UK: Board performance evaluation - room for improvement, according to ICSA

ICSA - the Institute of Chartered Secretaries and Administrators - will this week publish the 2008 edition of its annual board performance evaluation survey (copies can be requested here). A short overview has, however, been published in the Chartered Secretary magazine and this states:

A new ICSA survey has revealed that only 16 per cent of companies in the FTSE 200 undertake an externally-developed or managed evaluation process.  The 2008 edition of ICSA’s annual board performance evaluation survey ... has revealed that only 32 of the UK’s top 200 companies used an external provider to assist with board performance evaluation last year. ICSA is concerned that, if companies do not benchmark internally - driven processes from time to time by using an external facilitator, then evaluations could become less valuable – or, in the worst case scenario, the equivalent of children ‘marking their own homework’.  The report also argues that several companies appear not to understand the important distinction between the chief executive reviewing the performance of executive main board directors in their capacity as members of the top management team, and the ‘entirely separate task’ of evaluating the effectiveness of each of the main board executive directors. ICSA says that the two tasks are quite distinct, and should be mutually exclusive".

UK: The application of the Companies Act (2006) to Limited Liability Partnerships

The Government has published its response to the consultation on the application of the Companies Act (2006) to limited liability partnerships (LLPs).  The Government proposes to apply to LLPs  those provisions of the 2006 Act which correspond to those provisions in the Companies Act (1985) that were applied to LLPs, with modifications where needed.  More detailed proposals are contained in the Government's response, including one for two sets of regulations governing the form and content of LLP accounts (one for small LLPs and another for medium and large LLPs).

Europe: Freedom of establishment and the 'life and death' of companies

Yesterday, Advocate General Poiares Maduro gave his opinion in Cartesio Oktató és Szolgáltató Bt. (Case C-210/06). The case concerned a limited partnership (Cartesio) which wanted to move its headquarters from Hungary to Italy. Hungarian law prevented Cartesio transferring its headquarters to another Member State whilst retaining its status as a partnership governed by Hungarian law. The only way for Cartesio to transfer its operational headquarters was by dissolving its business in Hungary and reestablishing in Italy. Does this amount to a restriction on freedom of establishment under Articles 43 and 48 of the EC Treaty?

The Advocate General held that the Hungarian legislation, which applied to partnerships and companies, breached Articles 43 and 48 of the EC Treaty. Articles 43 and 48, in his opinion, precluded rules which make it impossible for a company or partnership formed under the national law of a Member State to transfer its operational headquarters to another Member State. In this regard, and after considering recent case law of the Court, the Advocate General observed:

... it is impossible, in my view, to argue on the basis of the current state of Community law that Member States enjoy an absolute freedom to determine the ‘life and death’ of companies constituted under their domestic law, irrespective of the consequences for the freedom of establishment. Otherwise, Member States would have carte blanche to impose a ‘death sentence’ on a company constituted under its laws just because it had decided to exercise the freedom of establishment".

The Advocate General nevertheless recognised that restrictions of the kind in the Hungarian law could be justified on grounds of general public interest including the prevention of fraudulent conduct or the protection of the interests of creditors, minority shareholders, employees or the tax authorities. The Hungarian law did not, however, contain any grounds of justification.

NB:

[1] The Advocate General's opinion is not binding on the Court but in the majority of cases such opinions are followed.

[2] In 2004 the European Commission consulted on a proposed Directive (the 14th Company Law Directive) on the right of limited companies to transfer their registered office from one Member State to another. However, in December 2007 the Internal Market Commissioner Charlie McCreevy decided that legislative action was not required (see here). In the impact assessment it was explained why:

Since the practical effect of the existing legislation on cross-border mobility (i.e. the cross-border merger directive) is not yet known and that the issue of the transfer of the registered office might be clarified by the Court of Justice in the near future, the assessment concludes that it might be more appropriate to wait until the impacts of those developments can be fully assessed and the need and scope for any EU action better defined"

UK: The Companies Act 2006 (Commencement No. 7 and Transitional Provisions) Order - revised draft published

Today a revised draft of the Companies Act 2006 (Commencement No. 7 and Transitional Provisions) Order was published by BERR (available here as a Word document).  This replaces the draft published on 2 May. In the explanatory text (see this Word document) the Government explained the new provisions within the Order:

The new provisions in this revised draft are to commence the repeal of the bar, contained in the current legislation, on restoration of companies which were dissolved before 16 November 1969 (11 March 1971 in Northern Ireland). The bar could be retained using separate powers under the 2006 Act. However, the Government do not propose to retain the bar. Further, as it is proposed not to retain the current bar, the Government proposes to remove it without waiting for the commencement of the restoration provisions in Part 31 of the 2006 Act in October 2009. The Government therefore proposes to commence the relevant repeals together with the other commencements contained in the Seventh Commencement Order, to take effect as from 1 October 2008. These repeals are therefore provided for in Article 2 of the revised draft Order"

The following explanation was provided by the Government for repealing the bar:

The current bar means that some ex-employees or their estates are unable to press claims for compensation in respect of personal injury or fatal accident, either against the employing company, its insurers or the Financial Services Compensation Scheme, simply because the company was dissolved prior to 1969 (or 1971 in Northern Ireland). Removing the bar may therefore enable such ex-employees or their estates to receive compensation which they are currently unable to obtain. This may be relevant in particular to sufferers of so-called long-tail diseases, such as mesothelioma.

In 1998 the Law Commission and the Scottish Law Commission sought views in their consultation on the reform of the Third Parties (Rights against Insurers) Act 1930 on the case for removing the bar on restoration of companies dissolved before 1969. In publishing their recommendations (Law Commission Report No. 272, Scottish Law Commission Report No. 184) they reported that most respondents to the consultation agreed that section 651 and section 141 should be amended.

The Government further take the view that, as it is proposed not to retain the current bar, it would be desirable to remove it without waiting for the commencement of Part 31 of the 2006 Act in October 2009. "

International Financial Reporting Standards: Amendments announced

The International Accounting Standards Board (IASB) has today issued Improvements to IFRSs, a collection of amendments to International Financial Reporting Standards.   For further information, click here. These amendments are the result of the IASB's first annual improvements process.

UK: Companies House: Issue 69 of Register

Issue 69 of the Companies House newsletter Register has been published.  It contains a review of some recent cases by Prof. Brenda Hannigan, an article titled "10 Key Things You Need to Know About the Companies Act (2006)" as well as a section of FAQs concerning the 6 April 2008 implementation of various Companies Act (2006) provisions.  Back issues are available here.

UK: Directors' pay and bankers' bonuses

The Financial Services Authority's chief executive, Hector Sants, delivered a speech yesterday evening (at the Investment Management Association's AGM dinner) in which he considered recent market events and the FSA's response. Of particular interest are his comments concerning remuneration structures:

I feel that it is also worth taking some time here to consider the effects of incentive and remuneration structures. As I have said before, it is important for Boards to recognise that having asymmetrical structures where employees receive immediate reward and do not bear the consequences of losses is a risk to shareholders. I do, therefore, believe that firms should focus on minimising this risk by ensuring, as far as possible, the structures ensure employees and shareholders both share in the risk, in the upside and the downside.

There are various ways of achieving this goal, such as deferred compensation with claw back and the increased use of share options. None, however, is perfect, but I do believe Boards and shareholders need to carefully consider the incentive structures in place in their companies and their propensity to encourage risk. I know many of you already do this, but I ask you to increase your focus on this critical issue.

From the regulatory point of view, it is not our role to dictate the quantum of individual remuneration, that is for the market, but we do need to consider the implication of remuneration structures when judging the overall risk of individual institutions. We will do this with increased intensity.

Away from London, Royal Dutch Shell plc held its AGM yesterday. Remuneration proved a controversial issue. As reported here in the Financial Times:

One in three Royal Dutch Shell shareholders at the oil company's annual meeting yesterday voted against plans to award three executives one-off bonuses worth about €1m ($1.6m) to stay in their jobs. The vote adds to a growing chorus of dissent over so-called "retention payments", in which managements at some of the UK's most venerable companies have felt the wrath of investors in recent weeks".

It should, however, be noted that many shareholders withheld their votes; the results were:

• Votes for: 1,517,884,288
  
• Votes against: 706,398,270
  
• Votes withheld: 776,213,431 
  

Europe: European Private Company Statute

In a speech delivered in Athens on 16 May, European Internal Market Commissioner McCreevy provided further information about the proposed European Private Company Statute. Commissioner McCreevy observed:

In the field of company law, we are working on the upcoming proposal for a European Private Company Statute (or SPE). It should provide small enterprises that could not benefit from the European (Public) Company Statute with a legal form specifically designed for them and allow them to carry out their business using a single company form across the EU. As you know, business has been calling for this for many years, and I now intend to present a proposal on 25 June ... As with any important proposal in the field of company law, there are many important features to this upcoming initiative, but I would particularly highlight the following elements of it to you:

• I believe the European Private Company should be accessible to single and multiple shareholders, that is, to natural and legal persons alike, without any cross-border requirement;
  
• It should be capable of being set up from scratch, by the merger of existing companies or by transformation of an existing company;
  
• In accordance with the case law of the Court of Justice, a European Private Company should be free to have its headquarters in any EU Member State, regardless of its place of registration. In other words, the company could be registered in one Member State while conducting the entirety of its activity in another; it should also be able to merge and transfer its registered office cross-border;
  
• Its shareholders should have the freedom to determine the internal organisation of the company; and finally,
  
• Rules on employee participation in companies set up using the SPE Statute should draw as much as possible from existing solutions.

I think you will agree that this is an ambitious, and business-friendly, piece of legislation that we are about to come forward with..."

For background information, see here.

UK: Financial reporting and the "true and fair" view

The Financial Reporting Council has today published the legal opinion of Martin Moore QC concerning the "true and fair" view.  By way of background, the FRC states:

The ‘true and fair’ concept has been a part of English law and central to accounting and auditing practice in the UK for many decades. There has been no statutory definition of ‘true and fair’. The most authoritative statements as to the meaning of ‘true and fair’ have been legal opinions written by Lord Hoffman [sic] and Dame Mary Arden in 1983 and 1984 and by Dame Mary Arden in 1993 (‘the Opinions’). Since those Opinions were written, there have been some significant changes in accounting standards and company law which have led some to question whether the views expressed in those Opinions remain applicable. In these circumstances, the FRC concluded that it would be helpful to its preparers, auditors and users of financial statements if it commissioned a further legal opinion to ascertain whether the approach to ‘true and fair’ taken in the Opinions requires to be revised. The FRC instructed Martin Moore QC and his Opinion is now published on the FRC website.

Martin Moore QC observes in his opinion (at para. 46):

...the true and fair, or fair presentation concept, remains at the heart of the preparation of financial statements. It can aptly be described as an overarching concept which should inform all decisions by the preparers of such statements.

For further information, and the earlier legal opinions of Lord Hoffmann and Lady Justice Arden, see here.

NB: Section 393 of the Companies Act (2006) provides that a company's directors must not approve accounts unless they are satisfied that they give a true and fair view of the company's assets, liabilities, financial position and profit or loss.

Corporate Governance: An International Review

The January 2008 issue of Corporate Governance: An International Review is currently available to view, free of charge, here.  

Europe: Executive pay

Executive pay was discussed at this week's meeting of the European finance ministers. In a report published in International Herald Tribune it is stated:

For the first time, the finance ministers pledged to consider steps to rein in bonuses for executives that are deemed 'excessive'. Dutch Finance Minister Wouter Bos explained how his government plans to discourage such payments with a 30 percent tax for companies that shell out €500,000 (US$772,000) or more to get an executive out the door. Bos said concern was expressed by all EU finance ministers about the size of so-called 'golden parachute' payments and other executive bonuses that have been making headlines. 'There is a general commitment of us all that this is a subject that we have to take a serious look at,' Slovenian Finance Minister Andrej Bajuk, the meeting's chairman, told reporters.

The International Herald Tribune has reported on the Dutch proposals here. For further information about the European Commission's work on executive pay, see here.

NB: In 2002, the UK introduced the Directors' Remuneration Report Regulations which required quoted companies to provide shareholders with an advisory vote on the Remuneration Report (see, now, Section 439 of the Companies Act (2006)). Recent research suggests that this change has contributed to the higher sensitivity of CEO cash and total pay to negative operating performance. See: Maber, D. and Ferri, F., "Solving the Executive Compensation Problem Through Shareholder Votes? Evidence from the UK", available on SSRN here.

Japan: White paper published by ACGA

The Asian Corporate Governance Association has published a white paper in which recommendations are made for the reform of corporate governance in Japan. In the executive summary it is stated:

While a number of leading companies in Japan have made strides in corporate governance in recent years, we submit that the system of governance in most listed companies is not meeting the needs of stakeholders or the nation at large in three ways:

• By not providing for adequate supervision of corporate strategy;
• By protecting management from the discipline of the market, thus rendering the development of a healthy and efficient market in corporate control all but impossible;
• By failing to provide the returns that are vitally necessary to protect Japan’s social safety net—its pension system.

This White Paper focuses on, and makes recommendations with regard to, six key corporate governance issues".

For further information about corporate governance in Japan, including recent reforms, see: Buchanan, J. and Deakin, S., "Japan's Paradoxical Response to the New 'Global Standard' in Corporate Governance", September 2007, CLPE Research Paper No. 26/2007, available on SSRN here.

UK: Choice in the UK audit market: FRC report and further consultation

The Financial Reporting Council has published Choice in the UK audit market: progress report and further consultation. In the associated press release, it is stated:

"The Financial Reporting Council has today published a discussion paper on the possible effects of changes to audit firm ownership rules, and a consultation on the use of audit firms from more than one network. The discussion paper and consultation form part of the FRC’s latest progress report on the recommendations of the Market Participants’ Group (MPG) on actions to enhance the efficiency of the market for audit services to large companies in the UK. The discussion paper considers a number of issues in relation to audit ownership, including:

• Ease of entry and the potential for mid-sized firms to gain market share
• The potential impact of the introduction of outside capital to audit firms on audit quality
• The impact of the introduction of outside capital on the supply of auditors with appropriate skills and personal qualities
• Possible decline in audit quality arising from conflicts of interest associated with a firm’s ownership"

For recent research looking at concentration in the UK audit market, see: Abidin, S., Beattie, V., and Goodacre, A., "Audit Market Structure and Choice: Further Evidence from the UK", January 2008, available on SSRN here.

Scotland: Directors' duties and unfair prejudice

The Court of Session has, today, declined to grant West Coast Capital (WCC) an interim interdict (injunction) which would have prevented Dobbies plc from proceeding with a rights issue.  WCC, a minority shareholder in Dobbies, presented a petition under Section 994 of the Companies Act (2006), alleging that the Dobbies directors (several of whom were officers or directors of Tesco plc and had been appointed last year when Tesco became a majority shareholder) had exercised their powers in Tesco's interests to the prejudice of the other shareholders and had failed to act fairly between Tesco and the other shareholders.  

Lord Glennie was not satisified that WCC had an arguable case.  His opinion is available here and it is important for several reasons:

[1] There is discussion of Section 171 and Section 172 of the Companies Act (2006).  Section 172 imposes a duty on company directors to promote the success of the company for the benefit of the shareholders as a whole.  In doing so, directors are required to have regard to various factors, including the impact of the company's operations on the community and the environment and the need to act fairly as between members of the company.  In Lord Glennie's view, Section 172 does "little more than set out the pre-existing law on the subject" (para. [21]).  Some may question that interpretation because Section 172 sets out, for the first time in companies legislation, certain factors that directors are required to consider. 

[2] There is the clear recognition that breaches of directors' duties can be unfairly prejudicial.  This point remains controversial.  Lord Glennie nevertheless observes: "... it is important to have in mind that fairness and unfairness (in the context of assessing whether conduct is "unfairly prejudicial") are not abstract concepts. They are used in the context of a commercial relationship, where the parties' rights and expectations are governed by contract, namely the articles of association, and, possibly, by other agreements or understandings, as well as by the fiduciary duties which directors owe to the company" (para. [19]).

The case has attracted widespread attention in the media because of the parties involved. See, e.g., The Scotsman, The Guardian and The Times.

Postscript (21 May 2008): The Guardian has reported that West Coast Capital has agreed to accept an offer from Tesco of £12 per share.

England and Wales: Winding-up in the public interest

Section 124A of the Insolvency Act (1986) provides the Secretary of State for Business, Enterprise and Regulatory Reform with the power to petition the court for the winding-up of a company where this is “expedient in the public interest”. In considering the Secretary of State’s application, the court must satisfy itself that it is “just and equitable” for the company to be wound-up.

In Secretary of State for Business, Enterprise and Regulatory Reform v Amway (UK) Ltd [2008] EWHC 1054 (Ch), a Section 124A petition was presented in April 2007 by the Secretary of State with regard to a company running a direct selling business. Following the petition's presentment the company made changes to its business model which were implemented in October 2007 (and reported in the press at the time: see here). The case was heard in late 2007 and judgment was given today by Norris J. His Lordship declined to grant the petition (subject to the company providing certain undertakings) and observed:

The Court has a discretion whether or not to make a winding up order. The Court may simply dismiss the petition if satisfied that past wrongs have been remedied and the management can be trusted not to permit their recurrence (even if unconstrained by any undertakings). But the Court has power to accept undertakings as to future conduct, and a discretion as to whether to make the giving of undertakings a condition of dismissing the petition. The power will not be exercised (and undertakings will be refused) if those offering them cannot be trusted. The power to accept undertakings is likely to be exercised if that course is acceptable to the Secretary of State. If the Court considers that undertakings may be acceptable, it should nonetheless be slow to accept them if the Secretary of State is not willing to dispose of the petition in that way: but whilst the course may be unusual, the Court undoubtedly has power to do so if there are countervailing factors which outweigh the Secretary of State's opposition. In the instant case I could simply dismiss the petition: but undertakings are offered and I see no need to spurn them even if the Secretary of State shows no enthusiasm for their acceptance" (para. [62]).

With regard to Section 124A, his Lordship observed:

Parliament has charged the Department with wide ranging responsibilities in relation to the affairs of companies including (under section 124A of the Insolvency Act 1986) their investigation and the formation of the view that it would be expedient in the public interest that companies should be wound up ... The Secretary of State is not a licensor of approved business models or a business design consultant and is under no obligation to approve or to police a scheme of undertakings relating to the conduct of an individual company's business" (para. [10])

NB: Under Section 27 of the Serious Crime Act (2007), a petition to wind-up a company can be presented by the Director of Public Prosecutions, the Director of HMRC and the Director of the Serious Fraud Office, where (a) the company has been convicted of an offence under section 25 in relation to a serious crime prevention order; and (b) the relevant Director considers it would be in the public interest for the company to be wound-up.