Tuesday 31 January 2012

UK: the future of the UK financial reporting - revised proposals from the ASB

The Accounting Standards Board, part of the Financial Reporting Council, has published revised proposals for the future of financial reporting in the UK.  In brief, the ASB has decided not to go ahead with its proposals for a three tier framework but is instead proposing to replace all current accounting standards with a single Financial Reporting Standard, based on the IFRS for SMEs (although the Financial Reporting Standard for Smaller Entities will be retained). Further information is available here and a key facts document is available here (pdf). The relevant Financial Reporting Exposure Drafts are available here.

Monday 30 January 2012

UK: financial regulation reform - Financial Services Bill introduced in Parliament

The Financial Services Bill was introduced in Parliament last Thursday and received its First Reading. Second Reading, which will provide MPs with their first opportunity to debate the main principles of the Bill, is scheduled for today. The Bill's progress can be followed here. A copy of the Bill as introduced is available here (html) and here (pdf). Explanatory notes are available here (html) and here (pdf).

The Government has also published another White Paper - A new approach to financial regulation: securing stability, protecting consumers, available here (pdf) - which builds on earlier White Papers and sets out its response to some of the recommendations made by the Treasury Select Committee and Pre-Legislative Scrutiny Committee in respect of an earlier draft of the Bill. Revised objectives have, for example, been provided for the Financial Conduct Authority (FCA); an explicit "duty to supervise" will be given to the Prudential Regulation Authority (PRA); and the Chancellor will be given a limited statutory power of direction over the Bank of England where a notification of risk to public funds has been made by the Bank's Governor and there is a serious threat to financial stability.

The White Paper also explains some new policy decisions including, for example, a much greater role for the FCA with regard to consumer credit. The Government also appears to have rejected calls for the creation of a Supervisory Board for the Bank of England, preferring instead the Bank's proposal for an Oversight Committee. Further consultation is promised in respect of the suggestion that the Threshold Conditions for authorisation should be reviewed and also with regard to the manner in which these Conditions are divided between the FCA and PRA. Further consultation is also to take place with regard to the macro-prudential tools available to the Financial Policy Committee (FPC). The Paper also explains that the Government will be consulting later this year in respect of a couple of issues identified by the Financial Services Authority in its report into the failure of Royal Bank of Scotland: should regulatory pre-approval be required for all significant merger and acquisition activity in the banking sector and are changes necessary to the liability regime for senior management and directors?

One of the recommendations made by the Scrutiny Committee was for the publication, alongside the Bill, of relevant secondary legislation including the Order under which the scope of the PRA's prudential supervision role would be defined. This has been done: a draft of the Financial Services and Markets Act 2000 (PRA-Regulated Activities) Order has been published (see here, pdf) along with further draft secondary legislation and draft memoranda of understanding (including a memorandum setting out the framework for coordination of financial crisis management between the Treasury, Bank of England and the PRA: see here.

Update (30 January 2012): Hansard, when recording the Bill's First Reading, also states that Second Reading was scheduled for today. This is a mistake. According to the Parliamentary Calendar, Second Reading has been timetabled for 6 February 2012.

Friday 27 January 2012

UK: England and Wales: directors' duties - disclosure, creditors and other matters

Mr Justice Newey gave judgment earlier this week in GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch). Amongst the matters for consideration was a claim that a sale of stock by directors to another company shortly before they were removed as directors involved a breach of duty. The decision is interesting for several reasons. First, there is discussion of the consequences of insolvency (or near insolvency) on the application of the duty found in Section 172 of the Companies Act (2006). In this regard, the trial judge noted that "Where creditors are relevant, it will ... be a director's duty to have regard to the interests of the creditors as a class. If a director acts to advance the interests of a particular creditor, without believing the action to be in the interests of creditors as a class, it seems to me that he will commit a breach of duty" (para. [168]).

Second, the trial judge considered the consequences of a sale of stock by directors in pursuit of their own self-interest and not the company's where the contracting party had notice of this fact: the contract was void. Third, there is discussion of Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, in which Arden LJ held that a director could be required to disclose his own misconduct as part of the director's duty to act in what he in good faith considers to be the best interests of his company (the duty now incorporated in Section 172). Noting the controversy surrounding Arden LJ's decision, Mr Justice Newey observed (at paras. [193] and [194]):
Arguably, it breaks new ground in treating a fiduciary duty as prescriptive rather than merely proscriptive. Its result can perhaps now be justified also by reference to section 172 of the Companies Act 2006, which came into force on 1 October 2007. The duty to promote the success of a company which that provision imposes can be said to be expressed in prescriptive terms (a director "must act in the way he considers, in good faith, would be most likely to promote the success of the company …" – emphasis added). Be that as it may, Item Software (UK) Ltd v Fassihi is clearly binding on me. I therefore proceed on the basis that a director's duty of good faith can potentially require him to disclose misconduct. .... a company complaining of a director's failure to disclose a matter must, I think, establish that the fiduciary subjectively concluded that disclosure was in his company's interests or, at least, that the director would have so concluded had he been acting in good faith". 

Fourth, Mr Justice Newey considered to whom the director was required to disclose information and stated (at para. [198] and [199]):

... it is perfectly possible to conceive of a director being bound to disclose a matter to someone other than fellow board members. Since the "touchstone" is the duty of a director to act in what he considers in good faith to be in the best interests of the company, the focus must be on what the relevant director in fact believed to be in the company's interests or would have believed to be in the company's interests had he been acting in good faith. If a director subjectively concluded that it was in the company's interests for a matter to be disclosed to a person who was not a member of the board (or if he would have so concluded had he been acting in good faith), it would, it appears, be incumbent on him to ensure that such disclosure was made. On the other hand, a director's duty of good faith is owed to his company, not to shareholders. The question is therefore as to what the director thought (or would have thought) was in the company's interests. That disclosure might have been in a shareholder's interests will not matter as such.

Thursday 26 January 2012

UK: FSA seeks views on premium listing regime and proposes other amendments

The Financial Services Authority has published for consultation proposed amendments to the Listing Rules, Prospectus Rules, and the Disclosure Rules and Transparency Rules: see here (pdf). The FSA is also seeking views on the nature of the premium listing standard more generally and whether changes are needed to enhance the protections provided to shareholders regarding, for example, related party transactions, free float requirements and whether it should be a condition of listing that companies with controlling shareholders should be capable of carrying out their business independently of such controlling shareholders.

Wednesday 25 January 2012

UK: financial regulation reform - the approach of the FCA

Martin Wheatley, the chief executive designate of the new Financial Conduct Authority, spoke today at the British Bankers' Association about his vision for the FCA: see here. Briefly put, Mr Wheatley said that "getting a fair deal for consumers" would be at the heart of the FCA's work and noted that "The global world of regulation has moved on from a belief that providing information to people combined with some conduct rules over the people selling products will lead to good outcomes". Much in his speech was about cultural change in firms but he also referred to the way in which the FCA would operate by, for example, taking an earlier judgment as to the suitability of products.

Tuesday 24 January 2012

UK: Implementation of the Alternative Investment Fund Managers Directive

As part of the UK's implementation of the AIFM Directive, the Financial Services Authority has published a discussion paper setting out provisional thoughts with regard to the approach that it will adopt: see here (pdf).

Monday 23 January 2012

UK: Government announces executive pay proposals

A day earlier than expected, and in response to an Urgent Question in Parliament, the Secretary of State for Business, Innovation and Skills today set out the Government's proposals regarding executive pay. Speaking in the House of Commons, the Secretary of State outlined measures concerning disclosure and shareholder voting and explained his aspirations regarding board diversity.

Changes in the structure of remuneration reports will be introduced through secondary legislation, separating the report into two sections, one on future policy and another on the implementation of policy in the previous year. A binding vote - on which further consultation will take place - will be introduced with regard to future policy.  Shareholder approval will also be required where a director's notice period is greater than a year, which will bring the legal framework in line with the UK's Corporate Governance Code which provides that notice or contract periods should be set at one year or less (Provision D.1.5).

It appears that the advisory vote will remain in respect of that part of the remuneration report concerning policy implementation but further consultation will take place on the consequences of a vote against and the threshold required for shareholder approval. In this section of the report companies will be required to provide a single figure for each director's pay and an explanation of how rewards relate to the company's performance.

With regard to board diversity, no new proposals were offered but the Secretary of State said that he wanted to see boards contain at least two people with no previous board level experience. He also said that he supported greater worker participation but that there were too many problems associated with a mandatory approach to worker representation on boards. Greater transparency regarding the role of remuneration consultants was promised and the Secretary of State also said that the Financial Reporting Council would be asked to amend the UK Corporate Governance Code to provide specific provisions regarding clawbacks.

A copy of the Secretary of State's statement will be published in Hansard - see here - and further information will be published soon on the BIS website. The proposals follow the publication in 2011 of a discussion paper, a summary of the responses to which were published today: see here (pdf).

UK: financial regulation reform - the accountability of the Bank of England

The debate about the accountability of the Bank of England within the new financial regulatory framework continued today with the publication by the Treasury Committee of a report - see here - regarding the suggestion last week from the Court of the Bank of England that an Oversight Committee, a sub-committee of the Court, should be created. The Treasury Committee has concluded, amongst other things, that the role of the Bank's proposed Oversight Committee "would be so heavily circumscribed that it could not be relied upon to provide adequate scrutiny".

Friday 20 January 2012

UK: Scotland: company representation in court proceedings

In Secretary of State for Business, Enterprise and Regulatory Reform v UK Bankruptcy Ltd [2010] CSIH 80, 2011 SC 115, it was held that in Scotland a company could not be represented in proceedings by anyone other than an advocate or solicitor possessing a right of audience. This rule has been considered again by the Court of Session in an opinion delivered earlier this week - Apollo Engineering Ltd (In Liquidation) v James Scott Ltd [2012] CSIH 4 - in which one of Apollo's directors sought permission to represent the company in legal proceedings where the company was unable to afford legal representation.

The court unanimously held that the director should not be permitted to represent the company. Different reasons for reaching this conclusion were given by Lady Paton and Lord Reed (Lord Bracadale supported Lord Reed's position). In Apollo and unlike the earlier Bankruptcy case, the court considered the relevance of Article 6 ("Right to a fair trial") of the European Convention on Human Rights. Nevertheless, with reference to Airey v Ireland (1979) 2 EHRR 305, Lord Reed found that Article 6(1) did not require the court to give the director permission to represent the company because this would not provide the company with an effective right of access to the court.

Thursday 19 January 2012

UK: Government promises consolidated legislation for co-operatives and mutuals

In a speech delivered earlier today, the Prime Minister stated that the Government would seek to consolidate the legislation concerning co-operatives and mutuals during the current session of Parliament: see here.

UK: shareholder voting rights and takeovers

In 2010 the Takeover Panel Code Committee conducted a review of certain aspects of the regulation of takeovers (here, pdf). One of the questions posed by the Code Committee in its review was whether shares acquired during the course of an offer period should be disenfranchised. In its response to the consultation (here, pdf) the Committee noted that most respondents were against this suggestion and changes to the Takeover Code were not proposed. However, the Code Committee stated that it would be logically consistent for the Code to be amended if qualifying periods (or weighted voting rights) were introduced through company law, thereby leaving the issue in the hands of Government.

It's possible, although probably unlikely, that specific proposals regarding voting rights will be published in July this year when the Government publishes the final report as part of its short-termism review. Meanwhile, in today's Financial Times newspaper, the Labour Party leader, the Rt Hon Ed Miliband, writes that he is considering a proposal to limit shareholders' voting rights during takeovers as well as increasing the threshold required for shareholder approval of a takeover.

Wednesday 18 January 2012

UK: financial regulation reform - the accountability of the Bank of England

The accountability of the Bank of England within the new financial regulatory framework being introduced in the UK has received much attention, with recommendations being made by the Treasury Committee and the Joint Parliamentary Committee formed to conduct pre-legislative scrutiny of the Financial Services Bill: see, respectively, here and here. The Court of the Bank of England yesterday responded to these recommendations - see here (pdf) - and suggested, amongst other things, that an oversight committee, a sub-committee of the Court, should be created.

Tuesday 17 January 2012

Italy: updated corporate governance code published by Borsa Italiana

The codes and principles directory maintained by the European Corporate Governance Institute was updated yesterday to include a copy of the revised edition of the corporate governance code published by the Italian Stock Exchange last December: see here (pdf, English) or here (pdf, Italian).

Monday 16 January 2012

UK: Deputy Prime Minister on "responsible capitalism"

The Deputy Prime Minister, the Rt. Hon Nick Clegg MP, delivered a speech in London today in which he reflected on "responsible capitalism" and argued that shareholders should "behave like business owners rather than absentee landlords": see here. In addition to the introduction of a binding vote on executive pay for shareholders - the proposals for which will be published next week by the Department for Business, Innovation and Skills - Mr Clegg stated that the Government intends to "overhaul the way shareholders – and others – can access information". This was necessary, he argued, because "Often, the reason investors are passive is because they can’t see the reasons to act". Mr Clegg also announced a Government review into what can be done to encourage greater employee share ownership and, in this regard, mooted the idea of giving employees a "right to request" shares.

Friday 13 January 2012

UK: the Financial Conduct Authority - Treasury Committee recommendations

The House of Commons Treasury Committee has published a report regarding the Financial Conduct Authority, the conduct of business regulator within the Government's new financial regulation framework: see here or here (pdf). Amongst other matters, the Committee raises concerns with regard to the accountability of the FCA and argues that much more detail should be provided in legislation regarding the relationship between the FCA, Prudential Regulation Authority and Financial Policy Committee. The Committee also argues that the Government should reconsider the FCA's strategic objective, explained as "protecting and enhancing confidence in the UK financial system” within the draft Financial Services Bill. In the Committee's view, the objective of ensuring "fair, efficient and transparent markets in financial services" would be an improvement. The Committee also argued that the promotion of competition should receive far greater prominence in the FCA's strategic and operational objectives.

Europe: ESMA's first credit rating agency annual report

The European Securities and Markets Authority has published its first annual report in respect of its supervision of credit rating agencies: see here (pdf). Since 1 July 2011, ESMA has had the exclusive responsibility for the registration and supervision of credit rating agencies in the EU.

Thursday 12 January 2012

UK: some reform proposals from the Labour Party

The Shadow Minister for Business, Innovation and Skills, Mr Chuka Umunna MP, delivered a speech today at the Institute for Public Policy Research in which he set out various proposals for the reform of the UK's corporate governance framework: see here. Mr Umunna said that reform was best achieved through changes to the UK Corporate Governance Code rather than legislation and he endorsed the recommendations made by the High Pay Commission (in the report it published last year) with regard to the transparency of executive rewards. He also said that consideration should be given to changing dramatically the composition of the nomination and remuneration committees. To quote directly from his speech:

We should consider moving towards a system which other countries have adopted where the nomination committee is not composed of board members but is composed of the four or five biggest shareholders in the company along with the non-executive chair of the board – that same committee, composed of shareholders, also recommends the structure and amount of remuneration. This would create far stronger lines of accountability to those who ultimately own the business and would promote the shareholder activism and engagement which is key".

Japan: an update from Olympus - legal action against directors

Following the publication in December last year of the investigation report, Olympus has announced the commencement of legal action against certain current and former directors: see here (pdf).

Wednesday 11 January 2012

UK: Labour Party to conduct review of short-termism

At last year's Labour Party annual conference, the party's leader - the Rt. Hon. Ed Miliband MP - delivered a speech in which he argued that remuneration committees should have an employee representative. In a speech delivered yesterday Mr Miliband repeated this call and also said that the Labour Party would soon announce a review of "short-termism in British corporate life".

Tuesday 10 January 2012

Conference: corporate governance after the crisis

The European Corporate Governance Institute, in conjunction with Columbia Law School, the Faculty of Law at Oxford and Oxford's Saïd Business School, will be holding a conference later this week, the theme of which is corporate governance after the crisis. Whilst attendance at the conference is by invitation only, some of the papers being presented are publicly available on the ECGI's website: see here.

Monday 9 January 2012

UK: shareholders to get binding vote on pay

Later this month the Government will publish proposals following its consultation on executive remuneration. However, ahead of this announcement, the Prime Minister had made clear that shareholders in the largest companies are to be given a binding vote on remuneration: see here.

Basel Committee consults on revised Core Principles for Effective Banking Supervision

The Basel Committee on Banking Supervision has published for consultation a revision of its Core Principles for Effective Banking Supervision: see here (pdf). A comparison between the existing Principles (dated 2006) and the proposed revised edition is available here (pdf) and an overview of the changes is available here.

Friday 6 January 2012

Europe: EBA Internal Governance Guidelines - compliance information published

The European Banking Authority has published a document setting out whether Member States' competent authorities comply (or intend to comply) with the EBA's Guidelines on Internal Governance published in September 2011: see here (pdf).

Under Article 16(3) of the EBA Regulation (available here, pdf), Member States' competent authorities are required to inform the EBA whether they comply (or intend to comply) with EBA guidelines or recommendations within two months of the publication of such guidelines and recommendations. Where a competent authority does not comply, or does not intend to comply, it is required to provide reasons to the EBA, which the EBA has the discretion to publish.

Thursday 5 January 2012

USA: PCAOB proposes auditing standard on communication with audit committees

Towards the end of last year the Public Company Accounting Oversight Board proposed for comment an auditing standard on communication with audit committees: see here. The standard, which was originally proposed in March 2010 (see here, pdf), seeks to enhance the relevance and quality of the communications between the auditor and audit committee. It retains many existing requirements but establishes additional categories of information requiring disclosure by the auditor including, for example, significant transactions outside of the normal course of the company's business.

Wednesday 4 January 2012

Netherlands: compliance with the Dutch Corporate Governance Code

Towards the end of last year, the Corporate Governance Code Monitoring Committee published its annual survey of companies' compliance with the Dutch Corporate Governance Code: see here (pdf). A summary of the findings, in English, is expected to be published soon.

Tuesday 3 January 2012

UAE: Cabinet approves draft of new companies legislation

The Cabinet has approved a draft of new companies legislation which, if enacted, will herald significant change: see here. For media comment see here and here.