Friday 30 September 2011

Australia: APRA's discussion paper on prudential standards for superannuation

The Australian Prudential Regulation Authority has published for consultation its proposed prudential standards for the superannuation industry: see here (pdf). Amongst the matters covered are governance, risk management outsourcing and auditing.

UK: England and Wales: directors and company jointly and severally liable for discrimination compensation

The Employment Appeal Tribunal gave judgment earlier this week in Bungay v Saini [2011] UKEAT 0331_10_2709 and held that the Employment Tribunal was entitled to find that a company and two if its directors were jointly and severally liable to pay compensation in a claim for race discrimination.

Thursday 29 September 2011

UK: ABI publishes board effectiveness report and updated remuneration principles

The Association of British Insurers yesterday published a report on boardroom effectiveness (see here, pdf) and an updated edition of its remuneration principles (see here or here, pdf).

UK: Scotland: shareholder approval of directors' long-term service agreements

Should the chief executive of a public company know whether his employment contract had received shareholder approval under Section 188 of the Companies Act (2006)? Yes, according to the opinion of Lodge Hodge, given last week, in Bain v The Rangers Football Club Plc [2011] CSOH 158.

Wednesday 28 September 2011

UK: Miliband wants employee representation on remuneration committees

Yesterday, at the Labour Party annual conference, the party's leader - the Rt. Hon. Ed Miliband MP - delivered a speech in which he argued that more should be done to encourage those businesses "producing" in preference to those business he described as "predators": see here. Not much detail was provided on how this might be done but it would be unrealistic to expect detailed proposals at this early stage in policy development. This said, Mr Miliband did say that remuneration committees should have an employee representative, something on which the present Government is seeking views in its consultation on executive remuneration.

Europe: Commission publishes financial transaction tax proposal

The European Commission today published its proposal for a Directive introducing a common framework for a tax on financial transactions in the 27 Member States: see here (pdf). According to the Commission, ten Member States already have a form of financial transaction tax in place. The Directive would introduce minimum tax rates and harmonise the taxation of financial transactions. For further information see: press release | FAQs | citizens' summary (pdf) | impact assessment (zip file containing 19 pdfs) | summary of the impact assessment (pdf) |

UK: the FRRP's annual report and improving the operation of 'comply or explain'

The Financial Reporting Review Panel published its 2011 annual report today: see here (pdf). Of particular interest is what the Panel says regarding corporate governance statements: explanations for departures from the Combined Code (now the UK Corporate Governance Code) could often be clearer and more informative. In this regard, the Panel's report states that the FRC will be facilitating a debate about the characteristics of an 'explanation' in order to decide what shareholders should expect from boards who choose to 'explain' rather than 'comply'. If a consensus can be found, consideration will be given to what role, if any, the Panel should have in encouraging companies to provide more informative explanations. One suggestion outlined in the report would be to permit shareholders to contact the Panel if a company failed to respond to a request for a clearer explanation. The Panel's role would be to raise the matter with the company. The report makes clear, however, that the Panel would not make a judgment about the appropriateness of the company's governance arrangements: its remit would be limited to the explanation of those arrangements provided by the company.

Elsewhere in the report, the Panel expresses concern with the quality of the reports and accounts of some smaller listed and AIM quoted companies.

Tuesday 27 September 2011

Europe: FT reports on draft of audit policy regulation

The lead article on the front page of today's Financial Times newspaper reads "Big audit firms face Brussels onslaught": see here. The authors of the article refer to a draft European Regulation which they have seen which would require large companies to have two auditors, one of which must be from outside the Big Four. Mandatory rotation is also proposed, with a time limit of nine years set. The authors state that the proposals have the strong support of the Internal Market Commissioner, Michel Barnier, but rightly note the likely opposition of some Member States.

Monday 26 September 2011

UK: NHS foundation trusts and the role of governors

The House of Commons Health Committee recently published its report Annual accountability hearing with Monitor: see here or here (pdf). Monitor is the independent regulator of National Health Service foundation trusts (last year it published an updated edition of its Code of Governance for NHS Foundation Trusts). Under the Health and Social Care Bill, Monitor's role will change and foundation trust governors will have much greater responsibilities in respect of the accountability of the foundation trust board. Whether governors will be able to fulfil these increased expectations is a concern for the Committee, which recommends that the Government should, if necessary, provide additional resources to Monitor (for the purposes of supporting boards and governors) or consider delaying the introduction of the governors' new responsibilities.

Friday 23 September 2011

UK: pre-legislative scrutiny of the Financial Services Bill - the FSA's submission to the Joint Select Committee

The Financial Services Authority has published the memorandum it has sent to the Joint Select Committee on the Financial Services Bill, following the Committee's call for evidence in respect of its pre-legislative scrutiny of the Bill. The FSA welcomes much that is in the Bill but highlights areas where greater clarity is required including, for example, with regard to the objective given to the proposed Financial Conduct Authority for promoting efficiency and choice in the market for financial services. The FSA also identifies areas where it would welcome further Parliamentary debate, including with regard to the accountability of regulators and where, in particular, the line is to be drawn between accountability and the autonomy of regulators to make judgments regarding rule-making and in relation to individual firms.

Other evidence receivied by the Committee, in writing and orally, is available here.

UK: manufactured overseas dividends - clarification of tax treatment

The Government has announced, in a recently published Ministerial Statement (here, pdf), that it will be clarifying in the next Finance Bill the corporation tax treatment of manufactured overseas dividends (MODs) received by companies. Draft legislation has been published here (pdf). This follows the disclosure of a scheme under which the recipient of a MOD claims to have received it under deduction of UK income tax, which it then seeks to set off against its corporation tax liability, or to have repaid, in circumstances where no actual UK income tax had been paid. The Government has also announced that it will issue a consultation paper after next year's budget setting out further changes to the tax rules on MODs.

Singapore: Listing Rule amendments

Following a consultation which ended last year, the Singapore Exchange has published various amendments to its Mainboard Listing Rules and Catlist Listing Rules with regard to corporate governance: see here.

Thursday 22 September 2011

UK: gender diversity of FTSE350 boards - institutional investors write to chairmen

Today's Telegraph newspaper reports that seven institutional investors have written to 250 chairmen of FTSE350 companies asking them to disclose by the end of next week, in a regulatory statement, their plans for employing more women directors: see here. It is also reported that at the start of this month only eight companies had publicly agreed to meet the targets set by Lord Davies with regard to the proportion of female directors on the board.

New Zealand: proposed changes to the financial reporting framework

Following a review of New Zealand's financial reporting framework, the Government has published wide-ranging reform proposals: see here.

Wednesday 21 September 2011

Europe: credit rating agencies - ESMA's proposed Regulatory Technical Standards

The European Securities and Markets Authority has published for consultation its proposed Regulatory Technical Standards for credit rating agencies: see here. These Standards contain the disclosure obligations and rules which such agencies will be required to meet within the framework established by Regulation (EC) Number 1060/2009 of the European Parliament and of the Council on credit rating agencies.

UK: the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2011

The Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2011 was made last week and came into force on 16 September: see here or here (pdf). The Order amends the Financial Services and Markets Act 2000 (Carrying on Regulated Activities By Way of Business) Order 2001 in order to clarify when a sale and rent back agreement will be regarded as being entered into "by way of business" for the purposes of Section 22 of the Financial Services and Markets Act (2000). Further background information, including an explanation of the policy background, is available in the explanatory memorandum accompanying the Order: see here (pdf).

UK: audit quality - the Audit Inspection Unit's report on firms auditing ten or fewer entities

The Professional Oversight Board - part of the Financial Reporting Council - has published the Audit Inspection Unit's report on its inspections for 2010/11 at firms auditing ten or fewer entities: see here (pdf). The AIU reviewed selected aspects of nine audits and found that they all required improvement. In respect of four of these audits, the AIU found that significant improvement was required. The AIU identified the quality of audits in respect of multi-national groups as a major concern. Indeed, possible disciplinary action may follow as a result of the AIU's investigations in respect of two of the audits requiring significant improvement. Other areas for improvement identified by the AIU included the going concern assessment and the standard of reporting to audit committees.

Tuesday 20 September 2011

UK: England and Wales: giving advice or providing information?

The High Court gave judgment earlier this month in Rubenstein v HSBC Bank Plc [2011] EWHC 2304 (QB). Amongst the matters considered, in the context of a claim for the alleged mis-selling of a financial product, was the difference between the giving of advice and the provision of information. The trial judge was reluctant to provide a comprehensive definition of what would constitute the giving of advice in an investment context, but nevertheless suggested (at para. [82]):

... the starting point of any inquiry as to whether what was said by an IFA in a particular situation did or did not amount to advice is to look at the inquiry to which he was responding. If a client asks for a recommendation, any response is likely to be regarded as advice unless there is an express disclaimer to the effect that advice is not being given. On the other hand, if a client makes a purely factual inquiry such as "What corporate bonds are currently yielding X%?" or "How does this structured product work?", it is not difficult to conclude that a reply which simply provides the relevant information is no more than that."

Monday 19 September 2011

UK: Government consults on executive remuneration and outlines new narrative reporting framework

The Department for Business, Innovation and Skills published a couple of consultation papers today. The first concerns executive remuneration and is available here (pdf). In this paper the Government asks fifteen questions concerning the structure of remuneration, the role of remuneration committees, the role of shareholders and promoting best practice. Question one, for example, asks whether providing shareholders with a binding vote on remuneration would improve their ability to hold companies to account on pay and performance.

The second paper, unlike the first, contains specific proposals. It sets out the Government's proposals for a new narrative reporting framework: see here (pdf). The Government proposes that the current Directors' Report should be abolished and that quoted companies and medium and large companies should publish a Strategic Report (replacing the Business Review). All companies will be required to prepare an Annual Directors' Statement. Major changes are proposed with regard to the Directors' Remuneration Report, which will become part of the Annual Directors' Statement with important information moving to the Strategic Report. In addition, changes to what quoted companies must disclose with regard to remuneration are proposed, including more information on the relationship between pay and performance.

Friday 16 September 2011

UK: IRM guidance on risk appetite and tolerance

The Institute of Risk Management has published a guidance paper for directors and others with regard to the UK Corporate Governance Code principle that the board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives: see here (pdf).

Europe: empty voting - ESMA's call for evidence

The European Securities and Markets Authority has published a call for evidence concerning empty voting: see here (pdf). The purpose of the call for evidence is to collect information and evidence on the prevalence and effects of empty voting. This will enable the ESMA to consider whether action at European level is required.

Thursday 15 September 2011

UK: the Kay Review of UK Equity Markets and Long-Term Decision Making - call for evidence published

In a speech delivered earlier this year, the Secretary of State for the Department for Business, Innovation and Skills - the Rt. Hon. Dr Vince Cable MP - announced the launch of an independent review, chaired by Professor John Kay, to consider the effect of UK equity markets on the competitiveness of business. The review's terms of reference were published at this time: see here (pdf). Today the terms of reference were expanded upon in a call for evidence - see here (pdf) - and information about the broad philosophy of the review was given in a speech by Professor Kay: see here (pdf). A timetable for the review, and other information, is available here.

UK: Scotland: payment of 'discretionary bonus for past services' was breach of duty

The duty to act bona fide in the interests of the company, upon which Section 172 of the Companies Act (2006) is based, is a subjective duty. What matters is whether the director honestly believed that he was acting in the interests of the company. Establishing a breach of this duty is unlikely to be easy but, as Jonathan Parker J. observed in Regentcrest v Cohen [2001] BCC 494, it will be much harder for a director to persuade the court that he honestly believed his actions were in the interests of the company where those actions resulted in substantial detriment to the company.

A good illustration of this point is provided by the opinion of Lord Glennie in Dryburgh v Scotts Media Tax Ltd. [2011] CSOH 147, which was given last week. In respect of transactions which substantially depleted a company's assets by £756,649 - described by a director as a form of discretionary bonus for past services - Lord Glennie reached the opinion that this director did not believe that transactions were in the interests of the company and he was, therefore, in breach of the duty to act bona fide in the interests of the company. However, Lord Glennie held that this claim, together with another for negligence, was prescribed (i.e., the time for bringing the claim against the director had passed, in accordance with the Prescription and Limitation (Scotland) Act (1973)).

Wednesday 14 September 2011

UK: the Overseas Companies (Execution of Documents and Registration of Charges) (Amendment) Regulations 2011

The Overseas Companies (Execution of Documents and Registration of Charges) (Amendment) Regulations 2011 were laid before Parliament on 7 September and come into force on 1 October: see here or here (pdf). An explanatory memorandum is available here (pdf). One of the purposes of the Regulations is to remove the requirement imposed on certain overseas companies to register with the Registrar of Companies any charge created over UK property. Further guidance has been published by Companies House: see here.

India: company law reform and the Companies Bill

It looks as if we are moving closer to the long awaited updating of company law in India. The Companies Bill 2009 was introduced in the Lok Sabha on 2009 and later referred to the Standing Committee on Finance for examination. The Committee's report was published in 2010 - see here (pdf) - and, since then, further work on the Bill has been undertaken. In a recent interview the Minister for Corporate Affairs said that an "entirely rewritten" Bill - the Companies Bill 2011 - would be introduced in the winter session of Parliament.  A transcript of the interview is available here, in which the Minister provides some insights regarding the contents of the Bill, including fixed terms for the external auditor and independent directors.

Tuesday 13 September 2011

UK: the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011

The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011 were laid before Parliament on 8 September and come into force on 1 October: see here or here (pdf). An explanatory memorandum is available here (pdf).

The Regulations provide a new classification of audit and non-audit services, replacing that found in the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 and used by large companies and groups for the purposes of the disclosure of fees paid to their auditor. The classification is intended to be linked more clearly to that found in Directives 78/660/EEC and 83/349/EEC and the APB's Revised Ethical Standards for Auditors.

Canada: Toronto Stock Exchange proposes governance amendments for listed issuers

The Toronto Stock Exchange has published for consultation proposed changes to Part IV ("Maintaining a Listing - General Requirements") of its Company Manual: see here. The proposed amendments would require, amongst other things, issuers listed on the Exchange to elect directors individually and on an annual basis. The Exchange is also proposing greater disclosure with regard to the manner in which directors are elected: issuers will be required to disclose whether directors are elected through majority voting. Where majority voting is not adopted, disclosure of the practice adopted will be required together with an explanation of why majority voting has not been adopted.

Monday 12 September 2011

UK: the ICB's final report - ring-fencing of retail banking

The Independent Commission on Banking delivered its final report this morning - see here (pdf) - in which it sets out recommendations for the ring-fencing of retail banking operations. The recommendations, which the Government has welcomed, will bring result in dramatic changes to the structure of UK banks. The ring-fencing proposed by the Commission is to be achieved through the creation of UK retail subsidiaries which would be legally, economically and operationally separate from the rest of the banking groups to which they belong. These subsidiaries, the Commission states, should have different cultures and distinct governance arrangements, including a board with, normally, a majority of independent non-executive directors including the chairman. The subsidiary would also be expected to make disclosures and reports as if it were an independently listed company.

Friday 9 September 2011

UK: the future of computer trading in financial markets - working paper

The Department for Business, Innovation and Skills has published a document titled The Future of Computer Trading in Financial Markets which contains three papers exploring the risks and benefits associated with computer based trading, considering financial stability, liquidity, price efficiency and transaction costs: see here (pdf).

Thursday 8 September 2011

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

The High Court gave judgment yesterday in Kleanthous v Paphitis [2011] EWHC 2287 (Ch) and refused permission to continue a derivative claim under Part 11 of the Companies Act (2006) in respect of alleged breaches of directors' duties. The decision provides a useful reminder that even where there may be an arguable case of breach of duty, it does not follow that permission will be granted because of the factors to which the court must have regard in determining whether to grant permission.

There is much else of interest in this decision, including, for example, discussion of whether the court must be satisfied that the claimant has a strong case in order for permission to continue to be granted. The trial judge thought not, referring to Stainer v Lee [2010] EWHC 1539 (Ch) and Wishart v Castlecroft Securities Ltd. [2009] CSIH 65, to support his view that there was no threshold test. Indeed, the factors which led him to decline permission - [a] opposition to the claim by a directors' committee formed to consider the claim in the light of professional advice, [b] the availability of relief under Section 994 and [c] the fact that much of the money that would be recovered from the directors would probably be returned to them as a distribution - were such that he would have declined permission even if he had been persuaded that the claim against the directors was a strong one.

Australia: AVCAL's private equity governance code

The Australian Private Equity and Venture Capital Association (AVCAL) published a private equity governance code earlier this week: see here (pdf).

Wednesday 7 September 2011

Cayman Islands: the duties of a hedge fund's non-executive directors

The Grand Court gave judgment late last month in Weavering Macro Fixed Income Fund Ltd. (in liquidation) v Peterson and Ekstrom: see here (pdf). The case concerned a claim by the liquidators of a hedge fund (formed as an open ended investment company), which was listed on the Irish Stock Exchange, against its two non-executive directors. These directors were closely related to the fund's promoter and principal investment manager. The company entered liquidation shortly after it was discovered that many of the assets on its balance sheet did not exist.

Consistent with common practice, the investment management, administration and accounting functions of the fund had been delegated to professional service providers. The role of the non-executive directors was to perform a supervisory function. The liquidators argued that the directors had failed in this regard and had breached their duty of skill, care and diligence; the losses suffered by the fund, it was argued, arose because of their neglect. The liquidators were successful in their claim against the directors. The trial judge found that the directors had, amongst other things, assumed the "posture of automatons" by signing whatever documents were put in front of them by the investment manager and made no attempt to understand exactly how each of the service providers intended to perform its duties.

The judgment contains much about the standards expected of the non-executive directors under the law of the Cayman Islands, and there are many references to decisions of the English courts. For example, the judge held that the the scope of the directors' duties was not reduced because they were unpaid and received no expenses. The judge also explained what he expected of the directors in terms of the conduct of board meetings and the matters that the directors should have discussed. He criticised the production of standard form minutes for meetings. The directors of investment funds, he observed, had a duty to ensure that minutes of meetings were taken which enable the reader to understand the basis on which decisions were taken. Moreover, not once in six years did the directors ask for a written report, or receive an oral report, from those they were required to supervise.

UK: Scotland: ICAS publishes response to Scottish Government's corporation tax discussion paper

The Institute of Chartered Accountants of Scotland has published its response to the Scottish Government's recent corporation tax discussion paper: see here (pdf). ICAS identifies the problems with some of the data used in the discussion paper and notes, amongst other things, that more work is needed to determine what would be the likely economic impact of devolution of corporation tax to Scotland.

Tuesday 6 September 2011

UK: England and Wales: did section 190(5) of the Companies Act (2006) change or clarify the law?

The High Court gave judgment in Attwood v Maidment [2011] EWHC 2186 (Ch) at the end of July; a copy of the decision was published on BAILII last week: see here. The case concerned two petitions presented under Section 994 of the Companies Act (2006) (the unfair prejudice remedy).

The decision is worth noting because it contains discussion of Section 190(5) of the 2006 Act. Section 190(5) provides, for the purposes of the rules regarding shareholder approval of substantial property transactions, that an arrangement involving more than one non-cash asset, or an arrangement that is one of a series involving non-cash assets, will be treated as involving a non-cash asset of a value equal to the aggregate value of all the non-cash assets. The explanatory notes accompanying the 2006 Act - see here - suggest that Section 190(5), which is based on Section 320 of the Companies Act (1985), introduced a change in the law. The trial judge took a different view: Section 190(5) had, in his opinion, clarified the law but had not changed it.

UK: first prosecution under the Bribery Act

The Crown Prosecution Service has published information about the first person to be prosecuted under the Bribery Act (2010), which came into force earlier this year: see here.

Monday 5 September 2011

UK: new edition of the Takeover Code published

The Takeover Panel has published the new edition of the Takeover Code which comes into force on 19 September: see here (pdf).

UK: Leveson inquiry terms of reference published

The Leveson Inquiry into the culture, practices and ethics of the press has published its terms of reference: see here. These include (to quote): "To inquire into the extent of corporate governance and management failures at News International and other newspaper organisations, and the role, if any, of politicians, public servants and others in relation to any failure to investigate wrongdoing at News International".

UK: High Pay Commission publishes executive pay report

The High Pay Commission published its latest report today, titled What are we paying for? Exploring executive pay and performance: see here (pdf). The report was discussed on Radio 4's Today programme this morning: listen here (mp3).

UK: England and Wales: the authority of the managing director

The High Court gave judgment last week in Smith v Butler [2011] EWHC 2301 (Ch). The case concerned a company with two shareholders: Mr Smith (the majority shareholder and chairman) and Mr Butler (the minority shareholder and managing director). Under the company's articles, two directors (one of whom must be Mr Smith) were required for a quorum at a directors' meeting. Mr Butler purported to suspend Mr Smith as chairman at a board meeting (but there was no board resolution). The trial judge held that Mr Smith's suspension was unlawful and rejected the argument that Mr Butler, as managing director, had the implied authority to suspend Mr Smith. It was, he held, for the board and not the managing director to suspend the chairman. The judge also noted that Mr Butler was not powerless: he could, potentially, bring actions under section 994 (unfair prejudice) or section 260 (derivative claims) of the Companies Act (2006).

Friday 2 September 2011

Germany: Hermes' Corporate Governance Principles for German Listed Companies

Hermes has published an updated edition of its Corporate Governance Principles for German Listed Companies: see here (pdf). Further information about the revised Principles, and several current issues, is available here. Hermes' Principles for other countries are available here.

Ireland: the Central Bank's fitness and probity regime

The Central Bank yesterday published further information about its new fitness and probity regime: see here. Included in the publications are the Regulations which identify those positions within credit institutions subject to the new regime (herepdf), the Standards of Fitness and Probity (here, pdf) and draft guidance on fitness and probity (here, pdf).

Thursday 1 September 2011

UK: FRC proposals published - narrative reporting, risk and going concern, the role of the audit committee and auditors

At the start of this year the Financial Reporting Council published a consultation paper titled Effective Company Stewardship - Enhancing Corporate Reporting and Audit: see here (pdf). Today, in a paper titled Effective Company Stewardship - the Next Steps, the FRC has set out some of the actions it proposes to take: see here (pdf).

With regard to narrative reporting, the FRC notes that the Government will be publishing proposals in the autumn following the consultation which ended last year. The autumn will also see the FRC launch its 'Financial Reporting Laboratory' (on October 14 to be precise) and the continuation of work to consider whether there is support for the development of narrative reporting standards. In the FRC's view, narrative reports should, in the future, focus primarily on strategic risks and should disclose the risks inherent in companies' business model. An update of the Turnbull guidance is promised but there will not be a comprehensive review. Instead, the updating will reflect improvements in practice and will clarify the board's responsibilities with regard to determining the nature and extent of the significant risks it is willing to take. With regard to boards and risk, the FRC has published a summary of its discussions with companies, investors and advisors: see here (pdf).

With regard to auditing, the FRC proposes to review and revise the auditing standards concerned with the audit report and reporting by the auditor to the audit committee - ISA (UK & Ireland) 260 and ISA (UK & Ireland) 700 - reflecting its view that more needs to be done to demonstrate that auditors are achieving the fundamental purpose of the audit. Perhaps one of the most interesting proposals is that concerning the debate about audit firm rotation. The FRC is proposing to amend the UK Corporate Governance Code to require companies to put the external audit out to tender at least once every ten years or to explain why this has not been done and the reasons for not doing so. Other changes are proposed to the Code in order to extend the remit of the audit committee with regard to the whole of the company's annual report.

South Africa: the Code for Responsible Investing in South Africa

Following consultation on a draft version last year, the Institute of Directors has published its Code for Responsible Investing in South Africa: see here (pdf). The Code complements the King Code and provides guidance, based on five principles, on how institutional investor should conduct investment activities and exercise rights in order to promote sound governance. A regard for sustainability issues is a prominent feature of the Code. Principle one, for example, provides that the institutional investor "should incorporate sustainability considerations, including ESG, into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries".