Tuesday 31 August 2010

UK: increase in director disqualification proceedings

The August 2010 edition of Deloitte's UK Corporate Governance Update - available here (pdf) - reports that in the year to 31 March 2010, the number of director disqualification proceedings was 17% higher than in the previous year (2,169 compared to 1,852).

Monday 30 August 2010

Canada: regulatory oversight of credit rating organisations

The Canadian Securities Administrators (CSA) have published for comment proposed National Instrument 25-101 Designated Rating Organizations and related consequential amendments - see here (pdf) - the purpose of which is to introduce regulatory oversight of credit rating organisations.

Friday 27 August 2010

UK: criminal liability in regulatory contexts - Law Commission consultation paper published

The Law Commission for England and Wales has published a wide ranging consultation paper titled Criminal Liability in Regulatory Contexts: see here (pdf). The paper sets out the Commission's provisional proposals, which include the following:
  • The criminal law should only be employed to deal with wrongdoers who deserve the stigma associated with criminal conviction because they have engaged in seriously reprehensible conduct. It should not be used as the primary means of promoting regulatory objectives.
  • Harm done or risked should be regarded as serious enough to warrant criminalisation only if, (a) in some circumstances (not just extreme circumstances), an individual could justifiably be sent to prison for a first offence, or (b) an unlimited fine is necessary to address the seriousness of
    the wrongdoing in issue, and its consequences.
  • Criminal offences should, along with the civil measures that accompany them, form a hierarchy of seriousness.
  • Legislation should include specific provisions in criminal
    offences to indicate the basis on which companies may be found liable, but in the absence of such provisions, the courts should treat the question of how corporate fault may be established as a matter of statutory interpretation. We encourage the courts not to presume that the identification doctrine applies when interpreting the scope of criminal offences applicable to companies.
  • When it is appropriate to provide that individual directors (or equivalent officers) can themselves be liable for an offence committed by their company, on the basis that they consented or connived at the company’s commission of that offence, the provision in question should not be extended to include instances in which the company’s offence is attributable to neglect on the part of an individual director or equivalent person.

For further information see: Commission press release (pdf) | overview of consultation paper (pdf) |

Thursday 26 August 2010

USA: proxy access rules approved by SEC

At an open meeting yesterday the Securities and Exchange Commission adopted new rules designed to give shareholders greater power to nominate directors to company boards: see here (pdf). Under one of these rules (to quote from the SEC's fact sheet):

... companies will be required to include shareholder nominees for director in the company's proxy materials, if the shareholder meets certain conditions, and if the shareholders are not otherwise prohibited — either by applicable state or foreign law or a company's governing documents — from nominating a candidate for election as a director.

The rule applies to all Exchange Act reporting companies, including investment companies, other than companies whose only public securities are debt securities. 'Smaller reporting companies' are subject to the rule, but it does not apply to them until after a three-year phase-in period. Foreign companies that come within the definition of 'foreign private issuer' are not currently subject to the SEC's proxy rules and would not be subject to these new rules. Foreign companies that do not qualify as foreign private issuers would be subject to the rules.

Shareholders will be eligible to have their nominee included in the proxy materials if:
  • They own at least 3 percent of the total voting power of the company's securities that are entitled to be voted on the election of directors at the annual meeting. Shareholders will be able to aggregate holdings to meet this threshold.
  • Shareholders will be required to have held their shares for at least three years and will be required to continue to own at least the required amount of securities through the date of the meeting at which directors are elected.
  • Shareholders will not be eligible to use the rule if they are holding the securities for the purpose of changing control of the company, or to gain a number of seats on the board of directors that exceeds the number of nominees a company is required to include under new Rule 14a-11".

Wednesday 25 August 2010

UK: FSA discussion paper: the prudential regime for trading activities - a fundamental review

The Financial Services Authority has begun a fundamental review of the regulation of trading activities with the launch of a discussion paper: see here (pdf). By way of background, the discussion paper explains (paras. 1.1 and 1.2):

In July 2009, the Basel Committee on Banking Supervision (BCBS) agreed a range of amendments to the Basel II market risk framework, targeting specific weaknesses highlighted by the financial crisis [see here]. On average, these changes will increase the capital held against trading activities in large banks to more than three times current levels. Trading activities have grown enormously in recent years, and the financial crisis was in part triggered by losses crystallised in the trading books of large banks. It is therefore necessary to build on the changes already in progress with a re-appraisal of the prudential approach to trading activities, dealing with the arbitrages and mis-specifications of risk that continue to exist and complementing the many other areas of financial reform currently under consideration.

We expressed this view in The Turner Review where we called for a ‘Fundamental Review’ of the prudential regime for trading activities. This Discussion Paper (DP) follows up The Turner Review with a detailed discussion of the issues that we think should form part of the Fundamental Review which is now being developed internationally by the BCBS".

Tuesday 24 August 2010

UK: interim management statements - Deloitte survey

Deloitte has published a survey of companies' interim management statements. The report, titled And there’s more: Surveying second halves’ interim management statements, is available here (pdf). In the accompanying press release, available here, it is noted:

Only 28% of corporates clearly met the Disclosure and Transparency Rules (DTR) on the content of second halves interim management statements (IMS) ... this result is a marked improvement on the first half IMS for which only 15% did so.

Deloitte’s survey of 100 corporates contained 34, 33 and 33 companies from the top 350, middle group and smallest 350 companies by market capitalisation. 30 investment trusts, spread equally across these three groups, were also surveyed. The survey examined second half IMSs and compared these with those issued in the first half of the year by the same companies".

Monday 23 August 2010

UK: what has corporate law reform achieved?

Earlier this year, as part of the Current Legal Problems 2009/10 lecture serious, Dr Arad Reisberg delivered a lecture titled Corporate Law in the UK after Recent Reforms: The Good, the Bad and the Ugly. The purpose of the lecture was to assess, from the perspective of someone contemplating the creation of a private company to conduct an IT business, the attractiveness of the UK and, amongst other things, the significance of the Companies Act (2006) in this regard. Dr Reisberg has recently published his analysis on SSRN: see here.

The Department for Business, Innovation and Skills is also conducting its own evaluation of the 2006 Act: see here.

Friday 20 August 2010

Europe: corporate governance in financial institutions - ecoDa's response to Commission Green Paper

Earlier this year the European Commission published a green paper titled Corporate governance in financial institutions and remuneration policies: see here. Ahead of the closing date for responses (1 September), the European Confederation of Directors’ Associations (ecoDa) has published its response: see here (pdf). ecoDa endorses some of the suggestions put forward (including a more explicit duty for directors of systemically important financial institutions to take into account the interests of a broad range of stakeholders) but is somewhat critical of the tone of the Green paper and notes, for example:

Whereas the accompanying working document [here, pdf] presents a nuanced assessment of the role of different governance actors, the Green Paper should be more balanced in its description of the role of directors in failing to prevent the financial crisis. In contrast, it underplays the impact of macroeconomic factors and the unsatisfactory role played by other corporate governance actors, such as regulators, financial supervisors and shareholders. Many investors did not invest the time or resources to provide effective oversight".

Thursday 19 August 2010

UK: FRRP annual report published

The Financial Reporting Review Panel has published its annual report (previously known as its activity report): see here (pdf). For the period in question - the year to March 2010 - the Panel reviewed 308 sets of accounts; 146 companies were approached for further information or explanation and 3 companies agreed to restate amounts reported in prior periods.

The Panel found improvements in the general quality of IFRS reporting although with regard to capital management and share‐based payment disclosures, reporting was sometimes poor in terms of content, extent and usefulness. The Panel also had concerns with the quality of reports and accounts of some smaller listed and AIM quoted companies. Interestingly, the report contains a couple of pages dedicated to explaining what makes a "good set of accounts" (see pages 2 and 3).

The Panel's remit was extended last year to include monitoring company's compliance with the FSA Disclosure Rules and Transparency Rules (DTR) 7.1.5 and 7.2 relating, respectively, to audit committees and corporate governance statements. In this regard the Panel examined a sample of 30 accounts and found clear room for improvement; to quote from pages 7 and 8:

.. all provided a corporate governance statement and gave information on the composition and operation of their board and of their nomination, remuneration and audit committees as required by the rules. Companies that did not apply all the provisions of the Combined Code generally provided an explanation for the departures, although these could have been clearer at times. The areas of the code most often not complied with related to board balance and independence ...

Most companies provided some explanation of the key features of the internal control and risk management systems in relation to their financial reporting process although the level of detail provided was variable. Some companies provided boiler‐plate descriptions of their budgeting process while others had not adjusted their descriptions of the key features of their internal control system to focus specifically on the financial reporting process, as now required by 7.2.5. Few companies referred to the preparation of the consolidated accounts despite DTR 7.2.10 requiring a description to be given of the main features of the group’s internal control and risk management systems in relation to the process for preparing consolidated accounts".

ECGI summer 2010 research newsletter published

The latest edition of the ECGI research newsletter - titled The Governance and Regulation of Financial Institutions: Lessons from the Crisis - has been published: see here (pdf). The newsletter provides an excellent overview of the papers presented in June at a conference held under the auspices of the Spanish Presidency of the EU by the ECGI, the Centre for Economic Policy Research and the IESE Business School. Links to the papers are available here.

Wednesday 18 August 2010

New Zealand: Securities Commission annual report published

The Securities Commission has published its 2010 annual report: see here (html) or here (pdf). This provides, amongst other things, an overview of the regulatory changes taking place in New Zealand and discussed by the Commission's chairman, Jane Diplock, in her report:

In September 2009, the Report on the Effectiveness of New Zealand's Securities Commission [here, pdf] was published by two independent experts ... Their key findings were that the Commission was an efficient and effective organisation within the constraints of its funding and legislative remit. The report concluded that New Zealand securities regulation has been hampered by the Securities Commission's narrow mandate, and limited powers and funding. This view reflects the Commission's own and the recommendations we have consistently made to government in recent years.

Consequently, the Commission has actively supported the process of regulatory reform over the past 12 months, working with the Capital Market Development Taskforce and the Ministry of Economic Development (MED). Like many other New Zealanders, I am enthusiastic about the potential of the new Financial Markets Authority (FMA) when it takes over the functions of the Securities Commission in 2011. It will combine the functions of the Securities Commission with some regulatory functions of the Companies Office, the MED's National Enforcement Unit, the Government Actuary and NZX".

Tuesday 17 August 2010

UK: England and Wales: protecting client money

The Court of Appeal gave judgment in CRC Credit Fund Ltd & Ors v GLG Investments Plc (Sub-Fund: European Equity Fund) & Ors [2010] EWCA Civ 917 earlier this month. This is an important decision concerning one aspect of investor protection under the Financial Services and Markets Act (2000). A summary of the decision has been published here by the ICLR as part of its WLR Daily service, the headnote for which reads:

Chapter 7 of the Clients Assets Sourcebook (“CASS 7”), issued by the Financial Services Authority (“FSA”) under s 139 of the Financial Services and Markets Act 2000, created a statutory trust in respect of client money (obtained by an investment firm for the purposes of its investment business on behalf of those clients) which arose immediately on receipt of that client money and not when it was paid into a segregated account".

It is also worth noting this summary of CASS7 provided by Arden LJ in her judgment (at para. [77]):

CASS7 is a code for dealing with client money but is not a substitute for, or a codification of, the general law. The default rules of the general law of trust may fill in gaps and provide additional remedies in the protection for investors provided by CASS7. The principle of pari passu distribution also forms part of the legal background which the court must keep well in mind".

Monday 16 August 2010

Europe: Commission proposes amendments to the Financial Conglomerates Directive

The European Commission has published proposals to amend the Financial Conglomerates Directive (2002/87/EC), the purpose of which is to provide Member States' regulators with greater powers in respect of so-called supplementary supervision. For further information see: FAQs | Proposal text (pdf) | Impact Assessment - full text (pdf) : executive summary (pdf) |

UK: FTSE100 board gender diversity

Last Saturday's Independent newspaper contained a front page report about gender diversity and FTSE100 company boards: see here. According to the report, only 20 of the 329 executive directors at FTSE100 companies are women. A table containing the newspaper's data on the companies is available here (pdf). The report contains a useful overview of the measures taken in other countries to increase the proportion of women on company boards.

Friday 13 August 2010

Ireland: company law reform update

The Department of Enterprise, Trade and Innovation has recently published the Company Law Review Group annual report for 2009: see here (pdf). In his letter at the start of the report, the CLRG chairman provides this update on the drafting of the Companies Bill:

It is understood that the new Bill is unlikely to be published before the end of 2011 and although it is disappointing that the process is taking so long, it is, I believe more important that it is done properly. The Bill is likely to be the largest single enactment in the history of the State and whilst company law in Ireland is no less complex than it is in the United Kingdom the reality is that the State’s resources are fewer and have been stretched even further by the work needed on two Companies Bills prepared in 2009 as well as a significant number of complex legislative enactments addressing the crisis in Irish banking".

Thursday 12 August 2010

Mexico: Código de Mejores Prácticas Corporativas 2010

The Mexican Stock Exchange has published, in Spanish, a new edition of its corporate governance code (the Código de Mejores Prácticas Corporativas): see here. A copy in English is not yet available.

Wednesday 11 August 2010

UK: concerns over shortage of non-executives are misplaced says FRC chief executive

In a letter published in yesterday's Financial Times newspaper, the chief executive of the Financial Reporting Council, Mr Stephen Haddrill, described as "misplaced" the claim that the new UK Corporate Governance Code would lead to a shortage in non-executive directors. Further background information is available here.

Tuesday 10 August 2010

UK: OFT confirms scope of equity underwriting study

The Office of Fair Trading has published a statement in which it provides further information about its study into equity underwriting: see here (pdf).

The OFT will be examining the way that the underwriting market works and will assess whether there is potential for improving the way it functions. This will involve considering how underwriting services are purchased and provided and the affects of regulation in this regard.

The study will focus specifically on equity underwriting services for the different types of share issue used by listed companies to raise capital in the UK, including rights issues, placings and other types of follow-on offer. The study will be limited to equity issues carried out by FTSE 350 listed firms and will not examine Initial Public Offerings.

Further information is available here.

Monday 9 August 2010

UK: gender equality on listed company boards - the Davies review launched

The Davies Review was launched last Friday by the Government. The purpose of the review, being led by Lord Davies of Abersoch, is to make recommendations for promoting gender equality on listed company boards. For further information see here. The review's terms of reference are:

To consider options for promoting gender equality on the Boards of listed companies. In doing so to consider the obstacles to women becoming directors of listed company boards including looking at existing research about women on listed company boards and recent developments in international practice and to make proposals on what action should be taken to improve the position. It should involve interested parties including Board members, executive search firms, investors and other interested parties in considering proposals for change. The business strategy will be presented jointly to the Secretary of State for Business, Innovation and Skills and the Minister for Women and Equalities. The business strategy should deliver a set of recommendations with supporting material outlining the thinking behind the recommendations and the views of key interested parties. The final recommendations should be provided by December 2010".

Friday 6 August 2010

United Nations corporate law project

In 2009 the Special Representative of the UN Secretary-General on Business and Human Rights launched a Corporate Law project. The purpose was to examine company and securities laws in over 40 jurisdictions to determine the extent to which they recognised human rights. Questions were framed around around several broad themes including incorporation and listing, directors' duties, reporting and stakeholder engagement. The survey also sought background information concerning the legal and regulatory landscape in each jurisdiction.

An overview of the survey results was published last month: see here (pdf). Further background information (including completed surveys for some of the jurisdictions, e.g., UK, France, South Africa, India and Japan), is available here.

UK: England and Wales: the director's duty of reasonable skill, care and diligence

Judgment was given last week in Abbey Forwarding Ltd v Hone & Ors [2010] EWHC 2029 (Ch), a case in which several allegations were made against four directors, including that they had breached the duty to exercise reasonable care, skill and diligence under Section 174 of the Companies Act (2006) by allowing the company to become exposed to various liabilities to HMRC.

The trial judge, Lewison J., was not prepared to find that the directors had breached Section 174, noting the system of due diligence in place and the fact that evidence concerning industry practice had been provided by only one individual. With regard to the Section 174 duty, Lewison J. observed (at para. [198]):

In deciding whether directors have fallen short of their duty of skill and care, particularly where the breach of duty concerns the precise way in which the business is run, evidence of what is normal in the field of commerce in which the company operates is of considerable relevance. Although it is only an analogy, in Sansom & Or v Metcalfe Hambleton & Co [1998] 2 EGLR 103 (which was a case of alleged professional negligence) Butler-Sloss LJ said:

"In my judgment, it is clear, from both lines of authority to which I have referred, that a court should be slow to find a professionally qualified man guilty of a breach of his duty of skill and care towards a client (or third party) without evidence from those within the same profession as to the standard expected on the facts of the case and the failure of the professionally qualified man to measure up to that standard. It is not an absolute rule, as Sachs LJ indicated by his example, but, unless it is an obvious case, in the absence of the relevant expert evidence the claim will not be proved."

Thursday 5 August 2010

UK: 'Auditor scepticism: raising the bar' - APB discussion paper

The Auditing Practices Board has today published a discussion paper titled Auditor scepticism: raising the bar. The purpose of the paper, which is available here (pdf), is explained in its introduction as follows:

Audit is essential to public and investor confidence in companies. It is far from easy to do well, requiring judgement and technical competence, often in complex circumstances. This paper discusses the degree of scepticism that auditors need to apply to conduct an audit to a high standard. .... The application of an appropriate degree of professional scepticism is a crucial skill for auditors. Unless auditors are prepared to challenge management’s assertions they will not act as a deterrence to fraud nor be able to confirm, with confidence, that a company’s financial statements give a true and fair view. However, scepticism can be taken too far; challenging everything in a well run company will slow down the publication of its financial statements and risks unnecessary costs".

UK: the Companies House annual report, new companies and company secretary appointments

Companies House has published its 2009/10 annual report: see here (pdf). This contains the expected operational information and financial statements as well as some interesting statistics. For example, 362,317 new companies were incorporated in the year to 31 March 2010 and of these 229,147 (or 63.2%) opted not to appoint a company secretary. To put this another way: a company secretary was appointed in 36.8% of new incorporations although companies legislation no longer requires such an appointment by private companies.

Germany: the Act on the Prevention of Improper Securities and Derivatives Transactions

The Act on the Prevention of Improper Securities and Derivatives Transactions (Gesetz zur Vorbeugung gegen missbräuchliche Wertpapier- und Derivategeschäfte) came into force on 27 July. Further information, in English, is available on the BaFin website: see here.

Wednesday 4 August 2010

UK: review of certain aspects of takeover regulation - Law Society response

The Takeovers Joint Working Party of the City of London Law Society Company Law Sub-Committee and the Law Society of England and Wales' Standing Committee on Company Law has published its submission to the Takeover Panel's review of certain aspects of takeover regulation (about which see here, pdf).

In its submission, available here (pdf), the Working Party responds to the consultation questions but also offers some further suggestions for topics to be considered if there is to be a debate on the suitability of the current UK structure, including, for example, defence tactics:

In a variety of major jurisdictions, including the US and Germany, boards of offeree companies have considerably greater say in whether or not a bid may proceed, or at least in the timing of any hostile bid's success. In looking at the checks and balances between offerors and offerees, it seems odd to leave out consideration of the board's powers available in other sophisticated regimes. Whether such board rights achieve better economic or other outcomes and if so for whom, or do so at a justifiable cost, is a matter for further consideration by others better qualified to make these judgements. They do however potentially have significant negative impact on shareholder democracy".

Tuesday 3 August 2010

UK: takeover regulation review - GC100 response

The Association of General Counsel and Company Secretaries of the FTSE 100 (the GC100) has published its submission to the Takeover Panel's review of certain aspects of takeover regulation (about which see here, pdf). In its submission, available here (Word), the GC100 notes:

We believe that the Code has served its purpose well and generally do not see the need for wholesale change in the approach of the Panel or provisions of the Code at this stage. However, the Code should keep pace with the way takeover practice evolves, and, in particular, we believe that the opportunity should be taken to think whether shareholders get the right information, advice and time to consider what action they should take in order to decide whether to accept or reject an offer. We also suggest that the opportunity should be taken to review whether the Code’s timetable and disclosure requirements can be more consistently aligned with the requirements of other jurisdictions".

Ireland: consultation on proposed corporate governance standards for banks and insurance companies

Earlier this year the Financial Regulator published for consultation minimum corporate governance standards for banks and insurance companies (see here, pdf). Responses to the consultation have now been published: see here.

Monday 2 August 2010

UK: the future of narrative reporting - BIS consultation paper published

The Department for Business, Innovation and Skills has today published a consultation paper on the future of narrative reporting: see here (pdf). To quote from the paper:

This consultation is looking at how the narrative reporting framework is working in practice. How well are companies complying with the existing requirements? Are they focusing on their strategy, their principal risks and uncertainties and providing the right quality of relevant information on these matters to enable their members to hold them to account? Are shareholders actually using the information that companies provide? Do narrative reports generally reflect the intentions and spirit underlying the statutory framework? Are there ways to improve the narrative reporting framework as a whole?

The consultation focuses in particular on the business review provisions. In this context, the Coalition commitment to reinstate an Operating and Financial Review to ensure that directors’ social and environmental duties have to be covered in company reporting and investigate further ways of improving corporate accountability and transparency is particularly relevant. It also considers issues relating to remuneration, and in particular to the link between performance criteria for payment to directors and the company’s objectives and performance".

A consultation response form is available here (Word) and further background information is available here.

UK: England and Wales: competition law, undertakings and separate legal personality

A summary of the Court of Appeal decision Cooper Tire & Rubber Company Europe Ltd. v Dow Deutschland Inc. [2010] EWCA Civ 864 has recently been provided by the ICLR as part of its (free) WLR(D) Service: see here. To quote from the summary:

Once the Commission of the European Communities had found that an undertaking had participated in anti-competitive practices the undertaking could not rely on the English domestic law concept of separate corporate entity to argue that the undertaking as a whole or a parent company in the group had not participated in those practices. Where it was alleged in a claim against the defendants that representatives of those alleged to have been party to the anti-competitive behaviour had had discussions to co-ordinate that behaviour and that those discussions had led to each of the defendants co-ordinating their anti-competitive behaviour, that was sufficient to allow the claim against the defendants to continue even if none of the defendants fined by the commission was domiciled in England.

LONGMORE LJ giving the judgment of the court said that in English domestic law, which proceeded on the basis that corporate bodies are all separate legal personalities, one could not say that the act of one company in a group of companies, all controlled by a holding company, was automatically the act of any other company in that group. The position in EU law was however, different at least in the area of competition law and alleged breaches of art 81EC of the EC Treaty [now Article 101 of the Treaty of the Functioning of the European Union, see here (pdf)]. What concerned EU law was the activity of 'undertakings' which might comprise a number of separate corporate entities. The question under art 81EC was whether an 'undertaking' had participated in anti-competitive practices and it would not avail the undertaking to say that because a corporate entity which was part of the undertaking was a party to anti-competitive practices, either the undertaking as a whole or a parent company in the group did not participate in those practices. Otherwise evasion of art 81EC would be too easy".

UK: Insolvency Service consults on proposal for a restructuring moratorium

The Insolvency Service is consulting on a proposal to introduce a restructuring moratorium for companies: see here (pdf). According to the consultation paper:

The moratorium is intended to help companies where the core business is viable but, in order to avoid the prospect of future financial distress or even insolvency, there is nevertheless the need to reach some form of compromise or restructuring. It would provide those companies with the option of a protected breathing space, during which a restructuring could be negotiated and agreed".