UK: the Statutory Auditors and Third Country Auditors (Amendment) (No 2) Regulations 2008

The Department for Business, Enterprise and Regulatory Reform has published a draft of the Statutory Auditors and Third Country Auditors (Amendment) (No. 2) Regulations 2008 (available here in Word format). Further information, with background information, is available in the explanatory text accompanying the draft (available here in Word format) and from where the following text is taken:

The EU’s Statutory Audit Directive (2006/43/EC) introduces the regulation of auditors from outside the EEA (“Third Country Auditors”) who audit the accounts of companies who issue securities on regulated markets in the EEA. The Directive also allows these requirements to be disapplied where third country auditors are subject to a system of regulation in their home country which is determined to be equivalent to those in the EU.

Although the Commission has not yet made proposals for determinations of equivalence, the Commission and Member States have recently agreed a decision (2008/627/EC) on transitional measures which will allow Member States to treat auditors from specified countries largely as though the regulatory regimes were equivalent. This will allow the introduction of these provisions with the minimum disruption to EU markets. 

... because of the legal approach of the Commission’s decision, some amendments are needed to the existing provisions in SI 2007/3494 [The Statutory Auditors and Third Country Auditors Regulations 2007, and this is the purpose of the new Regulations]".

Europe: consultation on credit rating agencies

The European Commission has issued a consultation document as part of its work developing proposals with regard to the regulation of credit rating agencies. According to the Commission: 

The policy response currently being developed ... is likely to involve a legislative framework for credit rating agencies comprising both a set of legal obligations to be complied with by CRAs as well as independent external oversight. Addressees of the rules proposed by the Commission will be all existing (and prospective) credit rating agencies with business operations having significant market impact in Europe. The proposed directive / regulation will aim to achieve the following
objectives:

• Appropriate management of conflicts of interest.
  
• Improvements in quality of output.
  
• Increased transparency of CRAs' activities.
  
• Establishment of a supervisory and enforcement regime on the territory of the EU."
  

The consultation period ends on 5 September 2008. Further information is available here.

UK: proposed reforms to Part 7 of the Companies Act (1989)

HM Treasury has published a consultation paper titled "Modernising the insolvency protections for the operation of financial markets – proposals to reform Part 7 of the 1989 Companies Act". In the executive summary it is stated:

Part 7 of the Companies Act 1989 modifies general insolvency law to provide systemic protection for certain financial markets in the event that one of their participants defaults. Due to the rapidly evolving nature of financial markets, the Act allows for these provisions to be updated by regulations and this consultation concerns proposals for such an update. Central counterparty clearing, which is the main focus of Part 7, is increasingly recognised as a vital element of market infrastructure, helping to guarantee transactions and produce efficiencies of risk management. In November 2004 the IOSCO (International Organization of Securities Commissions) and the Group of Ten central banks produced recommendations for the operation of central counterparties. The amendments proposed here are in accord with those recommendations, and with the recent proposal by the EU Commission to update the Settlement Finality Directive in line with latest market and regulatory developments, including the increased interoperability of systems".

UK: delayed disclosure of liquidity support - FSA consultation

The UK's Financial Services Authority has published a consultation paper in which it proposes amending the Disclosure and Transparency Rules (DTR) in order to clarify that, in a limited set of circumstances, financial institutions admitted to trading on a regulated market and in receipt of liquidity support from the Bank of England can delay disclosure of this fact.

There is unlikely to be unanimous support for this proposal, not least because of the argument that the proposal (which is clearly designed to support financial stability) undermines the transparency of the market. The FSA nevertheless states in its consultation paper that its proposal is consistent with Article 3 of the European Market Abuse Directive (2003/124/EC) which recognises certain circumstances in which delayed disclosure can be justified. These circumstances are reflected in the current version of DTR 2.5. 

For further information see:

FSA press release | FSA newsletter | FSA consultation paper | Online response form | 

UK: issuer liability - Government response to the Davies review

Section 1270 of the Companies Act (2006) inserted Section 90A of the Financial Services and Markets Act (2000) and established a statutory civil liability regime for issuer misstatements to the market. A review of this regime was conducted by Professor Paul Davies FBA QC - the Davies review - and recommendations published in June 2007.  The Government has published its response in "Extension of the statutory regime for issuer liability", in which it outlines its proposals which include the following:

• There is to be no change to the current basis of liability (which is based on fraud).
  
• The liability regime should apply to [a] issuers of all securities admitted to trading on a UK regulated market or multilateral trading facility and [b] issuers of securities admitted to trading on an EEA regulated market or multilateral trading facility, where the UK is the home state for the issuer under the Transparency Directive (2004/109/EC) or the issuer has its registered office in the UK.
  
• The regime should apply to "transferable securities" as defined in Section 102A(3) of the Financial Services and Markets Act (2000).
  

A draft statutory instrument - The Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2008 - has been included in the Government's response document.

For further information see:

HM Treasury: Davies review page

Europe: European Works Councils reform

In the Renewed Social Agenda adopted today by the European Commission there are proposals for the reform of the legislation governing European Works Councils. A draft directive has been published and in its press release the Commission provides the following information:

The 1994 Directive (94/45/EC) requires Member States to provide for the right to establish European Works Councils in companies or groups of companies employing at least 1000 people in the European Union and the other countries of the European Economic Area (Norway, Iceland and Liechtenstein), with at least 150 employees in each of two Member States.

While European Works Councils have been successful in many areas, they cannot fully play their role in anticipating and properly managing change and in developing genuine cross-border social dialogue. Indeed, European Works Councils are not properly informed and consulted in half of the transnational restructuring cases and the take-up of European Works Councils needs to be increased.

The 1994 legal framework on European Works Councils therefore needs to be adapted to changes in the legislative, economic and social context, where the cross-border dimension proves more and more important, and to be clarified on different aspects".

Note: The 1994 Directive did not apply to the UK because of its opt-out from the Social Chapter.  When the opt out ended, Directive 97/74/EC extended the Works Councils framework to the UK.

For further information see:

Works Councils press release | Draft directive | Renewed Social Agenda website | Directive 94/45/EC | Directive 97/74/EC | 

UK: comply or explain and corporate governance statements

The Financial Services Authority has today published a policy statement in which it announces a change to the "comply or explain" statement required by listed companies with regard to their compliance with the Combined Code on Corporate Governance. The FSA is modifying Listing Rule 9.8.6R(5) so that listed companies will be required to report on how they have applied "the main principles" set out in Section 1 of the Combined Code. This change will come into force on 29 June 2008 for financial reporting periods beginning on or after this date. At present, rule 9.8.6R(5) requires companies to state how they have applied "the principles" in Section 1. With regard to this change, the FSA explains:

Where a company has applied the Code’s Main Principles by complying with the associated provisions it should be sufficient for the company simply to report that it has done so. However, where a company has taken additional actions to apply the principles or otherwise improve its governance, it would be helpful to shareholders to describe these in the annual report. We do not expect this to have any cost implications, and modification will benefit smaller companies by cutting back the amount of boiler-plate"

This change is one of many being made as part of the FSA's implementation of the Statutory Audit Directive (2006/43/EC) and the Company Reporting Directive (2006/46/EC). The latter requires companies whose securities are admitted to trading on a regulated market to produce a corporate governance statement in their annual reports. This statement must explain which corporate governance code the company has followed and the extent to which it has complied with the code. The UK rules governing the corporate governance statement will be introduced in new rule DTR 7 within the FSA Handbook and will come into force on 29 June 2008 for financial reporting periods beginning on or after this date. 

For further information see:
FSA policy statement | FSA newsletter | FSA consultation paper (Dec 2007) | FSA Handbook | Listing Rules | DTR 7 - corporate governance statements | Statutory Audit Directive | Company Reporting Directive |

UK: BERR business plan for 2008-2011 published

The UK's Department for Business, Enterprise and Regulatory Reform (BERR) has published its business plan for 2008-2011. One of BERR's strategic objectives is "free and fair markets" and in this regard a number of specific proposals are made including:

• Implement the EU Services Directive by the end of 2009, to make it easier for service providers to set up business, or provide services, in another Member State
• Implement the Companies Act 2006 by October 2009, to ensure that company law reflects the modern business world
• Reduce the administrative burdens of regulations imposed by BERR, mainly from employment, company and consumer law, by 25% by May 2010 

In one important respect the business plan is disappointing: there is little discussion of the concepts of the free and fair market. What does fairness mean in this context?

Further information is available here:

Directive 2006/123/EC (the Services Directive) | BERR Services Directive implementation information | BERR business plan | 

UK: the super equivalence of the market abuse rules

In February this year, HM Treasury launched a consultation concerning the definition of market abuse within the Financial Services and Markets Act (2000). The FSMA definition is wider than that found in the European Market Abuse Directive (2003/6/EC) (it includes, for example, behaviour based on a wider set of information than the Directive).  For this reason HM Treasury sought views on the desirability of this position of "super equivalence".  HM Treasury's response to the consultation has now been published; to quote directly from the response document (para. 1.2):

Having an effective set of tools to tackle market abuse is crucial. This is a shared objective at the EU level and we are therefore keen that the EU review of the Market Abuse Directive should ultimately deliver an outcome that we consider fully satisfactory for combating market abuse. Pending this work we have decided to retain the areas in which we are superequivalent to the EU’s Market Abuse Directive until December 2009 to enable a wider consideration of their benefits for addressing identified issues with the EU regime and to minimise transition costs for industry".

For further information about the European Market Abuse Directive, see here and for discussion see Siems, M."The EU Market Abuse Directive: A Case-Based Analysis", 2007, available on SSRN here.

Postscript (11 June 2008): The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2008, which will extend the super equivalent provisions until 31 December 2009, have been published and come into force on 30 June 2008. 

UK: publishing the annual report and accounts - listed companies missing the new deadline

Under Disclosure and Transparency Rule (DTR) 4.1 listed companies are required to publish their annual report and accounts within 4 months of their financial year end. This rule implements Article 4(1) of the European Transparency Directive (2004/109/EC) and applies to companies with year ends after 20 January 2008. According to the FSA (acting as the UK Listing Authority):

Our recent experience, with the first issuers required to comply with these new rules, suggests that some companies have mistakenly believed that publishing Preliminary Results (required previously under the Listing Rules) within this period was enough to fulfil their obligations under DTR 4.1. This is not the case. We would remind issuers that we are able to suspend the listing of, or even take enforcement action against, companies who do not publish the required financial information within the required deadlines, and may employ this where necessary in the future".

For further information see this update. 

Jersey: statutory basis for the UK Takeover Panel

Takeovers in Jersey are currently governed by the UK Takeover Code and Takeover Panel but this arrangement is informal.  This will soon change: draft legislation - the Companies (Takeovers and Mergers Panel) (Jersey) Law - has been published and its purpose is to place the UK Takeover Panel's role on a statutory footing.  This will bring Jersey into line with the United Kingdom, where Part 28 of the Companies Act (2006) governs the Panel's operation.  The Panel has only recently been placed on a statutory footing in the UK, following the implementation of the European Takeover Directive (2004/25/EC).  For further information, see this press release from the Takeover Panel or this press release from the States of Jersey.

UK: changes to the Combined Code

The Financial Reporting Council has announced several changes to the UK's Combined Code on Corporate Governance:

• the removal of the restriction on an individual chairing more than one FTSE100 company.
  
• for listed companies outside of the FTSE350, permitting the chairman to sit on the audit committee where he/she was considered independent on appointment.
  

These changes follow a consultation earlier this year.  The revised Code will be published at the end of June and it will apply to accounting periods beginning on or after 29 June 2008.  Click here for further information.  The FRC has also published a regulatory impact assessment and a summary of consultees' responses.

NB: The revised Code will come into force on the same day as new FSA rules implementing European Directive 2006/46/EC which will require a corporate governance statement to be published in the annual reports of companies who have their registered office in the Community and whose securities are admitted to trading on a regulated market.  For further information, see here.

Postscript (27 June 2008): Further information about the new FSA rules is available here and information about the revised Combined Code is available here.

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"

EU: Member States' failure to implement company law Directives

The European Commission has sent reasoned opinions (about which see here) to several countries - including Hungary, the Netherlands and Poland - concerning their failure to implement Directive 2004/109/EC on the transparency obligations of listed companies. The Commission is also bringing a case before the European Court of Justice against Italy with regard to the latter's failure to implement in full Directive 2003/58/EC on company disclosure requirements.

Further information about the above is available here and for information concerning European company law, see here. For the current position on Member States' implementation of company law directives, see here.

Ireland: Company Law Reform

In Ireland, the Company Law Consolidation and Reform Bill is currently being drafted. Meanwhile, and in order to implement European law provisions concerning company law, new Regulations have been introduced. Statutory Instrument 89/2008 came into force on 15 April 2008 and made the following changes (to quote directly from the relevant press release):

"Firstly, the provisions of the 1963 Act dealing with objections by creditors to Court Orders confirming a reduction by a company of its issued share capital are being amended to reflect the change in emphasis in the Directive in respect of public companies, shifting the burden of proof from the company to the creditors in establishing grounds for an objection to the Court Order. Secondly Part XI of the 1990 Act dealing with the purchase by a company of its own shares is also being amended. These amendments are essentially for clarification purposes and do not give rise any changes of substance to the basic rules currently applying to purchase of own shares".

For further information about company law reform in Ireland, click here.

Europe: Commission consultation on access to company registers

The European Commission has published a green paper to launch a consultation on improving access to company registers across the EU. It has also published a progress report concerning the interconnection of European company registers in which it describes the current legal and factual position regarding access to information and co-operation between business registries. The Commission provides this short overview in the green paper (at pp. 2 and 3):

There is an increasing demand for access to information on companies in a cross-border context, either for commercial purposes or to facilitate access to justice. However, while official information on companies is easily available in the country of their registration, access to the same information from another Member State may be hindered by technical or language barriers. In these circumstances, facilitating cross-border access to official and reliable company information for creditors, business partners and consumers is necessary to ensure an appropriate degree of transparency and legal certainty in the markets all over the EU. To achieve this, the cross-border cooperation of business registers is indispensable.

Efficient cross-border cooperation between the registers is not only essential for a smooth functioning of the Single Market. It also significantly reduces the costs for companies operating cross-border. ... The existing voluntary cooperation between business registries is, however, not enough. There is a need for enhanced cooperation between them. ... This Green Paper describes the existing framework and considers possible ways forward to improve access to information on businesses across the EU and more effective application of the company law directives".

Responses to the green paper should be made here.

UK: Auditing Practices Board: ISA (UK and Ireland) 600 - "Using the Work of Another Auditor"

The APB has issued a revision of ISA (UK and Ireland) 600, 'Using the Work of Another Auditor', which will apply to audits of financial statements for periods commencing on or after 6 April 2008. According to the APB's press release:

"The main effect of the revision is to add a new requirement that in an audit of group financial statements the principal auditor should document any review that it undertakes, for the purpose of the group audit, of the audit work conducted by other auditors. This reflects a new requirement in Schedule 10, paragraph 10A, of the Companies Act 2006, implementing a provision of the European Statutory Audit Directive".

Europe: European Commission: Alternative capital maintenance regime

Several years ago the European Commission began to consider the feasibility of establishing an alternative to the current capital maintenance regime established by the Second Company Law Directive (77/91/EEC). In October 2006, KPMG was commissioned to undertake a study exploring the main features of the current regime (including the costs imposed) as well as that in Australia, Canada, New Zealand, California and Delaware. KPMG also considered four academic proposals for alternative regimes to the current capital maintenance rules. The KPMG study has now been published and is available here. Background information is available here.

Europe: exempting "micro-entities" from the Accounting Directives - McCreevy recommendation

Internal Market Commissioner Charlie McCreevy has stated that he will recommend to the European Commission that Member States should be given the option to exempt "micro-entities" from the Accounting Directives (Fourth Council Directive 78/660/EEC (annual accounts of companies with limited liability) and the Seventh Council Directive 89/349/EEC (consolidated accounts of companies with limited liability). Mr McCreevy also announced that the time has come to overhaul the Accounting Directives and in this regard he stated that his review would be guided by the "think small first" principle. 

Europe: Commission proposals for simplification of the EU rules on mergers and divisions

The European Commission has published proposals to simplify the European rules governing mergers and divisions.  A new Directive is proposed which will amend various company law Directives including 77/91/EEC, 78/855/EEC, 82/891/EEC and 2005/56/EC.  According to the Commission, the proposal is intended, inter alia, to reduce the reporting requirements of companies and avoid double reporting.

For further information see: press release | proposal | regulatory impact assessment |