India: OECD report - company groups

The OECD has published a report, working with SEBI, on company groups in India: see here (pdf). The report, to quote directly from its foreword, "presents an overview of company groups in India, including group structures (e.g. hierarchical structures and cross-shareholdings), promoters, and related party transactions. It also covers the legal and regulatory approaches to addressing issues relating to company groups".

OECD: Working Paper 22 - the governance of company groups

The latest addition to the OECD working paper series on corporate governance has been published: number 22, the governance of company groups. This paper, to quote from its abstract, "presents a comparative overview of the regulation of groups in company law ... [and] also discusses how different corporate governance codes make recommendations on issues relevant to the boards in company groups". 

 

OECD Report: The Duties and Responsibilities of Boards in Company Groups

The OECD, as part of its corporate governance series of publications, has published an overview, covering 45 jurisdictions, of the duties and responsibilities of boards in the context of corporate groups: see here.

European Union: freedom of establishment, group relief and 'final losses'

The Court of Justice of the European Union gave its judgment last month in Skatteverket v Holmen AB (Case C-608/17). The judgment is an important one on the meaning of 'final losses' as described by the court in its judgment Marks and Spencer plc (C-446/03). A summary, published by the ICLR, is available here.

New Zealand: reckless trading and some governance lessons

The High Court gave judgment earlier this week in Mainzeal Property and Construction Limited (in liquidation) v Yan [2019] NZHC 255: see here or here (pdf). A summary is available here (pdf).

The principal claim before court, brought by a company's liquidator, was that the company's former directors had breached section 135 of the Companies Act 1993. Section 135 provides that a company director must not "(a) agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or (b) cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors". The company in question was a wholly-owned subsidiary within a larger corporate group.

The directors - including a former prime minister of New Zealand, Dame Jenny Shipley - were held to have breached section 135, the trial judge (the Hon Justice Cooke) finding that the following three factors were relevant (and all necessary) for this finding: (a) the company had traded while balance sheet insolvent because of the unrecoverable nature of intercompany debt; (b) the absence of group support on which the directors could rely; (c) the company's generally poor trading performance.  Thus, the judge noted, trading while insolvent would not have been fatal if the trading position had been strong or there had been reliable group support. The directors had taken risks that the judge held could not be regarded as "normal business risk taking" and they had allowed the company to continue trading in "highly unorthodox circumstances" (para. [284]).

The decision contains important governance lessons, particularly with regard to the way in which the company's board operated and risk was managed (against the background of the wider group operations). This makes it of interest beyond New Zealand. The court received evidence on "good corporate governance standards" in order to assist it in assessing the questions arising under section 135. In this regard, the judge accepted evidence that the directors had failed to address risk appropriately; there was no risk register and the board was too small to have committees with audit or risk responsibilities (para. [271]). The judge also accepted the evidence that the board was "too operationally focused ... [it] operated more as a management committee, and failed to properly address the governance issues and the systemic risks to the overall operation" (para. [272]).

The trial judge also rejected the argument - in what he regarded as the exceptional circumstances of the case (para. [285]) - that to hold the directors liable under section 135 would discourage individuals from becoming directors of major companies (para. [285]). To find that the directors had not breached section 135, he stated, would "undermine the purposes of s 135 ... [and] would also suggest that directors of companies within corporate groups do not need to consider the types of risks that would normally be very serious for a stand-alone company. That is simply not the case." (para. [286]).

OECD working paper - the corporate governance of financial groups

The twentieth paper in the OECD Corporate Governance Working Paper series, titled Corporate Governance of Financial Groups, has been published: see here.

UK: Scotland: corporate groups and implied terms

Lord Malcolm, sitting in the Court of Session (Outer House), delivered his opinion in Fisher v Applied Drilling Technology International Ltd [2016] CSOH 108 last month. At issue was whether the company, ADTI, was in breach of an implied term in Mr Fisher's contract of employment concerning the making of enhanced redundancy payments. It was said that such a term arose through custom and practice within a group of companies. The company sought to have the action dismissed on the grounds that the pleadings did not set out a relevant and sufficiently specific case. Lord Malcolm refused to dismiss the action.

Of interest, albeit at this early stage in the case, is the fact that Lord Malcolm refused to uphold the submission that Mr Fisher was bound to fail in his claim that senior executives of the parent company, acting on behalf of other companies in the group, had given undertakings in respect of the enhanced payments.

UK: The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015

The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 were made last week and come into force on 6 April 2015: see here or here (pdf). The purpose of the Regulations is to update and consolidate existing legislation on the content and presentation of company accounts, making amendments to Part 15 (Accounts and reports) of the Companies Act 2006 and other legislation, and in doing so implement Chapters 1-9 of Directive 2013/34/EU.

The Regulations will, for example, permit small companies to prepare an abridged balance sheet and abridged profit and loss account; they also remove the requirement for micro-entity companies (as defined by sections 384A and 384B of the Companies Act 2006) to prepare a Directors’ Report. Further information is available in the accompanying explanatory memorandum (here, pdf), impact assessment (here, pdf) and transposition note (here, pdf).

UK: Scotland: Court of Session considers meaning of 'company' in investment syndicate constitution

Lord Hodge delivered his opinion yesterday in Symphony Equity Investments Ltd. v Shakeshaft [2013] CSOH 102. In doing so he was required to interpret an investment syndicate's constitution, one of the terms of which required a majority of the syndicate's members to approve in advance investments over a certain limit made in a 'single investment company'. The meaning of the word 'company' was disputed. Lord Hodge held that 'company' referred to a single, individual company with its own legal personality. There was, he observed, no ambiguity in the phrase 'single investee company' and he rejected the argument that 'company' should be capable of referring to an undertaking, such as a corporate group, where activities were carried out by different companies. The constitution, he noted, had been drafted by skilled solicitors with extensive commercial experience, who should be taken as being very familiar with the principle of separate corporate personality. Moreover, had they wished to restrict the board's power of investment in companies within a group, they could have chosen words which clearly achieved that result.

Singapore: a new framework for financial holding companies

Last year the Monetary Authority of Singapore published for comment a draft of the Financial Holdings Bill, following an earlier consultation: see here (pdf). The purpose of the Bill is to introduce a new regulatory framework for financial holding companies (i.e., companies that have a bank or an insurance company as a subsidiary but which do not undertake such activities or other commercial activities). This week MAS a feedback statement containing its responses to the matters raised by those responding to the consultation: see here (pdf).

UK: Banking Standards Committee recommends 'electrification' of proposed ring-fence for banks

The Parliamentary Commission on Banking Standards has published its first report in which it considers the Government’s draft Financial Services (Banking Reform) Bill and related proposals designed to implement, with some exceptions, the recommendations of the Independent Commission on Banking (ICB): see here (pdf). A summary of the report's conclusions and recommendations is available here. The Commission's report does not, however, represent its final opinion on the Government's proposals because the draft Bill provides only a framework and will be supported by secondary legislation. In the words of the Committee: "Without further information about the secondary legislation, it is not possible for this Commission to assess with any certainty how faithfully the Bill will give effect to the ICB recommendations. The jury is still out on the question of whether the Bill will implement those recommendations in letter and spirit" (para. 124).

With regard to the requirement for banks to ring-fence their retail and investment banking activities, the Committee concludes that the Government's proposals do not go far enough: electrification of the ring fence is proposed, i.e., a reserve power should be included in the legislation providing for full separation of retail and investment banking activities where the regulator concludes that the objectives of the ring-fence would not be met in respect of a particular bank. The Commission also concludes that the draft Bill needs to do more to ensure the independence of ring-fenced banks from other parts of the banking group. Amongst the suggestions made is the introduction of a legal duty on directors to preserve the integrity of the ring-fence.

The report also notes that next year the Commission will consider what contribution changes in areas such as competition, corporate governance, supervision and regulation and the civil and criminal law could make to enhancing standards and culture in banking.

Europe: the Commission's action plan for company law and corporate governance

The European Commission published its company law and corporate governance action plan yesterday: see here (pdf). Nothing revolutionary in approach is proposed: national corporate governance codes, and the dominant 'comply or explain' approach, will remain. There are, instead, proposals within three broad areas which build on the current framework: increased transparency; more shareholder engagement; and exploring ways to support economic growth particularly in the cross-border context. Amongst the Commission's proposals are the following:

• Increase disclosure of board diversity policy and of risk management arrangements.
• Improve the visibility of shareholdings in listed companies in Europe.
• Improve the quality of corporate governance reports (in particular the quality of explanations provided by companies departing from corporate governance code provisions).
• Disclosure of voting and engagement policies as well as voting records by institutional investors.
• Improving transparency on remuneration policies and individual remuneration of directors, and granting shareholders the right to vote on the remuneration policy.
• Improve shareholder control over related party transactions.
• Improve the transparency and the conflict of interest frameworks applicable to proxy advisors.
• Work closely with competent national authorities and the European Securities and Markets Authority to develop guidance to increase legal certainty as regards the relationship between investor cooperation on corporate governance issues and the rules on acting in concert.
• Increase awareness of the European Company (SE) Statute (including employees' involvement) and possibly of the European Cooperative (SCE) Statute.
• Identify obstacles to employee share ownership in Member States.
• Further investigate the rules on the cross-border transfer of a company's registered office.
• Revise the rules on cross-border mergers.
• Investigate further rules on cross-border divisions.
• Codify the major company law Directives.
• Improve the information available on groups and recognition of the concept of ‘group interest’.

UK: Resolution strategies for large and complex firms

The Bank of England, in conjunction with with the Federal Deposit Insurance Corporation in the United States, has released a joint paper outlining possible resolution strategies to be adopted by a single authority in a cross-border context with respect to the parent company of a financial group: see here (pdf).

Singapore: a regulatory framework for financial holding companies

The Singapore Monetary Authority has published for comment a draft of the Financial Holdings Bill, following a consultation earlier this year: see here (pdf). The purpose of the Bill is to introduce a new regulatory framework for financial holding companies (i.e., companies that have a bank or an insurance company as a subsidiary but which do not undertake such activities or other commercial activities).

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: company law - Commission consultation launched

The European Commission launched a wide ranging consultation yesterday on the future of European company law. Amongst the matters on which views are sought are the objectives and scope of European company law, the relationship between company law and corporate governance, the future of European company law entities, cross border mobility, corporate groups and the minimum capital and capital maintenance regimes. For further information see: Commission press release | FAQs | Background information | Questionnaire (for online completion) | Questionnaire (pdf) |.