UK: The Queen's Speech - the Government's legislative programme

The State Opening of Parliament took place today with the Queen's Speech setting out the Government's legislative programme. The briefing notes accompanying the Speech, explaining in more detail the Bills that the Government intends to introduce, are available here (pdf). In the section of this document discussing the proposed Employment Bill, the following is said:

We will also develop proposals on company audit and corporate reporting, including a stronger regulator with all the powers necessary to reform the sector. These proposals aim to improve public trust in business, following the three independent reviews [see here, here and here] commissioned in 2018. It will also help workers employed by a large company in future to know how resilient it is".

Other proposals include the introduction of a new insolvency regime for airlines and further financial services legislation - the latter to include measures dealing with the selling of overseas investment funds in the UK and the UK's implementation of the Basel Framework standards following its departure from the European Union.

UK: Auditing - The Brydon review report and recommendations

The Brydon review's report concerning the quality and effectiveness of audit was published today: see here (pdf). It looks set to become a landmark publication in the development of the UK corporate governance framework. A list of the report's recommendations is available here (pdf). In its tone, and in the scope of the recommendations, the report calls for dramatic change. It extends beyond a narrow view of the audit process to consider the purpose of auditing (and the auditing profession) along with directors' reporting obligations and the role of audit committees.

Indeed, the report recommends the creation of a separate profession - corporate auditing - distinct from accounting, and operating within an overarching set of principles: the principles of corporate auditing.  It is recommended that the successor of the Financial Reporting Council - the Audit, Reporting and Governance Authority - should act as "midwife" for this new profession.

The report also recommends the adoption, in the Companies Act 2006, of this purpose of the statutory audit: “...to help establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements”.  Auditors should act in the public interest, the report states, and have regard to the interests of users beyond the shareholders. Moreover, the role of employees in the audit process is acknowledged with the recommendation that the directors seek the views of employees regarding the scope of any audit activity.

With regard to fraud, the report seeks to challenge the perception that auditors have no obligation to detect fraud and argue that they should endeavour to do so. It recommends that directors are subject to a new reporting duty: to set out the actions they have taken each year to prevent and detect material fraud. This would be subject to a corresponding duty, owed by the auditor, to state (1) how they have assured the directors' statement and (2) the additional steps they have taken to assess the effectiveness of the relevant controls and to detect any such fraud.

IOSCO: consultation - conflicts of interest during the debt capital raising process

The IOSCO has published a consultation paper in which views are sought on proposed guidance to address conflicts of interest and associated conduct risks during the debt capital raising process: see here (pdf).

UK: FRC publishes revised Auditing Standards

The Financial Reporting Council has today published revised Auditing Standards including a revised Ethical Standard: see here.

Antigua and Barbuda: Privy Council decision on unfair prejudice and insolvency

The Judicial Committee of the Privy Council delivered its opinion today in Stanford International Bank Ltd, Re (Antigua and Barbuda) [2019] UKPC 45. A summary is available here (pdf). The opinion is of particular interest because of the wide relevance of the central question before the Board: whether relief was available for oppressive or unfairly prejudicial conduct where a company was in liquidation. The Board held, by majority and with reference to authorities from across the Commonwealth, that such relief was not available. Lord Briggs (with whom Lord Wilson and Sir Andrew Longmore agreed) observed (paras. [56] and [57]):

There is nothing in section 204 [("Restraining Oppression")], construed as part of the [Antiguan International Business Corporations Act], which compels a conclusion that it provides relief in the context of insolvent liquidation. The breadth of the discretionary power given to the court and the broad range of stakeholders for whose benefit those powers may be exercised is perfectly consistent with an intention that they are designed and intended to be used entirely in the pre-liquidation context. Although it is difficult to discern a clear statutory prohibition of the use of those powers in an insolvency context, it is, in the Board’s view, fundamentally inappropriate that they should be so used.

This is mainly because relief from oppression or unfairly prejudicial conduct is conferred on essentially broad discretionary and equitable principles which simply cannot be made to fit within the implementation of the applicable insolvency scheme. The two frameworks (relief from oppression and the insolvency scheme) as described earlier in this judgment are simply incompatible with each other. They serve different objectives. One of them (the insolvency scheme) serves a recognised public interest whereas the other does not or, if it does at all, only to a much lesser extent, being concerned more with justice and equity as between stakeholders in the company’s affairs. The two frameworks are like chalk and cheese."

UK: FRC corporate reporting and audit quality review programme

The Financial Reporting Council has announced its 2020/21 corporate reporting and audit quality review programme see here.  Included in the programme is a review of IFRS16 disclosure (in the first year of implementation) and the effects on disclosure of the UK's departure from the European Union.

UK: Supreme Court considers meaning of 'adequate consideration'

The Supreme Court gave judgment last Wednesday in MacDonald v Carnbroe Estates Ltd (Scotland) [2019] UKSC 57. A summary of the judgment is available here (pdf). The court considered the meaning of the expression 'adequate consideration' as used in section 242 (Gratuitous alienations (Scotland)) of the Insolvency Act 1986 and unanimously held that it was to determined according to an objective test, with regard to the commercial justification of the transaction and assuming that the parties would be acting in good faith and at arm's length.

UK: FCA policy statement - PS19/28: Proxy Advisors (Shareholders’ Rights) Regulations implementation

The Financial Conduct Authority has published a policy statement in respect of the changes it will make to its Decision Procedure and Penalties manual (DEPP) and the Enforcement Guide (EG) following the new powers given to it by the Proxy Advisors (Shareholders’ Rights) Regulations 2019: see here (pdf).

UK: Updating the Charity Governance Code

The Steering Group responsible for the Charity Governance Code has announced that it proposes "a light 'refresh'" of the Code in 2020 and more extensive changes in 2023. A route map is being developed for the changes intended for 2023. Further information is available here.

India: Company Law Committee report published

The Committee set up in September by the Ministry of Corporate Affairs to consider certain aspects of the company law framework has published its first report, including recommendations, in respect of whether certain offences should give rise to criminal or civil liability: see here (pdf).

UK: FCA consultation - benchmark administrators and the SMR

The Financial Conduct Authority has published a consultation paper in which it sets out its proposals for the extension of the Senior Managers Regime to benchmark administrators: see here (pdf).

UK: England and Wales: The Re Duomatic principle | relieving a director of liability

Judgment was given yesterday by the Court of Appeal in Dickinson v NAL Realisations (Staffordshire) Ltd [2019] EWCA Civ 2146. The decision is noteworthy for two reasons.  First, the court held that section 1157 of the Companies Act 2006, which provides the court with the power to relieve a director from liability in "proceedings for negligence, default, breach of duty or breach of trust" is wide enough to include claims to enforce proprietary rights arising from the negligence, default, breach of duty or breach of trust.

Second, the court considered the Duomatic principle, which takes it name from Re Duomatic Ltd [1969] 2 Ch 365, and in which Buckley J said that "where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be" (p. 373).  Lord Justice Newey assumed - as he did when a High Court judge in Rolfe v Bernard Samuel Rolfe Tulsesense Ltd [2010] EWHC 244 (Ch) - that the assent of the beneficial owner of a share could meet Duomatic requirements.

USA: SEC consults on amendments to shareholder proposal rule

Rather belatedly I note proposals by the SEC, published earlier this month, to amend the process whereby shareholder proposals are included in a company's proxy statement: see here. The proposed changes would be significant if made and that is one of the reasons why there has been a call for the SEC to extend the period for comment (see, e.g., the letter sent by the Council of Institutional Investors: here, pdf).

UK: Principles for Purposeful Business

In 2017 the British Academy began a research project titled The Future of the Corporation. As part of this project, a report was published today setting out 'Principles for Purposeful Business'. A copy of the report is available here (pdf) and an executive summary is available here (pdf).

There are, in fact, eight principles intended for policymakers and business leaders. The first, for example, states that corporate law should "place purpose at the heart of the corporation and require directors to state their purposes and demonstrate commitment to them". The fourth states that "[c]orporate governance should align managerial interests with companies' purposes and establish accountability to a range of stakeholders through appropriate board structures".

OECD report: the owners of the world's listed companies

The OECD has published a report titled Owners of the World's Listed Companies: see here (pdf). The report is based on ownership information for the 10,000 largest listed companies, comprising 90% of global market capitalisation.  A summary of the report's findings is available in the below presentation:

UK: IoD publishes corporate governance manifesto

With the UK general election underway, the Institute of Directors has published a manifesto for corporate governance: see here (pdf). Amongst other things, the IoD calls for the establishment of an independent corporate governance commission, with oversight of the UK corporate governance and stewardships codes, and separate from the organisation - the Audit, Reporting and Governance Authority - that is to replace the Financial Reporting Council.

UK: England and Wales: the extent of the duties owed by shadow directors

Mr Justice Trower delivered judgment earlier this week in Standish v The Royal Bank of Scotland Plc [2019] EWHC 3116 (Ch). The decision is noteworthy because of the discussion it contains concerning the application of section 170(5) of the Companies Act 2006, which provides that the "general duties [in sections 171 to 177 of the Act] apply to a shadow director of a company where and to the extent that they are capable of so applying". Mr Justice Trower stated (paras. [55] to [57]): 

It is therefore quite clear that section 170 of the 2006 Act cannot be read as imposing the full range of fiduciary duties owed by a de jure director on somebody merely because they have acquired the status of a shadow director. Put another way, because the status of shadow directorship can be acquired through the giving of instructions that are limited to only some part of a company's activities or affairs, there can be commensurable limitations on the nature and extent of the duties that they will thereby owe.

It also follows that the extent of any fiduciary duty owed by a person who is in the position of being a shadow director will reflect the extent and nature of the instructions that he gives. Those acts of instruction are the basis of the relationship between him and the company (and its de jure directors). Fiduciary duties flow from relationships and it necessarily follows that when shadow directorship (and nothing else) is relied on as the source of the fiduciary duty, it is only those acts of instruction which can form the foundation for any fiduciary duties that he may owe.

Thus, where any instructions are pervasive and all-encompassing, extending over the full range of the directors' decision-making, it is possible that the shadow director may owe fiduciary duties across the entire range of the company's activities. In other instances, the extent and nature of the instructions may be more restricted, being limited to particular aspects of the company's business or affairs. It seems to me that it follows that, where there is no relationship between the instruction and the act or omission of which complaint is made, it would be wrong in principle for any fiduciary duty to be owed. There is no principled basis on which a person whose shadow directorship arises out of unrelated matters ought thereby to be treated as having committed a breach of duty".

UK: Jurisdiction Taskforce legal statement on the status of cryptoassets and smart contracts

The chair of the UK Jurisdiction Taskforce, Sir Geoffrey Vos (Chancellor of the High Court), today launched the publication by the Taskforce of a legal statement on the status of cryptoassets and smart contracts: see here (pdf).  In a speech to mark the occasion (here, pdf), Sir Geoffrey observed: "I believe that this morning is a watershed for English law and the UK’s jurisdictions. Our statement on the legal status of cryptoassets and smart contracts is something that no other jurisdiction has attempted. It is genuinely groundbreaking".

UK: England and Wales: the scope of the auditor's duty of care

Judgment was given last Friday in BTI 2014 LLC v Pricewaterhousecoopers LLP & Anor [2019] EWHC 3034 (Ch). The case concerned an application by PwC to strike out a claim or alternatively for summary judgment in its favour. The claim was brought by BTI and centred on the allegation that PwC's negligent audit of two sets of annual accounts had caused directors to pay large dividends that they would not have paid had PwC acted non-negligently (the accounts, it was said, should have shown higher liabilities and fewer distributable reserves).

Mr Justice Fancourt refused PwC application and noted, in particular, that question of the scope of the auditor's duty of care was "a notoriously difficult area of the law ... it would be wrong, in my judgment, to decide the issue of law as a general proposition, on a summary basis, without having the benefit of clear factual findings in the context of which the arguments and their consequences can be properly tested" (para. [121]).

UK: New edition of the Co-operative Corporate Governance Code

Co-operatives UK has published a new edition of its Corporate Governance Code: see here (pdf). The accompanying press release is available here.

UK: The fourth Hampton-Alexander report

The fourth Hampton-Alexander report has been published: see here (pdf). Published by the Hampton-Alexander Review (an independent body set up to increase the number of women on FTSE350 boards) it provides an update on board diversity amongst FTSE350 companies. It notes, for example, that only two FTSE350 boards are male only; 42 boards have only one female director. Amongst FTSE100 boards, 32.4% of directors are female and the report notes that the target of 33% is likely to be met ahead of the December 2020 deadline.

New Zealand: Ministry for the Environment consults on climate related financial disclosure framework

The Ministry for the Environment has published a consultation paper setting out it proposals for a new framework on climate related financial disclosures: see here (pdf). This includes, in the chapter 4, a discussion of directors' legal obligations and climate change. The proposed framework would apply to listed issuers, banks, general insurers, asset owners and asset managers. It would subject them to a mandatory reporting obligation, draws on TCFD Recommendations.

UK: England and Wales: company fraud and the bankers' duty of care

The ICLR have published a summary for the recent Supreme Court decision Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50: see here. The summary reads (to provide an extract) "On a claim by a company against a bank for breach of its duty of care to prevent a withdrawal of funds from its account by one of the company’s directors when it had reason to suspect the transaction to be fraudulent, there was no principle of law that the fraudulent conduct of the director was to be attributed to the company if it was a one-man company".

UK: audit reform - an update from Government

Parliament was dissolved earlier today in order for the general election to begin; voting takes place on December 12. Yesterday, in Parliament, the Secretary of State for Business, Energy and Industrial Strategy commented briefly on audit reform, stating (on the assumption she remained in office) that she was "very keen on the BEIS Committee’s report into audit ... I will bring forward fundamental changes to audit. I expect that to be in the first quarter of next year. I am very interested to read its report and, as I also made clear, I want to see Donald Brydon’s report, which I believe he expects to provide to Government by the end of this year". The Secretary of State has followed these comments within an opinion article published on the Economia website in which her aspirations are more fully articulated.

UK: England and Wales: the new compensation order and disqualified directors

Earlier this month judgment was given by ICC Judge Prentis in Secretary of State for Business, Energy And Industrial Strategy v Eagling [2019] EWHC 2806 (Ch). The case is important because it is the first to consider an application by the Secretary of State for a compensation order under sections 15A and 15B of the Company Directors Disqualification Act 1986. A

The case concerned a director, Kevin Eagling, in respect of whom the Secretary of State had sought (and gained) a disqualification order under section 6 of the 1986 Act. Disqualification was for 15 years. In addition to disqualification, the Secretary of State also applied for a compensation order under which, in general terms, Mr Eagling would be required to pay a fixed amount of compensation to certain identified creditors and a further sum to be available to the general body of creditors.

The compensation order sought by the Secretary of State was granted. ICC Judge Prentis viewed the compensation order regime as being new and free-standing and it required interpretation as such. He also rejected as misplaced the criticisms that had been made of the new regime, including the argument that the new regime - alongside the existing insolvency law regime - would permit double recovery. Such criticisms also overlooked, in his view, the role of the court in exercising discretion as to whether to grant an order and on what terms.

UK: FRC report - Developments in Audit

The Financial Reporting Council has published the latest edition of its annual report Developments in Audit: see here (pdf). The tone of the report is set by the opening line of the executive summary: "Audits are not consistently reaching the necessary, high standards required to provide confidence in financial reporting". The most frequent issue raised by the FRC as part of its audit inspection work concerns the sufficiency of the auditors' challenge of management; the FRC states that firms need to increase urgently their efforts to understand why audit partners and their teams continue to underperform in this area.

UK: Companies House statistics on incorporated companies

Companies House has published its latest quarterly statistics report for incorporated companies in the UK: see here. The report covers the three months ending September 2019 and it notes that this is the first quarter where the size of the effective register has exceeded four million companies (the effective register excludes those companies in the course of winding-up or dissolution).

IOSCO statement on global stablecoin initiatives

The IOSCO has today published a statement concerning the risks and benefits arising from global stablecoin initiatives and the potential application of securities market regulation to such initiatives: see here (pdf). This statement appears not long after the publication, by the Financial Stability Board, of an issues note on the regulatory issues of stablecoins.

UK: England and Wales: winding-up in the public interest

Judgment was given yesterday by HHJ Stephen Davies (sitting as a judge of the High Court) in Secretary of State for Business, Energy and Industrial Strategy v PAG Asset Preservation Ltd [2019] EWHC 2890 (Ch). The case concerned an application by the Secretary of State for the winding-up, on public interest grounds under section 124A of the Insolvency Act 1986, of two companies. Petitions under this ground often provide the opportunity for the court to consider the acceptable use to which the corporate form can be put. The current case is no exception.

The companies at the centre of the case operated a scheme the purpose of which was enable the owners of commercial property to avoid paying business rates on empty commercial property owned by them. This was achieved through the leasing of the property to a special purpose vehicle (SPV) that was then placed in members' voluntary liquidation and thereby relieved of liability to pay business rates. The Secretary of State argued that the companies' business model involved a misuse of insolvency legislation demonstrating a lack of commercial probity justifying winding-up. HHJ Davies rejected this argument, and observed (paras. [126], [127]):

.... it cannot be said that to devise and implement a lawful scheme to avoid business rates which involves the use of the insolvency legislation and process through the use of the MVL [members' voluntary liquidation] in a way which is consistent with the purpose of MVLs, even though that is achieved through the intended creation of a lease containing a term (the determination premium) which artificially creates an asset, is lacking in commercial probity or otherwise contrary to the public interest. In my judgment that would not be consistent with the accepted general principle that it is perfectly proper for companies as artificial constructs to be incorporated with a view to obtaining a fiscal advantage, to create or have transferred to them assets which are artificial from a commercial perspective to achieve the same purpose and/or to be placed into liquidation, again artificially from a commercial perspective to achieve the same purpose, so long as each transaction is a legally genuine and effective transaction and not a sham and so long as each step in the transaction is in accordance with, and not contrary to, the general purpose or a specific purpose of the legislation governing such transactions. In my judgment there has to be something more to justify a finding that the operators of such a scheme are not acting with commercial probity or otherwise contrary to the public interest."

UK: The FRC's annual review of corporate reporting

The Financial Reporting Council has published the results of its annual review of corporate reporting: see here (pdf). Published alongside the report is an open letter addressed to audit committee chairs and finance directors: see here (pdf). The FRC is calling for improvements in (a) companies' reporting of forwarding-looking information, (b) the potential impact of emerging risks on future strategy and (c) the carrying value of assets and the recognition of liabilities.

The report no longer contains a review of corporate governance disclosures and compliance with the UK Corporate Governance Code because a separate report covering these matters will be published later this year.

FRC: Key Facts and Trends in the Accountancy Profession

The Financial Reporting Council has published the latest edition of its report Key Facts and Trends in the Accountancy Profession: see here (pdf). This reports, amongst many other things, that in the year ending 31 December 2018, all companies in the FTSE100 were audited by the Big Four accountancy firms.

UK: The Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019

The Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019 were made last week. This statutory instrument - to quote directly from the accompanying explanatory memorandum (here, pdf) - "... continues the process of addressing failures of retained EU law to operate effectively and other deficiencies arising from the withdrawal of the United Kingdom (UK) from the European Union (EU). This is intended to ensure that the frameworks for the application of international accounting standards under UK law, and for regulatory oversight and professional recognition of statutory auditors and third country auditors in the UK, work effectively following the UK’s withdrawal from the EU" (para. 2.1).

UK: England and Wales: issuer liability and dematerialised shares

Judgment was given yesterday by Mr Justice Hildyard in SL Claimants v Tesco Plc [2019] EWHC 2858 (Ch) in a first instance decision that will nevertheless be regarded as a leading authority on issuer liability towards those holding shares in dematerialised form. The case concerned claims against Tesco under section 90A ("Liability of issuers in connection with published information") and schedule 10A of the Financial Services and Markets Act 2000. The claimants had never directly acquired, held or disposed of a legal interest in the shares: the shares were, instead, held in dematerialised form through CREST using custodians and sub-custodians. Tesco sought to strike-out the claims, arguing that it could not be liable to the claimants under section 90A because (to put matters very generally) of their position in the custody chain. Tesco's arguments were rejected.

UK: The Stewardship Code 2020

The Financial Reporting Council has today published a revised edition of the UK Stewardship Code: see here (pdf). This new Code - titled the Stewardship Code 2020 - is effective from 1 January 2020 and is accompanied by a feedback statement: see here (pdf). The Code contains Principles for asset managers and asset owners and a separate set of Principles for service providers. It operates on the basis of "apply and explain".

UK: FRC Reporting Lab report - climate related corporate reporting

The FRC's Financial Reporting Lab has published a report on climate-related corporate reporting: see here (pdf). The report provides guidance for companies on how their reporting can be improved. It is recommends that companies use the Task Force on Climate-related Financial Disclosures (TCFD) framework to report on climate-related issues; it is noted that the UK Government expects all listed companies and large asset owners to disclose in line with TCFD recommendations by 2022.

UK: BEIS research paper - perceptions of non-financial reporting

The Department for Business, Energy and Industrial Strategy has published a research paper on stakeholder perceptions of non-financial reporting: see here (pdf).

UK: England and Wales: leave to act as a director whilst disqualified to act as such

Judgment was given today in Rwamba v The Secretary of State for Business Energy And Industrial Strategy [2019] EWHC 2669 (Ch). The unusual facts of the case make it noteworthy: an application for permission to act as a director, under section 17 of the Company Directors Disqualification Act 1986, by a director previously disqualified for breaches of an order under section 17. ICC Judge Prentis stated (para. [31]):

Permission given to one who has already been disqualified twice, and the second time for breach of an earlier permission, carries with it the unavoidable additional risk that the disqualification regime is perceived as lax and permissive, a perception which would lead to a lowering of corporate standards contrary to a purpose of the Act. So, the reasons in favour of permission are going to have to be that the more cogent if it is to be granted".

Permission to act as a director was not granted: while the reasons advanced for permission were regarded as legitimate, ICC Judge Prentis found the evidence "simply too fragile to ascribe them much cogency" (para. [72]). The required full explanation for why permission was sought, with relevant corroborative evidence, was not provided. To grant permission in such circumstances, the judge stated, would be "an undermining of the public protection policy within the Act" (para. [72]).

UK: FCA feedback statement - climate change and green finance

The Financial Conduct Authority has published a feedback statement in respect of the discussion paper on climate change and green finance it published a year ago: see here (pdf). The FCA has confirmed that it will, in early 2020, publish a consultation paper in which new disclosure rules are proposed, operating on a 'comply or explain' basis for some issuers, and aligned with TCFD recommendations. The FCA has also stated that it will, in the next few weeks, publish a feedback statement concerning its joint discussion paper with the Financial Reporting Council on effective stewardship.

UK: England and Wales: health and safety fines, subsidiary companies and parent company turnover

Judgment was given last week by the Court of Appeal in Bupa Care Homes (BNH) Ltd, R v [2019] EWCA Crim 1691. The court heard an appeal by a company against a fine of imposed by Her Honour Judge Peters at the Crown Court in Ipswich, where the company had pleaded guilty to an office contrary to section 3(1) of the Health and Safety at Work Act 1974.

The fine had been increased by HHJ Peters with reference to the turnover of the company's parent company (at Step Three under the Sentencing Guideline). The Court of Appeal unanimously held that HHJ Peters was wrong to have done this because it did not "properly reflect the economic realities of the situation" (para. [82]). The Court continued (paras. [83] and [84]):

... the Guideline has to be applied in a way which does not infringe ordinary and well-understood principles of company law. Thus, the mere fact that one company may be the wholly owned subsidiary of a larger parent (with larger financial resources) does not mean that the resources of the parent can be treated as available to, or as part of the turnover of, the subsidiary company, because they are not. The Guideline phrase 'economic realities' cannot be extended to mean that the parent's resources belong to the subsidiary simply in order to justify a large increase in fine at Step Three, any more than they can be taken into account to increase the size of the subsidiary's turnover for the purposes of the tables in Step Two .... if it is generally wrong to take into account the parent's turnover so as to increase the subsidiary's turnover at Step Two (which it is) then it is wrong to take it into account to increase the fine at Step Three absent some special factor of the type identified in Tata Steel Ltd [2017] EWCA Crim 704 or NPS London [2019] EWCA Crim 228 (although, as we have observed, these were cases where fines were not reduced because of the parental turnover; they were not cases where fines were increased because of it). We decline to speculate on what such special factors might be; the question will have to be determined as and when it arises".

Australia: financial assistance and pre-emption rights

The High Court gave judgment yesterday in Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33. The decision is an important and interesting one on the interaction between pre-emption provisions and the prohibition, within section 260A(1) of the Corporations Act 2001, against a company providing, in certain circumstances, financial assistance to a person in respect of that person's purchase of the company's shares. The court stated (at para. [39]):

Section 260A(1) does not abrogate the power of a company to enforce its constitution. However, together with s 1324(1B), it has the effect that if a company wishes to bring proceedings to enforce pre-emptive rights in its constitution, for the benefit of some of its shareholders but at the company's expense, then the company is liable to be enjoined from doing so unless the assistance is approved by shareholders under s 260B, or unless the company can satisfy the court that bringing the proceedings at its own expense does not materially prejudice the interests of the company or its shareholders or the company's ability to pay its creditors".

UK: England and Wales: just and equitable winding-up

Judgment was given yesterday by the Court of Appeal in Badyal v Badyal [2019] EWCA Civ 1644. At first instance the trial judge had rejected the argument that in order to secure the winding-up of a company under the just and equitable ground - section 122(1)(g) of the Insolvency Act 1986 - it was necessary only to show that mutual trust and confidence between the shareholders had broken down. The Court of Appeal agreed with the trial judge.

Australia: ASIC Corporate Governance Taskforce report - director and officer oversight of non-financial risk

The Corporate Governance Taskforce established by the Australian Securities and Investments Commission has published its first report. The report, on the subject of director and officer oversight of non-financial risk, is available here (pdf). The report found, amongst other things, that there was scope to improve the effectiveness of board risk committees: they ought to meet more regularly and be actively engaged in overseeing material risks in a timely and effective manner.

Canada: the gender diversity of boards

The Canadian Securities Administrators have published data on boards' gender diversity, based on the disclosures under National Instrument 58-101 Disclosure of Corporate Governance Practices, provided by 641 issuers with year ends between 31 December 2018 and 31 March 2019: see here. It is reported that the number of board positions occupied by women has increased to 17%, up from 11% in 2015.

UK: England and Wales: the extraterritorial effect of section 236 of the Insolvency Act 1986

Judgment was delivered earlier this week by Adam Johnson QC (sitting as a Judge of the High Court) in Wallace v Wallace [2019] EWHC 2503 (Ch). At issue was whether an order under section 236 ("Inquiry into company’s dealings, etc.") of the Insolvency Act 1986 could be made against an individual resident abroad. To put this another way: does section 236 have extraterritorial effect? The existing authorities presented, the Judge noted, "a somewhat fragmented picture" (para. [46]) but he concluded, with respect to the power to order the production of "any books, papers or other records" under section 236(3), that an order could be made against an individual resident outside of the United Kingdom.

UK: FRC says Audit Transparency Reporting is ineffective

The Financial Reporting Council has published the results of its review of audit firm transparency reporting: see here (pdf). The FRC reviewed, amongst other things, the 2017 Transparency Reports for each of the 33 audit firms that audit a public interest entity and which, therefore, are subject to the requirement to prepare a Transparency Report (see, now, EU Regulation 537/2014, article 13). The FRC identified five firms - unnamed in the report - that had failed to publish a Transparency Report notwithstanding the requirement to do so.

The FRC has concluded that audit transparency reporting is ineffective, with Transparency Reports seen by many firms as a marketing opportunity (rather than an accountability or compliance document) and the Reports themselves remaining unread by the intended beneficiaries (principally investors and audit committee members). A review of the current requirements will begin in 2020.

Australia: ASIC report on corporate finance regulation

The Australian Securities and Investments Commission has published its latest report on its corporate finance oversight activities for the period January to June 2019: see here (pdf). The report notes, amongst other things, that ASIC asked for amended or additional disclosure in more than a quarter of the prospectuses lodged during this period. Under the heading of corporate governance, the report outlines what ASIC has recently done to clarify its policy concerning the disclosure of the risk and opportunities associated with climate change. 

Singapore: Court of Appeal considers the prohibition against a company acquiring its own shares

The Court of Appeal gave judgment a few days ago in The Enterprise Fund III Ltd and others v OUE Lippo Healthcare Ltd (formerly known as International Healthway Corp Ltd) [2019] SGCA 48: see here (pdf). The decision is important as it has become the leading authority on the prohibition, within sections 76 and 76A of the Companies Act (Cap 50, 2006 Rev Ed), against a company acquiring its own shares. Amongst the specific matters considered by the court were the breadth of an indirect acquisition (under section 76(1A)(a)(i)) and the scope of the saving provision (in section 76A(1A)) for a disposition of book-entry securities.

France: AMF consultation on squeeze outs

AMF - Autorité des Marchés Financiers, the financial market regulator - has begun a consultation on squeeze outs: see here.

UK: England and Wales: more on relational contracts and good faith

Judgment was given yesterday by Mr Justice Fancourt in UTB LLC v Sheffield United Ltd & Ors [2019] EWHC 2322 (Ch). The decision is noteworthy because of the discussion it contains concerning the use of the label 'relational contract' and the circumstances in which a duty of good faith should be implied in an investment and shareholder agreement. The trial observed (paras. [203] - [204]):

Rather than seek to identify and weigh likely indicia of a "relational contract" in the narrower sense used by Leggatt LJ, it is, I consider, preferable to ask oneself first – as Leggatt LJ did in the Sheikh Tahnoon case – whether a reasonable reader of the contract would consider that an obligation of good faith was obviously meant or whether the obligation is necessary to the proper working of the contract. The overall character of the contract in issue will of course be highly material in answering that question but so will its particular terms, as recognised by the principle that (as restated in the Marks and Spencer case) no term may be implied into a contract if it would be inconsistent with an express term.

That approach is, in my respectful opinion, preferable also because the exact content of any implied obligation of fair dealing, or to act with integrity, or to act in good faith, will be highly sensitive to the particular context of the contract, as observed by Dove J in D&G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB) at [175]. The greater part of that context is the express terms of the contract. Thus, to imply a general obligation to act at all times in good faith towards the counterparty because the contract is a relational contract may fail to have regard to rights and obligations created by the express terms, to which any implied obligation must be tailored if it is not to be excluded as being inconsistent with them. In the instant case there is a real example of just such a question, to which I return ..."

UK: Treasury announces review of the disguised remuneration loan charge

The Treasury has announced a review of the disguised remuneration loan charge: see here. The operation of the charge has been subject to intense criticism, not least by the Loan Charge All Party Parliamentary Group in its report published in April this year: see here (pdf). The review will be conducted by Sir Amyas Morse, the former Comptroller and Auditor General and Chief Executive of the National Audit Office.