UK: England and Wales: section 172 of the Companies Act 2006

The High Court gave judgment last week in Shepherd v Williamson [2010] EWHC 2375 (Ch). The case concerned a petition presented under section 994 of the Companies Act (2006) (the unfair prejudice remedy) but what makes it particularly noteworthy is the judge's assessment of a director's actions with reference to Section 172 of the 2006 Act. Section 172 imposes, for the first time under UK companies legislation, a duty on each director to act in the way in which he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members (shareholders) and lists various matters to which he should have regard including the likely consequences of decisions in the long-term and the interests of the company's employees.

The shareholder presenting the Section 994 petition - Mr Shepherd - was also a director of the company. In 2007 the relationship between Mr Shepherd and Mr Williamson (the company's other director and shareholder) deteriorated when they failed to agree the terms on which Mr Shepherd would retire from the business. Mr Shepherd subsequently petitioned under Section 994, seeking the purchase of his shares and alleging, amongst other things, that he had been excluded from management of the company.

It was in this context that Mr Williamson argued that Mr Shepherd had failed to act in good faith when, in November 2007, he left an anonymous voicemail message on the phone of a senior project manager of one of the company's important clients (a hotel chain) to whom tenders were being submitted saying that the company was under investigation by the OFT and that an employee of the company and the hotel chain were colluding. Prior to January 2006, the point at which an Office for Fair Trading investigation began, the company had taken part in "covering" in the construction industry, i.e., submitting a bid higher than other competing bids in a tender for a contract knowing that it would not succeed in order to prefer a chosen tenderer amongst the colluding parties. Mr Shepherd was not directly involved with these activities. In September 2009 the company was fined £ 91,053 by the OFT, a reduced figure reflecting a leniency agreement in which the company agreed to cooperate with the OFT's investigation.

The trial judge, Mrs Justice Proudman, considered Mr Shepherd's good faith for the purposes of Section 994 with reference to Section 172. She noted that "[an] anonymous telephone call is not a praiseworthy course of action" but did not find that Mr Shepherd had breached the duty imposed by Section 172. It is interesting to note the manner in which Mrs Justice Proudman assessed Mr Shepherd's actions with regard to the factors (e.g., the company's reputation) identified in Section 172; to quote (from paras. [103] - [104]):

Applying the criteria laid down in s. 172, Mr Shepherd was balancing the deleterious consequences of his conduct as far as its relations with its major customer was concerned, and the potential for damage to the Company's employees if the contract was not gained, (s. 172 (1) (a) (b) and (c)), against the Company's reputation as a whole (s. 172(1)(d) and (e)) in the light of the OFT investigation.
The decision as to what promotes the success of the Company within s. 172(1) is one for a director's subjective judgment, exercised in good faith: see per Lord Greene MR in Re Smith and Fawcett Limited [1942] Ch 304 at 306, per Jonathan Parker J in Re Regentcrest plc v. Cohen [2001] 2 BCLC 80 and see also Extrasure Travel Limited [2003] 1 BCLC 598. In my judgment Mr Shepherd cannot be criticised for wanting to ensure that the contract was not obtained by the use of collusive activities, irrespective of whether it meant that the Company might lose the contract altogether". 

Ireland: ISE decides against introduction of Irish Corporate Governance Code

Earlier this year the Irish Stock Exchange published a consultation paper (here, pdf) in which it proposed the adoption of an Irish Corporate Governance Code, based on the UK Corporate Governance Code. In a feedback statement published yesterday - see here (pdf) - the Exchange announced that most respondents were against the introduction of an Irish Code. The ISE has therefore decided not to introduce its own Code and will retain the Listing Rule requiring ISE listed companies to comply or explain with the UK Corporate Governance Code.

The ISE is, however, proposing that listed companies should additionally comply or explain with a new Irish corporate governance annex within its Listing Rules. A draft of this annex has been published - see here (pdf) - and it contains provisions concerning the board (e.g., composition, evaluation, appointments, re-election), audit committee and remuneration.

UK: Grant Thornton argues for limit on auditors' market share

The House of Lords Economic Affairs Committee is currently undertaking an investigation into the role of auditors and concentration in the audit market: see here. In this regard, today's Financial Times newspaper reports - see here - that Grant Thornton, in its submission to the Committee, has called for a limit to be set on UK auditors' market share in order to reduce the dominance of the "Big Four" firms (Deloitte, PwC, KPMG and Ernst & Young). According to the newspaper's report, Grant Thornton, the fifth largest UK audit firm, has called for "an oversight body that would place limits on how many listed companies any one firm could audit in the UK".

France: the corporate governance of listed companies - AFM report

The Manifest blog reports - see here - that corporate governance disclosure has improved in France although there is room for improvement concerning, for example, the information provided about directors' independence. The blog report is based on the Rapport 2010 de l’AMF sur le gouvernement d’entreprise et la rémunération des dirigeants, which is available (in French) here (pdf). A more comprehensive summary of the AMF report, which also considered remuneration, is available (in English) here (pdf).

UK: PwC and the Audit Firm Governance Code

Principle C.1. of the UK Audit Firm Governance Code (2010) provides that firms should appoint independent non-executives, the involvement of which is intended, amongst other things, to enhance shareholder confidence in the public interest aspects of firms' decision-making. In this regard, PwC UK has announced this week (see here):

... the appointment of five Non-Executives in response to the new governance code for audit firms ... The appointed Non-Executives are Dame Karen Dunnell, Sir Ian Gibson, Professor Andrew Hamilton, Sir Richard Lapthorne and Paul Skinner and come from the fields of business, academia and the public and professional services sectors. The Non-Executives will sit on PwC’s newly constituted Public Interest Body in the UK, including the senior partner and the Chairman of the supervisory board, where they will be joined by partners of the firm but will have a majority".

UK: significant influence functions and the Walker Review

In January 2010, the Financial Services Authority published CP10/3: Effective corporate governance (Significant influence controlled functions and the Walker Review), a consultation paper that contained proposals designed to implement relevant recommendations from Sir David Walker's review of corporate governance in banks and other financial institutions as well as improve the governance of regulated firms and the intensity of the FSA's supervisory regime.

The FSA published its response to this consultation last Friday and outlined the actions it proposes to take: see its policy statement available here (pdf). Chapter 3 of the statement provides further background concerning the FSA's work assessing candidates for significant influence functions (e.g., directors). It is worth noting the further clarification provided by the FSA regarding its work in this area, including the following:

... we focus on the competencies and capabilities of individuals, in parallel with our taking a view on an individual’s role in relation to the wider composition of the governing body. Such an approach will, we believe, help to allay concerns that our focus on experience and qualifications could increase the conformity and homogeneity of individuals at the top of the UK financial services industry, with the risk that levels of challenge and alternative points of view are reduced ... For each interviewee, we examine specific competencies and behaviours at interview, as appropriate. The approval process already considers such things as non-technical skills and behaviours and ‘culture’ is a core component of the ARROW framework".

UK: improving auditors' reports on client assets

The Financial Services Authority has today published a consultation paper containing proposals designed to improve auditors' reports on client assets: see here (pdf). The accompanying press release provides this background information:

As part of its more intensive approach to supervision and enhanced focus on client assets, the FSA has reviewed the quality and consistency of auditors’ reports submitted in this regard. A number of serious failings were identified – these were not localised to one or a limited number of auditors, but indicate a general deficiency by auditors in applying the FSA requirements on client assets, and a need to take steps to improve the quality of auditors’ reports".

UK: NAPF Corporate Governance Policy and Voting Guidelines – 2010 update for comment

The National Association of Pension Funds (NAPF) has published for comment an amended edition of its Corporate Governance Policy and Voting Guidelines, which takes into account the publication of the new UK Corporate Governance Code: see here (.docf).

USA: NYSE Commission on Corporate Governance - report and principles published

Last year the New York Stock Exchange formed a commission the purpose of which was to develop a set of core corporate governance principles. The Commission's report was published yesterday - see here (pdf) - and sets out ten principles of corporate governance and further guidance.

UK: Banking Commission publishes issues paper and call for evidence

The Independent Commission on Banking - formed by the Government to make recommendations on the structure of the UK banking sector - has today published an issues paper and call for evidence: see here (pdf). The purpose of the paper is to invite views on some basic questions which will shape the Commission's recommendations. There are three broad topics on which the Commission is particularly keen to receive submissions: its objectives; options for reform; and the benefits and costs of the reform options.

At this stage the Commission has not ruled in (or out) any of the options for reform but it will, in the Spring next year, publish what it believes to be the leading reform options.

UK: Scotland: no lay representation for a company in public interest winding-up

Section 124A of the Insolvency Act (1986) gives the Secretary of State the power to petition the court for the winding-up of a company where this is in the public interest. At issue before the Court of Session (Inner House) in HM Secretary of State for Business, Enterprise and Regulatory Reform, Re An Order To Wind Up UK Bankruptcy Ltd [2010] CSIH 80 was whether in such proceedings a company was entitled to be represented by a lay person (e.g., a director) rather than a lawyer with rights of audience before the court.

Lord Hodge, in the Outer House (see [2009] CSOH 50) held that following Equity and Law Life Ass Soc v Tritonia Ltd (1943 SC (HL) 88), the director had no right to represent the company but he found that there were exceptional circumstances where representation by a lay person was necessary to ensure a fair hearing. Counsel before the Inner House also agreed that lay representation should be permitted, noting that the rule preventing it (to quote from para. [28]):

... forces upon companies the expense of legal representation in all cases, whether or not in any individual case the enforcement of the rule would be of material benefit to the court or to the company itself. There may be cases in which a lay representative of a company, for example a director, may be best placed to articulate the company's position and thereby to assist the court. The rule also forces upon the company in every case an expense that may significantly affect its financial position or may be disproportionate to any advantage that legal representation may bring. In extreme cases, the cost of legal representation may cause the company not to be represented at all, with the consequent risk that it may suffer an injustice thereby". 

A unanimous Inner House (Lord Justice Clerk, Lord Clarke and Lord Marnoch) held that the director could not represent the company. The Lord Justice Clerk, with whom Lord Clarke and Lord Marnoch concurred, observed (paras. [39] to [41] and [43] to [44]):

In my view, it is not open to this court to modify the rule, whether by the use of its inherent power or by act of sederunt, no matter what conditions or safeguards it might impose.

In any event, I consider that even if it were open to this court to modify the rule, it should not do so. The proposal raises questions of social policy relating to rights of audience in the civil courts. Such questions are not for us to decide. From the brief review of the legislation that I have given, it is clear that every extension of rights of audience in the courts has been brought about by express legislation. If there were to be an extension of rights of audience in relation to artificial legal persons, that, in my opinion, should be effected only by legislation after the normal consultative processes of law reform.

This court cannot foresee all the wider implications of an ad hoc judicial decision to relax the present rule; nor the practical difficulties that might follow from it. However, certain practical problems at once come to mind. In a company liquidation or in a compulsory winding up of the kind with which this case is concerned, I can think of good reasons why a company should not be represented by a director whose own actings may have caused the litigation.

I am also of the view that the granting of this proposal would inevitably lead to wider questions of rights of audience in relation to unqualified persons; for example, in the representation of a trust by one of its trustees; or the representation of a commercial partnership by one of its partners.

Even if it were open to us to allow representation of a company by an unqualified person, these considerations would persuade me of the unwisdom of our taking that step".

OECD: Guidelines on Insurer Governance - revised draft published for consultation

The OECD has published for comment a revised draft of its Guidelines on Insurer Governance, which were first published in 2005: see here (pdf). For further information, including a link to the 2005 edition, see here.

UK: the strategic leaking of inside information

In its latest Market Watch newsletter - available here (pdf) - the Financial Services Authority has highlighted its concerns with the strategic leaking of inside information (i.e., the deliberate leaking of inside information sanctioned by an issuer's senior management or its advisors with the intention of gaining a strategic advantage through media positioning). In its newsletter the FSA states (at p. 2):

We are particularly concerned about the suspected practice of core insiders strategically leaking inside information; we have stated we will increase our efforts into the causes of leaks in individual cases. While it is difficult to measure the frequency of these leaks, we believe a significant number of leaks may be strategic ... Despite our focus on how firms could tighten their controls, the frequency of leaks do not appear to have reduced, and we are concerned that senior management at regulated/unregulated firms and issuers may not be doing enough to set a suitable anti-leaking culture".

UK: POB concerned by number of audits by smaller firms requiring significant improvement

The Professional Oversight Board ("the Board"), part of the Financial Reporting Council, has published the results of its review of selected aspects of eleven audits conducted by smaller audit firms (those that audit up to ten listed or other major public interest entities within the POB's scope): see here (pdf).

Significant improvements were found necessary in six of the audits reviewed and concern was expressed with smaller firms acting as group auditors where they lacked the resources and expertise to undertake the audit to an acceptable standard. The Board found that the standard of reporting to audit committees required improvement in respect of five of the audits reviewed. In light of these and other findings, the Board suggests that consideration should be given to establishing specific competency requirements for auditors of listed and major public interest entities.

UK: the Government's review of corporate governance

The Department for Business, Innovation and Skills has announced some details about its forthcoming review of corporate governance: see its press release here. Given the scope of the review, it has the potential to be the most wide reaching and important undertaken in recent years. In the press release, the BIS Secretary, Dr Cable, is quoted as follows:

“We will look at the economic impact of takeovers, shareholder responsibility, corporate incentives and pay – all the factors that can help us build a framework founded on long-term economic logic. Short-termism and shareholder disengagement are an increasing problem for our economy. Short-term investors and financial gamblers value a quick buck above all else, for example, by driving company boards into accepting takeover bids that make no economic sense. We need shareholders that act like long-term owners, alive to the risks of instability and the broader consequences of how the companies they own behave.

I welcome the Takeover Panel's decision to look into the rules on takeovers [see here, pdf], but this is just part of a broader picture. My department is complementing this work with a comprehensive review that will ask fundamental questions about corporate governance and short-termism. Alongside ongoing work into the shape of regulation and narrative reporting, we aim to put responsible shareholders back in the driving seat of our economy.

The Government will launch a comprehensive consultation in the autumn. Areas it may cover include:

• What drives market short-termism?
• Do boards set out their long-term objectives sufficiently clearly?
• How can we encourage shareholders to become more engaged in the company’s future?
• Do shareholders have sufficient opportunity to vote on takeover bids?
• Do target boards do enough to consider whether the bid represents value for their shareholders in the long-term?
• Does the way in which directors are paid unduly encourage takeover activity?

Singapore: shareholders' access to company financial information

The Singapore High Court gave judgment earlier this month in Lian Hwee Choo Phebe v Maxz Universal Development Group Pte Ltd. [2010] SGHC 268. The judgment is, for the time being, available on the Singapore Law Watch website: see here. It is interesting for two reasons. First, it provides an excellent overview of recent case law concerning Section 216 (personal remedies in cases of oppression or injustice) of the Companies Act (Cap. 50, 2006 Rev Ed), against the background of the Court of Appeal decision Over & Over Ltd. v Bonvests Holdings Ltd. [2010] 2 SLR 776.

Second, there is discussion of the extent to which shareholders have access to company financial information beyond that to which they are statutorily entitled. In this regard, the trial judge observed (at para [87]) that "Apart from the annual audited accounts and accompanying reports, a member has no access to the accounting records of the company" but nevertheless found (para. [89]):

In my view, it could not be said that directors have an absolute right to deny financial information to shareholders in all circumstances. There is neither statutory nor common law authority to justify such an absolute position. As can be seen from the authorities ... it is clear that there is in principle no absolute bar against granting shareholders, in limited circumstances, access to specified financial information".

USA: public companies' short-term borrowing - SEC proposes increased disclosure

The Securities and Exchange Commission has published for consultation proposed new rules the purpose of which is to increase the disclosure provided by public companies in respect of short-term borrowing: see here (pdf). At the open meeting of the SEC at which the new rules were announced, the SEC chairman, Mary Schapiro, observed:

I believe that investors will benefit from additional transparency in this area, particularly when the difference between short-term borrowing during a reporting period varies significantly from the snapshot that is presented at period-end. The proposed rule amendments before us today should address this gap in our current disclosure requirements".

Further information is available in the SEC's press release, available here.

Europe: European Issuers publishes Market Standards for General Meetings

European Issuers - a Pan European organisation representing quoted companies in Europe - has published guidance titled Market Standards for General Meetings: see here (pdf). The purpose of the guidance, to quote from the introductory notes, is to achieve "... streamlined communication and operational processes, based on a best practices approach, so as to ensure that information from the Issuer can reach the End Investor and vice versa in a timely and cost efficient manner".

For further background information see here.

New Zealand: The Financial Markets (Regulators and KiwiSaver) Bill

The Financial Markets (Regulators and KiwiSaver) Bill was introduced in Parliament earlier this week and provides for the creation of the new financial regulator, the Financial Markets Authority (FMA), and sets out its objective, functions and powers. A copy of the Bill is available here (html) and here (pdf, 4.2 MB).

Interestingly, the Bill contains provisions (in sections 34 to 41) which will given the FMA the power to exercise a person's civil right of action against, amongst others, financial market participants (defined in section 4) where, as a result of an investigation or inquiry carried out by the FMA, this is considered to be in the public interest. In other words, it will provide for the public enforcement of certain duties owed by financial market participants.

Note: it is intended that the Bill will be divided at the Committee of the whole House stage into the following separate Bills:

• Parts 1 to 4 and Schedules 1 to 4 will become the Financial Markets Authority Bill.
• Part 5 will become a Securities Amendment Bill.
• Part 6 and Schedule 5 will become a Securities Markets Amendment Bill.
• Part 7 and Schedule 6 will become a KiwiSaver Amendment Bill.
• Part 8 and Schedule 7 will become a Financial Advisers Amendment Bill.

UK: governance reforms - a view from Government

Edward Davey MP, the Department for Business, Innovation and Skills minister with responsibility for corporate governance, delivered a speech yesterday at the ABI Investment Conference: see here. Mr Davey spoke about the Stewardship Code, shareholder empowerment, regulation and takeovers and short-termism. His speech provides a useful overview of the Government's current work in these areas.

Mr Davey observed that owning shares should be seen as a "responsibility" and "companies need to empower shareholders – big and small – by providing the information they need to act as effective stewards". With regard to takeovers, he noted:

... we want the takeover process to be more transparent. Directors to think about their long-term legal duties. Takeovers to be decided on the basis of long term shareholder value, not short-term speculation. And we want all shareholders to be empowered to influence the outcome. So we are committed to reviewing the factors that can be considered by regulators when takeovers are proposed. And which aspects of the framework could be tightened up. These might include higher merger fees. Or a pre-notification requirement for some deals, like those that exist in many other European jurisdictions.

The Takeover Panel has been looking at the way takeover rules operate as part of its review [see here, pdf]. The Government will set out its thinking later this year [and] we will be focusing on three key questions. Do takeovers make economic sense for the bidders? Do target boards too often act as if their sole responsibility is to get the highest price? And are takeover bids decided by investors with short-term horizons?"

UK: Bribery Act 2010 consultation - guidance for commercial organisations on preventing bribery

Section 7 of the Bribery Act (2010) provides for a new strict liability offence: the failure by a commercial organisation to prevent bribery by a person associated with it. A defence is available where the organisation has in place adequate procedures designed to prevent such behaviour. Section 7 comes into force next April.

Section 9 imposes an obligation on the the Secretary of State to publish guidance about the procedures that commercial organisations can put in place to prevent associated persons from bribing. In this regard, the Government, through the Ministry of Justice, has published draft guidance for consultation: see here (pdf). This guidance consists of six principles which the Government considers should inform the procedures organisations have in place to prevent bribery:

• Risk assessment: the organisation regularly and comprehensively assesses the nature and extent of the risks relating to bribery to which it is exposed.
• Top level commitment: the top level management of a commercial organisation (be it a board of directors, the owners or any other equivalent body or person) are committed to preventing bribery. They establish a culture within the organisation in which bribery is never acceptable. They take steps to ensure that the organisation’s policy to operate without bribery is clearly communicated to all levels of management, the workforce and any relevant external actors.
• Due diligence: the commercial organisation has due diligence polices and procedures which cover all parties to a business relationship, including the organisation’s supply chain, agents and intermediaries, all forms of joint venture and similar relationships and all markets in which the commercial organisation does business.
  
• Clear, practical and accessible policies and procedures: the commercial organisation’s policies and procedures to prevent bribery being committed on its behalf are clear, practical, accessible and enforceable. Policies and procedures take account of the roles of the whole work force from the owners or board of directors to all employees, and all people and entities over which the commercial organisation has control.
• Effective implementation: the commercial organisation effectively implements its anti-bribery policies and procedures and ensures they are embedded throughout the organisation. This process ensures that the development of polices and procedures reflects the practical business issues that an organisation’s management and workforce face when seeking to conduct business without bribery.
• Monitoring and review: the commercial organisation institutes monitoring and review mechanisms to ensure compliance with relevant policies and procedures and identifies any issues as they arise. The organisation implements improvements where appropriate.

For further information about the Act see here.

Europe: derivatives, credit default swaps and short selling - legislative proposals published

The European Commission today published a proposal for a Regulation on OTC derivatives, central counterparties and trade repositories: see here (pdf). Further details are available in the Commission's press release and in the background information available here.

The Commission has also published a proposal for a Regulation on short selling and credit default swaps, one of the purposes of which is to increase transparency: see here (pdf). Further details are available in the Commission's press release and in the background information available here.

With regard to naked short selling, the Commission is proposing, subject to certain exemptions, that to enter a short sale, an investor must have borrowed the instruments concerned, entered into an agreement to borrow them, or have an arrangement with a third party to locate and reserve them for lending so that they are delivered by the settlement date.

ACGA report: independent directors - rules and recommendations

The Asian Corporate Governance Association has published a useful overview of the rules and recommendations regarding independent directors in China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand: see here (pdf).

UK: Audit Inspection Unit publishes reports for the Big Four

Earlier this year the Audit Inspection Unit Annual Report for 2009/10 was published (see here, pdf). This provided an overview of the recommendations made by the AIU in respect of the quality of auditing by firms. Today the AIU's reports in respect of four firms (Deloitte LLP, Ernst & Young LLP, KPMG LLP and KPMG Audit PLC and PricewaterhouseCoopers LLP), on which some of its recommendations were based, have been published: see here. All of these reports identify areas for improvement by the firms.

UK: financial reporting disclosures by credit institutions - FSA feedback and new BBA code

Last autumn the Financial Services Authority published a discussion paper titled Enhancing financial reporting disclosures by UK credit institutions (see here, pdf). A summary of the feedback received, along with the FSA's response and its proposed actions, was published yesterday: see here (pdf).

This publication also includes the FSA's assessment of credit institutions' compliance with the British Bankers' Association draft Code for Financial Reporting Disclosure (available here, pdf). The FSA found, amongst other things, that credit institutions could do more to improve the comparability of the information provided, particularly with regard to terminology, explanation, presentation and methodology.

In light of the feedback received by the FSA, an updated edition of the BBA's Code for Financial Reporting Disclosure was published last week: see here (pdf). The Code applies to disclosures in annual reports and accounts and interim reports.

UK: executive directors' remuneration in FTSE350 companies

Later this month Deloitte will publish its annual survey of executive directors' remuneration in FTSE350 companies. Ahead of publication, some of the survey's findings have been announced, including (to quote from a press release published today):

Over half of FTSE 350 companies will not increase the salaries of executive directors in 2010 ... This will mean a two year salary freeze for many executives, after over two thirds were awarded no pay increase in 2009. Increases, where given, are likely to be around 3%, which is much lower than the level of increase seen in prior years ... There is more volatility in bonus payouts, which are higher than last year in FTSE 100 companies and lower in FTSE 250 companies. One in seven FTSE 250 companies paid no bonus to executive directors for the 2008/09 period and the median bonus was around 60% of salary, almost 10% lower than the previous year. In contrast, bonuses were paid in almost all FTSE 100 companies and payments have returned to more ‘normal’ levels, following a year in which they were generally slightly lower. The median bonus payment was around 100% of salary and in the top 30 companies was 140% of salary, almost 20% higher than last year".

For further information see here.

Basel Committee agrees higher global minimum capital standards

The Group of Governors and Heads of Supervision, the governing body of the Basel Committee on Banking Supervision, yesterday announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached in July this year. Transitional arrangements were also published (here, pdf). Further information is available in a press release published yesterday - see here - from which this short summary is taken:

The Committee's package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011".

Patience, finance and corporate governance

Andrew Haldane, an executive director at the Bank of England, yesterday delivered a paper titled "Patience and Finance" at the Oxford China Business Forum in Beijing: see here (pdf). One argument advanced by Mr Haldane is that the "public good of information and liquidity may unleash the public bad of myopia and volatility". He provides examples of "impatience" and one of particular relevance for corporate governance policy stands out given the pivotal role ascribed to shareholders: the secular fall over the past 40 years in the average duration for which listed company shares are held. In the US and UK, the average duration is now less than a year. It was around 7 years in the US in 1940 and in the UK in the mid 1960s it was around 5 years.

Europe: freedom of establishment and Austrian casinos

The European Court of Justice delivered its judgment yesterday in Case C-64/08 (Criminal proceedings against Ernst Engelmann). The case concerned Austrian legislation which gave the Federal Minister for Finance the power to grant concessions entitling their holders to operate casinos in Austria. The grant of these concessions was restricted to public limited companies with their seat in Austria.

Mr Engelmann, a German national, operated a couple of casinos in Austria without applying for a concession and was found guilty of unlawfully organising games of chance and fined €2000. He appealed to the Landesgericht Linz (Regional Court, Linz, Austria), which referred questions to the ECJ for a preliminary ruling, including whether the Austrian legislation was compatible with European Union Law on the freedom to provide services and freedom of establishment.

The ECJ held - see here (judgment) or here (press release, pdf) - that requiring the company's seat to be in Austria constituted a restriction on freedom of establishment contrary to EU Law: it discriminated against companies with seats in other Member States and prevented them from operating gaming establishments in Austria through an agency, branch or subsidiary. With regard to the argument that such a restriction was justified in the interests of preventing fraud and crime, the ECJ held that the blanket exclusion of companies with seats in other Member States was disproportionate: it went beyond what was necessary to combat crime.

UK: the Independent Commission on Banking

The Independent Commission on Banking was created by the Government to consider the structure of the UK banking sector and examine structural and non-structural measures to reform the banking system and promote competition. The Commission's website is now available - see here - with information on the Commission's members, terms of reference and publications. An Issues Paper, the purpose of which is to begin debate, is due to be published later this month.

UK: football club governance - Westminster Hall debate

The governance of football clubs, and the role of supporters in this regard, was the subject of a Westminster Hall debate by MPs yesterday. The official record of the debate, Hansard, is available here.

UK: England and Wales: access to privileged legal advice?

The ICLR has published, as part of its WLR Daily service, a summary for BBGP Managing General Partner Ltd and others v Babcock & Brown Global Partners [2010] EWHC 2176 (Ch): see here. The judgment has not yet been added to BAILII. The summary's headnote reads:

The direct shareholder of a company which was the client of a solicitor, having access to privileged legal advice under the principle of common interest, was not entitled to share such material with its own shareholders. Nor was the direct shareholder entitled to see privileged material which might relate to external claims, on the ground of lack of common interest".

Update (5 October 2010): a copy of the judgment has been published on BAILII: see here.

Nigeria: code added to ECGI directory

The codes and principles directory maintained by the European Corporate Governance Institute has recently been updated to include a copy of the 2003 code of governance published by the Securities and Exchange Commission: see here (pdf).

The 2003 Code has recently been reviewed by the SEC and a draft code published. A copy of the draft code has not been published on the SEC's website (if it's there, I cannot find it) but an indication of some of the changes included in the draft edition was given in a speech earlier this year by the SEC's Director General: see here (pdf).

Europe: the Commission's work programme - governance and financial regulation

Some of the matters being considered by the European Commission for inclusion in its work programme, and those already decided upon, have been outlined in a letter - available here - sent to MEPs by the Commission's President, José Manuel Barroso. Here is an extract concerning governance and financial regulation:

... the Commission will complete its financial reform programme by making further proposals including a set of crisis management tools for prevention and resolution of failing banks, improved market transparency, sanctions against market abuse, further strengthening of the bank capital rules and initiatives to improve corporate governance in the financial sector. In the coming days we will present legislative proposals to bring transparency and security to derivatives markets, and to address the issue of naked short selling including credit default swaps. Most of these proposals will be adopted by the Commission this autumn, with the rest to follow early next year, thus also ensuring that we have delivered on our international commitments to the G 20. We will want to work closely with the Parliament to accelerate decisions on these proposals.

The 2011 Work Programme will include:

• The ongoing work to complete and conclude a new framework for economic governance, including legislative proposals.
• The final measures to complete the comprehensive reform of the European financial system: MIFID review; UCITS rules on depositories and remuneration; legislation on packaged retail investment products; further amendments to the credit rating agencies regulation; legislation on crisis management and bank resolution funds; legislation on corporate governance. The Commission will also follow up on the conclusions to be reached this autumn in areas like taxes on the financial sector".

Note: the minutes for the June 2010 meeting of the European Corporate Governance Forum have recently been published: see here (pdf). These report that the Commission will be publishing a green paper on corporate governance in listed companies in Spring 2011.

Europe: financial regulation reform moves closer

The Council of the European Union yesterday endorsed the proposals agreed last week by the European Parliament concerning reform of the European financial regulation architecture: see here (pdf). These proposals will see the creation of a European Systemic Risk Board, to provide macro-prudential oversight, and three supervisory authorities: a European Banking Authority; a European Insurance and Occupational Pensions Authority and a European Securities and Markets Authority.

The European Parliament is expected to approve the relevant texts in first reading at a plenary session later this month with the Council then formally approving them without further discussion. It is expected that the new structure will be in operation from 1 January 2011.

South Africa: the Code for Responsible Investing by Institutional Investors - draft published

A draft of the Code for Responsible Investing by Institutional Investors in South Africa has been published: see here (pdf). The purpose of the Code, in conjunction with the King III Code, is "to provide a voluntary framework that can be used to ensure that sound governance is practised. The framework relates to the governance role of boards of companies, institutional shareholders and the ultimate beneficiaries".

The Code will operate on the 'apply or explain' basis and contains the following four principles:

• An institutional investor should incorporate ESG [environmental, social and governance] considerations into its investment analysis and activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries.
• An institutional investor should demonstrate its ownership approach in its investment arrangements and activities.
• Where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the principles of this Code and other codes and standards applicable to institutional shareholders.
• Institutional investors should be transparent about their policies how the policies are implemented, and how the Code is applied to enable stakeholders to make informed assessments.

Further background information (including how to comment on the draft) is available here.

Hong Kong: draft Companies Bill - first phase consultation conclusions

Conclusions arising from the first phase of consultation on the draft Companies Bill have been published by the Financial Services and the Treasury Bureau (FSTB): see here (pdf). Written submissions are available here.

One of the matters considered in the consultation was whether the director's duty of skill and care should be codified along the lines of section 174 of the UK's Companies Act (2006), to include a dual subjective/objective standard. According to the conclusions document, some respondents were concerned that this would be "onerous and problematic in operation and would discourage persons having good qualifications from taking up directorships in Hong Kong" (paragraph 38). The FSTB disagreed and at paragraph 40 explained:

While the subjective element of the proposed mixed test has been interpreted as raising the standard where the particular director has special knowledge, skill and experience, it does not depart significantly from the common law position in Hong Kong of directors’ duty of care, skill and diligence in this respect. Also, it seems that the concerns of some respondents may arise from a misunderstanding that the minimum objective standard of conduct of all directors would necessarily raise the standard to be followed by non-executive directors to require them to use the same care, skill and diligence of executive directors. Indeed clause 10.13 makes it clear that the courts must also take into account the “functions carried out by the relevant director”. This means that the courts should consider the different functions of executive and non-executive directors when determining whether a particular director has exercised reasonable care, skill and diligence. Clause 20.10 (in the second phase consultation) provides that the court may relieve an officer of a company from liability for any misconduct if he has acted honestly and reasonably and ought fairly to be excused having regard to all the circumstances (including those connected with his appointment). There is no obvious need to introduce a 'safe harbour' as suggested by some respondents".

Europe: EFRP response to Commission green paper on governance of financial institutions

The European Federation for Retirement Provision (EFRP) has published its response to the European Commission's green paper on corporate governance in financial institutions: see here (pdf). The EFRP takes the view, which not everyone will share, that:

"... the financial crisis was first and foremost the result of inadequate regulation of financial institutions giving rise to moral hazard problems ... We have some doubts whether better governance arrangements – stronger Board of Directors, independent risk function, long-term remuneration policies – would have moderated risk-seeking behaviour ... Nevertheless, EFRP feels that many of the corporate governance proposals put forward make good sense ... ".

India: the Companies Bill 2009 - Standing Committee report

The Companies Bill 2009 was introduced in the Lok Sabha on 3 August 2009 and was later referred to the Standing Committee on Finance for examination. The Committee's report was presented on 31 August 2010: see here (pdf).

There is much in the Committee's 375 page report but it is worth noting that it is stated, at paragraph 16, that the Ministry of Corporate Affairs has accepted that some of the matters included in the Corporate Governance Voluntary Guidelines 2009 (here, pdf) should be included in the Bill. These include the separation of the roles of chairman and chief executive; the attributes and tenure of independent directors; board evaluation; the appointment of auditors and the rotation of audit partners and firms. Elsewhere in the report the role and function of independent directors receives further consideration, with the Committee noting (at paragraph 29):

As the institution of Independent Directors is a critical instrument for ensuring good corporate governance, it is necessary that the functioning of this institution is critically analysed and proper safeguards are made to ensure its efficacy. The appointment of Independent Directors should not be a case of mere technical compliance reduced to the letter of the law. It is important that Independent Directors play their designated role to nurture the financial health of the Company and to protect the interests of various stakeholders, particularly the minority shareholders. The Committee, therefore, believe provisions pertaining to the Independent Directors should be distinguished from other Directors in the Bill. The Government should, therefore, prescribe precisely their mode of appointment, their qualifications, extent of independence from promoters/management, their role and responsibilities as well as their liabilities. In this context, it would be pertinent to mention that there is a need to circumscribe and limit the liabilities of Independent Directors, so that they are able to act freely and objectively and are able to share their expertise with the rest of the Board. A provision may also be made for their rotation by restricting their tenure in a company to say, five years. The Ministry of Corporate Affairs thus needs to revisit the Institution of Independent Directors and make amendments in the Bill accordingly. A code for independent directors may be considered for this purpose. The appointment process of Independent Directors may also be made independent of the company management by constituting a panel or a data bank to be maintained by the Ministry of Corporate Affairs, out of which companies may choose their requirement of Independent Directors. It is expected that the system of independent directors will evolve as a corporate governance institution over time. The Committee also desire that the Ministry may also explore the feasibility of Advisory Boards for bigger companies comprising of qualified persons/professional experts".

UK: The Companies (Disclosure of Address) (Amendment) Regulations 2010

The Companies (Disclosure of Address) (Amendment) Regulations 2010 were laid before Parliament last week and come into force on 1 October 2010: see here (html) or here (pdf). An explanatory memorandum is available (here, pdf) and this explains that the purpose of the Regulations is to allow the Marine Management Organisation to have access to the residential address of directors of registered companies (held by the Companies Registrar) for the purpose of exercising its enforcement functions.

UK: Scotland: lax governance and relief under s 1157 of the Companies Act (2006)

The opinion of Lord Hodge in Gillespie Investments Ltd v Gillespie [2010] CSOH 113 was delivered last month. One of the questions before him was whether directors should be relieved from liability, under section 1157 of the Companies Act (2006), in respect of breaches of fiduciary duty. Section 1157 provides the court with the power to relieve a director from liability (in whole or in part) in respect of breach of duty where he acted honestly and reasonably and, having regard to the circumstances of the case, he ought fairly to be excused. With regard to the application of section 1157 to the facts before him, Lord Hodge observed (para. [54]):

I am not satisfied that either defender [i.e., director] acted reasonably in their failure to keep proper records to vouch the various transactions and thereby to have a proper basis for the reimbursement of the company by the persons who benefited from the irregular appropriation of its funds. I am therefore not in a position to grant relief under section 1157. Had I concluded that the defender in each action had acted reasonably in the circumstances, I would still have been disinclined to grant relief as I do not think that either ought to be excused the consequences of their lax governance. I note that in Re Duckwari plc (No 2) [1997] 2 BCLC 729 Judge Paul Baker QC (at p.737) took account of the personal interest of a director in a transaction as a factor which pointed against the fairness of granting relief. In my opinion the combination of lax governance and personal gain in these cases would have militated against the grant of relief".

Europe: CESR consults on the development of pan-European access to financial information

The Committee of European Securities Regulators has published a consultation paper on the development of pan-European access to the financial information disclosed by listed companies: see here (pdf).

UK: Scotland: restoration to the register of companies

In August 2007 a company - Spring Salmon & Seafood Ltd. - was struck off the register of companies. On 14 July 2010, Lord Glennie granted a petition presented by the Advocate General for Scotland (on behalf of HMRC) under Section 653 ("objection to striking off by person aggrieved") of the Companies Act (1985) for the company to be restored to the register. Lord Glennie's reasons for doing so were given in a short extempore judgment, an extended version of which has recently been published: see [2010] CSOH 117. The effect of the company's restoration is to permit HMRC to levy tax due.