UK: Government confirms proposals for audit and governance reform

The Department for Business, Energy and Industrial Strategy today published its response, and proposals, following last year's white paper consultation Restoring Trust in Audit and Corporate Governance: see here (pdf). The accompanying press release is available here.    

The Financial Reporting Council - set to become the Audit, Reporting and Governance Authority (ARGA) with new powers through legislation under the Government's plans - has welcomed the Government's proposals although its chief executive, Sir Jon Thompson, described as a "missed opportunity" the decision not to introduce a statutory version of the Sarbanes-Oxley internal control statement: see here. Instead, the Government will invite the FRC/ARGA to include such a statement in the UK Corporate Governance Code as part of a review of its internal control principles and provisions.

Dramatic changes to the auditing profession now seem most unlikely, the Government having decided against seeking to establish, at this stage, a new corporate auditing framework or a new professional body for auditing. Instead, ARGA is to be invited to work with the existing professonal bodies to improve auditor education and continuing professional development.

Other proposals include giving ARGA the power to set new minimum requirements for audit committees.  It will also be given the power to investigate and sanction certain breaches of reporting and auditing responsibilities by directors of public interest entities.

UK: NHS England consults on revised Code of Governance for NHS provider trusts

NHS England has published for consultation an updated edition of its Code of Governance for NHS provider trusts: see here. The Code will apply to NHS foundation trusts and, for the first time, NHS trusts, the consultation noting that "[d]espite their different constitutions, there are overarching principles of corporate governance that apply to both" (para. 2.6). The Code, as with the UK Corporate Governance Code, contains principles and provisions and operates on the basis of 'comply or explain'.

UK: FCA sets out plans for single segment listing regime

The Financial Conduct Authority has published a discussion paper, as part of its Primary Markets Effectiveness Review, in which it seeks views on reforms to the listing regime: see here (pdf). The FCA is proposing to introduce a single segment regime for commercial companies. Under this regime, companies would be subject to the same eligibility criteria and mandatory continuing obligations, but there would be the option to adopt supplementary obligations. 

Under the FCA's proposal, the mandatory continuing obligations would include, amongst other things, the UK Corporate Governance Code and its 'comply or explain' approach. The current controlling shareholder regime would, however, become supplementary.

India: Company Law Committee report published by MCA

The Ministry of Corporate Affairs published, last month, a report by the Company Law Committee in which wide-ranging reforms were proposed: see here. The Committee has recommended, amongst other things, that the Companies Act 2013 is amended to (a) provide the Central Government with the power to require certain companies to be subject to joint audit; (b) recognise Special Purpose Acquisition Companies (SPACs); and (c) give Central Government the power to prescribe Rules to provide for greater use of electronic communication and the format (physical, electronic, hybrid) of shareholder meetings.

UK: England and Wales: Court of Appeal considers application of section 168(5) of the Insolvency Act 1986

Earlier this month the Court of Appeal gave judgment in Re Edengate Homes (Butley Hall) Ltd [2022] EWCA Civ 626. The case is of interest because of the discussion it contains concerning the application of section 168(5) of the Insolvency Act 1986. This provision provides that where "any person is aggrieved by an act or decision of the liquidator, that person may apply to the court; and the court may confirm, reverse or modify the act or decision complained of; and make such order in the case as it thinks just." Males LJ, with whom Stuart-Smith and Aplin LJJ agreed, stated (at para. [36]): 

It is not sufficient that an applicant for relief under section 168(5) is a creditor of the insolvent company. It must in addition have a legitimate interest in the relief sought. Where the application is to set aside a disposal of property by the liquidator, including the assignment of a claim, an applicant will have a legitimate interest if it is acting in the interests of creditors generally. Typically that will be the case when the effect of the relief sought will be to maximise the assets of the estate. But an applicant will not have standing if the relief sought is contrary to the interests of the creditors as a class, as it will be where that will result in a lesser recovery."

The case reached the Court of Appeal because, it seems, the trial judge was of the view that the case law authorities were inconsistent. This view was rejected by the Court of Appeal, with Males LJ observing: "the principles are clear and have been consistently applied" (para. [37]).

FATF publishes updated Recommendations

The Financial Action Task Force has recently updated its International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (the FATF Recommendations): see here. The update relates to Recommendation 24 on the transparency and beneficial ownership of legal persons: see here for further information.

UK: England and Wales: multiple derivative claims

A very quick post to say: I see that permission to continue various claims has been refused by Mr Justice Leech in McGaughey & Anor v Universities Superannuation Scheme Ltd & Anor [2022] EWHC 1233 (Ch). Some claims were found not to be multiple derivative claims, as the claimants argued they were, while in respect of another - alleged breaches of directors' duties where directors continued to invest in fossil fuels without an immediate plan to divest contrary to the company's long-term interests - the judge held that the claimants lacked a sufficient interest or standing.

UK: FRC publishes updated International Standards on Auditing

The Financial Reporting Council has today published 29 updated International Standards on Auditing (UK): see here.

UK: England and Wales: on the definition of 'persons discharging managerial responsibility'

The catching-up (also known as "101 ways to avoid marking, number 42") continues with a post to note that the ICLR has published a summary of the High Court decision Allianz Global Investors GmbH v G4S Ltd [2022] EWHC 1081 (Ch): see [2022] WLR(D) 206. The case concerned an issuer's liability under section 90A of the Financial Services and Markets Act 2000 for untrue or misleading statements. Such liability arises only if a 'person discharging managerial responsibilities' within the issuer knew that the statement was untrue or misleading, or was reckless as to whether this was so. The court held (to quote the summary):

The definition in paragraph 8(5) of Schedule 10A of “persons discharging managerial responsibility” was clear and unambiguous and should be given its natural reading. Read as a whole, it clearly stipulated that where an issuer had directors the persons discharging managerial responsibility were the directors (including persons occupying the position of director, by whatever name) and only in a case where there were no directors could a senior executive of the issuer have such responsibility". 

UK: England and Wales: unfair prejudice petitions - long delays and acquiescence

The circumstances in which a shareholder's petition under section 994 of the Companies Act 2006 - the unfair prejudice remedy - will be dismissed on the grounds of delay, or acquiescence by the petitioner, have recently been considered by the Court of Appeal in Bailey v Cherry Hill Skip Hire Ltd [2022] EWCA Civ 531. Noting that there was no statutory period of limitation applicable to unfair prejudice petition, and with regard to the issue of delay, Lady Justice Andrews (with whom Snowden and Lewison LJJ agreed) observed (emphasis in the original): 

.... there is a distinction to be drawn between a shareholder who knows he has been excluded from active involvement in the company's affairs and fails to complain about that for many years, and a passive shareholder who knows he is not getting the company's accounts or an invitation to the AGM and is not receiving dividends and does nothing about any of those matters, but then discovers years later that money or corporate opportunities have been diverted from the company for the benefit of its directors ... The distinction lies in the fact that in the absence of evidence to the contrary, a shareholder is entitled to assume that the company is being managed properly by its directors in accordance with their fiduciary and statutory duties, and that its constitution has been followed" (para. [46]). 

 

UK: England and Wales: the director's duty to promote the success of the company

In IBM United Kingdom Ltd v Lzlabs GmbH [2022] EWHC 884 (TCC), Mr Justice Eyre has explored the circumstances in which the director's duty to promote the success of the company, under section 172 of the Companies Act 2006, will be broken where the director causes the company to breach a contract or other legal obligation. Drawing heavily on Antuzis & Ors v DJ Houghton Catching Services Ltd & Ors [2019] EWHC 843 (QB), [2019] WLR(D) 254, his Lordship observed (at para. [36]): 

... not every instance of causing a company to breach a contract or a legal obligation will involve a director in a breach of the section 172 duties ... The key will be whether the director was properly acting to promote the success of the company taking account of the matters to which he or she is required by section 172 to have regard. In that exercise it will be necessary to consider the circumstances as a whole. Those will include the motivation of the director and the nature of the duties said to be broken but in addition the nature of the obligations being broken by the company and the consequences of the company's breach can be relevant to the question of whether the director can properly have been said to have been acting in the interests of the company."

 

Germany: DCGK publishes new edition of Code following consultation

The German Corporate Governance Commission, DCGK, has concluded its consultation on proposed changes to the German Corporate Governance Code.The new Code was published last week and submitted to the Federal Ministry of Justice. It takes effect when published in the Federal Gazette. A copy of the Code, in German, is available here. A copy in English is expected soon.

UK: HPC analysis of FTSE350 pay ratios

The High Pay Centre has today published analysis of median CEO/median employee pay ratios in the FTSE350. In 2020/21, the ratio was 44:1, down from 53:1 in 2019/20. The report notes, however, that the 69 companies reporting in the first quarter of 2022 had a ratio of 63:1 - up from 34:1 in 2021. For further information see here.