Thursday 28 February 2013

UK: Government consults on company law changes - company names and micro-entity financial reporting

The Government has announced some preliminary findings following its 'red tape challenge' in the field of company and commercial law: see here. Two consultations have also been launched. The first seeks views on possible changes to the Regulations regarding company and business: see here. The second concerns the implementation of Directive 2012/6/EU on the annual accounts of certain types of companies as regards micro-entities (the so-called 'Micros Directive'): see here. This consultation seeks views on the extent to which companies falling within the definition of micro-entity should receive the exemptions from certain financial reporting obligations which the Directive permits Member States to provide. More specific questions are asked with regard to the introduction and implementation of these exemptions.

Wednesday 27 February 2013

UK: England and Wales: multiple derivative actions not abolished by the Companies Act 2006

Judgment was given yesterday in Universal Project Management Services Ltd v Fort Gilkicker Ltd & Ors [2013] EWHC 348 (Ch). This is an important and interesting decision in which the trial judge held that the Companies Act 2006 did not remove the multiple derivative action at common law. The trial judge, Briggs J., observed (paras. [44] to [46]):

I have come on balance to the conclusion that the 2006 Act did not do away with the multiple derivative action. My reasons follow. First, there was before 2006 a common law procedural device called the derivative action by which the court could permit a person or persons with the closest sufficient interest to litigate on behalf of a company by seeking for the company relief in respect of a cause of action vested in it. Those persons would usually be a minority of the company's members, but might, if the company was wholly owned by another company, be a minority of the holding company's members. These were not separate derivative actions, but simply examples of the efficient application of the procedural device, designed to avoid injustice, to different factual circumstances.

In 2006 Parliament identified the main version of that device, namely where locus standi is accorded to the wronged company's members, labelled it a "derivative claim" and enacted a comprehensive statutory code in relation to it. As a matter of language, section 260 applied Chapter 1 of Part 11 only to that part of the old common law device thus labelled, leaving other instances of its application unaffected.

Applying the well established relevant principle of construction, Parliament did not expressly abolish the whole of the common law derivative action in relation to companies, even though by implication from the comprehensiveness of the statutory code it did do so in relation to derivative claims by members (as defined) of the wronged company. Beyond that, the assertion that the remainder of the common law device was abolished fails because abolition was neither express nor a clear or necessary implication.

Update (28 February 2013) - a summary of the judgment has been provided by the ICLR: see here.

Update (14 February 2014) - the conclusion and reasoning of Briggs J was endorsed yesterday by Mr Justice David Richards in Abouraya v Sigmund & Ors [2014] EWHC 277 (Ch).

UK: Competition Commission publishes full provisional findings report for statutory audit market inquiry

Last week the Competition Commission published a summary of its preliminary findings in respect of its inquiry into the market for statutory audit services: see here. The Commission provisionally concluded that there were features of the market that created an adverse affect on competition and that this resulted in companies being offered higher prices, lower quality and less innovation (and differentiation of offering) than would be the case in a market without the adverse features. The full report containing the Commission's findings is now available: see here (pdf). The supporting appendices are available here.

UK: England and Wales: Law Commission to examine fiduciary duty in the investment context

One of the recommendations made by Professor John Kay, in his Review of UK Equity Markets and Long-Term Decision Making (herepdf), was that the Law Commission should be asked to review the legal concept of fiduciary duty as applied to investment in order to address uncertainties and misunderstandings on the part of trustees and their advisors. This recommendation was accepted by the Government and a request made to the Law Commission (see herepdf). The Law Commission has started the preparation needed to undertake this new project: it has advertised for a lawyer to lead this project (see here).

Tuesday 26 February 2013

UK: Lord Turner on global financial and Eurozone reform

Earlier this month Lord Turner, the chairman of the Financial Services Authority, delivered a speech titled Global Financial and Eurozone Reform: Five Questions on a Common Theme: see here (pdf). In a wide-ranging speech, Lord Turner considered the desirability of the single market right available to banks in one Member State to operate through a branch in another Member State. He argued that there was a reasonable case for giving national authorities within the EU the power to require banks from other Member State to operate as subsidiaries not branches, particularly where the bank's operations involved accepting significant retail deposits.

Monday 25 February 2013

Europe: FSA update on CRD IV implementation

The Financial Services Authority has published an update with regard to the implementation of the new European CRD IV legislation in the United Kingdom: see here. The FSA notes that the European Commission CRD IV proposals - consisting of a Regulation and a Directive - had an implementation date of 1 January 2013 but that agreement has not yet been reached between the European Commission, Parliament and Council. Nevertheless, the FSA expects all firms within the scope of CRD to undertake all preparatory work that is possible in the absence of finalised European legislation.

Friday 22 February 2013

UK: audit market not serving shareholder interests says Competition Commission

The Competition Commission has published preliminary findings in respect of its inquiry into the market for statutory audit services: see here (pdf). The Commission has provisionally concluded that there are features of the market that create an adverse affect on competition and that this results in companies being offered higher prices, lower quality and less innovation (and differentiation of offering) than would be the case in a market without the adverse features. The Commission's accompanying press release, available here, carries the headline "Audit market not serving shareholders".

A summary of the Commission's preliminary findings is available here (pdf) and the full preliminary findings report will be published shortly. Possible remedies are outlined and include mandatory tendering, mandatory rotation and greater shareholder engagement: see here (pdf). The following features of the market have been identified by the Commission:
  • Barriers to switching: [i] Companies face significant hurdles in comparing the offerings of an incumbent firm with those of alternative suppliers other than through a tender process, [ii] It is difficult for companies to judge audit quality in advance due to the nature of audit; [iii] Companies and firms invest in a relationship of mutual trust and confidence from which neither will lightly walk away as this means the loss of the benefits of continuity stemming from the relationship.
  • Company management face significant opportunity costs in the management time involved in the selection and education of a new auditor. 
  • Mid Tier firms face experience and reputational barriers to expansion and selection in the FTSE 350 audit market.
  • Auditors have misaligned incentives, as between shareholders and company management, and so compete to satisfy management rather than shareholder demand, where the demands of executive management and shareholders differ.
  • Auditors face barriers to the provision of information that shareholders demand (in particular from the reluctance of company management to permit further disclosure). 
Further information, including all of the Commission's supporting documentation (e.g., working papers), is available here The Commission's final report is expected in August this year.

UK: PIRC recommends opposition to all new long-term incentive plans

PIRC has published the latest edition of its share owner voting guidelines: see here. Opposition to all new long-term incentive plans is recommended because, in PIRC's view, they are not long-term and do not incentivise. PIRC is also calling for greater scrutiny of remuneration consultants and companies' use of International Financial Reporting Standards.

Thursday 21 February 2013

UK: FSA responds to to Treasury Committee report on LIBOR

Last August the Treasury Select Committee published its report Fixing LIBOR: some preliminary findings: see here. The response of the Financial Services Authority was published today: see here (pdf). This contains some interesting points about the FSA's powers in respect of approved persons, and the approved persons regime, which were also recently discussed before the Parliamentary Commission on Banking Standards: see here.

Europe: Consultation on Principles for Benchmarks-Setting Processes - responses published

Responses to the joint European Securities and Markets Authority/European Banking Authority consultation on Principles for Benchmarks-Setting Processes in the EU have been published: see here.

Wednesday 20 February 2013

Europe: IMF discussion note on the banking union

The International Monetary Fund has published a staff discussion note concerning the proposed banking union, together with accompanying technical notes: see, respectively, here (pdf) and here (pdf). It is stated, amongst other things, that the European Council's agreement on the single supervisory mechanism in December was an important step but raises challenges that should not be underestimated.

Tuesday 19 February 2013

Europe: ESMA recommends EU Code of Conduct for Proxy Advisors

The European Securities and Markets Authority has published its final report on the proxy advisory industry: see here (pdf). The report identifies several concerns with regard to the independence of proxy advisors and the accuracy of the advice provided. ESMA believes that these should be addressed through the introduction of an EU code of conduct for proxy advisors and its report sets out a proposed framework for such a code.

Maldives: the Capital Market Development Authority's Corporate Governance Code and Principles

The codes and principles directory maintained by the European Corporate Governance Institute has been updated this week to include a copy of the Corporate Governance Code and Principles published by the Capital Market Development Authority: see here.

Netherlands: compliance with the corporate governance code

Last December the Corporate Governance Monitoring Committee published a report regarding companies' compliance with the Dutch Corporate Governance Code: see here. A copy of the report in English is now available: see here (pdf).

Isle of Man: Treasury begins consultation on company law consolidation and reform

The Isle of Man Treasury has published for consultation a draft Companies Bill 2013 and draft Foreign Companies Bill 2013. The purpose of the Companies Bill 2013 is to consolidate and update the existing company law framework (as found in the Companies Acts 1931-2004). A stand alone Foreign Companies Bill 2013 is proposed to replace Part XI of the Companies Act 1931.

An overview of the consolidation and proposed changes is available here (pdf). The draft Bills are available here. A table of derivations is available and this usefully identifies new provisions: see here (pdf). Amongst the changes being proposed is the codification of directors' duties (along the same lines as the UK's Companies Act 2006) and the introduction of a statutory procedure for bringing a derivative claim on behalf of the company.

Monday 18 February 2013

IAASB consults on audit quality framework

Earlier this year the International Auditing and Assurance Standards Board published for consultation its proposed framework for audit quality: see here (pdf). Responses are invited by 15 May 2013 and, in particular, the IAASB would like to know if the framework is clear, comprehensive and useful.

Friday 15 February 2013

Australia: ASIC consults on proposals to strengthen debenture regulation

The Australian Securities and Investments Commission and the Australian Prudential Regulation Authority have published for consultation proposals to strengthen the regulation of companies that issue debentures to retail investors, including mandatory capital and liquidity requirements: see here (pdf).

Jersey: capital maintenance, reduction of capital and the protection of creditors

The Royal Court (Samedi Division) has delivered an important judgment - Re WPP Plc [2013] JRC031 - concerning the effect of the Companies (Amendment No.9) (Jersey) Law 2008 and the Companies (Amendment No.2) (Jersey) Regulations 2008 ("the 2008 amendments") on the courts' approach to the protection of creditors on a reduction of capital. Amongst other things the 2008 amendments introduced into Jersey company law (through amendments to the Companies (Jersey) Law 1991) a new procedure for reductions of capital including the requirement for directors to make a solvency statement. The court held that following these amendments the principle of capital maintenance was of limited application in Jersey, with (new) Article 115 of the 1991 Act making clear that distributions were no longer restricted to being made out of profits. More specifically, the court held (para. [24]):

We reiterate that the 2008 amendments do not remove the duty of the Court to have regard to the interests of creditors in relation to any reduction of capital. The sole effect of the 2008 amendments is that, where the reduction effectively transfers funds from a capital account such as a share premium account (from which distributions may be freely made under Article 115 subject only to the solvency requirement) to a non-capital account (from which distributions may be made on exactly the same basis), it is hard to envisage the Court concluding that creditors may be prejudiced or that any other measure to protect creditors is required. We emphasise however that these observations apply only to a reduction of this nature. Where any other form of reduction is proposed, the Court may still require measures to be taken to satisfy it that creditors will not be prejudiced by the reduction.

Europe: trends, risk and vulnerability in securities markets - ESMA report published

The European Securities and Markets Authority has published its first report on trends, risks and vulnerabilities in European Union securities markets: see here (pdf). Amongst other things, the report notes that activity on European trading venues decreased in 2012, dropping below the five year average, and liquidity risk remains a source of concern especially in the sovereign bond market.

Europe: Commission publishes proposed FTT Directive

The European Commission yesterday published its proposed Directive for a financial transaction tax in eleven Member States (Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia): see here (pdf). Further information is available in the accompanying press release, the FAQs and on the Commission's website.

Thursday 14 February 2013

UK: recommendations on effective internal audit in the financial services sector

The Committee on Internal Audit Guidance for Financial Services has published for consultation its draft recommendations on effective internal audit in the financial services sector: see here (pdf). The recommendations are designed to provide a benchmark for effective internal audit in financial services and have been produced at the request of the Financial Services Authority.

Germany: corporate governance code amendments now available in English

Earlier this month the Government Commission on the German Corporate Governance Code published for consultation proposed changes to the German Corporate Governance Code. An overview of these changes, together with a copy of the Code showing the proposed amendments, is now available in English: see, respectively, here (pdf) and here (pdf).

Wednesday 13 February 2013

UK: Supreme Court holds that extended warranty contracts were contracts of insurance

The Supreme Court gave judgment today in Digital Satellite Warranty Cover Limited v Financial Services Authority [2013] UKSC 7: see here or here (pdf). The court unanimously held that extended warranty contracts were contracts of insurance as defined in Article 3(1) and Schedule 1 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/344). The court also held that the fact that the First Council Non-life Insurance Directive (73/239/EEC), as amended by Council Directive 84/641/EEC, specified certain categories of non-life insurance that required regulation did not mean that Member States were precluded from regulating further or wider categories under national law. As such, the court held that the FSA was entitled to seek the winding-up of the companies offering these contracts where they had failed to gain the FSA's authorisation in breach of the general prohibition under section 19 of the Financial Services and Markets Act 2000.

A summary of the court's decision is available here (pdf). A summary was also delivered by Lord Sumption (see below):

FSB peer review report on risk governance

The Financial Stability Board has published a peer review report as part of its thematic review on risk governance: see here (pdf). The accompanying press release, which provides a brief overview of the report's findings, is available here (pdf). The report makes several recommendations, one of which is that standard setting bodies should review their governance principles to take into account the FSB's sound risk governance practices (as outlined in the report). In part this recommendation is made because of the FSB's finding that firms' progress has been uneven in developing and implementing effective risk appetite frameworks.

Tuesday 12 February 2013

Europe: ESMA publishes final guidelines on remuneration of alternative investment fund managers

The European Securities and Markets Authority has published its final Guidelines on sound remuneration policies under the Alternative Investment Fund Managers Directive: see here (pdf). These operate on a 'comply or explain' basis: competent authorities (e.g., regulators/supervisors) within the Member States are required to inform ESMA whether they comply or intend to comply with the guidelines.

Monday 11 February 2013

UK: CEO pay - High Pay Centre report describes global talent pool argument as 'self-serving myth'

The High Pay Centre today published a report titled Global CEO Appointments - A Very Domestic Issue: see here (pdf). According to the report: "Less than one per cent of top chief executives are poached from overseas, and 80% are promoted from within the company, proving that justifications for high pay in the UK due to a highly-paid global talent pool are a 'self-serving myth'".

Europe: Commission consultation on benchmarks - responses published

The European Commission has published a summary of the responses received in respect of its recent consultation regarding a possible framework for the regulation of benchmarks: see here (pdf). The individual responses are available here.

UK: England and Wales: land-banking and collective investment schemes

The High Court gave judgment last Friday in Financial Services Authority v Asset L I Inc (t/a Asset Land Investment Inc) [2013] EWHC 178 (Ch). The trial judge held that land-banking schemes were collective investment schemes as defined by section 235 of the Financial Services and Markets Act 2000. The judgment contains some interesting discussion of section 235 including the first part of the definition which refers to "any arrangements" in respect of which the trial judge stated (para. [160]):
"I accept that a (mis)understanding or expectation held by only one person involved in a matter does not amount to an "arrangement" about it. But there can be an "arrangement" without both (or all) parties sharing an intention or expectation (just as a person can make a contract without intending to keep it). The FSA's case, that I have upheld, is not that there would be arrangements if investors simply leapt to their own understanding about their investments or misunderstood what they were being told: it is that the investors' understanding was based, and reasonably based, on what they were told by Asset Land's representatives. Thus, arrangements were made even if Asset Land had no intention of acting in accordance with them and even if their representatives knew this when they made the arrangements. Mr Coppel accepted that a fraudulent scheme can be an arrangement, but explained this on the basis that the parties to it have "mutual expectations", the fraudulent party expecting the innocent party to adhere to it and the innocent party likewise expecting the fraudulent party to do so. I reject that argument; the parties to a fraudulent scheme do not have an arrangement because of such mutual expectations or because of any subjective expectations or intentions, but because of what they have arranged objectively."

Update (13 February 2013): a summary of the case, provided by the ICLR, is available here.

Friday 8 February 2013

UK: Supreme Court to give judgment in Digital Satellite Warranty case next week

The Supreme Court has announced that its decision in Digital Satellite Warranty Cover Limited v Financial Services Authority will be given next Wednesday: see here. At issue was whether extended warranties for satellite television equipment were contracts of general insurance under Article 3 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 SI 2001/344.

UK: Remuneration Principles for Building and Reinforcing Long-Term Business Success

Hermes EOS, the National Association of Pension Funds, BT Pension Scheme, RPMI Railpen Investments and USS Investment Management, have published guidance for boards titled Remuneration Principles for Building and Reinforcing Long-Term Business Success: see here (pdf). The guidance contains four high-level principles:
  1. Management should make a material long-term investment in shares of the businesses they manage.
  2. Pay should be aligned to long-term success and the desired corporate culture throughout the organisation.
  3. Pay schemes should be simple, understandable for both investors and executives, and ensure that rewards reflect long-term returns to shareholders.
  4. Remuneration committees should fully explain and justify how their decisions operate to deliver long-term business success.

Denmark: Committee consults on new and simplified governance recommendations

Earlier this year the Committee on Corporate Governance published for consultation new and simplified recommendations on corporate governance: see here. A draft copy of the revised recommendations is not yet available in English but a copy in Danish is available here (pdf). The Committee is proposing, amongst other things, to replace its current 79 recommendations with 50. Earlier recommendations of the Committee are available here.

Thursday 7 February 2013

Europe: protecting the financial system from money laundering and terrorist financing

The European Commission has published a proposal for a Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (see here, pdf) and a Regulation on the information accompanying transfers of funds (see here, pdf). These proposals are designed to improve the current legal framework governing money laundering and funds transfer and reflect recent FATF recommendations. For further information see: Commission press release | FAQs | Impact assessment: complete (pdf) and summary (pdf) |.

UK: Insolvency Service inquiry - BIS Committee publishes report

Yesterday the Business, Innovation and Skills Committee published its Insolvency Service inquiry report: see here (pdf). Amongst other things the Committee stated: "We are strongly of the opinion that the levels of disqualification of errant directors should not be determined by an arbitrary level set in what the Insolvency Service describes as the public interest. We believe that any dilution of enforcement activity would send entirely the wrong message to delinquent directors and recommend that the Department provides the Insolvency Service with sufficient, and if necessary, additional funding to disqualify or sanction all directors who have been found guilty of misconduct." (para. 62).

Wednesday 6 February 2013

UK: Supreme Court judgment in VTB Capital (piercing the corporate veil and other matters)

The Supreme Court gave judgment today in VTB Capital plc v Nutritek International Corp [2013] UKSC 5. A copy of the judgment is available here and here (pdf). A summary is available here (pdf) and also below (delivered by Lord Mance, the corporate veil point is considered at 5:36). A summary of the decision has also been provided by the ICLR: see here.

Germany: Commission proposes changes to Corporate Governance Code

The Government Commission on the German Corporate Governance Code yesterday published for consultation the changes it proposes to make to the German Corporate Governance Code. An overview of the changes, in English, is available here (pdf). These include the recommendation that the supervisory board place a cap on the total remuneration of directors as well as those elements which make up remuneration. A more detailed explanation of the proposed changes is available, in German, here (pdf). A copy of the Code, reflecting the proposed changes, has also been published (in German): see here (pdf).

Tuesday 5 February 2013

UK: The FInancial Services (Banking Reform) Bill - First reading in House of Commons

The Financial Services (Banking Reform) Bill received its First reading in the House of Commons yesterday: see here. A copy of the Bill, as introduced, is available here or here (pdf). Explanatory notes will be available here and the progress of the Bill can be followed here. Second reading of the Bill is scheduled for today.

UK: FRC consults on revisions to the content of the auditor's report on financial statements

The Financial Reporting Council has published a consultation paper in which it sets out proposed revisions to the content of the auditor's report on financial statements in respect of those entities required to comply or explain with the UK Corporate Governance Code. The revisions are to be made to International Standards on Auditing (UK and Ireland) 700: The Auditor's report on Financial Statements and include, amongst other things, the addition of a description of the assessed risks of material misstatement that were identified by the auditor and which had the greatest effect on: overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team.

Monday 4 February 2013

UK: structural reform of the banking sector and the electrification of the ring-fence

Last year the Government published its proposals for the ring-fencing of banks' deposit-taking activities: see here. These were subject to review by the Parliamentary Commission on Banking Standards which, in a report published shortly before Christmas, recommended that the legislation should seek to deter banks from testing the limits of the ring-fence by providing for full separation of activities in certain circumstances, so-called 'electrification' of the ring-fence: see here. Today, the Chancellor of Exchequer announced in a speech his acceptance of the Commission's electrification recommendation: see here. A document outlining the Government's response to the Commission's recommendations was also published and this states that the amended Financial Services (Banking Reform) Bill will be introduced in Parliament today: see here (pdf).

South Africa: introducing twin peaks financial regulation

In 2011 the National Treasury published a policy document titled A safer financial sector to serve South Africa better in which the adoption of a twin peaks model of financial regulation was proposed: see here (pdf). The Financial Regulatory Reform Steering Committee - comprising senior officials from the South African Reserve Bank, Financial Services Board and National Treasury - was subsequently formed and last Friday published proposals outlining how the implementation of a twin peaks regulatory structure is to be achieved: see here (pdf).

Friday 1 February 2013

UK: introducing the new financial regulatory structure - the Financial Services Act 2012 (Transitional Provisions) (Rules and Miscellaneous Provisions) Order 2013

The Financial Services Act 2012 (Transitional Provisions) (Rules and Miscellaneous Provisions) Order 2013 was laid before Parliament earlier this week and comes into force on 20 February. An explanatory memorandum is available here and here (pdf). Amongst other things, the Order provides the means by which rules made by the current regulator, the Financial Services Authority, are to be treated as made by the new regulators (the Financial Conduct Authority and the Prudential Regulation Authority) or the Bank of England. It also provides the FSA with the power to appoint individuals to perform certain functions of the Financial Conduct Authority prior to 1 April 2013 when, formally, the new regulators replace the FSA.