Thursday 31 March 2011

USA: SEC adopts remuneration committee rules

The Securities and Exchange Commission has unanimously decided to adopt rules directing national securities exchanges to adopt listing standards regarding the board remuneration committee and remuneration advisers: see here. The rules will require, amongst other things, remuneration committee members to be members of the board and to be independent.

Germany: board diversity and DAX30 companies

The Guardian newspaper reports (see here) that "[the] 30 companies listed on Frankfurt's Dax index of leading shares said after meeting ministers on Wednesday that they would set targets to promote more female managers. The German government indicated that the firms would aim to increase female representation on their boards by 30% by 2013. It said that companies that failed to meet these goals would face as yet unspecified sanctions".

UK: the Bribery Act (2010) - guidance for prosecutors

The Director of Public Prosecutions, Keir Starmer QC, and the Director of the Serious Fraud Office, Richard Alderman, yesterday issued joint guidance for prosecutors on the Bribery Act 2010: see here (Word). The purpose of the guidance is to set out the Directors' approach to deciding whether to bring a prosecution under the Act.

UK: England and Wales: no proprietary claim over sale proceeds

The Court of Appeal yesterday delivered an important decision - Sinclair Investments (UK) Ltd. v Versailles Trade Finance Ltd. [2011] EWCA Civ 347 - in which it declined to follow Attorney General for Hong Kong v Reid [1993] 1 AC 324 (a decision of the Judicial Committee of the Privy Council). The court unanimously held that the trial judge (at [2010] EWHC 1614 (Ch)) was right to hold that a proprietary claim did not exist in respect of the proceeds of sale (£28.69 million) of shares purchased by a director in breach of fiduciary duty using funds entrusted to the company. The Master of the Rolls, Lord Neuberger, observed (paras. [80], [88] and [89]):

It seems to me that there is a real case for saying that the decision in Reid [1994] 1 AC 324 is unsound. In cases where a fiduciary takes for himself an asset which, if he chose to take, he was under a duty to take for the beneficiary, it is easy to see why the asset should be treated as the property of the beneficiary. However, a bribe paid to a fiduciary could not possibly be said to be an asset which the fiduciary was under a duty to take for the beneficiary. There can thus be said to be a fundamental distinction between (i) a fiduciary enriching himself by depriving a claimant of an asset and (ii) a fiduciary enriching himself by doing a wrong to the claimant. Having said that, I can see a real policy reason in its favour (if equitable accounting is not available), but the fact that it may not accord with principle is obviously a good reason for not following it in preference to decisions of this court.

In my view, Lewison J [the trial judge] was right to reject [the company's] proprietary claim to the proceeds of sale of the Shares. It is true that the decisions in Reid [1994] 1 AC 324, Sugden v Crossland (1856) 2 Sm & G 192, and (at least arguably) Re Caerphilly Colliery Company (Pearson's case) (1877) LR 5 Ch D 336 go the other way. However, there is a consistent line of reasoned decisions of this court (two of which were decided within the last ten years) stretching back into the late 19th century, and one decision of the House of Lords 150 years ago, which appear to establish that a beneficiary of a fiduciary's duties cannot claim a proprietary interest, but is entitled to an equitable account, in respect of any money or asset acquired by a fiduciary in breach of his duties to the beneficiary, unless the asset or money is or has been beneficially the property of the beneficiary or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary.

... previous decisions of this court establish that a claimant cannot claim proprietary ownership of an asset purchased by the defaulting fiduciary with funds which, although they could not have been obtained if he had not enjoyed his fiduciary status, were not beneficially owned by the claimant or derived from opportunities beneficially owned by the claimant. However, those cases also establish that, in such a case, a claimant does have a personal claim in equity to the funds. There is no case which appears to support the notion that such a personal claim entitles the claimant to claim the value of the asset (if it is greater than the amount of the funds together with interest), and there are judicial indications which tend to militate against that notion".

Wednesday 30 March 2011

UK: the Bribery Act (2010) - guidance and coming into force date

The Ministry of Justice today announced that the Bribery Act (2010) will come into force on July 1 this year. The Act introduces, in Section 7, a new offence of strict liability: the failure by a commercial organisation to prevent bribery by a person associated with it. Section 9 requires the Secretary of State to publish guidance about the procedures which such organisations can put in place to avoid liability under Section 7; this guidance was published today - see here (pdf) - and is based on six principles. With regard to Principle 2 - top level commitment - it is stated that "In a large multi- national organisation the board should be responsible for setting bribery prevention policies, tasking management to design, operate and monitor bribery prevention procedures, and keeping these policies and procedures under regular review" (at p. 24).

UK: report published - auditors: market concentration and their role

The House of Lords Economics Affairs Committee has today published its report Auditors: Market Concentration and their Role: see here. The report makes three principal recommendations:
  • There should be a detailed investigation of the large-firm audit market by the Office of Fair Trading, with a view to an inquiry by the Competition Commission so that all the interrelated issues surrounding concentration, competition and choice can be examined in detail. 
  • Prudence should be reasserted as the guiding principle of the audit.
  • The new framework of banking supervision should provide for the bank audit to contribute more to the transparency and stability of the financial system, in particular through two-way dialogue between auditors and supervisors about the financial health of banks.
Other recommendations include requiring FTSE 350 companies to carry out a mandatory tender of their audit contract every 5 years, with the audit committee including detailed reasons for their choice of auditors in their report to shareholders; and the development of separate risk committees in banks and major financial institutions. Greater reliance on shareholder engagement is rejected by the report, it being noted (at para. 50) that:

...most shareholders appear to care little about a company's choice of auditor. It seems improbable that this apathy will soon be remedied. So measures which rely on shareholder engagement to help lessen audit market concentration are unlikely to be effective".

UK: whither the credit rating industry?

Whither the credit rating industry? is the title of paper nine in the Bank of England's financial stability series. Published earlier this week, and available here (pdf), the paper describes the role of credit rating agencies (CRAs) and the failures observed during the financial crisis. The paper's authors argue that:

... rating agencies perform a valuable role, but that the common and often mechanistic reliance on ratings for information, certification and regulatory purposes lies beneath many of the problems observed during the crisis. The policy priority should therefore be to reduce the scope of such reliance, but to the extent that CRAs nevertheless retain a strong influence in financial markets there may also be a case to consider structural measures to directly tackle potential conflicts of interest in the way in which ratings are produced".

Tuesday 29 March 2011

Isle of Man: consultation on changes to the Financial Services Act 2008

The Isle of Man's Financial Supervision Commission (FSC) has published a consultation paper - see here (pdf) - in which it sets out proposed changes to the Financial Services Act 2008 (here, pdf) and Collective Investment Schemes Act 2008 (here, pdf). Some of these changes are based on recommendations made by the International Monetary Fund, including adding to the FSA's statutory objectives (within Section 2 of the FSA 2008) the mitigation of systemic risk in the financial system.

UK: the Companies Act 2006 (Annual Returns) Regulations 2011 - draft published

A draft of the Companies Act 2006 (Annual Returns) Regulations 2011, together with a short explanatory memorandum, has been published by the Department for Business, Innovation and Skills: see here (pdf).

Monday 28 March 2011

UK: BIS consultation responses - a Long Term Focus for Corporate Britian

The Department for Business, Innovation and Skills has published a summary of responses received in respect of its corporate governance consultation A Long-Term Focus for Corporate Britain: see here (pdf). According to BIS:

Overall, respondents believe that short-termism exists in UK equity markets but provided little evidence to demonstrate the scale of the consequences for companies and investors. Many respondents noted the decline in the proportion of UK equities held by UK institutional investors (and a corresponding rise in the proportion held by overseas investors and hedge funds), and raised a range of concerns related to this increasing atomisation of ownership of UK companies. However, many respondents also made the point that the UK benefits from investors using a range of strategies, both long-term and short-term ... The majority of respondents agree that executive pay has risen to unacceptable levels in some cases given performance, however they did not agree on the causes or the best methods of mitigation ... There was a mixed response on the issue of whether boards understand effectively the long-term implications of takeovers or communicate these effectively to investors. However, there was not much support for requiring a vote for shareholders in acquiring companies involved in a takeover". 

Later this year the Government will provide further information about the next stage of its review of corporate governance.

Friday 25 March 2011

Ireland: Moriarty Tribunal report part II and company law

The Moriarty Tribunal has published its Report Into Payments to Politicians and Related Matters - Part II. The report is published in two volumes: one (here, pdf) and two (here, pdf). The second volume contains a short section on company law, at pages 1161 to 1162, where it is recommended that consideration be given to introducing in Ireland provisions similar to those found in Part 14 (control of political donations and expenditure) of the UK's Companies Act (2006) and in Section 172 of the 2006 Act (the director's duty to promote the success of the company). These recommendations are addressed to the Oireachtas and Company Law Review Group (the latter is drafting the Companies Consolidation and Reform Bill, which is due next year; the general scheme of the Bill is available here).

France: the AFG corporation governance recommendations 2011

The Association Française de la Gestion Financière (AFG, the French Asset Management Association) has published, in English, a copy of its 2011 corporate governance recommendations: see here (pdf). An important change made in the 2011 recommendations is the inclusion of greater information regarding the role of the lead director (the lead director being appointed in companies where the same person acts as chairman and chief executive).

Thursday 24 March 2011

UK: the Plan for Growth and corporate governance

HM Treasury and the Department for Business, Innovation and Skills published A Plan for Growth yesterday, described in its introduction as "an urgent call for action": see here (pdf). The document contains a section on corporate governance, defined as "the framework established through legislation, regulation and practice by which companies are directed or controlled" (para. 2.133). In this section proposals are outlined which, in the Government's view, will improve corporate governance, including:
  • Reducing the number of companies required to be audited and pressing the European Commission to remove the audit requirement for most medium sized companies as part of a revised audit directive (expected, the Government states, in November 2011).
  • Changing the law in 2012 to exempt many subsidiaries from producing audited accounts and encouraging the European Commission to exempt the smallest companies from reporting requirements.
  • Requesting the Office of Fair Trading to investigate whether clauses in lending agreements made by banks are unfairly restricting competition in the audit market [in this context, the report refers to work by the OECD, available here (pdf)].
  • Simplifying the narrative reporting requirements for quoted companies (views will be sought from business by the end of July 2011).
  • Modernising the legislative framework governing mutuals. 
The Government also explains, at para. 2.139, that it will publish in the summer this year "the next steps" of its review of corporate governance and economic short-termism.

Wednesday 23 March 2011

Ireland: Central Bank consults on fit and proper regime

The Central Bank of Ireland has published a consultation paper regarding the "fit and proper" regime in Part 3 of the Central Bank Reform Act (2010): see here (pdf). The consultation concerns two aspects of the new regime: the designation of those positions in financial services firms the holders of which must meet the fit and proper criteria before taking up appointment; and the standards of fitness and probity which such individuals must meet.  The Central Bank proposes that directors should require prior approval under the new regime, as should the company secretary. The proposed standards require such individuals to be [a] competent and capable, [b] honest, ethical and to act with integrity, and [c] financially sound.

Tuesday 22 March 2011

UK: the FSA's 2011/12 business plan published

The Financial Services Authority has published its 2011/12 business plan: see here (pdf). The document is interesting for many reasons, not least because it sets out what work is taking place in the move towards a new financial regulatory structure, and also because Hector Sants, the FSA's chief executive, has highlighted once more the importance of changes at the European level (the creation of new supervisory authorities) which have reduced the policy making role of the FSA and its successor authorities.

UK: Takeover Panel consults on Code amendments

The Takeover Panel Code Committee has published a consultation paper - see here (pdf) - setting out proposed amendments to the Takeover Code based on the conclusions reached last year following its review of certain aspects of the takeover process (about which see herepdf). The proposed amendments are intended to:
  • Increase the protection for offeree companies against protracted “virtual bid” periods by requiring potential offerors to clarify their position within a short period of time;
  • Strengthen the position of the offeree company by [i] prohibiting deal protection measures and inducement fees other than in certain limited cases; and [ii] clarifying that offeree company boards are not limited in the factors that they may take into account in giving their opinion and recommendation on an offer;
  • Increase transparency and improve the quality of disclosure by [i] requiring the disclosure of offer-related fees; and [ii] requiring the disclosure of the same financial information in relation to an offeror and the financing of an offer irrespective of the nature of the offer;
  • Provide greater recognition of the interests of offeree company employees by [i] improving the quality of disclosure by offerors and offeree companies in relation to the offeror’s intentions regarding the offeree company and its employees; and [ii] improving the ability of employee representatives to make their views known.

Monday 21 March 2011

New Zealand: securities law reform and criminal liability for serious breaches of directors' duties

A summary of the decisions made by the New Zealand Cabinet in respect of securities law reform was published last week: see here. An exposure draft for new legislation will be published in August this year. In the field of corporate governance it is interesting to note the Cabinet's decision that it should become a criminal offence for a director to recklessly or intentionally breach the following duties under the Companies Act (1993):
  • section 131 (act in good faith and in what the director believes to be the best interests of the company);
  • section 135 (avoid carrying on the business of the company in a manner likely to create a substantial risk of serious loss to the company’s creditors);
  • section 136 (not to incur an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so). 
It is also proposed that these duties should be publicly enforceable by the new Financial Markets Authority and Registrar of Companies. For further information see the Cabinet paper available here (pdf).

Friday 18 March 2011

UK: financial crime debate in the House of Lords

There was a debate on financial crime in the House of Lords yesterday and the question of implementation of the Bribery Act (2010) was once more raised. The debate was moved by Baroness Williams of Crosby to call attention to the United Kingdom's record on legislation regarding bribery, tax avoidance, corruption and money laundering. Contributions were wide ranging; Hansard, the record of debate, can be read hereLord Sassoon, on the Government's behalf, stated (at col. 390):

One of the questions asked by my noble friend Lady Williams concerned responsibility. Responsibility for implementation [of the Bribery Act (2010)] is with my right honourable friend the Justice Secretary, who is concerned to ensure that the Act is implemented in a way that tackles bribery effectively but avoids imposing costs or uncertainty on business and certainly does not make this another gold mine for lawyers advising on either implementing or picking up the consequences of the Act. It is the intention of my right honourable friend and the Government to publish guidance shortly. Implementation of the Act will follow publication after three months, in order to give businesses time to prepare themselves. On the other question about responsibility, I can confirm that enforcement of the legislation will be a matter for the Serious Fraud Office and the police".

Thursday 17 March 2011

UK: Rio Tinto's business review - FRRP secures greater environmental disclosure

The Financial Reporting Review Panel has secured greater disclosure by Rio Tinto plc in respect of the business review it is required to publish under the Companies Act (2006); the required contents of the business review are set out in Section 417. This followed a complaint received by the FRRP last summer. Rio Tinto's most recent business review, published earlier this week, now contains more information regarding, for example, the potential health risks posed by exposure to workers and communities surrounding uranium mines and an example of the potential for the group’s projects to impact on biodiversity. For further information see here.

Wednesday 16 March 2011

UK: the Financial Services (Regulation of Derivatives) Bill

The Financial Services (Regulation of Derivatives) Bill received its first reading in the House of Commons yesterday and is timetabled for second reading on 10 June. The Bill was introduced under Standing Order 23 (about which see here, pdf) and was proposed by Steve Baker MP. Its purpose, to quote from Mr Baker's speech, is to "require certain financial institutions to prepare parallel accounts on the basis of the lower of historic cost and mark to market for their exposure to derivatives; and for connected purposes". A video recording of the Bill's introduction is available here and Hansard, the record of parliamentary debate, is available here. It is unlikely that the Bill will become law without Government support.

Tuesday 15 March 2011

UK: the Hutton Review of Fair Pay in the Public Sector

The Hutton Review of Fair Pay in the Public Sector, commissioned by the Government, published its report today: see here (pdf). Whilst focussing on the public sector, the report is relevant in the private sector, not least because it is argued that the proposed Fair Pay Code should apply to private sector companies which are major suppliers to the public sector. The report also recommends that the Government should improve corporate reporting by requiring all quoted companies to publish, monitor and explain their pay multiples.

Monday 14 March 2011

UK: England and Wales: the Re Duomatic principle in the Court of Appeal

A copy of the Court of Appeal judgment Schofield v Schofield [2011] EWCA Civ 154, handed down last month, has been published on BAILII: see here. The Court of Appeal considered the application of the so-called Re Duomatic principle, which takes its name from Re Duomatic Ltd. [1969] 2 Ch 365, in which Buckley J. stated (p. 373): "[W]here it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be".

In Schofield the Court of Appeal held that the Re Duomatic principle did not apply in order to treat as valid and effective a meeting at which a director (and holder of 0.1% of he company's shares) was removed from office. There was, the court held, no unqualified, objective agreement by this director qua shareholder with regard to the validity of the meeting.

Friday 11 March 2011

Europe: related party transactions - ECGF statement

The European Corporate Governance Forum has published a statement in which it recommends that consideration should be given to introducing common principles across Europe with regard to related party transactions and listed companies: see here (pdf).

UK: the Stewardship Code

Baroness Hogg, the chairman of the Financial Reporting Council, spoke yesterday at the NAPF conference. A video recording of the speech, and other conference speeches, is available here. Baroness Hogg took the opportunity to provide an update regarding the UK Stewardship Code. There had been, she noted, 147 signatories to the Code, including some from outside of the UK, and the concept of stewardship was being considered at the European level by EFAMA and globally by the OECD. Baroness Hogg also noted that the FRC had been working to promote the code with overseas investors as well as with sovereign wealth funds. Internationalisation of the debate, she observed, was important.

Thursday 10 March 2011

UK: the auditor's contribution to prudential regulation - feedback on FSA discussion paper

The Financial Services Authority has today published a feedback statement - see here (pdf) - in response to its discussion paper Enhancing the auditor's contribution to prudential regulation (here, pdf). This covers some of the same ground as the FRC in its paper below with regard to auditor scepticism and, in this regard, the FSA notes that a difference of views remains between it and auditors on whether auditors have been sufficiently sceptical. More specifically, the FSA states (paras 1.8 and 2.7):

While recognising that this may be exacerbated by the fact that it is often difficult to identify in retrospect whether auditors have been sufficiently sceptical, we have each held or will hold separate meetings with individual audit firms to explain the specific matters that led to our conclusions. Our concerns include whether there was sufficient challenge in relation to particular judgements and whether scepticism is adequately embedded in the audit firms’ processes and training ... We recognise that accounting estimates are the responsibility of management, not auditors. Our concern is about circumstances where auditors do not sufficiently consider whether there are alternatives not considered by management and therefore do not challenge whether management are making the most appropriate judgements ... We acknowledge that professional scepticism is a particular mindset and therefore that direct evidence of its exercise, or otherwise, may be hard to observe after the event and is often circumstantial. Going forward, we believe it is important that our focus is on improving confidence that an appropriate degree of scepticism will be applied consistently by auditors".

Elsewhere the FSA states its belief that it can enhance the effectiveness of audit committees through engaging with them on accounting and financial reporting issues to a greater extent. The FSA also states that it will soon publish a policy statement setting out proposals for final rules the objective of which is to improve the quality and consistency of auditors’ client asset reports.

UK: auditor scepticism - APB feedback statement on discussion paper

The Auditing Practices Board has today published a feedback statement - available here (pdf) - in response to its discussion paper Auditor Scepticism: Raising the Bar (here, pdf). The responses received in respect of the discussion paper have also been published: see here. In its feedback statement the APB states that it will be undertaking further work in these areas:
  • Ensuring that there is a consistent understanding of the nature of professional scepticism and its role in the conduct of an audit.
  • Reviewing ISAs (UK&I) for possible ambiguities in relation to the nature and importance of professional scepticism, and proposing such changes as may be needed to make sure the position is clear.
  • Reviewing ISQC (UK&I) 1 to ensure that it has sufficient requirements and guidance relating to the need for firms to have appropriate policies and procedures for promoting the competencies that underlie professional scepticism.
  • Considering how the application of scepticism can be made more transparent.
  • Considering, with other parts of the FRC, whether there is a need for guidance on the approach to be taken by auditors when considering the presentation in the financial statements of matters that have been the subject of significant challenge by auditors.

In its feedback statement, the APB expresses its concern with the lack of consensus about the nature of professional scepticism and its role in the conduct of an audit. The APB also rejects the view that the auditor's role is "limited to ensuring that management have appropriate evidence to support its assertions if this means accepting the evidence management present without subjecting it to robust challenge and comparison to alternative sources of evidence". Indeed, the APB the questions whether a 'neutral mindset' or just an 'inquiring mind' is the appropriate mindset for an auditor where, for example, "this mindset is applied during the planning process to assess the risk of misstatement in the different elements of the financial statements and these risk assessments are fundamental in determining the nature and extent of evidence to be obtained in the rest of the audit, and many of the numbers in financial statements are accounting estimates" (para. 26).

Wednesday 9 March 2011

UK: England and Wales: piercing the veil of incorporation

Late last month the High Court gave judgment in Antonio Gramsci Shipping Corp & Ors v Stepanovs [2011] EWHC 333 (Comm) and held 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. The trial judge observed (paras. [26] and [27]):

There is in my judgment 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".

Tuesday 8 March 2011

UK: England and Wales: Court of Appeal considers balance sheet test of insolvency under Insolvency Act (1986)

Yesterday the Court of Appeal gave its judgment in BNY Corporate Trustee Services Ltd v Eurosail - UK 2007 - 3bl Plc [2011] EWCA Civ 227, in which it was required to consider the so-called 'balance sheet test' of insolvency within Section 123(2) of the Insolvency Act (1986) in the context of the interpretation of a commercial contract. The court's decision is the leading English authority on this section and contains much worthy of quotation but the following stands out (to quote from the opinion of Lord Neuberger MR at para. [48] onwards):

In my view, the purpose of section 123(2) has been accurately characterised by Professor Sir Roy Goode in Principles of Corporate Insolvency Law (third edition). Having referred to section 123(1)(e) as being the "cash flow test" and to section 123(2) as being the "balance sheet test", he said this at para 4-06: 'If the cash flow test were the only relevant test [for insolvency] then current and short-term creditors would in effect be paid at the expense of creditors to whom liabilities were incurred after the company had reached the point of no return because of an incurable deficiency in its assets.'

In my judgment, both the purpose and the applicable test of section 123(2) are accurately encapsulated in that brief passage. Subsection (2) was, in my view, included in section 123 to cover a case where, although it could not be said that a company "is [currently] unable to pay its debts as they fall due" (either because it has no debts which are currently payable, or because it has, or can achieve, the cash flow to pay such debts), it is, in practical terms, clear that it will not be able to meet its future or contingent liabilities. A future or contingent creditor of a company can often claim to be prejudiced by the company using its cash or other assets to pay current creditors or even for some other purpose, but, within bounds, that is an inherent risk in the futurity or contingency of the liability. It is only when it can be said that the company's use of its cash or other assets for current purposes amounts to what may be vernacularly characterised as a fraud on the future or contingent creditors that it can be said that it "has reached the point of no return".

I disagree with ... [the] submission that, when carrying out the exercise required by section 123(2), one simply takes future and contingent liabilities at face amount. "Face amount" is not a term of art ... If a company has a liability for £x in ten years or more, it cannot be right to treat that as a present liability of £x, unless, perhaps, it carries interest at an appropriate rate. The idea that one has to carry out a valuation exercise in relation to future and contingent debts is supported by commercial common sense as well as by the provisions of Rule 13.12(3).

The appellants are on somewhat stronger ground in their contention that the figures in the company's balance sheet, and audited and signed off annual accounts, should be accorded weight in the exercise envisaged by section 123(2). I do not think that it is possible or helpful to describe in general terms the weight to be given to such figures in such an exercise. Clearly, the fact that the figures have been audited and are said to convey a "true and fair" view of the company's position in the opinion of its directors should normally have real force. However, the figures will inevitably be historic, they will normally be conservative, they will be based on accounting conventions, and they will rarely represent the only true and fair view. The court will ultimately have to form its own view as to whether the company in question has reached what Professor Goode described as "the point of no return".

It is not really possible, indeed it would be positively dangerous, to give much further general guidance as to the approach to be adopted by the court when deciding whether section 123(2) applies. The ultimate question, at least normally, is that identified by Professor Goode, and it is to be determined with a firm eye both on commercial reality and on commercial fairness. Clearly, the closer in time a future liability is to mature, or the more likely the contingency which would activate a contingent liability, and the greater the size of the likely liability, the more probable it would be that section 123(2) will apply.

Update (8 March 2011): The ICLR, as part of its WLRDaily service, has provided a summary of the decision here.

Europe: MEPs vote on short-selling

MEPs yesterday voted on draft EU legislation on short selling and credit default swaps. According to the European Parliament's press release: "A ban on certain trades in sovereign bonds, and requirement that traders settle their uncovered positions by the end of each trading day, were two key outcomes of Monday's Economic Affairs Committee vote on a draft EU regulation on short selling and credit default swaps". A press conference with rapporteur Pascal Canfin takes place later today: see here.

Europe: European Corporate Governance Forum - February meeting minutes published

The minutes of last month's meeting of the European Corporate Governance Forum have been published: see here (pdf). These provides a useful update concerning the European Commission's work in the fields of corporate governance and company law as well as some insights into the forthcoming green paper on corporate governance.

UK: going concern assessment enquiry launched by Financial Reporting Council

The Financial Reporting Council has today announced the start of an enquiry into going concern assessments: see here. The purpose of the enquiry is set out in the FRC's press release as follows:

... to identify lessons for companies and auditors addressing going concern and liquidity risks. The Inquiry will draw on the experience of companies and auditors who have had to address these issues in times of difficulty, including during the credit crisis. The Panel of Inquiry will recommend measures, if any, which are necessary to improve the existing reporting regime and related guidance for companies and auditors in relation to these matters".

Ireland: Government proposes binding governance code for listed companies

Following the recent election, Fine Gael and Labour have formed a coalition in Ireland and have published their joint programme for government: see here (pdf). Proposals are made with regard to corporate governance and financial regulation, including:

We will make good corporate governance the law, not an optional extra, and enact legislation to provide for binding code of practice for corporate governance, which will be obligatory for companies wishing to be listed on Irish stock exchange.

The new Government will re-structure bank boards and replace directors who presided over failed lending practices. We will ensure that the regulator has sufficient powers of pre-approval of bank directors and senior executives. To expedite this change-over we will openly construct a pool of globally experienced financial services managers and directors to be inserted into key executive and non-executive positions in banks receiving taxpayer support".

Monday 7 March 2011

UK: audit and accounting - reforms for small companies

In a speech delivered late last week, the Secretary of State for the Department for Business, Innovation and Skills - the Rt. Hon. Dr Vince Cable - announced the Government's intention to change the law regarding the audit requirements for small companies: see here. To quote from the speech:

... the UK gains a real advantage from upholding high standards in audit and accounting. But small company rules are stricter in the UK than in almost every else in the developed world. We will change the law to simplify small company audit rules, saving UK companies up to tens of millions in unnecessary audit fees. And we will reduce the costs for subsidiaries of larger companies. Small companies should also benefit from less complex financial reporting requirements; so we welcome the Accounting Standards Board consultation on the reporting requirements for 35,000 medium sized companies".

UK: the Eversheds Board report

The Eversheds Board Report has been published (but is not yet available in full online). A summary of the report's findings has been published here. Based on a study of 250 of the largest companies in Europe, the US and Asia Pacific between October 2007 and December 2009, the report argues that smaller boards (11 is said to be the optimal size), more female directors and a higher proportion of independent directors, are the "key boardroom components for company success".

Update: the report is not being made available online - which makes it difficult to comment in detail - but copies can be requested by following the instructions here. Main conclusions have been published here and include the finding that there is a positive correlation between share price performance and the number of independent directors on company boards. The question remains, of course, whether the components identified are causative of company success; correlation does not necessarily imply causation.

Friday 4 March 2011

UK: creating the Financial Conduct Authority - speech by FSA chief executive

The chief executive of the Financial Services Authority, Hector Sants, delivered a speech earlier this week in which set out his views on the regulatory improvements attainable with regard to consumer protection and markets through the creation of the new Financial Conduct Authority: see here. Mr Sants outlined the regulatory philosophy to be taken by the FCA and noted that "Good outcomes for society from regulation are less dependent on structure than the underlying regulatory philosophy and the quality of the judgements made".

Thursday 3 March 2011

UK: board effectiveness - new guidance from the Financial Reporting Council

The Financial Reporting Council has today published Guidance on Board Effectiveness which replaces the Good Practice Suggestions from the Higgs Report (2006): see here (pdf). The new guidance complements existing guidance published by the FRC and is intended to assist boards in their application of the principles of the UK Corporate Governance Code. The guidance is principally concerned with Sections A and B of the Code (leadership and effectiveness of the board) and, as the FRC has stressed, it is not intended to be prescriptive but to encourage board discussion over regarding the company's governance arrangements.

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

The Parliamentary Commerce Committee has published its report examining the Financial Markets (Regulators and KiwiSaver) Bill and has recommended that it be passed with amendments: see here (pdf). The Bill sets out proposals to reform the structure of financial regulation in New Zealand, including the creation of a new regulator: the Financial Markets Authority (FMA).

An interesting part of the Bill is that intended to give the FMA the power to exercise a person's right to bring civil action against a financial market participant, or to take over existing proceedings, where this is considered to be in the public interest. The Commerce Committee concluded that this power should be retained although it noted that it wished to see progress on a class actions Bill.

Europe: increasing the proportion of women on large listed company boards - last chance for self-regulation says EU Justice Commissioner

Earlier this week the EU Justice Commissioner, Viviane Reding, held a summit in Brussels to consider how to increase the number of women on the boards of large companies and whether self-regulation or regulation should be the way to make significant changes quickly. A report was published - available here (pdf) - which provides, amongst other things, data on the number of women on large listed companies across Europe. Commissioner Reding observed: "For the next 12 months, I want to give self-regulation a last chance. I would like companies to be creative so that regulators do not have to become creative". For further background information, see here.

UK: bringing the Bribery Act 2010 into force - no date yet

Yesterday, in the House of Lords, Lord Hannay of Chiswick asked Lord McNally (Minister of State, Ministry of Justice) when the Bribery Act (2010) would come into force (it received Royal Assent last April). Lord McNally provided this reply which did not impress Lord Hannay and others:

... the Government are committed to the implementation of the Bribery Act. We are urgently working on the guidance to commercial organisations to make it practical and useful for legitimate business and trade. After the guidance is published, there will be a three-month notice period before full implementation of the Act".

Hansard, the record of debate, is available here.

Wednesday 2 March 2011

UK: King and Turner on financial regulation reform

Lord Turner, the FSA chairman, delivered a speech last month in Cambridge titled Reforming finance: are we being radical enough? The speech, available here (pdf), was wide-ranging and well worth reading. Lord Turner asked what is meant by radicalism, which problems need to be fixed and how, and he returned to themes on which he has spoken before including the debate about whether, to use his words, "increased financialisation has delivered commensurate added value"?

Lord Turner argued that there are good reasons for rejecting the view that all of the increase in financial activity has delivered real economic value; there are, he notes, good reasons to suspect that what has taken place is a mix of value added and rent extraction. He explored the consequences of this conclusion for policy-makers in his speech and, with regard to financial regulation reform, argued that much has been done but more needs to be done, in particular (to quote directly):
  • Basel III is a major step forward, but in an ideal world, equity ratios would be set much higher.
  • We must understand the drivers of shadow banking and guard against the re-emergence of new risks in new financial mutations.
  • Complexity and interconnectedness are important in themselves, and specific regulatory action to offset the externalities created may be required.
  • We need to make a reality of macro-prudential oversight and policy response.
This final point provides a link with the appearance yesterday before the Treasury Select Committee of the Governor of the Bank of England, Mervyn King. Dr King made clear how regulation by the Bank (and authorities under its auspices) would be different from the approach adopted by the FSA. A useful report of his comments is available here. A video recording of the Committee's questioning is also available: see here (Windows Media) or here (Silverlight).

Tuesday 1 March 2011

UK: the taxation of 'disguised remuneration'

Draft legislation was published for comment last December in respect of arrangements intended to 'disguise' remuneration in order to avoid or defer income tax and/or national insurance contributions: see here (pdf). In response to comments received, HMRC has published FAQs and indicated where the proposed provisions require amendment: see here (pdf). In response to concerns about the effect of the proposed legislation on deferred rewards, the FAQ document states:

The policy intention is that the new rules should apply to arrangements involving a third party to reward employees and directors which seek to avoid, defer or reduce income tax and NICs and also to arrangements that are used as a tax‐advantaged way to save for retirement, using an employer financed retirement benefit scheme (EFRBS) as an alternative to, or to top up, savings in a registered pension scheme. However, it is not the policy intention that the new rules should apply to deferred rewards which are subject to a specified vesting date and on which income tax under PAYE and NICs will be due, particularly where the reward is subject to meaningful and time‐specific conditions which there is a realistic chance will not be met".

Europe: Commission proposal to connect European business registers

The European Commission has adopted a proposal to connect business registers across Europe: see here. A provisional text of the proposal is available here (pdf, an impact assessment here (pdf) and FAQs here.