India: company law reform moves a step closer - Companies Bill 2008 approved by Cabinet

In 2005 the Irani Report, on the reform of India's company law, was published. Legislation to replace the Companies Act 1956 has been expected for some time. Its introduction has moved a step closer: today it was announced that the Companies Bill 2008 has been approved by the Union Cabinet and will be introduced in Parliament in October. 

The Government's announcement contains an overview of the purpose of the Bill: to provide the principles for the internal governance of companies and a framework for their regulation, administered by Central Government, but with a much greater role for shareholders.  Specific proposals include:

• The introduction of a new entity, the "one-person company".
  
• The abolition of shares with differential voting rights.
  
• Provision for the duties and liabilities of directors, with every company to have at least one director resident in India.
  
• At least one third of board directors to be independent [it's not yet clear to which companies this rule will apply; the Irani Committee proposed that is should apply to public listed companies and those taking deposits from the public]. 
  
• Insider trading by directors to be recognised as a criminal offence.
  
• Auditors' rights and duties to be explained.
  
• Class action suits by shareholder associations to be permitted.
  

Singapore: restrictions on the transfer of shares

Where shareholders in a listed company agree not to sell, assign or dispose of their shares for a given period of time, does this agreement prevent them from using their shares as security? It does not according to Pacrim Investments Pte Ltd v Tan Mui Keow Claire [2008] SGCA 16, a decision of the Court of Appeal in Singapore.

The court's decision is noteworthy because the facts concerned a listed company (restrictions on the transfer of shares are more common in closely held companies) and also because it provides a good example of the approach taken by courts in many jurisdictions when interpreting provisions which purport to limit the transferability of shares. 

The court stated, with reference to the late Robert Pennington's textbook on English company law, that "[the] freedom of a shareholder to deal with his shares should generally be given a broad, rather than narrow, interpretation" and cited with approval the following principle enunciated by Lord Greene MR in the English case Greenhalgh v Mallard [1943] 2 All ER 234 at 237:

Questions of construction of this kind are always difficult, but in the case of the restriction of transfer of shares I think it is right for the court to remember that a share, being personal property, is prima facie transferable, although the conditions of the transfer are to be found in the terms laid down in the articles. If the right of transfer, which is inherent in property of this kind, is to be taken away or cut down, it seems to me that it should be done by language of sufficient clarity to make it apparent that that was the intention".

In the view of the Singapore Court of Appeal, there was no reason why this principle should not apply to agreements between the company and its shareholders made outside of the company's memorandum and articles of association.

Europe: an unjustified restriction on the free movement of capital - golden shares in Portuguese Telecom

In January 2008, the European Commission referred Portugal to the European Court of Justice because it considered that the special rights conferred on the State by its golden shares in Portugal Telecom (PT) discouraged investment from other Member States in violation of the EC Treaty.

Today the European Court of Justice gave its opinion - Commission v Portugal (Case C-171/08) - and supported the Commission's position. The court observed (paras. [60] to [62]):

... the Portuguese State’s holding of those golden shares, in so far as it confers on that State an influence on the management of PT which is not justified by the size of its shareholding in that company, is liable to discourage operators from other Member States from making direct investments in PT since they could not be involved in the management and control of that company in proportion to the value of their shareholdings (see, inter alia, Case C‑112/05 Commission v Germany [2007] ECR I‑8995, paragraphs 50 to 52).

Similarly, the structuring of the special shares at issue may have a deterrent effect on portfolio investments in PT in so far as a possible refusal by the Portuguese State to approve an important decision, proposed by the organs of the company concerned as being in the company’s interests, is in fact capable of depressing the value of the shares of that company and thus reduces the attractiveness of an investment in such shares (see, to that effect, Commission v Netherlands [C-283/04, [2006] ECR I‑9141], paragraph 27).

In those circumstances, it must be found that the Portuguese State’s holding of the golden shares at issue constitutes a restriction on the free movement of capital for the purposes of Article 56(1) EC".

A summary of the decision is available here (pdf). Following Lisbon, Article 56 is now Article 63 in the Treaty on the Functioning of the European Union: see here (pdf).

UK: Companies Act (2006) - The Companies (Reduction of Share Capital) Order 2008

The Companies (Reduction of Share Capital) Order 2008 has been published on the OPSI website, together with an explanatory memorandum. The Order was made on 17th July and comes into force on 1 October 2008. It sets out the form of the solvency statement for private companies wishing to reduce their share capital in accordance with Sections 642 to 644 of the Companies Act (2006). For background information see these FAQs provided by BERR. 

UK: Scotland: unfair prejudice, implied terms and the affairs of the company

An interesting judgment was handed down yesterday by Lord Glennie in Scotland's Court of Session (Outer House). The case - Gowanbrae Properties Ltd., a petition of [2008] CSOH 106 - concerned a petition presented under Section 994 of the Companies Act (2006) (the unfair prejudice remedy, formerly Section 459 of the Companies Act (1985)). The case deserves attention because of Lord Glennie's comments on the width of the remedy and also because it provides a good illustration of the difficulties associated with determining whether prejudice has been suffered by a shareholder qua shareholder.

The petitioner held redeemable preference shares in the company. At the time that the preference shares were created, the company's articles were amended to provide for the redemption of the preference shares on a specified date: the day on which a certificate of practical completion was issued in respect of the development of a property owned by the company. The company's board decided not to proceed with the development of the property. The petitioner claimed that this prevented the redeeming of its shares and that this amounted to the conduct of the company's affairs in a manner unfairly prejudicial to its interests.

In order to bring their claim within Section 994, the petitioner argued that the directors' decision ended the basis on which the parties had entered into association; it was thus unfair, the petitioner argued, for it to be bound to continue as a shareholder in the company. Lord Glennie rejected this argument and the argument that a term should be implied requiring the company to achieve practical completion. His Lordship dismissed the petition and in the course of his judgment observed (at para. [20]):

If there is no obligation on the Company in terms of the implied term contended for by the petitioner, it must follow that the Company is free to make commercial decisions in its own interests. The directors owe a fiduciary duty to the Company and complaints can be made against them if, in breach of that duty, they have regard to extraneous matters, such as a desire to benefit some other company. The court will not lightly infer from surrounding circumstances the existence of an understanding to which the Company should be held in equity and which would prevent it from making decisions in its best interests..."

Lord Glennie also made the following interesting observations with regard to the petitioner's claim and the court's jurisdiction under Section 994 (at para. [22]):

The essence of that jurisdiction [Section 994] is that the affairs of the company have been conducted in a manner which is unfairly prejudicial to the interests of the petitioner as a member of the company. The petitioner's claim, as was stressed repeatedly in argument, is based on the fact that it had an accrued right to payment ... It seems to me to be arguable that the prejudice which the petitioner has suffered, if it be prejudice, is as a seller of shares rather than as a member of the company. In response to this argument, I was referred on behalf of the petitioner to the case of Gamlestaden Fastigheter AB v Baltic Partners Limited [2007] 4 All ER 164. In that case a shareholder claimed under the Jersey equivalent of section 459 on the basis that he was a creditor, and would not have advanced sums to the company but for having been a shareholder. This, it was argued, illustrated the width of the jurisdiction. Those facts are, of course, the reverse of the present circumstances ..."

Note: For an earlier decision of Lord Glennie considering Section 994, see: West Coast Capital (Lios) Ltd. [2008] CSOH 72.

Hong Kong: first criminal conviction for insider dealing

Hong Kong has seen its first successful prosecution for insider dealing under the Securities and Futures Ordinance 2003. The case concerned a finance manager of a subsidiary of Sino Golf Holdings Ltd. In the course of her employment the manager became aware that a debtor of the subsidiary company had filed for Chapter 11 bankruptcy protection in the US. She sold her holding of 180,000 shares in Sino Golf before the market became aware of the debtor's financial difficulties and its impact on the subsidiary.

The Securities and Futures Commission (SFC) argued that by selling her shares at this time she avoided a loss of HK$63,333. This argument was upheld by the the Eastern Magistracy. The Principal Magistrate sentenced the employee to six months' imprisonment (suspended for two years), fined her HK$200,000 and ordered her to pay $20,253 in costs to the SFC.

For further information see:

SFC press release | Insider dealing is defined in Section 270 of the Securities and Futures Ordinance 2003.

Europe: European Council supports proposal for credit rating agency regulation

European Internal Market Commissioner McCreevy's proposals for the regulation of credit rating agencies were noted earlier today (see here). The likelihood of these proposals becoming law has increased following endorsement by the Council of the European Union. In a press release published today, the Council stated:

The Council welcomes the revision by IOSCO of its Code of Conduct at the international level, and CESR's and ESME's reports on rating agencies. The Council considers that the revisions to the IOSCO Code of Conduct provide a minimum benchmark for the actions that credit rating agencies should take to address concerns about their activities in the market for structured products. In this context, the Council takes note of the additional steps undertaken in this field by the rating agencies to better address the governance concerns and improve transparency concerning the value and limitations of the ratings.

However, the Council shares the Commission view that the current initiatives do not fully address the challenges posed, that further steps, are needed and that regulatory changes might be necessary. The Council supports the objective of introducing a strengthened oversight regime for rating agencies and notes in this regard the preliminary views by the Commission as well as the proposals by CESR and ESME. The Council supports an enhanced European approach and the objective of strengthening international cooperation to ensure a stringent implementation of internationally approved principles. To this end, and without prejudice to consideration of its practical application, the Council supports the principle envisaged by the Commission that the rating agencies should be subject to an EU registration system.

The Council would also welcome intensified competition by entry into the market of new players". 

For comment, see this article in the Financial Times newspaper.

UK: contracts for difference - general disclosure regime proposed by the FSA in respect of long positions

In November 2007 the FSA published a consultation paper titled "Disclosure of Contracts for Difference", which discussed the possible market failures (inefficient price formation, distorted market for takeovers and diminished market confidence) arising from non-disclosure of Contracts for Difference (CfDs) and the regulatory options available to address those failures. In this paper the FSA noted (at para. 1.8):

Despite the growth in the market, CfDs mostly remain outside the regulatory framework governing disclosure. This framework exists primarily to provide to the public accurate, comprehensive and timely information about changes in major shareholdings in companies issuing shares. The current disclosure requirements are therefore referenced to direct and indirect control of voting rights attaching to a share".

The FSA has today published a statement explaining its position following the end of the consultation period. In this statement the FSA explains:

We have concluded that our objective of addressing the market failures the [consultation paper] identified in relation to voting rights and corporate control can best be addressed through a general disclosure regime. Therefore we have decided to implement a general disclosure regime of long CfD positions, based on Option 3 in the consultation paper, but with two significant modifications: [1] in relation to aggregation and disclosure thresholds; and [2] in relation to an exemption for CfD intermediaries".

The FSA proposes setting the disclosure threshold at 3%., which is in line with the existing requirement with regard to voting rights in listed securities found within DTR Rule 5.1.2 (part of the Vote Holder and Issuer Notification Rules (DTR 5) within the FSA Handbook). A further consultation period has begun - on the technicalities of the proposals - and the FSA plans to publish a further statement and draft rules in September. The final rules will be published in February 2009.

For further information see:
FSA press release | FSA policy statement | November 2007 consultation paper | November 2007 consultation newsletter | FSA Handbook: DTR5 | Financial Times newspaper article | Times newspaper article | 

UK: the regulation of takeovers - Takeover Panel consultation paper published

The Takeover Panel Code Committee has published a wide-ranging consultation paper titled Review of Certain Aspects of the Regulation of Takeover Bids: see here (pdf).

The issues discussed include: the minimum threshold of acceptance for a bid by the offeree company shareholders (is the current “50% plus one” too low?); whether voting rights should be withheld from shares in an offeree company acquired during the course of an offer period; the level of information provided by offerors in relation to the financing of takeover bids; and whether protections similar to those afforded by the Code to offeree company shareholders should be afforded to shareholders in an offeror company.

The consultation paper is unusual because the Committee has departed from its usual practice of setting out proposals and draft amendments to the Code. The Committee has, instead, set out background information for each of the issues and the arguments for and against possible change, in order to instigate further debate. Further consultation papers will be published should the debate establish that there is a case for change in respect of the issues covered.

The Secretary of State for the Department for Business, Innovation and Skills - the Rt Hon Dr Vince Cable MP - welcomed the publication of the consultation paper and stated:

Getting the UK takeover framework right for the future is an important step in Government efforts to renew and reform the way markets work. This is not about economic nationalism. Open markets have made a huge contribution to growth in the UK over the past 30 years and must continue to do so in the future. We welcome foreign investors but we want all shareholders to be empowered, the takeover process to be more transparent, directors to think about their wider long term legal duties, and takeovers to be decided on the basis of long term shareholder value rather than short-term speculation. The Takeover Panel's work can play an important part in realising these goals".

UK: cooperative and credit union reform

In June 2007 the Government published  a consultation paper titled "Review of the GB cooperative and credit union legislation". A summary of the responses and the Government's proposals were published in December 2007. On June 5 of this year, the Government indicated in a parliamentary written answer that its proposals would be implemented "subject to parliamentary time". A further update has been provided today by Kitty Ussher - the Economic Secretary to HM Treasury - in a speech at the launch of the All Party Parliamentary Group on Credit Unions. The Government plans to introduce a Legislative Reform Order in order to make the following changes (quoting directly from the relevant press release):

Credit Unions:

• liberalising membership criteria and radically changing the "common bond", so that credit unions can provide their services to a wider range of people
  
• making it possible for groups, rather than just individuals, to become members
  
• allowing credit unions to pay interest on members' deposits.
  
• removing the statutory limit on non-qualifying members.
  
• allowing credit unions to charge the market rate for services such as chequebooks and money transfers.

Cooperatives:

• Removing the £20,000 limit on risk share capital which is transferable, but not withdrawable

Cooperatives and Credit Unions:

• Giving societies the flexibility to choose their own accounting year-ends
  
• Abolishing the requirement to have interim accounts audited.
  
• Lowering the minimum age for being an officer of a society to 16
  
• Bringing the fee for a copy of the society's rules up to date
  
• Making it easier for members to dissolve a society, subject to safeguards.

For further information see:

HM Treasury press release | HM Treasury consultation | Ussher's speech | Co-operatives UK | Association of British Credit Unions | 

Hong Kong: company law reform - third consultation paper published

The Financial Services and the Treasury Bureau has published a third consultation paper as part of its review of the company ordinances in Hong Kong.  The third consultation paper deals with share capital, capital maintenance and amalgamations. Amongst the proposals are:

• The introduction of a mandatory no-par value share regime for all companies
• The removal of the requirement for authorised capital
• The retention of the current capital maintenance regime
• The introduction of a court-free statutory amalgamation procedure

For further information see:
press release | third consultation paper | third consultation paper executive summary | earlier consultation papers | reform homepage

Australia: shareholder engagement and participation

On June 23, Australia's Parliamentary Joint Committee on Corporations and Financial Services published a report titled Better shareholders – Better company: Shareholder engagement and participation in Australia. The Committee considered several issues including the barriers to effective engagement by shareholders in the governance of companies, the engagement of institutional shareholders and the selection of directors. The report makes many recommendations including:

• ASIC should establish best practice guidelines for company annual general meetings and for clear and concise company reporting.
• The government should investigate an alternative regulatory framework for small incorporated companies and not-for-profit organisations.
• The government should investigate the most appropriate regulatory framework for ensuring that stock lenders retain the voting rights attached to the lent shares.
• The government should amend the Corporations Act to exclude shareholder directors from voting on their own remuneration packages either directly or by directing proxies

The Australian Government has welcomed the report: see here.

UK: the FSA flexes its muscles - part 1 - rights issues and short selling

The UK's Financial Services Authority believes that in the current market conditions there is increased potential for market abuse through the short-selling of shares during rights issues. Such is the FSA's concern that new disclosure rules will come into force this Friday. These require the disclosure of short positions (0.25% or more) in shares admitted to trading on prescribed markets where a rights issue is taking place. FAQs concerning these rules have been published here. The rules have caused much disquiet, as reported here, not least because they were introduced without consultation.

Canada: the Canada Not-For-Profit Corporations Act

The Canada Not-for-Profit Corporations Bill (C-62) received its first reading in Canada's House of Commons on June 13. According to a press release issued by Industry Canada (the relevant Government department):

The proposed Canada Not-For-Profit Corporations Act will enable organizations to incorporate faster and improve their financial accountability, clarify the roles and responsibilities of directors and officers, and enhance the protection of members' rights ... [It] will allow for the repeal of the outdated Canada Corporations Act. It will also move share capital corporations created by Special Acts of Parliament into the Canada Business Corporations Act, which will provide a modern, efficient corporate governance regime for the affected companies".

Background information is available here and the Bill's progress can be followed here.

UK: FSA fines Woolworths plc - what is inside information?

The decision of the FSA to fine Woolworths plc £350,000 has been widely reported (see, for example, this report in the Financial Times). The case concerned Woolworths' delay in disclosing information (a variation in a subsidiary's contract with a supplier which would reduce profits by £8 million) about which it became aware of on 20 December 2005.  Disclosure was made on 18 January 2006, when Woolworths provided a Christmas trading update. On this day the company's shares fell from 36.75p to 32.25p (a fall o just over 12%).  

The FSA argued that Woolworths' failure to disclose before 18 January 2006 breached Disclosure Rule 2.2.1 and Listing Principle 4. Rule 2.2.1 requires the issuer of listed securities to disclose inside information as soon as possible on a Regulated Information Service. Listing Principle 4 requires the communication of information by a listed company to those holding its securities (and potential holders) in order to avoid the creation or continuation of a false market in the securities. 

The FSA's Decision Notice is well worth reading because there is discussion of the definition of inside information. An important part of this definition is the requirement that if the information were generally available, it would "be likely to have a significant effect on the price of the qualifying investments or on the price of related investments" (emphasis added). Woolworths argued that the information about the contract did not satisfy this part of the definition because a share price fall of at least 10% is needed for there to be a significant effect and that when determining whether information is inside information, reference should be made to what caused the share price movement.  Woolworths contended that news about the contract variation explained less than half of the share price fall on 18 January and for this reason it was not inside information.  

The FSA rightly rejected these arguments and observed:

...it is the wrong approach to seek to analyse the amount of an actual fall that might be attributed to a particular piece of information in order to determine whether it was 'inside information'. Indeed it is an unworkable test if the relevant piece of information was not in fact disclosed".

"The FSA is satisfied that the Variation resulted in a profit reduction of more than 10% and that this is, on any view, information of a type that a reasonable investor would be likely to use as part of his investment decisions".

Implementing the OECD Principles: some personal reflections

The OECD has published a report titled "Using the OECD Principles of Corporate Governance: A Boardroom Perspective". The following extract explains well the purpose of the report and the insights it provides:

Chapter VI of the OECD Principles – The Responsibilities of the Board is underpinned by the notion that the board directs the affairs of the company. The concept on paper is sound. We wanted to find out what happens in practice, in the imperfect world beyond compliance with  guidelines. To that end, we contacted chairpersons, CEOs, directors, general counsels, corporate secretaries and other practitioners from different sectors, regions, corporations and business cultures ... we asked contributors to provide their personal reflections upon what Chapter VI of the OECD Principles – The Responsibilities of the Board actually requires from a director. We encouraged them to share their thoughts about what they believe are the key challenges faced by directors where the law ends and individual discretion begins, and how they managed the challenges. A number of strong, common themes emerged from the interviews and we found that our own thinking was challenged in various ways".

Hong Kong: Companies Ordinance Rewrite - second consultation phase launched

The second consultation phase for the Companies Ordinance Rewrite began today and will last until 6 August 2010. A consultation paper has been published - see here (pdf) - along with parts of the draft Companies Bill (see here). A full list of the phase two consultation questions is available here (pdf).

Netherlands: changes proposed to the Tabaksblat Code

The Dutch Corporate Governance Monitoring Commission has proposed changes to the Dutch Corporate Governance Code (a.k.a. the "Tabaksblat Code"). A summary in English is available in a Word document here. This document also contains the results of a survey of Dutch institutional investors' perceptions of corporate governance in Dutch companies. Many of the changes concern remuneration. The proposed additions to the Code include the following rules:

If a variable remuneration component (shares, options or a bonus) conditionally awarded in a previous financial year would, in the opinion of the supervisory board, produce an unfair result on account of incorrect financial data or special circumstances in the period in which the predetermined performance criteria have been or should have been achieved, the supervisory board may adjust the value downwards or upwards. This power of the supervisory board shall in any event be included in new remuneration contracts with management board members.

If the remuneration committee uses the services of a remuneration consultant, that consultant should not provide advice to any management board member.

The supervisory board should aim to have a diverse composition in terms of age and gender.

For further information see this press release (in Word format).

Update (15 September 2008): The ICGN has published a letter in which it comments on the proposed changes. 

England and Wales: the auditor's role and financial assistance

Section 151 of the Companies Act (1985) makes it is unlawful for a company to provide financial assistance for the purchase of its own shares.  Private companies can, however, provide financial assistance by complying with the so-called "whitewash" procedure.  This requires directors to make a solvency declaration (or statement) in accordance with Section 156. Atttached to this must be a report by the company's auditors stating that they have enquired into the company's affairs and that they are not aware of anything to indicate that the directors' opinion is unreasonable in all the circumstances.

The nature of the auditor's role in respect of this report has recently been considered in M&S Tarpaulins Ltd. v Green (Ch.D., Manchester, 2 May) (not yet available on BAILII). The trial judge: (a) held an auditor negligent in the preparation of the report (the auditor had failed, inter alia, to analyse the company's cash flow position) and (b) rejected the claim that the questions to be asked and the techniques to be used in preparing the report would vary depending on the size of the transaction.

The decision is, however, of wider interest because of the endorsement given to the Auditor's Code within the ICAEW's Audit Quality document and the way in which the Code was used by the trial judge to consider the auditor's role and responsibilities. The trial judge cited several Code provisions including:

Rigour

Auditors approach their work with thoroughness and with an attitude of professional scepticism. They assess critically the information and explanations obtained in the course of their work and such additional evidence as they consider necessary for the purposes of their audit

NB: Change is afoot: Part 18 of the Companies Act (2006) introduces a new regime, effective from 1 October 2008, under which it will no longer be unlawful for private companies to provide financial assistance. For further information, see here.

Australia: Large cap companies' corporate governance compliance

The 2008 BDO Kendalls large-cap corporate governance survey has been published. Amongst the findings are the following (to quote from BDO Kendalls' press release):

Australia’s largest publicly listed companies generally meet all aspects of best practice guidelines for corporate governance; however full independence still remains a key issue for some major companies.

Areas highlighted included some companies having audit, remuneration or nomination committees that were either not made up of all independent directors or the chair was not independent. The survey findings are based on the 2007 annual report disclosures of the 20 largest Australian listed companies by market capitalisation as at 13 March, 2008.

Several companies (15%) were also found to be paying a high proportion of non-audit fees to their statutory auditors. News Corporation and Newmont Mining were the only companies not to have a formal Share Trade Policy. Also, 40% of the top 20 companies did not have a dedicated Risk Management Committee.

However, despite some of the largest caps needing to improve in certain areas, the broad finding for Australia’s biggest listed companies is that their corporate governance structures are robust and in most areas meet best practice guidelines.

For further information click here. For further information about corporate governance in Australia, see here. For BDO Kendalls 2007 mid-cap corporate governance report, see here.