Thursday 30 June 2011

UK: the future of banking regulation - speech by Hector Sants

The chief executive of the Financial Services Authority, Hector Sants, delivered an interesting speech yesterday on the subject of banking regulation: see here. Of particular interest was what he said regarding the trade offs that will need to be considered by policy makers, and also the new regulatory authorities, with respect to various policy objectives. Mr Sants also took the opportunity, as he has frequently done, to note that the FSA and the new regulatory authorities operate as an extension of the broader European policy-making framework.

Wednesday 29 June 2011

UK: key facts and trends in the accountancy profession

The Professional Oversight Board, part of the Financial Reporting Council, has published the ninth edition of Key Facts and Trends in the Accountancy Profession: see here (pdf). The reports notes, amongst other things, a continuing decline in the number of registered audit firms and a decline in the fee income received by audit firms for non-audit work provided to their audit clients.

Tuesday 28 June 2011

UK: Scotland: discussion paper on moveable transactions published by Law Commission

The Scottish Law Commission has published a discussion paper on moveable transactions, in which it proposes the creation of a new security right: see here (pdf). The discussion paper contains much comparative research and also refers to academic literature discussing the economic benefits of secured transactions. The Law Commission's project page is available here.

UK: the FCA's approach to regulation

The Financial Services Authority yesterday published a document setting out the regulatory approach of the new Financial Conduct Authority: see here (pdf). Whilst the FCA"s supervisory framework is still being developed, the document indicates that much greater intervention in retail financial services markets is likely along with greater proactivity in the promotion of market efficiency and resilience.

Monday 27 June 2011

Australia: directors' duties and financial statements

The Federal Court delivered its judgment today in Australian Securities and Investments Commission v Healey [2011] FCA 717. The decision has been described by Mr Greg Medcraft, the chairman of the Australian Securities and Investments Commission, as a "landmark decision in Australian corporate governance": see here. It concerned the liability of directors (executive and non-executive) with regard to financial reports which failed to disclosure significant matters, including the existence of substantial short-term liabilities. The trial judge stated (para. [14] and paras. [15] to [22]):

A director is an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of a company. The higher the office that is held by a person, the greater the responsibility that falls upon him or her. The role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors ...

... What is required is that such documents [i.e., the financial reports], before they are adopted by the directors, be read, understood and focussed upon by each director with the knowledge each director has or should have by virtue of his or her position as a director. I do not consider this requirement overburdens a director, or as argued before me, would cause the boardrooms of Australia to empty overnight. Directors are generally well remunerated and hold positions of prestige, and the office of director will continue to attract competent, diligence and intelligent people.

The case law indicates that there is a core, irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor. There is a responsibility to read, understand and focus upon the contents of those reports which the law imposes a responsibility upon each director to approve or adopt.

All directors must carefully read and understand financial statements before they form the opinions which are to be expressed in the declaration required by s 295(4) [of the Corporations Act 2001]. Such a reading and understanding would require the director to consider whether the financial statements were consistent with his or her own knowledge of the company’s financial position. This accumulated knowledge arises from a number of responsibilities a director has in carrying out the role and function of a director. These include the following: a director should acquire at least a rudimentary understanding of the business of the corporation and become familiar with the fundamentals of the business in which the corporation is engaged; a director should keep informed about the activities of the corporation; whilst not required to have a detailed awareness of day-to-day activities, a director should monitor the corporate affairs and policies; a director should maintain familiarity with the financial status of the corporation by a regular review and understanding of financial statements; a director, whilst not an auditor, should still have a questioning mind.

A board should be established which enjoys the varied wisdom, experience and expertise of persons drawn from different commercial backgrounds. Even so, a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience or expertise. A director is not relieved of the duty to pay attention to the company’s affairs which might reasonably be expected to attract inquiry, even outside the area of the director’s expertise.

The words of Pollock J in the case of Francis v United Jersey Bank (1981) 432 A 2d 814, quoted with approval by Clarke and Sheller JJA in Daniels v Anderson (1995) 37 NSWLR 438, make it clear that more than a mere ‘going through the paces’ is required for directors. As Pollock J noted, a director is not an ornament, but an essential component of corporate governance.

Nothing I decide in this case should indicate that directors are required to have infinite knowledge or ability. Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her. Such a responsibility arises in this proceeding in adopting and approving the financial statements. Because of their nature and importance, the directors must understand and focus upon the content of financial statements, and if necessary, make further enquiries if matters revealed in these financial statements call for such enquiries.

No less is required by the objective duty of skill, competence and diligence in the understanding of the financial statements that are to be disclosed to the public as adopted and approved by the directors.

No one suggests that a director should not personally read and consider the financial statements before that director approves or adopts such financial statements. A reading of the financial statements by the directors is not merely undertaken for the purposes of correcting typographical or grammatical errors or even immaterial errors of arithmetic. The reading of financial statements by a director is for a higher and more important purpose: to ensure, as far as possible and reasonable, that the information included therein is accurate. The scrutiny by the directors of the financial statements involves understanding their content. The director should then bring the information known or available to him or her in the normal discharge of the director’s responsibilities to the task of focussing upon the financial statements. These are the minimal steps a person in the position of any director would and should take before participating in the approval or adoption of the financial statements and their own directors’ reports."

USA: the auditor's reporting model - concept release published by PCAOB

The Public Company Accounting Oversight Board is seeking views on a concept release published last week concerning the auditor's reporting model: see here (pdf). The concept release sets out several changes the purpose of which is to increase the transparency and relevance of the audit for the users of financial statements. A short fact sheet is available here (pdf). Consultation responses will be published here.

Europe: mandatory gender quotas for bank boards?

The Guardian newspaper reported last week that a proposal requiring at least 30% of bank directors to be female was under consideration by European policymakers as part of the fourth capital requirements directive. A more recent report in the Financial Times newspaper suggests that this is unlikely and notes the opposition of the Justice Commissioner, Viviane Reding, for quotas at the current time. The Financial Times also reports that an early draft of the Directive proposed limits on the number of directorships held by bank directors.

Friday 24 June 2011

UK: interim PFC publishes Financial Stability Report

The interim Financial Policy Committee published its first Financial Stability Report today: see here or here (pdf). The report advises UK banks that they should take the opportunity provided by strong earnings to build capital during the transition to the new Basel III capital requirements. The Committee expects the Financial Services Authority to ensure that the proportion of retained earnings by banks is consistent with this advice.

Thursday 23 June 2011

Australia: the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011

The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 received its third reading in Senate earlier this week and has now been passed by both Houses: see here. The Bill will become an Act when Assent is given. A copy of the Bill, as passed by both Houses, is available: see here or here (pdf) or here (Word). A summary of the Bill is available here. An explanatory memorandum is available here and here (pdf). The  Act will introduce, amongst other things, the so-called 'two strikes and re-election' process in respect of the shareholders' advisory vote on the remuneration report.

Update (29 June 2011): the Bill received Assent on 27 June (see here) and a copy of the Act is available here.

Wednesday 22 June 2011

UK: Vince Cable on corporate governance - the Kay review, remuneration and women on boards

In a speech delivered today, the Secretary of State for the Department for Business, Innovation and Skills - the Rt. Hon. Dr Vince Cable MP - observed that whilst there was much that was good about the UK corporate governance framework, the financial crisis had highlighted long-standing concerns: are there, in Dr Cable's words, "systemic flaws in the way companies are owned and managed in the UK"?

Dr Cable used his speech to launch an independent review considering the effect of UK equity markets on the competitiveness of UK business. The review's terms of reference are available here (pdf). The review's principal purpose will be "To examine the mechanisms of corporate control and accountability provided by UK equity markets and their impact on the long term competitive performance of UK businesses, and to make recommendations". In doing so the following areas have been identified for study (to quote directly from the terms of reference):
  • Whether the timescales considered by boards and senior management in evaluating corporate risks and opportunities, and by institutional shareholders and fund managers in making investment and governance decisions, match the time horizons of the underlying beneficiaries.
  • How to ensure that shareholders and their agents give sufficient emphasis to the underlying competitive strengths of the individual companies in which they invest.
  • Whether the current functioning of equity markets gives sufficient encouragement to boards to focus on the long term development of their business.
  • Whether Government policies directly relevant to individual quoted companies (such as regulation and procurement) sufficiently encourage boards to focus on the long term development of their business.
  • Whether Government policies directly relevant to institutional shareholders and fund managers promote long-term time horizons and effective collective engagement.
  • Whether the current legal duties and responsibilities of asset owners and fund managers, and the fee and pay structures in the investment chain, are consistent with asset owners’ long term objectives.
  • Whether there is sufficient transparency in the activities of fund managers, clients and their advisors, and companies themselves, and in the relationships between them.
  • The quality of engagement between institutional investors and fund managers and UK quoted companies, and the importance attached to such engagement, building on the success of the Stewardship Code.
  • The impact of greater fragmentation and internationalisation of UK share ownership, and other developments in global equity markets, on the quality of engagement between shareholders and quoted companies.
  • Likely trends in international investment and in the international regulatory framework, and their possible long term impact on UK equity markets and UK businesses.
Elsewhere in his speech, Dr Cable stated that a consultation paper on changes to company reporting, including increased disclosure regarding remuneration and its relationship with company performance, would be published next month. He also stated that in this context greater transparency was not enough and that he would be exploring other ways to "intervene sensibly" and "put an end to the culture of rewards for failure". With regard to increasing the proportion of women on company boards, Dr Cable stated that the Government was at the moment waiting to see what would be achieved by the voluntary approach advocated by Lord Davies.

Ireland: funds industry corporate governance code - draft published by IFIA

The Irish Funds Industry Association has published, for consultation and feedback, a draft of its voluntary corporate governance code for the funds industry: see here (pdf). It is proposed, following discussions with the Central Bank, that the final version will be published at the end of July. The Central Bank strongly recommends adoption of the Code which will operate on a comply or explain basis.

Tuesday 21 June 2011

Singapore: company law reform - consultation on Companies Act recommendations

The Ministry of Finance, in conjunction with the Accounting and Corporate Regulatory Authority, is seeking comments on a Steering Committee review report regarding the Companies Act: see here. The Committee's report is available here (pdf) and a short summary of its principal recommendations is available here (pdf).

The report contains over 200 recommendations across the following six chapters: [1] Directors, [2] Shareholders' Rights and Meetings, [3] Shares, Debentures, Capital Maintenance, Acquisitions and Amalgamations, [4] Accounts and Audit, [5] General Company Administration and [6] Registration of Charges. There is much of interest, not least because of the report's comparative focus and the consideration given to some of the changes introduced in the UK by the Companies Act (2006). For example, in Chapter One the Committee recommends that the duties of directors should not be codified along the lines found in the UK's Companies Act (2006) and states that it would be better to wait and see if codification in the UK has proved useful. In Chapter Two, the Committee recommends that a buy-out provision should not be introduced to enable a dissenting minority shareholder to require the company to buy him out at fair value. The Committee has also recommended that the law should be amended to extend the availability of the statutory derivative action to Singapore-incorporated companies that are quoted on a securities market whether in Singapore or overseas.

Australia: insider trading and the meaning of 'information'

The Supreme Court of Western Australia (Court of Appeal) gave judgment last week in R v Mansfield [2011] WASCA 132. This is an interesting and important decision, citing authorities from the UK and USA, concerning the meaning of 'information' in the context of the insider trading offence under Section 1043A of the Corporations Act 1991. The court held, by majority, that the fact that information was untrue did not result in it ceasing to be information for the purposes of Section 1043A.

Monday 20 June 2011

UK: supervising insurers - the PRA's approach

The Bank of England and Financial Services Authority have jointly published a document setting out how the new Prudential Regulation Authority will approach the supervision of insurers: see here (pdf).

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

The Companies Act 2006 (Annual Returns) Regulations 2011 were laid before Parliament last week and come into force on 1 October this year: see here or here (pdf). The Regulations make amendments to the Companies Act (2006) in respect of the information that certain companies will be required to provide in their annual return. An explanatory memorandum is available here (pdf).

Friday 17 June 2011

USA: say on pay - a "cruel hoax" says Bob Monks

Bloomberg Businessweek reports that at 1,998 companies where shareholders have had the opportunity to exercise a 'say on pay' vote, at only 32 were a majority of votes cast against: see here. The article quotes Bob Monks' response: "Say-on-pay is at best a diversion and at worst a deception ... You only have the appearance of reform, and it's a cruel hoax".

UAE: Dubai: authorised firms - governance and remuneration standards

The Dubai Financial Services Authority has published a consultation paper setting out proposed changes to the corporate governance and remuneration standards applicable to authorised firms and institutions, including greater clarity with regard to the purpose of those standards: see here (pdf). Appendices indicating the effect of the changes on the relevant DFSA rulebooks are available here.

Thursday 16 June 2011

UK: financial regulation reform white paper and draft bill published

The Government has today published its white paper A new approach to financial regulation: the blueprint for reform and draft Bill: see here (pdf). Background information is available here. The new regulatory framework will be achieved through a Bill making amendments to the Financial Services and Markets Act (2000), to be introduced in Parliament later this year.

UK: the role of audit and market concentration - Government response to Economic Affairs Committee report

The chairman of the House of Lords Economic Affairs Committee, Lord MacGregor of Pulham Market, has said that the Government’s response to the Committee's recent report on audit market concentration and the auditor's role is "not good enough": see here.

There is much in the Government's response - available here - in respect of its current position on various governance and financial reporting matters. For example, the Government rejects imposing a ban on audit firms providing non-audit services to their audit clients, because it believes that the APBs Ethical Standards are sufficient to ensure auditor independence. It notes, nevertheless, that the it would be desirable for company audits to be put out to tender more frequently than is currently the case. The response also states that BIS and the FRC are expected to seek views on possible reforms to the FRC's powers later this year.

UK: corporate governance raised at yesterday's PMQs

The removal of several non-executive directors from the board of ENRC, a FTSE100 listed company, by its controlling shareholders has remained in the news, not least because the company's general counsel has since resigned. The situation raises many questions concerning the extent to which the UK's governance framework for listed companies is appropriate for a company dominated by a few shareholders. The company's governance reached Prime Minister's Questions yesterday in Parliament where, in response to a question referring to ENRC and governance more generally, the Prime Minister stated (Hansard, col 778):

"... we want companies to come to London to access capital and float on the main market or the AIM market. It is one of the attractions of Britain that we are an open global economy, but when those companies come, they must understand that we have rules of corporate governance that are there for a reason, and they need to obey those rules. I am sure my right hon. Friend the Chancellor will address that not only in his speech tonight, but in the papers that we will be publishing in subsequent days".

It will be interesting to see what is forthcoming. What are these rules that must be obeyed to which the Prime Minister referred? It would be difficult to argue that he is referring to the UK's Corporate Governance Code given that it operates on the basis of 'comply or explain'.

Wednesday 15 June 2011

Singapore: revised corporate governance code - draft published by MAS

The Corporate Governance Council formed by the Monetary Authority of Singapore has published a consultation paper setting out proposed changes to the Corporate Governance Code to which listed companies are subject on a comply or explain basis: see here (pdf). A draft copy of the revised Code is available here (pdf).

The proposed changes are wide-ranging and include greater disclosure with regard to individual director remuneration and an increase in the proportion of independent directors on the board from the current one third to at least a half where: [a] the same person is chairman and chief executive; or [b] the chairman and chief executive are immediate family members; or [c] the chairman and chief executive are both part of the management team; or [d] the chairman is not independent.

Tuesday 14 June 2011

UK: the Bribery Act 2010 (Commencement) Order 2011

The Bribery Act 2010 (Commencement) Order 2011 was made on 7 June - see here or here (pdf) - and provides that the Bribery Act (2010) comes into force on 1 July.

UK: the FSA's 2010/11 annual report

The Financial Services Authority published its 2010/11 annual report yesterday: see here (pdf). Today's newspapers focus on the reported measure of market cleanliness in respect of takeovers, i.e. the proportion of abnormal share price movements prior to the takeover announcement: 21.2%. Elsewhere the report stresses the significance of the change introduced at the start of the year with regard to the European regulatory architecture and the creation of the new European Supervisory Authorities: the fact that the FSA (and it successor bodies) have a policy influencing rather that policy making role.

Monday 13 June 2011

Hong Kong: fiduciary obligation to consider shareholder interests in context of share issue

The High Court (Court of First Instance) gave judgment last week in Passport Special Opportunities Master Fund, LP v Esun Holdings Ltd (action number 2722 of 2008): see here or here (Word). This is a very interesting decision concerning the duties of directors in which the trial judge recognised the existence of a fiduciary obligation to have regard to the interests of shareholders when exercising the power to issue shares. To quote from the judgment (at paras. [147], [150] and [152]):

...although I was initially attracted by [the] submission that it would be inappropriate for a court to interfere with the decision of directors in relation to commercial questions such as whether or not, and how, funds should be raised for the company concerned once it is established that the power was exercised in good faith for proper purposes, and was not tainted by an improper primary motivation, I have come to the conclusion that there is an obligation of a fiduciary nature imposed upon directors, when deciding whether or not, and in what manner, to embark on an issue of new shares, to have regard to the interests of shareholders, and to exercise the power (if it is decided to do so) in a way that is fair as between different groups of shareholders ...

... While I accept that the court should not set itself up as a tribunal to which disgruntled litigants can appeal against the commercial decisions of the board of directors, I do not think that this excludes the possibility that the court can and should, in an appropriate case, inquire into the manner in which the decision was reached. If it can be established that the decision was reached with no consideration at all for a clearly relevant factor, it is not immediately apparent why it should not be subject to challenge ...

... I do not think that this involves a contravention of the principle that the court should not substitute its own judgment for the business judgment of the directors. If it is shown that the directors have taken account of the relevant factors, and have not acted for improper purposes, the weight that they choose to assign to the various factors which they properly take into account is a matter for them, and not something with which the court should concern itself".

Note: the Companies Bill is currently before the Bills Committee in the Legislative Council: see here. The Bill includes a partial codification of directors' duties (notably the standard of skill, care and diligence). Support for a more comprehensive codification of directors' general duties was not forthcoming at the consultation stage (see here, pp. 8 to 11, pdf).

Friday 10 June 2011

UK: Companies House - edition 71 of Register published

Companies House has published the spring 2011 edition of its newsletter Register: see here (pdf). This reports the intention of Companies House to move towards electronic filing for the majority of returns and incorporations by March 2013. Included elsewhere in the newsletter there is a short round-up of some recent company law cases.

Thursday 9 June 2011

Ireland: Corporate Governance Code for Credit Institutions and Insurance Undertakings - FAQs published

Last year the Central Bank published a corporate governance code for credit institutions and insurance undertakings: see here (pdf). A set of frequently asked questions has recently been published with regard to the application of the code: see here (pdf).

Wednesday 8 June 2011

UK: survey of board evaluations - ICSA report

ICSA has published the results of its annual survey of how board evaluations have been carried out by the largest UK listed companies: see here (pdf). The survey reports that 33 of the 200 companies in the survey undertook some form of external board evaluation. The UK's Corporate Governance Code, published last year, recommends that evaluation of FTSE350 company boards should be externally facilitated at least every three years (Code Provision B.6.2). Main Principle B.6. states that the board should, on an annual basis, evaluate its own performance and that of its committees and individual directors.

Australia: annual compliance reporting by credit rating agencies - ASIC consultation paper published

The Australian and Securities and Investments Commission has published a consultation paper concerning the annual compliance reporting of credit rating agencies: see here (pdf).

Tuesday 7 June 2011

Europe: ESMA's supervision of credit rating agencies

The European System of Financial Supervisors was introduced at the start of this year and with it came new regulatory authorities, building on the earlier Lamfalussy level 3 committees, including the European Securities and Markets Authority. The ESMA will be responsible for the supervision of credit rating agencies in Europe from 1 July 2011. The Regulation providing for its role in this regard - Regulation (EU) No. 513/2011 - has been published in the Official Journal of the European Union: see here (pdf).

For further information about the ESFS, see: Ferran, Eilis, "Understanding the New Institutional Architecture of EU Financial Market Supervision", University of Cambridge Faculty of Law Research Paper No. 29/2011, available at SSRN here.

Monday 6 June 2011

New Zealand: update on securities law reform

Further decisions regarding the proposed reform of New Zealand securities law have been made by the Cabinet. A paper outlining these decisions has been published (see here, pdf) - together with a press release (see here). A draft of the proposed legislation is expected in August. Background information is available here.

Friday 3 June 2011

USA: the audit - rethinking its relevance, credibility and transparency

Yesterday, at the SEC and Financial Reporting Institute 30th Annual Conference, the chairman of the Public Company Accounting Oversight Board (James R. Doty) delivered a speech titled Rethinking the Relevance, Credibility and Transparency of Audits: see here. Mr Doty explained that the PCAOB would, this month, be publishing a concept release concerning the auditor's reporting model. He also referred to the work of the PCAOB with regard to audit inspections and the failures identified. Against this background he stated that it was necessary for the PCAOB to consider audit firm tenure and whether there should be a limit on the length of the auditor's engagement. The issues here, and concerning the mindset required of auditors, are to be the subject of a further concept release.

Singapore: proposed changes to Listing Rules

The Singapore Exchange is seeking views on proposed changes to its Listing Rules which would require primary-listed issuers to hold their annual general meetings in Singapore, have poll voting for all resolutions and improve disclosure of the results of voting at general meetings. The consultation paper is available here (pdf) and an overview of the proposed changes is available here.

Thursday 2 June 2011

Ireland: company law reform - Companies Bill, Parts 1 to 15 published

The Department of Jobs, Enterprise and Innovation has published Parts 1 to 15 of the draft Companies Bill: see here. These apply to private companies limited by shares. Part 4, titled Corporate Governance is available here (pdf) and Part 5, titled Duties of Directors and Other Officers, is available here (pdf). For background information see here.

UK: England and Wales: costs and unfair prejudice petitions

The High Court gave judgment yesterday in Re Southern Counties Fresh Foods Ltd. [2011] EWHC 1370 (Ch). The court was required to consider which party should bear the costs in the context of a petition under Section 994 of the Companies Act (2006) (the unfair prejudice remedy). The decision contains a useful overview of the relevant principles, the trial judge noting that whilst there are no special principles applicable to unfair prejudice petitions there may well be facts commonly present and not found in other types of litigation.

Wednesday 1 June 2011

Europe: Council of the EU - SPE and reporting requirements

The Council of European Union met earlier this week: see here (pdf) for an overview of discussion and the decisions reached. A compromise text regarding the creation of a new corporate form - the European Private Company (Societas Privata Europaea) - was discussed but unanimity of agreement was not secured. Agreement was, however, reached with regard to legislation allowing member states to exempt very small enterprises (known as "micro-entities") from accounting and financial reporting obligations.