at least every three years
• the chairman should hold regular development reviews with each director
• new principles on the board's responsibility for managing risk.