India: India's Enron?

This week's Economist has an article exploring some of the lessons to be learned from the Satyam scandal in India. A useful events timeline has been produced by the Financial Times newspaper and there is further background information in this report from The Times and this overview of press reaction provided by the BBC.

UK: updated ABI guidance - directors' powers to allot shares and disapply pre-emption rights + articles of association

In December, the Association of British Insurers published updated guidance regarding: [1] Directors' powers to allot share capital and disapply shareholders' pre-emption rights and [2] articles of association. The former outlines the ABI's change of position following the recommendation of the Rights Issue Review Group that the overall allotment headroom that shareholders should normally be invited to approve be increased from one third to two thirds of the issuer's issued share capital. For further information, see the ABI's press release and this report from The Financial Times. 

The ABI's articles of association guidance states that "[a] company's Articles of Association are a key element of corporate governance and consequently of considerable interest to investors" and sets out the ABI's expectations with regard to various matters including directors' conflicts of interest, auditor liability limitation agreements and political expenditure. With regard to dispute resolution clauses, the guidance document explains:

Some companies believe that it is appropriate to provide for a dispute resolution procedure and governing law in their Articles. In general terms these provide that arbitration should be in accordance with the Rules of Arbitration of the International Chamber of Commerce. Where a court determines that arbitration cannot be used in a particular dispute, or where a derivative claim is being brought under the Companies Act 2006, the courts of England and Wales would have exclusive jurisdiction. However, ABI members remain concerned about such dispute resolution provisions being codified in the articles of association. If a Company considers that such provision may be appropriate in their case, it is advised that careful consultation with shareholders is necessary".

UK: England and Wales: accounting practice and company law - the tail wagging the dog?

In February 2008, Peter Smith J. held that there were circumstances where money advanced to a company, prior to a resolution or agreement to allot shares, could be regarded as a contribution to the capital of the company (see Blackburn v HMRC [2008] EWHC 266 (Ch)). In late December, a unanimous Court of Appeal endorsed this approach, relying on Kellar v Stanley Williams (Turks and Caicos Islands) [2000] UKPC 4: see Revenue and Customs v Alan Blackburn Sports Ltd & Anor [2008] EWCA Civ 1454.
 

The case concerned a taxpayer's entitlement to Enterprise Investment Scheme relief under the Taxation of Chargeable Gains Act (1992). However, it is of wider interest because of Lord Neuberger's comments on the significance of accounting practice in determining whether money received by a company could be regarded as a contribution to share capital (Lord Neuberger delivered the only reasoned opinion; Sedley and Wilson LJJ concurred).  His Lordship observed (at paras. [29] - [30]):

It was suggested that a limited company cannot effectively accept capital contributions other than in the form of loan capital or share capital. Even if that suggestion was, in general, correct, I cannot accept that it would extend so as to prevent a company from accepting and holding money on the basis that it is bound (or at least entitled) as against the payer, to allot shares to him in return for the payment (with the possibility of having to repay the money if the shares are not then allotted).

In any event, I severely doubt that there is any reason in terms of principle, authority or practice for accepting that suggestion. In practical terms, I find it impossible to see, for instance, why a company should not be able to treat a gift as a contribution to its capital. As to authority, far from there being any case which confirms the suggestion, the Privy Council in Kellar [2000] 2 BCLC 390, 395e-f indicated precisely the opposite. Lord Mackay of Clashfern, giving the judgment of the Committee (which included Lord Browne-Wilkinson and Lord Millett) said that "there was nothing in the law of the Turks and Caicos Islands or in the company law of England" which prevented giving effect to an agreement between "the shareholders of a company … to increase its capital without a formal allocation of shares". In such an event, he said, such capital would "become like share premium part of the owner's equity". So far as principle is concerned, I do not see why the fact that accountancy convention may make it difficult to decide how to record a particular type of payment in the Company's accounts means that, as a matter of law, the payment cannot be characterised as being of that type. While accountancy convention has an important part to play in some areas of tax law and company law, this would, I think, be a case of the tail wagging the dog".

Notes:

[1] A summary of the decision has been produced by Maitland Chambers: see here. A report has also been published in The Times: see here (this report will be available for a limited period of time).

[2] For information about the current operation of EIS relief, see here. 

[3] Lord Neuberger is a Law Lord but during 2008 he sat in the Court of Appeal in several cases including Underwood v HM Revenue & Customs [2008] EWCA Civ 1423, Symbian Ltd v Comptroller General of Patents [2008] EWCA Civ 1066 and Foxtons Ltd v Pelkey Bicknell & Anor [2008] EWCA Civ 419.

UK: FSA announces changes to the temporary short-selling regime

The Financial Services Authority has announced that it is lifting its ban on the short-selling of shares in certain UK financial sector companies. The FSA is, however, proposing to extend until 30 June 2009 its short-selling disclosure regime subject to one modification in respect of the disclosure required in respect of changes in net short positions. 

The FSA's consultation paper is of interest because it contains an attempt to quantify the costs and benefits of the disclosure regime. More detailed discussion can be expected in a further consultation paper, to be published within the next month, in which the FSA will set out its long-term proposals for the short-selling regime. 

For further information see:

FSA newsletter | FSA consultation paper | FSA press release | Overview of the existing regime | 

UK: FRC quarterly progress and planning report

The Financial Reporting Council has published the January 2009 edition of its quarterly progress and planning report. The report highlights FRC activities in the past quarter and indicates that the FRC has no major projects or activities concerning corporate governance planned for the next quarter. Activities are, however, planned with regard to corporate reporting, auditing and actuarial practice. The FRC also states that it will soon publish the outcome of its Accountancy Scheme Review and consultation including final proposals and a full draft of the revised Accountancy Scheme.