Jersey: the construction of the articles of association and the meaning of 'profits of that year'

Last week the Jersey Court of Appeal delivered its judgment in Trilogy Management Ltd. v YT Charitable Foundation (International) Ltd. and others [2012] JCA 152 (an appeal from a decision of the Royal Court delivered in May this year and reported at [2012] JRC 093). The case concerned the following provision (article 96) in a Jersey company's articles of association: “…the Directors shall, in any financial year in which profits of that year are available for dividend, recommend to the Company a dividend of not less than 75% of such profits”.

The dispute between the parties in the Court of Appeal concerned the meaning of "profits of that year" under article 96 in relation to the 12 months ending 31 December 2005. In its decision the Royal Court held that a gain on the revaluation of investments of over $220 million shown in the accounts for the year to 2005 was, for the purposes of article 96, to be regarded as profits of the year even though the income statement recorded a loss for the year. The Court of Appeal disagreed, holding that "profits of that year" should be interpreted as "profits of that year as ascertained by the generally accepted accounting principle applied by the company in the preparation of its accounts from time to time" (paras. [52] and [69], per Nugee JA delivering the court's opinion). Where those principles produced a loss, as they did for the 12 months to 31 December 2005, then the conclusion was that the mandatory dividend provision in article 96 did not apply.

In the course of its judgment the court considered principles of contract construction (including the recent Supreme Court decision Rainy Sky SA & Orsd v Kookmin Bank [2011] UKSC 50) and noted that in the case of articles of association there were limits on what evidence was admissible: "... the Memorandum and Articles of a company, once registered, constitute a statutory contract the terms of which are available to any member of the public, and as such cannot be affected by extrinsic matters known only to certain persons" (para. [41]). With reference to these principles, the court held that there was nothing in the admissible background or commercial consequences which would cause it to change its view as to the meaning of "profits of that year".

UK: the EU Short Selling Regulation and FSA Handbook changes

The Financial Services Authority has published for comment the changes it proposes to make to the FSA Handbook to deal with the coming into force on 1 November 2012 of the EU Short Selling Regulation (No 236/2012): see here (pdf).

Europe: a single banking supervisory mechanism - Commission proposals due on September 12

Yesterday the Guardian website published a short article by the President of the European Commission, José Manuel Barroso, in which it was stated that the Commission's proposal for a single banking supervisory mechanism would be published on September 12 (a day later than originally stated): see here. Mr Barroso provided an overview of the proposed mechanism, which has the European Central Bank at its core, and stated that all banks in the eurozone would be included within the new system. The aim is for the new mechanism to be in place for the start of 2013.

New Zealand: the FMA's inquiries, investigations and enforcement report

The Financial Markets Authority has published a report highlighting the key themes arising from its inquiries, investigations and enforcement activities over the past year: see here (pdf). The report refers to recent prosecution decisions, including R v Moses HC Auckland CRI 2009-004-1388 [2011] NZHC 646,  R v Graham [2012] NZHC 265 and R v Petricevic [2012] NZHC 665, to highlight what is expected of directors. A section in the report deals with directors' reliance on others and, in this regard, it is stated that directors of public issuers are required to have more than a basic knowledge of accounting concepts: they must have a working understanding of accounting principles to enable them to properly understand the documents they are required to approve.

Dubai: draft corporate governance code for developers

Dubai's Real Estate Regulatory Agency, working with Hawkamah, has published for comment a draft corporate governance code for developers: see here (pdf). The code applies to developers and sub-developers licensed by the Real Estate Regulatory Agency and operates on the basis of 'comply or explain'.

UK: England and Wales: common control does not justify treating companies as a single corporate entity

The ICLR has provided a summary of Camelot UK Lotteries Ltd, R (on the application of) v The Gambling Commission & Ors [2012] EWHC 2391 (Admin): see here. The court's decision has been widely reported (see here or here, for example). Camelot, the operator the UK's national lottery, sought permission (under Civil Procedure Rule 54.4) to continue a claim for judicial review of the decision by the Gambling Commission to grant lottery licences to 51 community interest companies and to licence another company (The Health Lottery ELM Ltd.) to act as an external lottery manager. This lottery management company acted as manager for the 51 community interest companies.

Judgment was given by Lord Justice Stanley Burnton (with whom Kenneth Parker J agreed): Camelot was refused permission to continue its claim for judicial review. Amongst the arguments made by Camelot was that the Health Lottery arrangements created a single lottery in breach of section 99 of the Gambling Act 2005 (section 99 requires the Gambling Commission, when granting a lottery licence, to impose various conditions including limits on the proceeds raised from lotteries). This argument was rejected. Stanley Burnton LJ accepted that the community interest companies were under common control and had common directors but held that this was not enough to treat them as a single corporate entity.

Camelot has announced that it will be appealing the court's decision: see here.

New Zealand: Takeovers Panel recommends changes to the Takeovers Code

The New Zealand Takeovers Panel has recommended changes to the Takeovers Code: see here. Amongst the recommendations is one designed to improve the quality of disclosure regarding the intentions of the offeror company in respect of the target company: the Panel recommends that clause 14(1) of Schedule 1 of the Code should be amended to require the offeror company to disclose its intentions regarding material changes to the target company's business activities, assets and capital structure (including dividend policy).

UK: England and Wales: what is the date of conversion when moving from administration to creditors' voluntary liquidation?

The Court of Appeal gave judgment last Friday in Cartwright v The Registrar of Companies [2012] EWCA Civ 1159. Lady Justice Arden (with whom Lord Justice Moses and the Master of the Rolls agreed) delivered the only reasoned opinion. At issue was the interpretation of paragraph 83(6) of Schedule B1 of the Insolvency Act 1986 and this question: what is the date of conversion where an administration is converted to a creditors' voluntary winding-up? At first instance the trial judge held that conversion took effect on the date the conversion notice was received by the registrar (see [2012] EWHC 359 (Ch)). Arden LJ held, however, that the conversion date was the date on which the conversion notice was registered by the registrar.

Update (30 August 2012): a summary of the decision has been published here by the ICLR.

Australia: FSC publishes draft superannuation fund governance standard

The Financial Services Council has published for consultation a draft standard on superannuation fund governance policy: see here (docx). A brief overview of the proposed standard is available here. The standard requires, amongst other things, the majority of board directors to be independent and the board to be chaired by an independent director.

Europe: proposals for a single banking supervisor and closer banking union

In a news release issued last Friday the European Commission stated that September 11 is the likely date for its publication of proposals for reforming the supervision of banks within the euro area. A greater role for the European Central Bank is envisaged. Further details are also expected with regard to the role of the European Banking Authority and the impact of the proposals on supervisory authorities in EU countries not in the euro area.

Update (31 August 2012): 12 September now appears to be the date on which the proposals will be published: see here.

Europe: Commission consultation on gender imbalance in company boards - responses published

The European Commission has published the responses received in respect of its recent consultation on possible actions in respect of the gender imbalance of company boards: see here. A summary of the responses has not, so far, been published but the Commission has stated that a summary "... will be included among the documents accompanying a possible legislative initiative".

UK: 'theft on a grand scale' and the sentencing of Asil Nadir

In December 1992 the Cadbury Committee published its report and code of best practice. A little short of twenty years later, one of the events that led to the Committee's formation, and which shaped the focus of its work, has returned to the news: the collapse of Polly Peck International plc, an apparently successful company. Asil Nadir, the company's chief executive and chairman, was sentenced to ten years' imprisonment yesterday having been found guilty by a jury of ten counts of theft from the company. The judge's sentencing remarks, directed at Mr Nadir, have been published on the England and Wales Judiciary website: see here (pdf). Five words from the opening paragraph dominate the news reports: "theft on a grand scale".

UK: BSI publishes draft governance standard

The British Standards Institution has published for comment a draft of a new standard: BS 13500, Code of practice for delivering effective governance. According to the BSI, the purpose of the standard is to give "recommendations and guidance for the effective delivery of governance. It is applicable to all organizations and is intended to promote a framework for effective governance that encompasses system, control, direction and accountability". A draft of the new standard is available here but (free) registration is required to view it. Some background information about the proposed standard is available here.

UK: financial regulation reform and Financial Policy Committee

The debate continues regarding the role and powers of the Bank of England under the new financial regulatory framework coming into force next year. Kate Barker, a former member of the Bank of England's Monetary Policy Committee, has published an essay under the auspices of CentreForum titled Macroeconomic policy - too much autonomy and too little coordination: see here (pdf). In the essay, which was discussed this morning on Radio 4's Today programme, Ms Barker argues, amongst other things, that the case for delegation to the Financial Policy Committee (which will be a committee of the Bank of England’s Court of Directors), is not made out and that the institutional arrangements for the FPC are flawed.

UK: FSA consults on restricting the selling of unregulated collective investment schemes

The Financial Services Authority has published a consultation paper in which it sets out proposals to restrict the selling of unregulated collective investment schemes and close substitutes to ordinary retail investors: see here (pdf).

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

Judgment was given in Hughes v Weiss [2012] EWHC 2363 (Ch) last week; a copy of the judgment was added to the BAILII database this week. The trial judge, His Honour Judge Keyser QC (sitting as a judge of the High Court), granted permission to continue a derivative claim under Part 11 of the Companies Act 2006. Amongst other things, the trial judge rejected the argument that permission should be refused because of the availability of alternative remedies including voluntary winding-up and a petition under section 994 of the 2006 Act. Indeed, the trial judge made clear that the a derivative claim was more appropriate than a section 994 petition because the shareholder was seeking a remedy for the company for alleged misfeasance by a director and not the purchase of her shares.

One interesting aspect of the proceedings was the fact that a personal claim by the shareholder against the company was included in order to avoid the need for a second set of proceedings (and the associated costs). The trial judge was, at first, attracted to the view that it would be simpler and cheaper to permit the personal claim and derivative claim to be dealt with in the same proceedings. He nevertheless concluded that this would not be appropriate, noting that the position relating to costs was likely to be very different between the cases, and stayed the personal claim until the case management conference.

USA: Business Roundtable updated corporate governance principles

Business Roundtable - an association of chief executive officers from US companies - has published a revised edition of its Principles of Corporate Governance: see here (pdf). These were last updated in 2010; a summary of the changes made is available here.

UK: Scotland: FSMA, companies, banks and mis-selling claims

Section 150 of the Financial Services and Markets Act 2000 provides that a "contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty". "Private person" is not defined in the 2000 Act but a definition is given by regulation 3 of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001. Regulation 3 provides, amongst other things, that "private person" includes "any person who is not an individual, unless he suffers the loss in question in the course of carrying on business of any kind". A company can, therefore, be a private person if it can establish that the loss was not incurred in the course of carrying on business of any kind. In Titan Steel Wheels Ltd v The Royal Bank of Scotland Plc [2010] EWHC 211 (Comm) the trial judge accepted the argument that "carrying on business of any kind" should be given a wide interpretation. This approach was accepted as correct earlier this year in Camerata Property Inc v Credit Suisse Securities (Europe) Ltd [2012] EWHC 7 (Comm), the trial judge rejecting the argument that Titan Steel had been wrongly decided.

The approach in these English authorities was endorsed today in the Scottish courts by Lord Hodge, delivering his opinion in Grant Estates Ltd. v Royal Bank of Scotland plc [2012] CSOH 133, which concerned an unsuccessful action by a company against a bank for the alleged mis-selling of an interest rate swap derivative. Lord Hodge rejected the view that "carrying on business of any kind" should be interpreted as encompassing only transactions which were an integral part of a person's business. He also rejected the argument that a narrow construction was required by the Markets in Financial Instruments Directive 2004/39/EC (as implemented by Directive 2006/73/EC). The argument that a common law duty of care was owed by the bank to the company in respect of the advice was also rejected, Lord Hodge declining to accept the view that such a duty could exist on the basis of the Conduct of Business Rules. Moreover, in Lord Hodge's view, the relative youth and inexperience of the company's directors was not a relevant ground for departing from the principle that a person will generally be bound by the terms in a document whether or not he has read them. In this regard, Lord Hodge noted that company law expected directors to achieve an objective standard of competence and knowledge under section 174 of the Companies Act 2006.

A brief summary of Lord Hodge's opinion has been published on the Judiciary of Scotland website: see here.

UK: LIBOR - Treasury Committee publishes preliminary findings

The House of Commons Treasury Select Committee has published a report titled Fixing LIBOR: some preliminary findings: see here or here (pdf). The Committee's conclusions and recommendations are available here. Amongst other things, the Committee expresses concern with the failure of the Financial Services Authority to appreciate the significance of market rumours relating to the artificial rigging of the LIBOR rate. The Committee also repeats its call for greater accountability of the Bank of England under the new regulatory framework being introduced next year by the Financial Services Bill 2012-13. The Bank, in its response to the Committee's report, rejects the view that the accountability mechanisms proposed in the Bill are insufficient.

Australia: judgment in Westpac Banking Corp v Bell Group

Judgment was given today by the Supreme Court of Western Australia (Court of Appeal) in one of its most keenly anticipated judgments of recent years: Westpac Banking Corporation v The Bell Group Ltd. (in liq) [No 3] [2012] WASCA 157, available here or here (pdf). A summary of the very lengthy judgment, in which the trial judge's decision (reported at [2008] WASC 239) was largely upheld, is available here (pdf). Amongst other things (of which there are many), the court considered directors' duties, their fiduciary character and their application in the context of insolvency and a corporate group.

Europe: ESMA consultation on materiality in financial reporting - summary of responses

Last year the European Securities and Markets Authority published a consultation paper concerning materiality in financial reporting: see here (pdf). A summary of the responses received was published yesterday: see here (pdf). ESMA noted that the majority of respondents considered the materiality concept to be generally well understood although many stated that there was diversity in its application. Many respondents also expressed the view that ESMA should not publish guidance, believing that the IASB was better placed to do so.

UK: the registration of charges by companies and LLPs - consultation on draft legislation

The Department for Business, Innovation and Skills is seeking final views on draft legislation to reform the current system for the registration of charges by companies and limited liability partnerships: see here. Updated explanatory notes, which also contain several questions for consultation, are available here (pdf). The draft of the Companies Act 2006 (Amendment of Part 25) Regulations 2012 is available here (pdf) and the draft of the Limited Liability Partnerships (Application of Companies Act 2006) (Amendment) Regulations 2012 is available here (pdf).

USA: PCAOB adopts Auditing Standard No 16 - Communications with Audit Committees

The Public Company Accounting Oversight Board has adopted Auditing Standard No. 16, Communications with Audit Committees: see here. A copy of the standard, which includes background information, is available here (pdf). The purpose of the standard is to enhance the relevance, timeliness, and quality of the communications between the auditor and the audit committee. One way through which this is achieved is the requirement for the auditor to communicate certain matters regarding the audit and financial statements to the audit committee, including, for example, significant difficulties encountered in performing the audit and disagreements with management.

CMEF: The Practice of Corporate Governance in Microfinance Institutions

The Council of Microfinance Equity Funds has published a revised edition of its corporate governance code, titled The Practice of Corporate Governance in Microfinance Institutions: see here (pdf).

UK: England and Wales: unfair prejudice - equitable considerations, directors' duties and the affairs of the company

The High Court gave judgment last Friday in McKillen v Misland (Cyprus) Investments Ltd & Ors [2012] EWHC 2343 (Ch). The outcome: a shareholder's petition for unfair prejudice, under section 994 of the Companies Act 2006, was unsuccessful and other claims were also dismissed. Unsuccessful petitions are not that unusual but the case has attracted considerable media interest because of the identities of the parties: see, for example, here or here. Indeed, a summary of the decision has been published on the Judiciary of England and Wales website: see here (pdf).

The identity of the parties aside, the judgment is interesting because it illustrates the difficulties shareholders will face in seeking to establish the existence of equitable considerations affecting the manner in which legal rights are exercised. There is also some discussion of the statutory duties of directors under the Companies Act 2006 as well as the concept of the "affairs of the company" under section 994.

Singapore: MAS proposes changes to the legal framework governing insurers' directors and executives

The Monetary Authority of Singapore has published for consultation proposed changes to the legal framework governing the approval and responsibilities of insurers' directors and the holders of other executive positions: see here (pdf). Amongst other things, there is a proposal to make explicit the power of the MAS to remove a director from holding office in an insurer.

UK: The Wheatley Review of LIBOR - discussion paper published

Martin Wheatley, the chief executive designate of the new Financial Conduct Authority and current head of the Financial Services Authority's Conduct of Business Unit, delivered a speech today in which he spoke about his review of LIBOR and the publication of a discussion paper. The paper, available here (pdf), seeks views on possible reform options and makes clear that retaining LIBOR in its current state is not viable. The paper also states that alternative benchmarks that can take on some (or all) of the roles currently performed by LIBOR should be identified and evaluated. Mr Wheatley's final report is expected by the end of next month in order to permit the Government to include, if necessary, legislative changes in the Financial Services Bill currently before Parliament.

Hong Kong: Companies Ordinance published

A copy of Hong Kong's new Companies Ordinance, passed by the Legislative Council last month, has been Gazetted (i.e., officially published in the Hong Kong Gazette): see here. The Companies Registry has also published some FAQs in respect of the new Ordinance - see here - and a summary of the changes that the new Ordinance will introduce is available here (pdf).

DIFC: DFSA corporate governance principles and best practice standards

The recently enacted Markets Law 2012 requires reporting entities to have "a corporate governance framework which is adequate to promote the prudent and sound management of the Reporting Entity in the long-term interest of the Reporting Entity and its shareholders" (s. 39(1)). The DIFC financial services regulator, the Dubai Financial Services Authority, is required to prescribe corporate governance principles and standards for such entities (s. 39(2)). These principles and standards have been published in the DFSA Rulebook: see here and here.

Canada: OSFI consults on revised corporate governance guideline for federally regulated financial institutions

The Office of the Superintendent of Financial Institutions Canada (OSFI) has published for consultation an updated edition of its Corporate Governance Guideline for Federally Regulated Financial Institutions: see here (pdf). Further information about the proposed changes is available in the accompanying letter addressed to regulated institutions (here, pdf) and the impact analysis statement (here, pdf).

Hong Kong: HKMA revises governance standards

The Hong Kong Monetary Authority has updated the section in its Supervisory Policy Manual concerning the corporate governance of locally incorporated authorised institutions: see here (pdf). This part of the Manual sets out the minimum standards which the Authority expects locally incorporated authorised institutions to adopt in respect of their corporate governance. An overview of the revisions is available here (pdf).

Nigeria: Central Bank consults on revised corporate governance code and whistle blowing guidelines

The Central Bank of Nigeria has published for consultation a revised draft of its corporate governance guidelines for banks in Nigeria: see here (pdf). Also included for consultation are draft guidelines for whistle blowing in the Nigerian banking industry.

British Virgin Islands: company law amendments

Law firm Harneys reports that the BVI Business Companies (Amendment) Act 2012 was passed into law last month by the House of Assembly: see here. The Act makes various changes to the BVI company law framework, more full explained here (pdf).

Australia: managed investment schemes - CAMAC report published

The Corporations and Markets Advisory Committee has published its report Managed Investment Schemes - see here (pdf) - and has, amongst other things, outlined proposals for a new legal framework governing such schemes. A summary of the Committee's recommendations is available here.

Jersey: JFSC proposes amendments to financial services legal framework

The Jersey Financial Services Commission has published a consultation paper setting out proposed amendments - described as "route maintenance" - to the legal framework governing financial services in Jersey: see here (pdf). Draft legislation has also been published: see here (pdf) and here (pdf).

Europe: Commission consults on direct tax problems in cross border venture capital investment

The European Commission has published a consultation paper in which it seeks evidence about the direct tax problems which arise in cross border venture capital investment: see here (pdf). Further information, included an expert group report, is available here.

Japan: Companies Act amendments published

The Ministry of Justice has published draft amendments for the Companies Act 2005, following a consultation earlier this year: see here. The Tokyo Stock Exchange has published a short statement, in English, which explains some of the proposed amendments: see here. From this statement it appears that the Ministry of Justice is not recommending a change in the law to require listed company boards to have at least one outside director. However, those listed companies which do not have an outside director will be required to disclose why the appointment of an outside director is regarded as inappropriate.

UK: CRD IV implementation - statement from the FSA

The Financial Services Authority has published a statement regarding implementation of CRD IV, following a delay in agreement amongst the European institutions: see here.

Bulgaria: revised corporate governance code

Earlier this year the National Corporate Governance Committee made amendments to the Bulgarian Code for Corporate Governance published in 2007. A copy of the revised Code, in English, is available here (pdf).

UK: Treasury consults on financial sector resolution proposals

HM Treasury has published a consultation paper titled Financial sector resolution: broadening the regime: see here (pdf). The paper sets out the Government's proposals regarding the mechanisms available to deal with the failure of systematically important investment firms, insurers, central counterparties and non-central counterparty financial market infrastructures.

Australia: adoption by ASX-listed companies of the ASX Corporate Governance Principles and Recommendations on diversity

The Australian Stock Exchange has published a report, prepared by KPMG, examining adoption of the ASX Corporate Governance Principles and Recommendations on diversity by a sample of 211 ASX-listed companies: see here (pdf). It is reported that 61% of companies in the sample disclosed that they had established a diversity policy. A short summary of the report's findings is available here (pdf).

Norway: Corporate Governance Board begins Code consultation

The Corporate Governance Board has published a consultation paper in which it seeks views on proposed changes to the Norwegian Code of Practice for Corporate Governance and invites any other comments concerning the Code: see here (pdf, Norwegian) or here (pdf, English). One of the proposed changes is intended to improve the quality of 'comply or explain' reporting by companies.

UK: England and Wales: Stone Rolls distinguished and the extra-territorial effect of section 213 of the Insolvency Act 1986

Sir Andrew Morritt CVO, the Chancellor of the High Court, gave judgment earlier this week in Bilta (UK) Ltd v Nazir [2012] EWHC 2163 (Ch). The case concerned claims brought by a company's liquidators against the sole directors of the company (one of whom owned all of the company's shares) in respect of alleged fraudulent trading, and breaches of duty including section 172 of the Companies Act 2006, arising from their depriving the company of its ability to meet VAT obligations arising from carbon credit trading.

The decision is noteworthy for a couple of reasons. First, it was held that section 213 of the Insolvency Act 1986 - the fraudulent trading provision - had extra-territorial effect. Second, the judge firmly rejected the argument that the claim against the directors was precluded by the ex turpi causa non oritur actio principle. His Lordship distinguished the facts before him from those in Moore Stephens v Stone Rolls Ltd [2009] UKHL 39 and stated that the ratio decidendi therein did not apply to cases in which the claim was based on a breach of duty encompassing persons or interests other than the fraudsters in corporate form. Section 172 of the Companies Act 2006 was one such duty, the Chancellor stating that the interests of creditors "... are within the scope of the duties of directors at least where the company is or may become insolvent. S. 172 ... is statutory recognition of the principle to that effect recognised by Dillon LJ in West Mercia Safetywear Ltd v Dodd [1988] BCLC 250" (para. [37]).

UK: England and Wales: corporate capacity and derivatives

The ICLR has provided a summary of Standard Chartered Bank v Ceylon Petroleum Corporation [2012] EWCA Civ 1049, a decision of the Court of Appeal handed down last week concerning a company's capacity to enter into derivative contracts: see here. The summary's headnote reads: "In the absence of any indication to the contrary, a commercial entity set up by statute to engage in international and domestic trade had the capacity to enter into the whole range of transactions which a commercial organisation acting in that field of business would ordinarily undertake, including hedging or speculative transactions".

It should be noted that the company in question was formed under the Ceylon Petroleum Corporation Act 1961 and at issue was the operation of section 5 of the Act, which contained the company's objects. This said, the court accepted that there was no material difference between English law and the law of Sri Lanka.