Season's greetings and best wishes for 2012

Season's greetings and best wishes for 2012 to all visitors to this blog and recipients of the daily blog e-mail updates (sign up by scrolling down and entering your e-mail address in the box on the right of the page). The next post will appear on January 3.

Gibraltar: a new Companies Act

Elections were held in Gibraltar earlier this month (see here, pdf) and a new Government, a coalition between the Socialist Labour Party and Liberals, was formed. In the joint SLP/Liberal manifesto - available here (pdf) - a pledge was made to replace the Companies Act (1930) as soon as possible with a revised and consolidated Act. The Government announced this week that it had "given instructions for the preparation of a draft bill to replace the Companies Act": see here (pdf).

Austria: Governance Code amendments published

The Working Group for Corporate Governance has published, in German, amendments to the Austrian Corporate Governance Code: see here (pdf). A copy of the amendments in English is likely to be published soon. The amendments concern board diversity and the relationship between the supervisory board and auditors.

Canada: proposed Securities Act not valid finds Supreme Court

The Supreme Court has held that the proposed Securities Act, which would create a national securities regulator, is not valid under the general branch of the federal power to regulate trade and commerce under the Constitution Act (1867): see here.

ECGI codes and principles directory: recent additions

The codes and principles directory maintained by the European Corporate Governance Institute has been updated this month to include codes for the following countries (click the country name to go the relevant directory page): Guernsey | Jordan | Mongolia | Taiwan | UAE |

Malaysia: Financial Sector Blueprint 2011-2020

Malaysia's central bank - Bank Negara Malaysia - has published a report titled Financial Sector Blueprint 2011-2020, which sets out proposals for the development of financial regulation and the financial system over the next ten years: see here. Chapter four of the report, available here (pdf), contains a section (numbered 4.2) setting out corporate governance related proposals, including the codification in law of the functions of boards and the responsibilities of individual directors.

UK: Remuneration Code and Pillar 3 disclosures on remuneration - FSA guidance on proportionality

The Financial Services Authority has, in respect of the Remuneration Code (SYSC 19A) and the Pillar 3 disclosures on remuneration (BIPRU 11), published general guidance on proportionality: see here (pdf).

UK: Walker Guidelines Monitoring Group - fourth compliance report published

The Guidelines Monitoring Group has published its fourth report concerning compliance with the Walker Guidelines on transparency within the private equity industry: see here (pdf). The Group found an improvement in the level of overall compliance but significant variations in the quality of disclosure.

Canada: the proposed national securities regulator - Supreme Court judgment due this week

Last year proposals for the creation of a national securities regulator for the provinces and territories of Canada were published and a reference was made to the Supreme Court in order to determine whether the proposed Securities Act was within the legislative authority of Canada's Parliament. The Supreme Court has announced that its decision will be given on Thursday this week: see here.

An overview of the proposed Act is available here and further information is available here. The Government's proposals build on the recommendations of the Expert Panel on Securities Regulation, which published its final report in 2009.

UK: banking reform - update from Government

Yesterday the Government published its response to the final report published earlier this year by the Independent Commission on Banking: see here (pdf). The response provides a very strong endorsement of the Commission's report and recommendations. The Government intends to pass legislation requiring the ring-fencing of retail banking activities whereby the ring-fenced bank is legally and operationally independent from the rest of its corporate group. Large ring-fenced banks will be subject to higher equity requirements. A White Paper will be published in the spring explaining how the Government's plans will be implemented. It is envisaged that full implementation will be achieved by 2019.

France: AMF consults on takeover rule changes

Autorité des marchés financiers (AMF), the financial regulator, has published a consultation paper setting out changes to the takeover rules. A press release, in English, setting out the principal changes is available here (pdf). The consultation paper, in French, is available here (pdf).

Isle of Man: Tynwald approves new financial services legislation

Changes to financial legislation were approved last week by Tynwald, the Isle of Man's Parliament; Hansard, the record of debate, is available here (pdf). Further information, and links to the new legislation, has been provided here by the Financial Supervision Commission.

UK: Commons Treasury Committee begins credit rating agency inquiry

The House of Commons Treasury Committee has published the terms of reference for its inquiry into credit rating agencies: see here.

UK: the draft Financial Services Bill - Parliamentary Committee report published

The Joint Parliamentary Committee formed to conduct pre-legislative scrutiny of the draft Financial Services Bill published its report today: see here or here (pdf). An executive summary is available here. The Committee makes many recommendations; the Government and regulators are asked, for example, to consider increasing the share of executive remuneration that is deferred and conditional on medium term outcomes. The Committee also suggests that further consideration be given to the introduction of a strict liability regime for executives and directors in respect of the adverse consequences of poor decisions. Elsewhere in the report, recommendations are made regarding the governance of the Bank of England and the objectives of the new Prudential Regulation Authority.

UK: APB publishes revised editions of ES1 and ES5

Earlier this year the Auditing Practices Board sought views on a couple of amendments to Ethical Standards 1 and 5: see here (pdf). The APB announced last week that it would be making the proposed amendments and published revised copies of ES1 (here, pdf) and ES5 (here, pdf). A copy of the APB's feedback statement is available here (pdf) and the responses received are available here.

As a result of the changes, the transitional arrangement for tax services provided on a contingency fee basis where contracts were entered prior to 31 December 2010 will be extended to 31 December 2014. Additionally, Ethical Standard 1 will be amended to provided a simplified illustrative template for communicating information on audit and non-audit services to those charged with governance which reflects amended UK regulations on auditor remuneration disclosures.

UK: Scotland: the criminal liability of partnerships - Law Commission report published

The Scottish Law Commission has published its report on the criminal liability of partnerships: see here (pdf) or here (html) or here (rtf). The report, which includes a draft Bill, recommends that it should be possible to prosecute a partnership during a period of 5 years following its dissolution. In Balmer v HM Advocate 2008 SCCR 765, 2008 SLT 799, 2008 GWD 26-410, [2008] HCJAC 44, the High Court of Justiciary held that such a prosecution was not possible because the partnership no longer had legal personality. Further background information is available here.

USA: GMI's 2011 CEO Pay Survey

GovernanceMetrics International has published its 2011 survey of CEO pay: see here (pdf). GMI reports, amongst other things, that the total realized compensation for CEOs in the S&P 500 has risen by a median 36.5%.

India: Companies Bill introduced in the Lok Sabha

The Companies Bill was introduced in the Lok Sabha earlier this week. A copy of the Bill is available here (pdf) and it is accompanied by a document containing corrigenda (here, doc). The Bill is wide-ranging, covering core company law matters, insolvency and governance provisions which are often found in codes of best practice.

A good indication of the Bill's breadth is provided by the following brief review.  Clause 144 imposes a restriction on auditors performing certain non-audit services (there was no such restriction in the earlier Act).  Clause 165 imposes a restriction on the number of directorships that one person may hold. Clause 166, a new provision, is titled 'Directors' duties' and subsection (2) contains this duty which is not that easy to interpret: "A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment".

The requirement for listed companies to have an Audit Committee is contained in Clause 177. A similar requirement for Nomination and Remuneration Committees is contained in Clause 178, a new provision, which also sets out the requirements for a Stakeholders Relationship Committee. Under Clause 135, certain companies will be required to form a Corporate Social Responsibility Committee for the purposes of formulating a CSR policy. Subsection (4) of this Clauses provides that the Board "shall make every endeavour to ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy".

Clause 197 imposes limits on the total remuneration that may be paid to the directors, with reference to the company's net profits. An oppression remedy is provided for shareholders in Clause 241 but its scope is wide because a shareholder is given the right to complain not just about conduct prejudicial or oppressive to him but also where the company's affairs are being conducted in a manner that is prejudicial to the public interest. However, as Clause 244 explains, the right to apply under Clause 241 is not one available to each individual shareholder because, as Clause 244 explains, in companies having a share capital, an application must be made by 100 or more shareholders or at least one tenth of the total number of shareholders.

UK: FTSE UK Index Series - free float minimum to become 25%

Following its recent consultation, the FTSE Group has announced that the minimum free float for UK incorporated companies in the FTSE UK Index Series will be increased from 15% to 25%, from 1 January 2012: see here (.doc). Those companies already admitted with a lower free float have 24 months to comply with the new requirement. The FTSE Group has also announced
FTSE will undertake further consultation on whether a higher threshold would be appropriate, or whether additional governance standards should be incorporated in the FTSE All-Share Index.

UK: FRC reports on corporate governance in 2011

The Financial Reporting Council has published a report titled Developments in Corporate Governance 2011 - The impact and implementation of the UK Corporate Governance and Stewardship Codes: see here (pdf). The report highlights changes that have taken place in the past year and draws upon FRC and other organisations' research to explain the changes in governance practices which have occurred and areas requiring improvement. The report notes, for example, that 80% of FTSE350 companies have adopted annual re-election of all directors and that over 230 asset managers, asset owners and service providers gave signed up to the Stewardship Code in its first year. However, the FRC reports, based on its discussions, that the majority of companies (and in particular smaller companies) say that they have seen relatively little change in institutional investors' approach to engagement.

The report also highlight areas where the FRC wishes to see improvements, including reporting by audit and remuneration committees. The FRC identifies the rights of minority shareholders in listed companies with dominant shareholders as requiring further attention, and welcomes the FTSE Group’s consultation on increasing its minimum free float requirement for UK incorporated companies.

UK: the UK implementation of Directive 2010/73/EU - consultation paper published

The Financial Services Authority and HM Treasury have published a consultation paper setting out how the UK proposes to implement Directive 2010/73/EU, which revised the Prospectus Directive (2003/71/EC) and Transparency Directive (2004/109/EC): see here (pdf).

UK: Competition Commission's audit market inquiry - issues statement published

The Competition Commission has published an issues statement as part of its inquiry into the audit market: see here (pdf). The statement draws on evidence so far received by the Commission and sets out some initial theories of what might be adversely affecting competition and what might be the adverse outcomes. These theories and findings provide the framework for the Commission's investigation (they are not, the Commission states, findings or conclusions).

UK: corporate governance since the mid 1980s - what has changed?

Yesterday's Financial Times newspaper highlighted research by Professor Annie Pye at University of Exeter Business School in respect of the changes seen in board practice over the last 24 years. Based on interviews spanning the period, the research also highlights the changes in regulation which have occurred. Further information is available here.

UK: Scotland: the defective exercise of fiduciary powers

The Scottish Law Commission has published a consultation paper in which it sets out proposals for a statutory procedure under Scots law to permit challenge to the exercise of fiduciary powers which are defectively exercised: see here (pdf). Whilst the Commission notes that the exercise of discretionary powers by trustees is the main area of interest, its proposal would apply to all exercises of fiduciary powers.

UK: the failure of RBS - FSA report published

The Financial Services Authority today published its report into the failure of Royal Bank of Scotland: see here (full report, pdf) or here (links to report chapters). The report concludes that six factors contributed to the failure of RBS:

• Significant weaknesses in RBS’s capital position, as a result of management decisions and as permitted by an inadequate regulatory capital framework;
• Over-reliance on risky short-term wholesale funding;
• Concerns and uncertainties about RBS’s underlying asset quality, which in turn was subject to little fundamental analysis by the FSA;
• Substantial losses in credit trading activities, which eroded market confidence. Both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit might be;
• The ABN AMRO acquisition, on which RBS proceeded without appropriate heed to the risks involved and with inadequate due diligence; and
• An overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure. RBS was one such bank.

Part 2 of the report - see here (pdf) - is titled "Management, governance and culture" and in this part of the report the FSA concludes that it is highly probably that aspects of RBS's management, governance and culture played a role in the failure of the bank. In his Foreword, Lord Turner, the chairman of the FSA, states that there is a strong public interest in ensuring that bank executives and boards reach a different balance between risk and return than would be acceptable in non-bank companies, which suggests that directors and boards should face different personal risk return trade offs compared with non-bank directors and boards. One suggestion made in this regard is the introduction of a strict liability regime for the adverse consequences of poor decisions.

UK: the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2011

The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2011 were laid before Parliament last week and come into force on 31 December 2011: see here or here (pdf). The Regulations provide that subsections (4) and (8) of Section 118 (Market abuse) of the Financial Services and Markets Act (2000) will remain in force until 31 December 2014. The accompanying explanatory memorandum explains why the subsections are to remain in force for a further three years: see here (pdf).

Hong Kong: HKEx consults on guide to ESG reporting

The Hong Kong Stock Exchange has published for consultation its proposed Environmental, Social and Governance (ESG) Reporting Guide: see here (pdf). The purpose of the Guide is to raise awareness and encourage listed companies to disclose more ESG information. The Exchange is not proposing that compliance with the Guide should be mandatory but it indicates that in future the Guide may operate on a 'comply or explain' basis.

Europe: Commission consults on application of Directive 2007/44 EC

The European Commission is seeking views on the application of Directive 2007/44 EC (regarding the procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of holdings in the financial sector) and in particular whether it has reduced barriers to cross-border mergers and acquisitions. The consultation paper is available here (pdf).

UK: FSA consults on NED retail conduct risk guidance

The Financial Services Authority has published for comment draft guidance setting out what it expects from non-executive directors with regard to retail conduct risk (i.e., the risk that a firm will treat its retail customers unfairly and deliver inappropriate outcomes): see here (pdf). Further information is available here.

UK: the Companies Act 2006 (Amendment of Part 23) (Investment Companies) Regulations 2012 - draft published

The Department for Business, Innovation and Skills has published a draft of the Companies Act 2006 (Amendment of Part 23) (Investment Companies) Regulations 2012: see here (pdf). The purpose of the Regulations is to amend provisions in Part 23 of the Companies Act (2006) in order to permit investment companies, in certain circumstances, to make distributions out of revenue profits.

Europe: European Venture Capital Funds - Commission proposal published

The European Commission has published a proposal for a Regulation on European Venture Capital Funds: see here (pdf). For further information see: Press release | FAQs | Citizens' summary (pdf) | Impact assessment: full text (pdf) or summary (pdf) |

Basel Committee consults on revised internal audit supervisory guidance

The Basel Committee on Banking Supervision has published a consultation paper titled 'The internal audit function in banks' in which its sets out revised supervisory guidance for assessing the effectiveness of the internal audit function in banks: see here (pdf).

UK: the Financial Services Act 2010 (Executives’ Remuneration Report) Regulations 2011 - draft published

HM Treasury has published a consultation paper containing a draft of the Financial Services Act 2010 (Executives’ Remuneration Report) Regulations 2011: see here (pdf). The purpose of the Regulations is to require certain large banks to disclose the remuneration received by their eight highest paid senior executive officers. A Treasury press release is available here.

Japan: Olympus - Investigation report published

A copy, in English, of the report prepared for Olympus by the Committee formed to investigate the hiding of investment losses has been published: see here (pdf). The report contains various recommendations, including changes to the board and the appointment of truly independent directors. More generally, the long-term challenge will be in addressing what the report describes as "corporate culture and mind": ensuring that board members are prepared to challenge and bring independence of mind to proceedings. These are not new concerns, as the white paper published in 2008 by the Asian Corporate Governance Association made clear (see here, pdf). Meanwhile, it has been reported that proposed changes to company law in Japan are likely to be published shortly: see here.

UK: Wales: the RTM Companies (Model Articles) (Wales) Regulations 2011

The RTM Companies (Model Articles) (Wales) Regulations 2011 were made on 5 November, laid before the Welsh Assembly on 8 November 2011 and came into force on 30 November: see here. An explanatory note is available here (pdf). The Regulations apply to RTM (right to manage) companies which exercise the right to manage premises in Wales.

Australia: CAMAC to review the annual general meeting

The Treasury has asked the Corporations and Markets Advisory Committee to consider, amongst other things, the future of the annual general meeting in Australia. The terms of reference are outlined in a letter sent to CAMAC by the Hon David Bradbury MP, Parliamentary Secretary to the Treasurer: see here (pdf).

Mr Bradbury's letter refers to a report published in 2008 by the Parliamentary Joint Committee on Corporations and Financial Services - titled 'Better shareholders – Better company: shareholder engagement and participation in Australia", available here (pdf) - in which  the role of the AGM was considered. The Joint Committee took the view that the AGM remained a useful engagement forum for retail investors.

UK: England and Wales: piercing the corporate veil

Earlier this year, in Antonio Gramsci Shipping Corp v Stepanovs [2011] EWHC 333 (Comm), Burton J. held that that there was a good arguable case that the veil of incorporation should be pierced in order to make liable under various charterparties the ultimate beneficial owners of companies which had been formed for the perpetuation of fraud. In reaching this decision, he observed that there was "no good reason of principle or jurisprudence why the victim cannot enforce the agreement against both the puppet company and the puppet who, all the time, was pulling the strings. ... I accept ... that the puppeteer can be made liable, as a party to the contract, but that as a matter of public policy he cannot enforce the contract" (at paras. [26] and [27]) .

Last week, in VTB Capital Plc v Nutritek International Corp [2011] EWHC 3107 (Ch), Arnold J. declined to follow much of Burton J.'s reasoning, observing that the decision was "not so much a decision to pierce the corporate veil as a decision to ignore privity of contract ... Neither in Gilford v Horne [1933] Ch 935 nor in Jones v Lipman [1962] 1 WLR 832 were damages awarded against the puppet for breach of the puppeteer's contract. Rather, equitable relief was granted against the puppet to stop the puppeteer evading his own contractual liability. Thus the puppet was not treated as being party to the puppeteer's contract" (para. [101]).

Germany: the Stock Corporation Act - English translation

Norton Rose LLP has published an English translation of the German Stock Corporation Act (the Aktiengesetz), as amended by the German Restructuring Act (Restrukturierungsgesetz) of 2010: see here (pdf).

Ireland: the Central Bank's fitness and probity regime

The Central Bank has published the final version of its Guidance on Fitness and probity Standards, in respect of the new regime which came into effect on 1 December: see here (pdf). The revised Regulations and Standards for Fitness and Probity, which were originally issued earlier this year, have also been published: see, respectively, here (pdf) and here (pdf).

Europe: empty voting - responses to ESMA's consultation

Earlier this year the European Securities and Markets Authority published a call for evidence concerning empty voting: see here (pdf). The responses received have now been published: see here.

UK: the Government's consultation on executive remuneration

The Government's consultation on executive remuneration ended last month. Responding to a submission from the Confederation of British Industry - available here (pdf) - the Secretary of State for Business, Innovation and Skills today announced that the Government's response would be published early next year: see here.

UK: NAPF publishes updated Corporate Governance Policy and Voting Guidelines

The National Association of Pension Funds has published an updated edition of its Corporate 
Governance 
Policy
 and 
Voting
 Guidelines: see here (pdf). A summary of the amendments is available here (pdf).

Europe: the Commission's audit market reform proposals

The European Commission today published wide-ranging proposals for the reform of the audit market. If these become law they will make dramatic changes to the legal framework governing the audit and the organisational structure of the largest firms.

With regard to public-interest entities, the Commission is proposing, amongst other things, mandatory audit firm rotation after six years (9 years if two audit firms are used) and a ban on the auditor providing certain non-audit services. Mandatory tendering of the audit is also proposed and contract clauses requiring a company to be audited by one of the 'Big Four' will be prohibited. The Commission also wants structural changes within the largest firms so that there is a complete separation between auditing and non-auditing activities.

Elsewhere in the proposals, a greater role is proposed for the audit committee, which the Commission says should consist of non-executive directors, with at least one NED having experience and knowledge of auditing and another experience and knowledge in accounting and/or auditing. A greater role for the European Securities and Markets Authority is proposed with regard to coordination between regulators in Member States but also with regard to the publication of guidance on various matters identified in the Regulation including, for example, the content of the handover file to be provided by outgoing auditor to the incoming auditor.

Requiring firms to have joint auditors is not proposed at this stage although it is clear that the Commission believes that there is merit in the largest firms having two auditors (note what is said in the below video).

For further information see: Press release | FAQs | Draft Regulation (pdf) | Draft Directive (pdf) | Impact assessment: full version (pdf) or summary (pdf) | Video summary (and below) |

Europe: freedom of establishment and taxation

The Court of Justice of the European Union gave its opinion yesterday in National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond / kantoor Rotterdam (C‑371/10). A summary of the court's opinion is available here (pdf), from which this headline is taken: "EU law does not in principle preclude the charging of tax on unrealised capital gains relating to the assets of a company when it transfers its place of management to another Member State".

UK: board trends and practices - SpencerStuart report

SpencerStuart has published the 2011 edition of its review of the governance practices of the largest 150 companies in the FTSE indexes: see here (pdf). The report notes an increase in the number of foreign non-executive directors and an increase in the number of companies having a separately constituted risk committee (up to 19, from 12 last year).

UK: England and Wales: Court of Appeal upholds decision to wind-up companies offering extended warranties

Earlier this year, in Re Digital Satellite Warranty Cover Ltd. [2011] EWHC 122 (Ch), the High Court held that three companies should be wound-up where they carried on business in contravention of the general prohibition found in Section 19 of the Financial Services and Markets Act (2000). The companies offered extended warranty contracts which the trial judge held were contracts of insurance as defined in Article 3(1) and Schedule 1 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/344).

An appeal against the winding-up orders was made and the Court of Appeal gave its opinion today: see Digital Satellite Warranty Cover Ltd v The Financial Services Authority [2011] EWCA Civ 1413. The court held that the trial judge was entitled to find that the warranties were contracts of insurance within class 16(b) in Schedule 1 of the 2001 Order.

UK: the Autumn Statement and financial regulation

The Chancellor delivered his Autumn Statement today: see here. Whilst principally focussed on Government spending and taxation, the Statement contained a couple of items concerning financial regulation (at paras. 1.70 to 1.74). First, the Government has reiterated its intention to introduce legislation next year to reform the UK's financial regulatory framework (draft legislation is currently under scrutiny in Parliament). Second, the Government states that by the end of the year it will publish further information regarding the options for the implementation of the recommendations made by the Independent Commission on Banking.

UK: England and Wales: permission granted to continue derivative claim

The High Court gave judgment today in Parry v Bartlett [2011] EWHC 3146 (Ch) and granted permission to continue a derivative claim under Part 11 of the Companies Act (2006) in respect of alleged breaches of directors' duties. The case was, in the view of the trial judge, a classic case for a derivative claim (and would have been so under the common law framework which was in place prior to Part 11).

UK: IoD calls for binding shareholder vote on remuneration

The deadline for submissions to the Government's consultation on executive remuneration closed last week. On Friday the Institute of Directors published a press release setting out what it had argued in its submission: see here. A binding shareholder vote on remuneration policy and greater simplification of remuneration packages were two of several recommendations made.

UK: Grant Thornton's FTSE350 Corporate Governance Review 2011

Grant Thornton has published the 2011 edition of its annual corporate governance review: see here (pdf). The review is based upon the annual reports of 298 FTSE350 companies with year ends between May 2010 and April 2011 (excluding investment companies). The review notes, amongst other things, that 70% of companies have introduced annual re-election for directors (one of the recommendations made in the revised UK Corporate Governance Code published last year). It is also reported that, on average, FTSE350 companies change their statutory auditor once every 34 years. With regard to board size, eleven is the average for FTSE100 companies.