UK (England and Wales)

Transcription

1 Corporate Governance and Directors Duties 2010 UK (England and Wales) UK (England and Wales) Alasdair Steele and Rosie Graham Nabarro LLP Corporate entities The main corporate entities used in the UK are limited liability companies. There are two types of limited liability company: Private limited liability companies (private companies). These are the most common form of business entity and the simplest to establish and administer. Private companies cannot offer their shares to the public (there are detailed provisions specifying what is meant by offering shares to the public in this context). A private limited company must have one issued share but there is no maximum limit on the number of shares that a private company can issue. Private companies must include the word limited at the end of their name. Public limited liability companies (public companies). These are companies that can offer their shares to the public. Public companies are not subject to any minimum number of shares but must have an issued share capital of at least GB 50,000 (about US$79,900). There is no maximum number of shares. All public companies must include the words public limited company or the abbreviation plc at the end of their name. Public companies often have their shares admitted to trading on stock markets, either in the UK or elsewhere, although this is not a requirement. LegAL framework 1. What is the regulatory framework for corporate governance and directors duties? The regulatory framework applicable to all companies (both private and public) is primarily contained in: Companies Act 2006 (Companies Act). This is the core legislation governing companies incorporated in the UK. Constitutional documents. Each company must have a memorandum and articles of association (articles). The memorandum of association is largely historic as a result of changes introduced in 2009 and the main provisions are contained in the articles of association. Financial Services and Markets Act 2000 (FSMA). FSMA covers any issue of shares or other securities of a company to shareholders and other investors. It applies to both private and public companies whenever they offer shares and includes the market abuse regime and the rules governing the sending of communications offering shares or other securities of a company (and applicable exemptions). In addition, a wide range of legislation imposes obligations on the directors of companies in a number of areas, such as health and safety, corporate manslaughter and taxation. UK-incorporated public companies The City Code on Takeovers and Mergers (Takeover Code) applies to all UK public companies, whether or not their shares are listed or traded on any stock market. UK-incorporated companies listed or traded on any stock market A UK incorporated company that is listed or that has shares traded on a UK market is subject to the following additional key sources of regulation: Code of Market Conduct. This is published by the Financial Services Authority (FSA) and includes key provisions of the UK market abuse regime. Prospectus Rules. These are published by the FSA under FSMA to implement Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive) and include rules relating to the offer of securities to the public and admission to a UK regulated market (such as the London Stock Exchange s Main Market or the PLUS-listed market). Disclosure and Transparency Rules (DTRs). These are published by the FSA under FSMA to implement Directive 2004/109/EC on transparency requirements for securities admitted to trading on a regulated market and amending Directive 2001/34/EC (Transparency Directive) and include rules on the disclosure of unpublished price-sensitive information by listed companies and interests in listed companies by shareholders and other investors. The Criminal Justice Act This contains the original insider dealing regime in the UK and continues to apply in parallel with the market abuse regime under FSMA and the Code of Market Conduct. Companies listed (or applying to be listed) on the London Stock Exchange s Main Market Listing Rules. These are published by the UK Listing Authority (UKLA) under FSMA to implement Directive 2001/34/ EC on the admission of securities to official stock exchange CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Corporate Governance and Directors' Duties Handbook 2010 and is reproduced with the permission of the publisher,

2 UK (England and Wales) Corporate Governance and Directors Duties 2010 listing and on information to be published on those securities. They give the eligibility rules, admission procedures and ongoing obligations of companies listed on the FSA s Official List and admitted to trading on the London Stock Exchange s Main Market. They also contain a Model Code on dealings in the company s shares, which must be adopted by all companies subject to Chapter 9 of the Listing Rules. Combined Code on Corporate Governance (Combined Code). This is published by the UK Financial Reporting Council (FRC) and sets out best practice corporate governance guidelines. The Combined Code is subject to regular review by the FRC and is due to be updated in mid-2010 to reflect lessons learned during the financial crash. Compliance with the Combined Code is not mandatory but listed companies must explain any areas where they do not comply in their annual reports. The Combined Code is supplemented by additional guidance including, in particular, the: Turnbull Guidance (on internal control); Higgs Guidance (for boards on complying with the Combined Code generally); and FRC Guidance on Audit Committees (previously known as the Smith Guidance). Investor Protection Committee guidance. A number of groups representing bodies of institutional shareholders issue guidance on matters on which shareholders may be asked to vote and on corporate governance generally. Members of these bodies are recommended to vote against resolutions at shareholder meetings that do not comply with the guidance (or not to invest in non-compliant companies at all). As a result, some of this guidance has set market standards. The main investor bodies are the Association of British Insurers (ABI), National Association of Pension Funds (NAPF) and PIRC. Admission and Disclosure Standards. The FSA maintains the Official List of securities that are admitted to trading on a UK regulated market. Securities cannot be admitted to trading on a regulated market unless they are listed on the Official List. The London Stock Exchange publishes these rules, which govern admission to the Main Market (the main regulated market in the UK) and the ongoing requirements for continued admission. Companies admitted to (or applying to be admitted to) trading on AIM AIM is not a UK-regulated market and is subject to its own rules, the AIM Rules for Companies (AIM Rules) published by the London Stock Exchange (which operates the market). Certain provisions of the Prospectus Rules and DTRs apply to AIM-listed companies and most AIM-listed companies voluntarily comply with the Combined Code. The Quoted Companies Alliance (QCA), which represents smaller quoted companies, has published Corporate Governance Guidelines to assist smaller companies in deciding the extent of their compliance with the Combined Code. Board composition and remuneration of directors 2. What is the management/board structure of a company? In particular: Is there a unitary or two-tiered board structure? Who manages a company and what name is given to these managers? Who sits on the board(s)? Do employees have a right to board representation? Is there a minimum or maximum number of directors or members of the managerial and supervisory bodies? Structure. UK company law envisages a unitary board structure and this is adopted by almost all companies. Some larger companies may have operating or executive boards. If so, the tiered board structure is part of the management structure and these boards authority is limited to what is delegated to them by the board of directors. Management. A UK company acts through its directors and therefore management lies with the board of directors. Company law does not distinguish between executive and non-executive directors (see Question 4, Recognition) and their duties are the same (see Questions 14 to 20). Most boards delegate day-to-day management to a chief executive officer (CEO) or managing director. Although the Combined Code recommends that the chairman of a company should be non-executive, a number of companies have an executive chairman who shares responsibility for day-today activities with the CEO, as decided by the board. Board members. The directors of the company sit on the board and can be executive or non-executive. Employees representation. There is no legal right for employees to have board representation. In some cases, a company s articles or an agreement with a third party, such as a trade union, may entitle employees to board representation. Number of directors or members. Private companies must have at least one director and public companies must have at least two. In each case, at least one director must be a natural person. There is no legal maximum number of directors, although the company s articles or a separate agreement, such as a shareholders agreement, may contain a maximum number. 3. Are there any age or nationality restrictions on the identity of directors? Age restrictions A director cannot be less than 16 years old but there is no maximum age limit. Nationality restrictions There is no legal nationality restriction but some companies articles may include restrictions to satisfy tax residency requirements. 198 CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Corporate Governance and Directors' Duties Handbook 2010 and is reproduced with the permission of the publisher,

3 Corporate Governance and Directors Duties 2010 UK (England and Wales) 4. In relation to non-executive, supervisory or independent directors: Are they recognised? Does a part of the board have to consist of them? If so, what proportion? Do non-executive or supervisory directors have to be independent of the company? If so, what is the test for independence or what makes a director not independent? What is the scope of their duties and potential liability to the company, shareholders and third parties? Recognition. Company law does not differentiate between executive and non-executive directors or between independent and non-independent directors. However, as a matter of practice and corporate governance, non-executive directors are recognised and usually work on a part-time basis, advising on the company s strategy and policy without being involved in the day-to-day operations. Independent directors are recognised as a matter of corporate governance (see below). Supervisory directors (as contemplated in a two-tier supervisory and management board structure) are not recognised in the UK but are similar to non-executive directors in the unitary board structure. Board composition. There is no legal requirement for a board to have a certain proportion of executive and nonexecutive directors. The Combined Code recommends that for larger companies, at least half of the directors should be independent non-executive directors and for smaller companies there should be at least two. Independence. There is no legal requirement for any company to have a minimum number of independent directors. Guidance on independence is contained in the Combined Code, which recommends that at least half the board of a large company should be formed of independent non-executive directors and that, for smaller companies, at least two non-executive directors should be independent. In considering independence, the board should consider whether a director is independent in character and judgement and whether there are relationships or circumstances that are likely to affect, or could appear to affect, the director s judgement. Factors that should be taken into account include whether the director: has been an employee of the company (or its group) during the last five years; has, or has had in the last three years, a material business relationship with the company (either directly or indirectly through being a partner, shareholder, director or senior employee of an entity that has had such a relationship); receives or has received additional remuneration or benefit from the company in addition to any director s fee (such as participating in a share scheme or performance-related pay scheme, or being a member of the company s pension scheme); has close family ties with any of the company s advisers, directors or senior employees; holds cross-directorships or has significant links with other directors through involvement in other entities; represents a significant shareholder; or has served on the board for more than nine years. Duties and liabilities. UK company law does not distinguish between executive and non-executive directors and all directors owe the same general duties to the company (see Question 14). However, the courts have recognised different levels of involvement in the company s business and acknowledge that, for example, a director who is a qualified accountant must meet a higher standard of skill in accounting matters than a director who is not. This applies whether or not the director is executive or non-executive. In addition, although a non-executive director has less dayto-day involvement in the business (and this is reflected in the standard of care expected), this does not relieve the director from a duty to enquire into matters affecting the company where required and the director cannot claim lack of relevant knowledge where he ought to have made some enquiry. 5. Are the roles of individual board members restricted? For example, can one person be the chairman and chief executive? There are no legal restrictions on the roles of individual board members. However, the Combined Code recommends that the CEO and chairman should be separate individuals and the Walker Review on corporate governance in banks and other financial institutions (Walker Review) recommends the appointment of a separate chief risk officer in those institutions. 6. How are directors appointed and removed? Is shareholder approval required? Appointment of directors The appointment of directors is contained in the company s articles. Usually these allow directors to be appointed by the board or by an ordinary resolution of shareholders. This is the case in the model articles contained in The Companies (Model Articles) Regulations 2008 (SI 2008/3229) (Model Articles), which apply in the absence of the company adopting other articles. In a public company, any director appointed by the board must be subject to re-election by shareholders at the next AGM following his appointment and each director should be subject to re-election at least once every three years. The Combined Code recommends that there should be a formal, rigorous and transparent procedure for appointing directors, under the control of a nomination committee of the board, of which a majority should be independent non-executive directors. Removal of directors Shareholders can remove a director by ordinary resolution under the procedure in section 168 of the Companies Act. Special notice (28 days) is required for the shareholder meeting to consider the CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Corporate Governance and Directors' Duties Handbook 2010 and is reproduced with the permission of the publisher,

4 UK (England and Wales) Corporate Governance and Directors Duties 2010 resolution (it cannot be passed by a written resolution) and the director can speak at the meeting and state his case in writing to shareholders. Any such removal does not prejudice any right of the director to compensation or damages and does not automatically terminate any employment contract he may have with the company. In some instances, a company s articles may include other ways of removing a director, such as by a board decision or by written notice from a parent company. 7. Are there any restrictions on a director s term of appointment? There is no legal limit on a director s term of appointment, although any service contract with a director that is for more than a two-year minimum period must first be approved by an ordinary resolution of shareholders. The Combined Code recommends that neither contract nor notice periods should be longer than one year. 10. How is directors remuneration determined? Is its disclosure necessary? Is shareholder approval required? Determination of directors remuneration The determination of directors remuneration is generally a matter for the board, subject to any restrictions in the company s articles and to the general duties of directors, including conflict of interest considerations (see Question 18). The Combined Code recommends that directors remuneration should be set by a remuneration committee consisting of independent non-executive directors. Disclosure The Small Companies and Groups (Accounts and Directors Report) Regulations 2008 and the Large and Medium-sized Companies and Groups (Accounts and Directors Report) Regulations 2008 require all companies to disclose details of directors remuneration and benefits in their annual accounts, with lower disclosure requirements applying to smaller companies. 8. Do directors have to be employees of the company? Can shareholders inspect directors service contracts? Directors employed by the company Directors do not need to be employed by the company. Executive directors are usually employed under an employment contract, while nonexecutive directors are usually engaged under contracts for services. Shareholders inspection All directors service contracts must be available for inspection by shareholders at the company s registered office, or another address notified to the Registrar of Companies, while the contract is in force and for one year after it terminates. Shareholders are entitled to copies of directors service contracts. In addition, the Combined Code recommends that the terms of appointment of non-executive directors should also be made available at the company s registered office and for 15 minutes before and during the company s AGM. 9. Are directors allowed or required to own shares in the company? In addition, the Listing Rules and Companies Act contain detailed disclosure requirements for quoted companies in the form of a directors remuneration report that must be sent to shareholders annually. Shareholder approval Shareholder approval of directors remuneration is not legally required. The directors remuneration report prepared by listed companies must be subject to a shareholder vote but the vote has no legal effect on the director s entitlement to the remuneration. The Combined Code also recommends that long term incentive schemes (such as share option schemes or performance-related pay schemes) that do not meet certain criteria set out in the Listing Rules should be approved by shareholders. Management rules and AUthority 11. How is a company s internal management regulated? For example, what is the length of notice and quorum for board meetings, and the voting requirements to pass resolutions at them? Directors are not required to own shares in a company. Directors are generally free to acquire shares in the company, although directors of listed companies may be subject to restrictions under the UK market abuse regime, the Model Code in the Listing Rules or equivalent provisions in the AIM Rules that restrict them from dealing in the company s shares at certain times (principally when they are in possession of inside, or unpublished price-sensitive, information and during fixed periods before the announcement of the company s financial results). Directors are not required to notify their interests in shares to the company unless they are subject to the DTRs or AIM Rules. The directors must act as a board, although the board can consist of one director. The articles set out the: Quorum for board meetings. This is normally set at two. Notice requirements. Directors must be given reasonable notice of board meetings. What is reasonable depends on the circumstances and a meeting to discuss an urgent matter can be convened on very short notice. Voting requirements. The starting point is that a simple majority will bind the board but this can be varied, for example to provide that a board resolution is not validly passed unless directors designated by particular shareholders vote in favour of it. 200 CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Corporate Governance and Directors' Duties Handbook 2010 and is reproduced with the permission of the publisher,

5 Corporate Governance and Directors Duties 2010 UK (England and Wales) Traditionally, the usual way for a board to carry out business is by resolutions passed at a board meeting, with the main alternative being a written resolution signed by all directors, and this continues to be the case for public companies. The Model Articles for private companies provide for much greater flexibility on decision-making, allowing a decision of the directors to be made when all eligible directors indicate to each other by any means that they share a common view on a matter. The Combined Code states that the board should meet sufficiently regularly to discharge its duties effectively. 12. Can directors exercise all the powers of the company or are some powers reserved to the supervisory board (if any) or a general meeting? Can the powers of directors be restricted and are such restrictions enforceable against third parties? Duties and liabilities of directors 14. What is the scope of a director s duties and personal liability to the company, shareholders and third parties? Please distinguish between civil and criminal liability under each of the following (if relevant): General duties. Theft and fraud. Securities law. Insolvency law. Health and safety. Environment. Anti-trust. Directors powers Directors are responsible for the management of the company s business and can exercise all the powers of the company for that purpose. This is generally set out in the articles of association. There is no concept of a supervisory board. Under the Listing Rules, shareholder consent is required for certain categories of transaction. Restrictions Shareholders can expressly reserve powers to themselves in the articles, and can by special resolution direct the directors to take, or refrain from taking, specified action. These restrictions are not enforceable against third parties unless they are insiders, in which case any transaction entered into is voidable at the company s request (section 41, Companies Act). 13. Can the board delegate responsibility for specific issues to individual directors or a committee of directors? Is the board required to delegate some responsibilities, for example for audit, appointment or directors remuneration? Other. General duties. The Companies Act sets out a statutory statement of directors duties (Part 10, Companies Act). The statutory duties are: to act within powers conferred by the company s constitution; to promote the success of the company for the benefit of its shareholders; to exercise independent judgment; to exercise reasonable care, skill and diligence; to avoid conflicts of interest (see Question 18); not to accept benefits from third parties; and to disclose an interest in a proposed transaction or arrangement with the company. There is also a separate statutory requirement to disclose an interest in an existing transaction or arrangement with the company. The articles of association generally contain a broad power of delegation, permitting the board to delegate any of its powers under the articles to a person or committee. The board is not legally required to delegate particular responsibilities but most boards delegate day-to-day management to a CEO or managing director. The Combined Code states that there should be a formal schedule of matters specifically reserved for board decision-making. It also recommends that there should be a nomination committee, an audit committee and a remuneration committee (see Question 10). All members of the remuneration and audit committees should be independent non-executive directors, as should a majority of the members of the nomination committee. Directors owe their duties to the company. Each of the duties set out above, except the duty of care, skill and diligence, is enforceable as a fiduciary duty. A director in breach of these duties is potentially liable to the company not only to pay compensation but also to restore the company s property or to account for any profits made. The transaction in question may also be voidable at the company s request. The remedy for breaches of the duty of care, skill and diligence is damages for loss suffered by the company. There is also a statutory procedure under Part 11 of the Companies Act for derivative claims, under which a shareholder can bring proceedings on behalf of the company against a director for negligence, default, breach of duty or breach of trust. CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Corporate Governance and Directors' Duties Handbook 2010 and is reproduced with the permission of the publisher,

6 UK (England and Wales) Corporate Governance and Directors Duties 2010 Theft and fraud. If a corporate body commits fraud under the Fraud Act 2006 with the consent or connivance of a director, manager, secretary or other officer of the company, then that individual, as well as the company, can be prosecuted. Securities law. Criminal penalties can be imposed on directors for misleading statements or misleading conduct in relation to an issue of the company s securities. The FSA can also impose a penalty on any person who has engaged in, or has encouraged another person to engage in, market abuse (FSMA). Insolvency law. A liquidator can apply to court to obtain a contribution from a director (or anyone else knowingly involved in the fraud) who carries on business with the intention of defrauding creditors in the knowledge that there is no reasonable prospect of the company repaying its creditors (fraudulent trading) (Insolvency Act 1986). Fraudulent trading is a criminal offence. Equally, a liquidator can apply to court to order a director to make a contribution to the company s assets where the director is liable for wrongful trading. Once a director concludes (or should have concluded) that there is no reasonable prospect of the company avoiding the onset of insolvency, he should take every possible step to minimise potential loss to the company s creditors, including stopping trading. Health and safety. If a health and safety offence is committed with the consent or connivance of, or is attributable to any negligence on the part of, a director, manager, secretary or other officer of the company, then that person (as well as the company) can be prosecuted. Individual directors are also potentially liable for other related offences, such as the common law offence of gross negligence manslaughter. In addition, a corporate body can be liable if the way in which its activities are organised or managed causes a person s death and this amounts to a gross breach of the duty of care owed by the organisation to the deceased (Corporate Manslaughter and Corporate Homicide Act 2007). If found guilty, the organisation can be subject to: an unlimited fine; a remedial order to force it to resolve relevant management failures; and/or publicity orders. However, this Act does not apply to directors themselves. Environment. Environmental legislation covers a wide number of regulatory controls which affect a company s business. These include controls on pollution, energy use, waste disposal, recycling and minimisation of packaging waste. If an environmental offence is committed with the consent or connivance of, or is attributable to any neglect on the part of, a director, manager, secretary or other officer of the company, then that person (as well as the company) can be prosecuted. Anti-trust. Cartel activity such as price fixing, limiting supply or production, market sharing or bid rigging is a criminal offence punishable by imprisonment and/or an unlimited fine (Enterprise Act 2002). There have been convictions under this legislation and a number of prosecutions are ongoing. The Office of Fair Trading can apply to the courts to order the disqualification of a director who has breached competition law. Other. A director can also incur civil or criminal liability for a variety of other breaches, including: where a person acts as a director while disqualified under the Company Director Disqualification Act 1986; a number of provisions of the Companies Act, including the giving of financial assistance by a public company for the purchase of its own shares; liability for the debts of the company in certain situations, for example, in relation to employer social security contributions. 15. Can a director s liability be restricted or limited? Is it possible for the company to indemnify a director against liabilities? It is not possible to exempt directors from liability for their negligence, default, breach of trust or breach of duty in relation to the company. The company can indemnify a director against liabilities incurred to third parties, but not the company or an associated company (other than for the costs of a successful defence). A qualifying third party indemnity provision (QTPIP) must not provide an indemnity against any liability of the director to pay: A fine imposed in criminal proceedings. A penalty imposed by a regulatory body. Defence costs of criminal proceedings where the director is found guilty. Defence costs of civil proceedings successfully brought against the director by the company or an associated company. Costs of any unsuccessful applications by the director for relief. There is also an exemption for pension trustee companies to provide a qualifying pension scheme indemnity provision (QPSIP) to a director to indemnify against liability incurred in connection with the company s activities as a trustee of the scheme. Shareholders have a right to inspect QTPIPs or QPSIPS. 16. Can a director obtain insurance against personal liability? If so, can the company pay the insurance premium? Directors and officers liability insurance (D&O insurance) is available in the UK to protect the personal assets of an individual director or officer. The Companies Act allows a company to purchase and maintain insurance for its directors in respect of liability for negligence, default, breach of duty or breach of trust. D&O insurance policies typically exclude fines and penalties imposed by a regulator or a criminal court, criminal defence costs and liability for fraudulent acts. 17. Can a third party (such as a parent company or controlling shareholder) be liable as a de facto director (even though such person has not been formally appointed as a director)? Many of the provisions of the Companies Act expressly apply to a shadow director (a person in accordance with whose directions or instructions the directors of the company are accustomed to 202 CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Corporate Governance and Directors' Duties Handbook 2010 and is reproduced with the permission of the publisher,

7 Corporate Governance and Directors Duties 2010 UK (England and Wales) act). Shadow directors therefore have some of the same responsibilities and liabilities they would have if they had been formally appointed as directors. However, a person who gives advice to a company s board in a professional capacity will not become a shadow director by virtue of the advice given. TransACtions with directors and conflicts 18. Are there general rules relating to conflicts of interest between a director and the company? Directors statutory duties and obligations in relation to conflicts of interest, include (Companies Act): Avoiding conflicts of interest. Not accepting benefits from third parties. Disclosing an interest in a proposed or existing transaction or arrangement with the company. There are some exceptions to the duties to avoid conflicts of interest and not to accept benefits. Directors can approve a matter that might otherwise give rise to a conflict, although in a public company the articles must authorise the directors to do so. This director approval route only applies to the rule against conflicts and not to the rule against directors accepting benefits. A conflict situation can also be authorised by a shareholders resolution. 19. Are there restrictions on particular transactions between a company and its directors? in the securities of a listed company. Under the Model Code, PDMRs must not deal in their company s securities without first obtaining clearance to deal. Clearance must not be given: To deal in any securities of the company for considerations of a short-term nature. During a close period (as defined in the Model Code). At any time when there is inside information relating to the company. There are equivalent provisions in the AIM Rules. The Takeover Code also imposes restrictions on a director s ability to deal in securities. Directors can be guilty of the criminal offence of insider dealing if they: Disclose information other than in the proper performance of their employment office or profession. Deal, or encourage others to deal, in the company s securities when in possession of price-sensitive information. The offence is punishable by a maximum of seven years imprisonment and/or a fine. DisCLosure of information 21. Do directors have to disclose information about the company to shareholders, the public or regulatory bodies? Certain transactions between a company and its directors require shareholder approval, including: Loans and quasi-loans. A director buying or selling a substantial non-cash asset from or to the company. Payment for loss of office. A service contract that is longer than two years. There are also restrictions relating to conflicts of interest (see Question 18). The Listing Rules require shareholder approval for certain related-party transactions, which includes transactions with a director or shadow director. 20. Are there restrictions on the purchase or sale by a director of the shares and other securities of the company he is a director of? Directors and other persons discharging managerial responsibilities (PDMRs) and their connected persons, must notify the company of any transactions by them in its shares, and the company must in turn publicly announce those transactions (DTRs). The Listing Rules require PDMRs (including directors) to comply with the Model Code, which imposes restrictions on dealing There is no general entitlement for shareholders to receive information about the company except as must be included in the company s annual accounts. However, there are a number of requirements on companies to provide certain information to different public bodies, such as the Registrar of Companies and HM Revenue and Customs. In addition, listed companies are subject to: DTRs. These include obligations to publicly announce details of shareholders holding 3% or more of the company, directors dealings in shares and unpublished price-sensitive information. Listing Rules. The Listing Rules specify certain information, such as information about large transactions, half-yearly results, (quarterly) interim management statements and the company s share capital, which must be publicly announced. Prospectus Rules. Subject to certain exceptions, any company offering shares to the public must produce a prospectus containing specified information. Aim Rules for Companies. AIM-listed companies must publicly announce certain information such as information about large transactions, significant shareholders and its directors. Takeover Code. When a company is subject to the Takeover Code, it and its shareholders may be subject to disclosure obligations under the Takeover Code. CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Corporate Governance and Directors' Duties Handbook 2010 and is reproduced with the permission of the publisher,

8 UK (England and Wales) Corporate Governance and Directors Duties 2010 Company meetings 22. Does a company have to hold an annual shareholders meeting? If so, when? What issues must be discussed and approved? Minority shareholder ACtion 24. What action, if any, can a minority shareholder take if it believes the company is being mismanaged and what level of shareholding is required to do this? A private company is no longer required to hold an annual shareholders meeting (the only exception is for private companies which are traded companies) (Companies Act). A private company can however hold an annual general meeting (AGM) if it wishes to do so and must if this is required by its articles. A public company must hold an AGM within six months of its financial year end. A public company must lay its annual accounts and reports before a general meeting within six months of its financial year end. A listed company must also put its directors remuneration report to a shareholder vote (see Question 10). The AGM also deals with the reappointment of directors and auditors. Listed and AIM companies also deal with a number of other matters at the AGM, such as authorising directors to allot shares and disapplying pre-emption rights. 23. Can shareholders call a meeting or propose a specific resolution for a meeting? If so, what level of shareholding is required to do this? The directors must call a general meeting once they have received either of the following: In companies with a share capital, requests from shareholders holding at least 5% of the company s paid-up share capital that carries the right to vote at general meetings. In companies without share capital, requests from members holding at least 5% of the total voting rights of all the members having a right to vote at general meetings. Members of a company holding at least 5% of the voting rights, or at least 100 members holding an average of GB 100 (about US$160) of paid up capital, can require the company to circulate a statement of not more than 1,000 words to those entitled to receive notice of a meeting about any resolution or business to be dealt with at that meeting. In addition, members of a public company holding at least 5% of the voting rights, or at least 100 members holding an average of GB 100 of paid up capital, can put forward a resolution to be considered at the AGM. If this is received before the end of the financial year preceding the AGM, the cost of circulating it falls on the company rather than the members. In the case of a traded company (which includes listed companies, but not AIM companies), members holding at least 5% of the voting rights, or at least 100 members holding an average of GB 100 paid up capital, can also put forward a matter for consideration at the AGM. Any shareholder can bring a derivative action on behalf of the company against a director for negligence, default, breach of duty or breach of trust (Part 11, Companies Act). There is no minimum shareholding level but the court s permission must be obtained before bringing a derivative action. To date there have only been a small number of attempts to bring proceedings under the new procedure. There is also a statutory remedy for any shareholder (whether or not in the minority) who considers that the company s affairs are or have been conducted in a manner that is unfairly prejudicial to shareholders. A range of remedies is available but the usual remedy granted is a buy-out order. Alternatively, where there are just and equitable grounds, a minority shareholder can apply for the company to be wound up. Shareholders can also seek support from other shareholders to make changes to the board (see Question 23). InternAL controls, ACCounts and AUDit 25. Are there any formal requirements or guidelines relating to the internal control of business risks? There are no specific legal requirements relating to the internal control of business risks beyond directors general duties. The DTRs require the provision of a corporate governance statement that includes a description of the company s internal control and risk management systems. The Combined Code recommends that the board should review all material controls (including financial, operational, compliance and risk management) at least annually and provide a report to shareholders. Guidance for directors can be found in the Turnbull Guidance and Higgs Guidance. For banks and other financial institutions, the Walker Review contains additional specific recommendations on risk management. 26. What are the responsibilities and potential liabilities of directors in relation to the company s accounts? The directors are responsible for the preparation and approval of the company s accounts and for the preparation of an annual report providing a fair view of its business. A company s accounts must be filed with the Registrar of Companies within nine months of the end of the financial year. This is in addition to requirements to send copies to shareholders under the Listing Rules (within four months of the year end) or AIM Rules (within six months of the year end). Failure to file the accounts on time can make the directors liable to penalties under the Companies Act. 204 CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Corporate Governance and Directors' Duties Handbook 2010 and is reproduced with the permission of the publisher,

9 Corporate Governance and Directors Duties 2010 UK (England and Wales) Listed companies can also be liable to investors if they suffer loss as a result of any untrue or misleading statement or omission from the accounts where the directors either knew of or were reckless as to the inaccuracy or omission. A director may then be liable in turn to the company for failing to perform his duties with reasonable skill and care. Anti-avoidance rules extend the restrictions to where the connection is through another member of the company s group. 30. Are there restrictions on non-audit work that auditors can do for the company that they audit accounts for? 27. Do a company s accounts have to be audited? The accounts of all companies must be audited, with the exception of small and dormant companies meeting the criteria in the Companies Act. There are no legal restrictions on the non-audit work that an auditor can carry out for a company, although details may need to be included in the company s annual report and accounts (guidance on this is published by the ICAEW and the Investor Protection Committees). In addition, ICAEW rules impose limitations on the provision of non-audit services to audit clients by ICAEW members. 28. How are the company s auditors appointed? Is there a limit on the length of their appointment? A company s auditors must be appointed by an ordinary resolution of shareholders on an annual basis, except in the case of private companies where there are other reappointment provisions. Auditors can be removed by an ordinary shareholder resolution. Special notice (28 days) is required for the shareholder meeting to consider the resolution (it cannot be passed by a written resolution). The auditors have rights to speak at the meeting and state their case in writing to shareholders. Any such removal does not prejudice any right of the auditors to compensation or damages. In addition, an auditor can resign at any time by giving written notice to the company accompanied by a statement describing the reasons for the resignation. 31. What is the potential liability of auditors to the company, its shareholders and third parties if the audited accounts are inaccurate? Can their liability be limited or excluded? Auditors are criminally liable if they knowingly or recklessly cause an audit report to include any matter that is materially misleading, false or deceptive. Auditors are liable to the company if they act negligently, without due skill and care or in breach of their terms of engagement. Auditors are also liable to shareholders (as a group) if they act negligently or without due skill and care, although the emphasis is on shareholders to demonstrate their reliance on the audited accounts and the loss that resulted. The courts have ruled that in the absence of any special relationship, the auditors are not liable to third parties. There is no limit on the length of an auditors appointment (subject to annual re-appointment, if required, as described above). The Institute of Chartered Accountants in England and Wales (ICAEW) recommends the internal rotation of audit engagement partners within an audit firm every five years for listed companies (ten years for non-listed companies). The Combined Code recommends the formation of an audit committee made up of independent non-executive directors, which should be responsible for reviewing and monitoring the work of the auditors and making recommendations to the board on the appointment, reappointment or removal of the auditors. The Companies Act introduced provisions allowing auditors to limit their liability in connection with the audit of a company s accounts within certain limited parameters (primarily, to an amount that is fair and reasonable). These limitations are subject to annual approval by shareholders (although shareholders in private companies can waive that requirement). The ABI, NAPF and PIRC generally oppose auditor liability limitation agreements and as a result very few have been agreed to by listed companies. Corporate social responsibility 29. Are there restrictions on who can be the company s auditors? Auditors must be appropriately qualified, be a member of a recognised professional (or supervisory) body and be independent of the company. A person may not act as an auditor of a company where the person is: An officer or employee of the company. A partner or employee of an officer or employee of the company. A partnership of which an officer or employee of the company is a partner. 32. Is it common for companies to report on social, environmental and ethical issues? Please highlight, where relevant, any legal requirements or non-binding guidance/best practice on corporate social responsibility. A director must act in the way the director considers, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole (Companies Act). In doing so the director must have regard to a non-exhaustive list of factors, including the impact of the company s operations on the community and the environment. Companies must produce a business review for each financial year and listed companies must include information on environmental CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Corporate Governance and Directors' Duties Handbook 2010 and is reproduced with the permission of the publisher,

10 UK (England and Wales) Corporate Governance and Directors Duties 2010 matters (including the impact of the company s business on the environment), the company s employees and social and community issues. If the review does not contain information on each of these, this must be stated. In addition, there are obligations to report on environmental issues under a number of other statutes and environmental regimes. The ABI, NAPF and PIRC include specific and detailed reference to corporate social responsibility matters in their voting guidelines. The London Stock Exchange publication Corporate Governance: A Practical Guide includes guidance on corporate social responsibility. Role of company secretary 33. What is the role of the company secretary in corporate governance? The main role of a company secretary is to review legislative, regulatory and governance developments that affect the company and ensure that the board is appropriately briefed. The company secretary s responsibilities include (Combined Code): Ensuring good communication within the board and its committees and between senior management and nonexecutive directors. Facilitating the induction of new directors. Assisting with professional development. Advising the board (through the chairman) on all governance matters. practice and recommend their members to abstain from voting or vote against resolutions proposed by companies that do not meet those standards. Although this guidance is not binding on companies, non-compliant companies are drawn to the attention of members and as a result most listed companies comply with the relevant guidance. The main investor bodies are the ABI, NAPF and PIRC. WhistleBLowing 35. Is there statutory protection for whistleblowers (persons who disclose criminal activity or other serious malpractice within a company)? The Public Interest Disclosure Act 1998 protects employees who report malpractice by their employers or third parties. Employees who find themselves subject to detriment from their employer as a result of raising legitimate concerns can claim compensation for unfair dismissal and bring an action for victimisation. The Combined Code also contains provisions on whistleblowing. Reform 36. Please summarise any impending developments or proposals for reform. The Combined Code is subject to regular review by the FRC and is due to be updated in mid-2010 in response to issues revealed by the financial crash. A private company is not required to have a company secretary (Companies Act). Role of institutional investors and shareholder groups 34. How influential are institutional investors and other shareholder groups in monitoring and enforcing good corporate governance? Please list any such groups with significant influence in this area. contributor details Alasdair Steele and Rosie Graham Nabarro LLP T F E a.steele@nabarro.com r.graham@nabarro.com W Institutional investor and shareholder groups provide guidance to their members and listed companies as to best corporate governance Law Department is a breath of fresh air. The way the material is presented makes you want to read it. Tim Lane, Legal Counsel, Rio Tinto. Law Department is the essential know-how service for in-house lawyers. Never miss an important development and confidently advise your business on law and its practical implications CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Corporate Governance and Directors' Duties Handbook 2010 and is reproduced with the permission of the publisher,