The Red Tape Challenge is a website-based project aimed at identifying – and scrapping – unnecessary regulations. Over the past few months, the Government has been asking interested parties to submit a response on the website, suggesting which regulations across various sectors should be scrapped, merged with other regulations, simplified, or improved. The focus is now on company law regulations. Further details on the Red Tape Challenge are here.

The Department for Business, Innovation and Skills (BIS) has invited comments on how it might reduce the administrative burden placed on UK businesses, whilst continuing to provide adequate protection for creditors, customers and suppliers. It highlights approximately 120 pieces of company legislation for review, under four headings: The Workings of Companies and Partnerships; Accounts and Returns; Business Names; and Disclosing Information about your Business. Comments can be made here.

BIS has also published a Discussion Paper, Providing a flexible framework which allows companies to compete and grow, which seeks views on how the company law framework can be improved in all areas. The Discussion Paper poses a number of questions in relation to the possible improvement in the following further areas of company law. These include:

1. Company names. BIS asks for views on whether the law on company names causes problems and delay;

2. Company filings. BIS asks whether it would be beneficial to be able to file an annual return and accounts together and how the system should change to best accommodate that;

3. Rights to inspect company registers. BIS asks for suggestions to improve, in practice, how registers may be inspected;

4. Penalties and enforcement. BIS asks whether the existing UK system of setting of fines and penalties is the most appropriate method for achieving compliance with the law; and

5. Employee share schemes. BIS asks whether existing company law as regards the design and operation of company share ownership schemes requires amendment or simplification.

The Red Tape Challenge is focusing on company law until 16 February 2012, but comments on UK regulation can be made after this date (although it is not clear to what extent the Government will take account of comments it receives after 16 February.) The Discussion Paper does not specify a date by which the Government must receive responses to the specific questions posed.

The revised UK Corporate Governance Code, which came into effect in June 2010, included a new Principle B.2 which stated that “the search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender.” Later that year, Lord Davies was commissioned by the Government to review gender diversity on the boards of listed companies and recommend how the Government and businesses could increase the proportion of women on company boards.

Following the completion of his review in February 2011 – and the subsequent FRC consultation paper on his recommendations for revising the UK Corporate Governance Code to require listed companies to establish a policy on boardroom diversity in May 2011 – the following changes relating to listed companies were announced:

1. They will have to report annually on their boardroom diversity policy, including gender, and on any measurable objectives that the board has set for implementing the policy and the progress it has made in achieving the objectives; and

2. They will have to consider diversity of the board, including gender, when evaluating their board’s effectiveness.

These changes have been deferred and will apply to financial years beginning on or after 1 October 2012; however, the FRC has encouraged all companies to voluntarily apply and report on these changes with immediate effect.

The change of policy aims to reduce the current level of rejections and to ensure that documents are entered onto the correct company record. Companies House will reject a document where a name has an abbreviation other than the following:

1. For public companies: public limited company; plc; p.l.c.; cwmmi cyfyngedig cyhoeddus; ccc; c.c.c.

2. For LLPs: Limited Liability Partnership; LLP; L.L.P.; Partneriaeth Atebolrwydd Cyfyngedig; PAC;  P.A.C.

3. For private limited companies: limited; ltd; ltd.; cyfyngedig; cyf; cyf.

4. For Community Interest Companies (private limited): Community Interest Company; CIC; C.I.C.; Cwmni Buddiant Cymunedol; CBC; C.B.C.

5. For Community Interest Companies (public limited): Community Interest Public Limited Company; Community Interest PLC; Community Interest P.L.C.; Cwmni Buddiant Cymunedol Cyhoeddus Cyfyngedig; Cwmni Buddiant Cymunedol CCC; Cwmni Buddiant Cymunedol C.C.C.

However, a few abbreviations will continue to be accepted:

1. The use of “Co” instead of “company”;

2. The use of “&” instead of “and”; and

3. The omission of the word ‘THE’, but only at the front of the name.

On a related matter, Companies House has also announced that it has dropped its requirement for the mandatory electronic filing of accounts by March 2013. This move is a direct result of the Government’s desire to reduce regulatory burden on small businesses. However, Companies House has maintained that it intends to eventually be a fully electronic registry, and mandating electronic services is an issue which they will revisit once the moratorium on new regulation for small businesses has ended in 2014.

This trial, which is expected to begin on 12 June 2012, is only the second corporate manslaughter case to be brought under the Corporate Manslaughter and Corporate Homicide Act 2007 since the Act came into force on 6 April 2008. The previous conviction under the Act was in February 2011 (click here and here for further details). Under the Act, convicted companies face unlimited fines, remedial orders and publicity orders; the common law offence of gross negligence manslaughter carries a maximum sentence of life imprisonment. The directors will return to court on 8 December 2011 to enter their pleas.

The case is of particular importance, as it is also the first case to be brought against a medium-sized company, with over 100 employees. Cotswold Geotechnical Holdings, the first company to be convicted, had less than five employees and was ultimately fined £385,000. If convicted, Lion Steel Equipment can probably expect a much larger fine.

The Companies Act 2006 sets out a director’s fiduciary duties in statute for the first time. These include duties:

- to promote the success of the company;

- to avoid conflicts of interest; and

- not to accept benefits from third parties.

Case details

A director acquired equipment for his personal use by way of a free, undisclosed and unapproved loan from one of the company’s customers. At the initial hearing, the judge held that the director had acted in breach of his fiduciary duties.

Decision

On appeal, the judge considered various defences put forward by the director such as the absence of evidence that the company had suffered any loss or that the director had any corrupt motive and the fact that the value of the benefit to the director was small. However, the judge dismissed such defences and upheld the initial decision.

Comment

This case shows that the courts take a strict view of any breach of directors’ duties and even a breach with a small financial value can lead to a director being found liable.

Philip Towers v Premier Waste Management Ltd [2011] EWCA Civ 923

I have reproduced the article in full below, with permission from The Financial Times.

Resigned to losing director

Q. I run an advertising business and, 18 months ago, we appointed a non-executive director to advise on our growth. We appointed her on good faith as we have known her for a long time and regard her as a friend. However, it has come to my attention that she is also advising a rival company and we are very concerned about this. Can you advise on the best course of action?

A. The duties of the non-executive director in this case are now codified within the Companies Act 2006. Under section 172 of the Act, there is an obligation on the part of the director to promote the success of the company. That section also states that a director must act in a way that he or she considers to be in good faith.

The director is obliged to consider the likely consequences of any decision made by her in the long term, in so far as it may affect the business.

By section 174, there is an obligation on the director to exercise reasonable care, skill and diligence and, by section 175, to avoid a conflict of interest. So, by advising a competitor in the sector, the director clearly has a conflict of interest – and thereby risks being in breach sections 172, 174 and 175 of the Act.

Consequently, your board should consider asking the non-executive director to resign from her position to avoid being in breach of her statutory duties as described above.

If she refuses, the board will have to consider terminating the arrangement.

Michael Delaney is a partner and head of employment at Matthew Arnold & Baldwin, a law firm.

If you would like further advice on this issue, or anything else employment-related, please contact me at michael.delaney@mablaw.com.

Corporate manslaughter has been a criminal offence under the Corporate Manslaughter and Corporate Homicide Act 2007 since the Act came into force on 6 April 2008.

As in the Cotswold Geotechnical case, Lion Steel Ltd has been charged with corporate manslaughter under the Corporate Manslaughter and Corporate Homicide Act 2007. Three of the company’s directors have also been charged with gross negligence manslaughter and charged under the Health and Safety at Work Act 1974 for failing to ensure the safety at work of their employees. In this particular case, an employee of the firm died after he fell through a factory roof.

The hearing will take place at Tameside Magistrates’ Court on the 2 August 2011.

The bringing of a second prosecution further demonstrates how important it is for businesses to ensure that they regularly review their health and safety and risk management systems/policies.

For advice on directors’ duties please contact Emma Cameron or any other member of our Corporate Team.

Hedgehog previously had two directors, FH and another. Due to contentious previous court proceedings between the directors, in which certain orders were made against FH, FH had resigned his position as a director of Hedgehog, leaving the other director as sole director.

Another company had brought a patent infringement claim against the golfing device developed by Hedgehog. A consultant of Hedgehog gave evidence to the High Court that FH had made threats in relation to proposals FH had made to Hedgehog, such that if the proposals were not accepted he would not only stop assisting Hedgehog in its defence of the patent infringement claim, but he would actually offer his services to the other company’s patent attorneys.

The consultant also gave evidence that FH had threatened to publicly announce the limitations of Hedgehog’s registered patent, allowing competitors to take advantage of its shortcomings.

The High Court ruled that it was appropriate to grant Hedgehog a perpetual injunction to prevent FH from disclosing confidential information without Hedgehog’s consent. The High Court ruled that FH’s previous conduct showed that he had intended to damage Hedgehog’s business by releasing information that would prejudice the business, and that he had also intended to reveal information that could put him in breach of the previous orders that had been made against him in the contentious proceedings with Hedgehog’s director.

The amendments include:

- no longer having to state whether the company was a traded company at any time during the return period;

- when describing a company’s principal business activity, the classification scheme that companies may use is the 2007 edition of the UK Standard Industrial Classification of Economic Activities (rather than the 2003 edition); and

- requiring the annual return to state whether any of the company’s shares were, at any time during the return period, admitted to trading on a “relevant market” which, for example, would include the London Stock Exchange’s main market, AIM and regulated markets outside the UK.

The regulations setting out these amendments are currently in draft form but it is intended that they will come into force on 1 October 2011 and apply to returns made up to that date or a later date.

The Government announced in August 2010 that it had asked Lord Davies of Abersoch to develop a strategy to address concerns that there are too few women on the boards of UK listed companies. The “Women on Boards” report has now been published.

Recommendations

The report does not propose statutory quotas as a way to incease female board representation but instead makes several “business-led” recommendations such as:

- the target percentage representation of women on the boards of FTSE 100 companies should be 25%;

- a voluntary code of conduct should be drawn up by headhunting firms to address gender diversity for the boards of FTSE 350 companies;

- disclosure requirements for quoted companies should be introduced (so that a quoted company must disclose the proportion of women on its board, the number of women in senior executive positions and its total number of women employees);

- a deadline of September 2011 should apply to FTSE 350 companies to announce their targets for female board representation; and

- companies should advertise their non-executive positions from time to time to encourage a wider range of applications.

If these recommendations do not result in a significant increase in female board representation for UK listed companies, the Government may yet introduce statutory quotas.

This is the first time that a company has been charged with, or convicted of, corporate manslaughter under the Corporate Manslaughter and Corporate Homicide Act 2007. For further details of the case, please click here.

Matthew Arnold & Baldwin partner Tim Constable has written about the background to this case in detail and looked at the impact the Act will have on companies. Please click here to read this analysis.

This successful prosecution demonstrates how important it is for businesses to ensure that they regularly review their health and safety and risk management systems/policies.

Sentencing is due to take place tomorrow (17 February 2011).

UPDATE (18 Feb 2011): Cotswold Geotechnical has been fined £385,000, but, due to the company’s poor financial state, the Court has said that the money can be paid over 10 years, at a rate of £38,500 per annum.

Disclosure obligations

The Disclosure and Transparency Rules (DTR) apply to companies which are listed on a regulated market in the UK. The Listing Rules (LR) apply to companies which are listed on the FSA’s Official List. The DTR and LR impose certain obligations on such companies, including the way in which inside information should be controlled and disclosed. This is to ensure that all of the users of the markets receive the same information at the same time.

As JJB is a FTSE listed company it is subject to the DTR and LR.

Facts

JJB acquired OSC on 18 December 2007 for £5 million but did not disclose that it was also to purchase the in-store stock at a price of £10.038 million. On the later acquisition of Qube on 22 May 2008 for the nominal sum of £1, JJB failed to disclose the fact that it was in addition settling Qube’s overdraft facility at a cost of £6.47 million.

It was only later on 26 September 2008 when JJB published its interim results that it disclosed the true costs of the acquisitions for the first time, resulting in its share price falling by 49.5%.

FSA decision

The FSA considered that JJB’s failure to disclose the true costs of the acquisitions had created a false market in JJB’s shares for over nine months. The true costs constituted inside information and the information was that which a reasonable investor would use to reach investment decisions. JJB had therefore failed to comply with the DTR and LR.

The FSA originally imposed a penalty fine of £650,000 which was later reduced to £455,000 as a result of JJB’s cooperation in quickly reaching a settlement. This sum is the second largest fine the FSA has imposed for a breach of the DTR and LR.

HMRC will target 50,000 SME’s a year looking at business records going back over the last 6 years.  There is a legal obligation to keep adequate records, and failure to do so can give rise to fines of up to £3,000.  This is a change of practice from HMRC who historically have rarely imposed these penalties.

Overtly raising taxes at the moment is political death.  So HM Treasury have to look elsewhere for money.  This seems to be a case of rummaging down the back of the sofa for those extra bits of revenue.  However, for most SMEs – £3,000 is not small change.  Businesses need to ensure that they keep all relevant documentation in addition to their accounts, such as till rolls, cheque stubs, paying-in-slips, cash receipts, etc.

If you want to speak to a solicitor or accountant about your obligations please contact us.

We also offer a business healthcheck  service, which includes a review of your business documentation and compliance.  If you are interested in this please contact our corporate team.

The Bribery Act is expected to have a huge impact on the way an organisation controls its internal affairs, as it will be responsible for any corrupt action by its employees unless it can show that it had in place adequate procedures and policies to prevent those actions.

The Bribery Act places the responsibility for compliance with the organisation rather than providing a tick-box system to ensure compliance. As part of the new law, the Government needed to produce guidance to help organisations to make the correct decisions.

The initial guidance was produced by the last government, but was widely criticised, by bodies such as the Law Society, for not being clear enough. Once the new guidance has been published, the MoJ have said that there will be a three month notice period before the Bribery Act comes into force.

The prosecution against Cotswold Geotechnical Holdings is the first to be brought against a company under the Corporate Manslaughter and Corporate Homicide Act 2007, which came into effect in April 2008. The case against the company followed the death of an employee, who was killed in September 2008 while taking soil samples from a building site.

The case was adjourned in October 2010 due to the ill-health of the company’s managing director, Peter Eaton. Mr Eaton also faced prosecution for gross negligence, but, at the original hearing, Bristol Crown Court permanently stayed the charges due to his ill-health.

The trial is expected to last three weeks.

The case demonstrates the importance for companies to ensure that they keep their health and safety and risk management systems/policies under review.

Matthew Arnold & Baldwin partner Tim Constable has written about this case and looked at the impact the Act will have on companies. Please click here.

If you have any concerns about how the Act may impact on you and your business, please contact Tim Constable at tim.constable@mablaw.com.

UPDATE: On 15 February 2011, Cotswold Geotechnical (Holdings) Ltd was found guilty of corporate manslaughter. Click here for further details.

It remains to be seen whether the Supreme Court accepts Safeway’s application, although if it takes into account the unanimous decision of the Court of Appeal, it is unlikely to do so. If the Supreme Court does choose to review the case, directors and employees of an organisation will again be at risk of being ruled to be liable for breaches of competition law by that organisation.

BAE Systems plc (BAE) and the Serious Fraud Office (SFO) reached a settlement agreement in February 2010 as regards BAE’s alleged corruption in the procurement by BAE of a contract with the government of Tanzania. The settlement with the SFO was the result of co-ordinated action with the US Department of Justice.

Since the settlement with the SFO, some court cases have questioned the ability of the SFO to conclude settlements. Judges in two such cases stated that the courts could not be bound by such settlements and the SFO may only suggest a sentencing range, rather than specific sentences. The outcome of the BAE court case has therefore been eagerly anticipated.

Decision

BAE was sentenced on 21 December 2010 after pleading guilty to failing to keep adequate accounting records contrary to the Companies Act 1985.  The guilty plea formed part of the settlement which BAE had reached with the SFO. The judge stated that although he was not bound by the settlement, he accepted the basis of the plea itself.

Comment

The case will be of interest to companies considering self-reporting to the SFO for corruption. It also has a particular relevance given that the Bribery Act 2010 is due to come into force in April of this year.

How can we help you?

We can provide your business with a one hour bespoke training session to explain the implications of the Bribery Act 2010. The wording of the new Act is very wide so it may well affect the way in which your business operates. We can also suggest practical steps to reduce the risk of prosecution.

If you would like more information on the Bribery Act 2010 then please contact Emma Cameron at emma.cameron@mablaw.com

PwC’s annual non-executive director report, which covers the majority of FTSE 350 companies, found that non-executive directors at FTSE 100 companies spent 24 days on company board work in 2010 (compared with just 20 in 2009), with more than half of those surveyed expecting this figure to increase again in 2011.

The increased time demands have been put down to a number of reasons: tougher regulatory requirements for companies, the recession, and even the need to attend occasional board meetings overseas. There is a real risk that if this time burden continues, the role may become less viable in the future, particularly as 45 per cent of non-executive respondents believe that the fees they charge are too low for the work they do (and the time spent doing it.) That said, 63 per cent of respondents also said that the role has actually become more attractive due to its challenging and rewarding nature.

The question that comes out of this report is: can the role of non-executive director be successfully combined with the demands of a full-time job?

The study also found that:

1. For companies, a candidate’s experience and personality are the most important selection criterion when appointing non-executive directors;

2. For candidates who are considering a non-executive position, the quality of a company’s executive directors is the most important factor. This is followed by the quality of the company’s existing non-executive directors, the financial strength of the company, the company’s business strategy, the time commitment required, and the firm’s reputation. Interestingly, fees are the least important consideration (even though 45 per cent of non-executive directors feel they are significantly underpaid);

3. The average pay for a non-executive director in the FTSE 100 is £57,000;

4. Across all non-executive roles, female representation is only 5 per cent in FTSE 100 companies and 8 per cent in FTSE 250 companies; and

5. Only 21 per cent of FTSE 100 companies and 6 per cent of FTSE 250 companies evaluate the performance of their non-executive directors. Also, only one third of FTSE 350 companies have externally facilitated board evaluations every three years, as laid out in Provision B.6.2 of the UK Corporate Governance Code.

These Regulations will implement in the UK the 2009 EU Directive on reporting and documentation requirements in the case of mergers and divisions, which must be done by 30 June 2011. This Directive makes various deregulatory amendments to several other EU directives, with the aim of simplifying some of the processes on public company mergers, the formation and capital of public companies, and cross-border mergers, by enabling companies to make use of new technology, removing over-regulation and protecting creditors.

The Regulations will amend Parts 17 (A company’s share capital) and 27 (Mergers and Divisions of public companies) of the Companies Act 2006, and also the Companies (Cross-Border Mergers) Regulations 2007.

It is hoped that the Regulations will reduce the administrative burden on companies. This includes, amongst other things:

1. Taking advantage of technology. Companies will be able to make use of electronic communications for the circulation of certain documents that would previously have had to be made available, or filed, in hard copy format. For example, documents will be able to be published on a company’s website or sent to shareholders electronically; and

2. Removing overregulation. A reduction in the need for companies to produce certain reports or statements (for example, expert’s reports, share valuation reports, directors’ reports, or other financial reports), where to do so might duplicate existing information.

BIS has not proposed changes in the area of strengthening creditor protection, as it considers the existing UK regime to already meet the 2009 Directive’s requirements.

BIS invites comments on the draft Regulations by 13 March 2011. Full details are here (Word doc) and here.

Well, essentially, the BIS report says the following:

1. Broadly speaking, the report identifies that there has been a better than expected awareness of the key changes in the Act and a higher than anticipated take up of certain measures. 85% of those companies interviewed were aware of the changes under the Act.

2. Whilst there was an acknowledgement that there were costs savings and benefits from simplifying procedures for private companies on resolutions and meetings, over a third of companies interviewed disagreed that company law had been simplified. This is a rather telling statistic in itself given that simplification was one of the main objectives of the Act when the White Paper was issued a number of years back.

3. The report highlights that there is already a need to improve certain areas of the Act – in particular those provisions dealing with directors’ duties and the duty to promote the success of the company, business review and enfranchising indirect investors.

So what can directors glean from this report? Not a great deal really, and it can be argued that at a time of continuing economic uncertainty, the Government should be spending more time and resources on guiding and assisting directors through the maze of this complex piece of legislation, with a view to helping them run their companies more efficiently. No doubt directors will be thinking they would like a helping hand from the Government on the key provisions in the Act rather than have to face the prospect of having to implement further changes in the future. Is this really simplification? Probably not, but we live in an age of over reporting and no doubt there will be more reports to follow. Whatever happens, directors can be certain of one thing – Whitehall will be introducing changes to the Act – you have have been forewarned !

The guidance addresses matters such as: 

1. the constitutional role of shareholders;
2. the collective responsibility of the board and functionality of an advisory board;
3. the size, composition, efficiency, skills and duties of the board of directors;
4. equal treatment of members and effective communication between the board and shareholders;
5. the balance of family governance and corporate governance;
6. the division of responsibilities between board and management;
7. nomination, remuneration and audit committees;
8. appraisals of the board and individual directors; and
9. annual reports to shareholders and other stakeholders.

 The guidance can be viewed via the following link:

http://www.ecoda.org/docs/Corp%20Gov%20Guidance%20and%20Principles%20for%20Unlisted%20Companies%20in%20the%20UK_Final.pdf

• whether there is a problem with short-termism in the UK’s equity markets and if action is needed to encourage investors to take a long term view;
• should the shareholders of a company have a greater degree of control over directors’ remuneration; and
• do boards understand the long-term implications of takeovers and do they communicate such implications effectively?

See my article on the Act published in the Director of Finance magazine in March 2010. The article focusses on two important areas for corporates – hospitality and maintaining adequate procedures to prevent bribery.

The Bribery Act 2010 (Act) is due to come into force in April 2011. The current English law on bribery was considered to be unsatisfactory because it did not comply with the Organisation for Economic Co-operation and Development’s Bribery Convention, ratified by the UK in 1998. The handling by the English courts of the investigation into bribery allegations against BAE Systems has also been the subject of much criticism. The Act is designed to address these issues.

Commercial organisations will have a defence against the offence of failing to prevent bribery if they can show that they had “adequate procedures” in place to prevent persons “associated” with the organisation from making bribes. The Act does not provide any detail as to what constitutes such “adequate procedures”.

Consultation

The Ministry of Justice has now published a consultation document on guidance for commercial organisations to help them ensure that they have “adequate procedures” in place.

The draft guidance contains 6 principles:

• risk management and mitigation;
• top level commitment to bribery prevention;
• due diligence;
• clear, practical and accessible policies and procedures;
• effective implementation; and
• monitoring and review.

The consultation period is to last 8 weeks, with 8 November 2010 being the deadline for responses. A response will be published early in 2011 together with the final form of the guidance.

Registered name

A company’s registered name must appear on all forms of business correspondence and documentation including:

• business letters, notices and other official publications;
• business emails;
• order forms;
• cheques purporting to be signed by or on behalf of the company;
• orders for money, goods or services purporting to be signed by or on behalf of the company;
• invoices and other demands for payment;
• receipts and letters of credit; and
• its websites.

In addition, a company must display its registered name at: its registered office; any location at which it keeps its records available for inspection; and any location at which it carries on business.

Additional information

Additional information is required to be displayed on all business letters and order forms (whether in hard copy, electronic or any other form) and on all websites of the company including:

• the part of the United Kingdom in which the company is registered;
• the company’s registered number;
• the address of the company’s registered office;
• if a company is exempt from the requirement to use “limited” in its name, the fact that it is a limited company;
• if the company is a community interest company which is not a public company, the fact that it is a limited company;
• if it is an investment company, the fact that it is this type of company;
• if it is a company which has chosen to display its share capital, it must refer to the amount of paid up share capital; and
• if the letter includes the name of a director of the company (other than in the text or as a signatory), the name of every director of that company.

If a company is supplying goods or services through a website then its VAT registration number should also appear on its website. HMRC has its own requirements as to the information to be included on a VAT invoice.

Failure to comply with the information requirements constitutes a criminal offence and the company and its officers who are in default are liable to a fine.

If you have any questions about what information your company needs to disclose, please contact a member of the Corporate Team at Matthew Arnold & Baldwin LLP.

The Association of Investment Companies (AIC) has recently published guidance for directors of investment companies to help investment company boards obtain the most appropriate D&O policy. Whilst aimed at investment companies, the guidance highlights principles that directors of other types of company may find useful.

Key points of the guidance worth noting include:

• The board of directors should always remain responsible for arranging their own D&O policies so that they are aware of what is and what is not covered. This is particularly important when subsidiary companies are involved under a group company structure.
• If the board is made responsible for putting in place the D&O cover this will help to ensure that all directors on the board are aware of what losses can and cannot be claimed against.
• Directors should receive advice on the D&O policy before making a claim as inaccurate reporting may lead to insufficient recoveries under the policy.
• Any new directors should be provided with a copy of the D&O policy.
• Consideration should be given as to what effect a merger or acquisition may have on the D&O policy.

If you would like further information on D&O policies, or to see the AIC’s guide in full, please do not hesitate to contact Emma Cameron, or another member of the corporate team at Matthew Arnold & Baldwin LLP.

The Financial Reporting Council (FRC) commissioned the ICSA to review and update the Good Practice Suggestions from the Higgs Report that relate to non-executive directors. A previous ICSA consultation, in March 2010, revealed that there was overwhelming support for new guidance to help boards to understand and implement the Combined Code (now called the UK Corporate Governance Code). Consequently, on 29 July 2010, the ICSA published a new consultation paper on improving board effectiveness, which includes draft guidance to assist boards in implementing the Principles in Sections A (Leadership) and B (Effectiveness) of the Code.

This draft guidance makes a number of amendments to Higgs’ guidance, most notably by placing a greater emphasis on the role of the chair in creating an effective board. However, it also contains sections on several areas/issues that were not covered by Higgs’ guidance, including:

1. Role of the board. The board is expected to set the company’s values and standards, and ensure that it meets its obligations to shareholders and others;

2. Role of the senior independent director. He or she should be more prominent when the board is undergoing a period of stress, in order to maintain board and company stability;

3. Role of executive directors. The CEO should improve the standards of discussion in the boardroom, whilst executive directors should represent the owners of the business and encourage non-executives to probe proposals as an essential part of good governance;

4. Role of the company secretary. The company secretary should add value, particularly in relation to induction and development, and advise the board of any changes which could be made to governance procedures in order to improve the governance of the company;

5. Decision-making. The Board should provide clear policies and look at how good decision-making can best be facilitated;

6. Board composition. Companies should consider internal appointments for executive director posts, and prospective directors should conduct sufficient due diligence to ensure that they fully understand the company before joining its board;

7. Establishing and maintaining directors’ skills. The chair, new director and company secretary should work together to devise an effective induction programme and directors’ development programme; and

8. Communicating with shareholders and other stakeholders. The annual report and accounts should be regarded as the most important communication between the company and its shareholders, and should be used to clearly set out the company’s governance arrangements.

The consultation closes on 14 October 2010, and the ICSA will then submit the completed draft guidance to the FRC in November 2010, so that the FRC can publish the final guidance by the end of 2010.  Although the UK Corporate Governance Code applies to companies with a premium listing of equity shares, the principles and ethics underlying the Code should be followed by a much wider class of company, given the duties and responsibilities to which all directors are subject. Take, for example, the fast growing private limited company which is attracting external funding and which is working towards a listing. Behaviour in line with the Code will make transformation smoother and its absence could even jeopardise pre-listing funding, as reputation is crucial to any legitimate funder associated with a company.

After an extensive consultation process, the Financial Reporting Council (FRC) has published the new UK Corporate Governance Code (Code).  The Code applies to all companies with a premium listing of equity shares, whether incorporated in the UK or elsewhere. These companies should include a statement in their annual financial reports indicating how they apply the principles of the Code.

Directors’ remuneration

The changes in the Code relating to directors’ remuneration include:

• Non-executive directors were previously prohibited from receiving options in case such options risked their independence. This prohibition now covers “other performance-related elements” of remuneration.
• Companies now have to consider using provisions that allow them to clawback remuneration from directors in exceptional circumstances of misstatement or misconduct.
• The Code now specifically states that remuneration and incentives should be compatible with risk policies and systems.
• The performance-related elements of executive directors’ remuneration should promote the long-term success of the company. 

Directors’ re-election

The issue which was most fiercely debated during the consultation process related to the re-election of directors. The compromise is to introduce annual re-elections for directors but to apply this requirement only to FTSE 350 companies, meaning that smaller premium-listed companies need not hold annual elections. The concern remains that annual re-elections will lead to short-termism which seems at odds with the Code’s emphasis on long-term success.

Conclusion

The amended Code is not ground-breaking but introduces some interesting changes. It may therefore be an appropriate time for remuneration committees to review their remuneration policies and ensure they comply with the Code.

A derivative action is an action brought by a shareholder on behalf of the company. Owing to the complexity of the previous law, very few derivative actions succeeded. When the Companies Act 2006 (2006 Act) came into force, it introduced a wider range of circumstances in which such actions could be brought. A derivative action is now expressly available for a breach of duty by a director, even if the director has not benefited personally from the breach. Furthermore, it is no longer necessary for the shareholder to show that the director(s) who carried out the wrongdoing control the majority of the company’s shares.

Initially, some legal commentators were concerned that activist shareholders would bring such actions simply to disrupt the affairs of the company or make life difficult for its directors.  I initially considered some of the early cases on this new derivative action in January 2010 and concluded that any concerns that activist shareholders would be allowed to use the action frivolously seemed to be unfounded. This was due to the strict application by the courts of the tests set out in the 2006 Act which need to be satisfied before permission to continue a derivative action will be granted.

Since January 2010, permission to continue a derivative claim has been granted in Kiani v Cooper [2010] B.C.C. 463.

Facts of the case

A shareholder (X) sought permission to continue a derivative claim against another director and shareholder (Y) for breach of fiduciary duty.  The court considered various tests as set out in the relevant part of the 2006 Act and decided that, in the circumstances, X was acting in good faith in bringing the derivative action. The court also took the view that a director acting in accordance with his statutory duties to promote the success of the company would decide to pursue the claim, at least to the point of disclosure in the court proceedings.  The court therefore held that X had made out a case for breach of fiduciary duty by Y to the relevant standard and allowed the derivative claim to be continued to the point of disclosure.

Comment

This case demonstrates that it is possible for a shareholder to succeed in a claim for permission to continue a derivative action. However, the fact that the court only granted permission to the point of disclosure indicates that the courts will still apply a strict interpretation to the tests set out in the 2006 Act.

1. Tackle ‘red tape’

Before the election, both the Conservatives and Liberal Democrats promised to tackle red tape, including imposing a “one-in-one-out rule” for new regulations. This rule will now be implemented. They have also agreed to scrap the culture of “tick-box regulation” enforcement and will introduce “sunset clauses” (a Liberal Democrat policy), so that rules will expire if they are not reviewed. Finally, the Government will scrap the “gold-plating” of European legislation (i.e the transposition of EU legislation, which goes beyond what is required by that legislation.)

2. Businesses

The Government aims to encourage new start-ups by reducing the number of forms needed to register a new business, so that Britain becomes the fastest place in the world to start a business (Conservative policy). It will also end the ban on social tenants starting businesses in their own homes (Conservative policy.)

3. Takeovers

The Government “will review the range of factors that can be considered by regulators when takeovers are proposed.” There are currently no further details. The Conservatives’ manifesto did not explicitly deal with takeovers, but the Liberal Democrats promised to ensure that the takeover rules restored a public interest test, so that a broader range of factors, other than competition, would be considered by regulators when takeovers are proposed.

4. Operating and Financial Reviews

The Government will reinstate Operating and Financial Reviews “to ensure that directors’ social and environmental duties have to be covered in company reporting, and investigate further ways of improving corporate accountability and transparency.” (Liberal Democrat policy). These Reviews were originally proposed, but then dropped, by the Labour Party in 2006.

It is currently early days for the Government, and their recently-published ‘Coalition Agreement’ will be implemented over the next five years. Many of the proposals lack sufficient detail at the moment, but this will surely become clearer over time. The emergency budget, which will be heard on 22 June, will be a starting point. From a small business perspective, look out for the capital gains tax changes.

A “de facto director” is a person who acts as if he is a director of a company and is treated as such by the company’s board but has not in fact been validly appointed. A de facto director is subject to the usual directors’ duties and can be the subject of actions against directors such as a “misfeasance” action under section 212 of the Insolvency Act 1986 (IA 1986) requiring the de facto director to repay, restore or account for any money or other property of the company which he has misapplied or retained or to contribute a sum to the company’s assets by way of compensation. 

Facts of the case

Person X was a human director of Company Y. Company Y was the corporate director of Company Z. Company Z allegedly underpaid tax to an extent which resulted in the unlawful distribution of dividends to its shareholders.

HMRC issued proceedings under section 212 of IA 1986 against Person X, claiming that because he was a human director of Company Y, he could also be regarded as a de facto director of Company Z and had therefore breached his directors’ duties and was guilty of misfeasance in respect of Company Z.

Decision

The Court of Appeal held that Person X was not a de facto director of Company Z as he had not done anything more than to act as a human director of Company Y. That was not, of itself, sufficient to make him a de facto director of Company Z. There was no evidence that Person X had himself acted as a director of Company Z.

The Court of Appeal stated that there is no basis in law or principle to hold that a human director, who causes a corporate director to exercise active control over a subject company, automatically becomes a de facto director of the subject company.

Comment

The case gives useful guidance on the circumstances in which a person will be found to be, or not to be, a de facto director. Such a finding can have important consequences, particularly as regards an insolvent company.

The case also reiterates the importance of a company properly appointing its directors so that there can be no doubt as to who is on its board.

Holland v HM Revenue & Customs; Re Paycheck Services 3 Ltd [2010] B.C.C. 104

See my previous blogs on the new Act and what it means for businesses.

Cotswold Geotechnical Holdings is accused over the death of 27 year old employee Alex Wright of Cheltenham. The geologist died in September 2008 when a trench collapsed on him as he collected soil samples in Brimscombe. The Company director, Peter Eaton, also faced a charge of gross negligence manslaughter.

The trial represents the first time a company has been charged under the Corporate Manslaughter and Corporate Homicide Act 2007. The firm has been charged with the criminal offence of corporate manslaughter and the company director, Mr Eaton, has been charged with the common law offence of gross negligence manslaughter. If convicted, the director could be jailed for life. The maximum sentence for his firm, which also faces charges for health and safety breaches, is an unlimited fine.

The Corporate Manslaughter Act 2007, which came into force on 6 April 2008, is a landmark law and was introduced to make corporate manslaughter cases easier to bring. For the first time, companies and organisations can be found guilty of corporate manslaughter as a result of serious management failures resulting in a gross breach of a duty of care.

Penalties that companies face include unlimited fines, remedial orders and publicity orders. A remedial order will require a company or organisation to take steps to remedy any management failure that led to a death. The court can also impose an order requiring a company or organisation to publicise that it has been convicted of the offence, giving the details, the amount of any fine imposed and the terms of any remedial order made. The publicity order provisions will not come into force until the Sentencing Guidelines Council has completed its work on the relevant guidance.

The Act is not retrospective and only applies to deaths that have occurred from 6 April 2008 onwards. Deaths that occur before 6 April 2008 will continue to be covered by the previous law on corporate manslaughter. Further information on the Act can be found here.

UPDATE: Bristol Crown Court has further adjourned the trial. Press reports have suggested that it will not commence until Autumn 2010, due to the ill-health of Mr Eaton.

UPDATE: This case began at Winchester Crown Court on 27 January 2011. Click here for full details.

UPDATE: On 15 February 2011, Cotswold Geotechnical (Holdings) Ltd was found guilty of corporate manslaughter. Click here for further details.

It is therefore no surprise that the most recent review of the Code by the Financial Reporting Council, previously scheduled for 2010, was brought forward as a result of the meltdown in the financial world.  It is now in its consultation period until 5 March 2010 and is likely to apply to accounting periods subsequent to 28 June next year.

The review of the Code, to be renamed “The UK Corporate Governance Code” to make its raison d’être clear to all, was conducted in close co-operation with Sir David Walker who was commissioned by the Government to review governance of financial institutions in the wake of the crisis.  Indeed, the changes proposed by the FRC broadly reflect those proposed under Walker.  Unlike the Walker review though, the Code is non-sector specific and does not include some of the politically motivated, headline-grabbing recommendations such as disclosure of high earners’ remuneration. 

All listed companies will need to monitor the consultation process closely as to the likely changes to the Code’s Main Principles, given the requirement on them to “comply or explain”.  Proposed new additions to those Main Principles include:

• the chairman being responsible for leadership of the Board and for ensuring its effectiveness;
• a “fit for purpose” obligation on the composition of boards to enable them to discharge duties and responsibilities effectively;
• an obligation on non-executive directors to constructively challenge and help develop proposals on strategy; and
• directors being required to allocate sufficient time to perform their responsibilities effectively.

Quite apart from the comply or explain rule, added strength is given to these principles by what is clearly the favoured media sound bite applied to the publishing of the FRC’s report – “annual re election”.  It remains to be seen whether that will ultimately apply to just the chairman or to the whole board, be annual or some longer period or be triggered by some shareholder dissatisfaction (Walker recommends that if 75% of shareholders disagree with the remuneration report, the chairman of that committee must be put up for re-election).

There is a move away from what has been an over-emphasis on independence at the expense of seeking the appropriate balance of skills, experience, independence and knowledge.

The importance of commitment is emphasised in the FRC’s report and this is the main driver for the requirement on directors to allocate sufficient time to their duties.  It picks up on the proposal of Walker to impose minimum time requirements, recognizes that this is too specific for the broad spectrum of companies covered by the Code but embraces the “spirit of Sir David’s recommendation” using the general principle.

The FRC state very clearly that they are aiming to redress the balance of the Code to put an emphasis on behaviour rather than process.  It is acknowledged that companies have been focusing on the latter, leading to the erosion of one of the practical cornerstones of the style of the Code – less prescription, more spirit and an ability to react to best practice.

The FRC and Walker recommendations provide a timely reminder of the need for best practice in corporate governance in the UK.