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NEWS ROUND-UP |
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New guidance on directors’ duties See CLM: ¶2333+ |
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ICSA has published new guidance on directors’ general duties under the new Companies Act (ICSA reference number 080110, January 2008). The guidance is primarily aimed at public and quoted companies, but it will also be useful to directors of private companies. The note deals with each of the general duties in turn, giving practical guidance on how directors can ensure that they comply with each one. The practical advice on compliance includes putting proper controls and procedures in place, for example: » clearly setting out the matters that need to be decided by the board and those that can be decided by board committees and non-board meetings; » ensuring that papers written for the board deal with the factors that the board needs to take into account when making a decision to promote the success of the company. The legislation sets out these factors, not all of which will be relevant to every decision (see CLM ¶2380). If the board papers deal with these matters properly, there should be no need for the minutes to detail how each factor was considered; » keeping a register of conflicts of interest. Since the board will be able to authorise directors to act despite conflicts in some situations, it must ensure that it makes these decisions so as to promote the success of the company; and » setting out a policy of what benefits would be acceptable for directors to accept from third parties and keeping a register of benefits offered and received. The guidance note also includes the GC100’s guidelines (February 2007) and the ministerial statements (June 2007) on directors’ duties. ICSA’s guidance can be freely downloaded from its website: http://www.icsa.org.uk/. The GC100 has also published new guidance on directors’ duty to avoid conflicts of interests. This is a duty that will come into force on 1 October 2008. The board will be able to authorise a director to act despite having a conflict, provided: » in the case of private companies, the articles do not prevent the board from authorising conflicts; or » in the case of public companies, the articles enable the board to authorise conflicts and they do so in accordance with the articles. The GC100 paper recommends that companies enable their boards to authorise conflicts, to give them the flexibility to deal with conflict situations as they arise. Since the board will always be constrained by the duty to promote the success of the company, they should not authorised conflicts in inappropriate situations. Shareholders would be further reassured by the company having proper procedures (both to authorise conflicts and to review the exercise of this power) in place. Guidance is given on how the board should exercise its power to authorise conflicts, where it has the power to do so. The guidance suggests alterations companies may want to make to their articles to make the best use of the new conflict provision, as well as a circular to explain the changes to shareholders. This includes the “safe harbour” provision that allows companies to set out situations in their articles in which the conflict duty will not be breached as long as the directors act within the company’s articles (s 180(4)(b) CA 2006). For example, the articles could state that a director is not in breach if he withdraws from decision making as soon as a conflict arises. The GC100’s guidance paper can is available via the Practical Law Company’s website: http://www.practicallaw.com/6-378-7923/. To recap, the general duties are: » to act within powers; » to exercise independent judgment; » to exercise reasonable care, skill and diligence; » to avoid conflicts of interest; » not to accept benefits from third parties; » to declare interests in proposed transactions or arrangements; and » to declare interests in existing transactions or arrangements. Not all of these general duties under the new Companies Act are in force yet: the last four listed above are due to come into force on 1 October 2008. |
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ASB proposed amendments on share-based accounts See CLM: ¶4211+ |
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The Accounting Standards Board (ASB) has recently issued an exposure draft of amendments to FRS 20 (IFRS) “Share based payment – Group cash-settled share-based payment transactions”. This follows similar proposals in December 2007 from the International Accounting Standards Board (IASB). The agreements in question concern the company’s parent paying a supplier for goods or services which are linked to the price of the shares of the company or its parent. The paper is available at http://frc.org.uk/asb/. |
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Hedge funds agree voluntary code of practice |
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The Hedge Fund Working Group chaired by Sir Andrew Large has come up with a range of proposals for a voluntary code of practice. These include better disclosure of operational and investment risks. A Hedge Fund Standards Board would be set up to oversee the standards. Fund managers who sign up to the standards would have to comply with the code, or explain why they did not. The background to this has been the feeling that hedge funds are under-regulated and engage in some questionable practices, such as influencing takeover battles by voting with borrowed shares. A hedge fund is a pooled investment which is free to put money into all financial instruments and markets. They can even borrow money to finance their purchases. Hedge funds often use derivatives, that is sophisticated bets on the future direction of an underlying asset such as a share or currency. Hedge funds are often registered in countries where there is little regulation of them, such as Ireland or Luxembourg, though many are managed from London. |
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ESME reports |
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The European Single Market Expert group, ESME, has reported on the operation of the Transparency Directive, see Focus on in this newsletter. The main issues identified by ESME were: » the rules relating to the notification of major shareholdings are complex and often difficult to adhere to in practice; and » the understanding and consequences of securities lending varies across the member states. The second ESME report deals with the admission of securities to stock exchanges in the EU. The report concludes that the measures adopted under EU Financial Services Action Plan (FSAP) have resulted in that the scope of EU rules becoming wider, for example on financial reporting, and prospectuses. Previously, such EU rules only applied on the official segment at European exchanges, but they now apply on all trading on a regulated market. The report is available at: http://ec.europa.eu/internal_market/securities/docs/esme/05122007_td_report_en.pdf |
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EU regulation on recognition of non-EU GAAPs See CLM: ¶4211, ¶4226, ¶4229 |
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An EU regulation has been passed which sets out the basis on which non-EU Generally Accepted Accounting Principles, GAAPs, will be considered equivalent to the International Financial Reporting Standards, IFRS, of the EU. This affects listed companies and their obligations under the Transparency Directive and the Disclosure Directive, see this issue’s Focus on. In effect, the non-EU GAAPs are considered equivalent if an investor can make a similar assessment of the financial statements as if they had been drawn up under the IFRS standards. Non-EU financial entities will be allowed to use their own GAAPs until 2011, provided that country’s standards are moving towards the IFRS ones. |
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EC Regulation 1569/2007 |
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FSA consults on changes to the Disclosure and Transparency Rules See CLM: ¶4226, ¶4290 |
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The Financial Services Authority (FSA) has published a consultation paper on the implementation of certain parts of the Statutory Audit Directive (EC Directive 2006/43) and the Company Reporting Directive (EC Directive 2006/46). The relevant parts apply to companies that have been admitted to trading on a regulated market, the subject of this issue’s Focus on. The FSA proposes to implement these changes by inserting new rules into the Disclosure and Transparency Rules. The Statutory Audit Directive aims to strengthen the standards and supervision of the audit profession. The consultation proposes to amend the Disclosure and Transparency Rules to address those parts of the Directive requiring: » companies with securities traded within the EU to have an audit committee (or an equivalent). The committee’s role will be to monitor the company’s financial reporting, statutory audits and internal controls and audits. It will have to comprise at least one independent member and one member with audit/accounting expertise. Companies will be required to issue a statement identifying the committee and detailing how it is composed. The Combined Code on Corporate Governance already includes detailed recommendations regarding primary listed companies’ audit committees, and so compliance with the Code will satisfy the new rules; and » companies incorporated outside the EEA with securities traded within the EEA to use registered auditors. The registration of auditors from outside the EEA will be dealt with in regulations under the new Companies Act (see CA 2006). These requirements must be implemented in the UK by 29 June 2008. The Company Reporting Directive aims to ensure that the public has confidence in the financial statements and reports published by European companies. The consultation proposes to amend the Disclosure and Transparency Rules to introduce the Directive’s requirement for companies that are admitted to trade on a regulated market to include a corporate governance statement in their annual accounts. This statement will have to: » state which corporate governance code has been adopted by the company and detail the extent of the company’s compliance with it. Companies with a primary listing are already required to do this under the Listing Rules on a “comply or explain” basis. Therefore, compliance with the Listing Rules will satisfy this requirement; and » set out the basic features of the company’s internal control and risk-management systems that apply to the financial reporting process. These requirements must be implemented in the UK by 5 September 2008. The FSA anticipates that the necessary changes will be made by June 2008, applying to financial reporting periods starting on or after 29 June 2008. The consultation paper can be freely downloaded from the FSA website: http://www.fsa.gov.uk/pubs/cp/cp07_24.pdf. Comments on the consultation should be returned to the FSA by 20 March 2008. |
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FRC consultation on auditors’ liability limitation agreements See CLM: ¶4303 |
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The Financial Reporting Council (FRC) has published a consultation on its new draft guidance on auditors’ liability limitation agreements (“FRC Working Group on Auditor Liability Limitation Agreements” (December 2007)). From 6 April, when the relevant provisions of the new Companies Act come into force, auditors will be able to enter into limitation liability agreements with their client companies provided the correct procedure is followed. The draft guidance seeks to assist directors, shareholders and auditors in interpreting and applying this new legislation. Generally, it provides information on: » how auditors’ liability can be limited under CA 2006; » factors to be considered by directors and shareholders when entering into a liability limitation agreement (e.g. directors’ duties); » issues to deal with in the agreement (e.g. what acts and omissions are covered, how to limit liability and how the agreement relates to the audit engagement letter); and » how to obtain shareholder approval, which is necessary for the agreement to be valid. The guidance also provides specimen documentation, including sample terms and shareholder resolutions. The consultation is open for comment until 14 March 2008 and the FRC anticipates being in a position to publish a final version of the guidance in May. The draft guidance and consultation document can be freely downloaded from the FRC’s website: http://www.frc.org.uk. |
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APB discussion paper on the auditor’s report See CLM: ¶4312+ |
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The Auditing Practices Board (APB) has issued a discussion paper on changes to the auditor’s report. The audit provisions of the new Companies Act will be implemented on 6 April 2008 and these will require a change in the contents and wording of auditor’s reports. The discussion paper sets out how to meet the new requirements. It also suggests further improvements that could be made to the form and content of the report. The discussion paper can be freely downloaded from the APB website: http://www.frc.org.uk/apb/. Comments are invited by 28 March 2008. |
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APB consultation papers on the auditing standards for group companies See CLM: ¶4382+ |
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The Auditing Practices Board (APB) has recently issued two consultation papers on changes to the International Standard on Auditing (ISA) relating to group company accounts. As part of the implementation of the Statutory Audit Directive (EC Directive 2006/43), the APB proposes adding a requirement to state the principal auditor’s involvement in the work of other auditors to ISA (UK and Ireland) 600. This change is intended to be implemented on 6 April 2008, applying to accounting periods starting on or after this date. The consultation paper invites comments on this change, and any difficulties the proposed implementation date may cause. The International Auditing and Assurance Standards Board (IAASB) has recently revised ISA 600, renaming it “Special considerations – Audits of group financial statements (including the work of competent auditors)”. This is part of the wider “Clarity Project” being conducted by the IAASB to update and reformat ISAs. The revised ISA 600 is due to come into force internationally for financial years beginning on or after 15 December 2009. The consultation paper sets out arguments for and against adopting the new material. The APB is seeking views on when to adopt the revised ISA and whether to adopt a hybrid solution by converting the revised ISA into a Practice Note. The consultation papers can be freely downloaded from the APB website http://www.frc.org.uk/apb/. Comments should be submitted by 7 March 2008. |
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Changes to capital gains tax proposals See CLM: ¶5335, ¶5343+ |
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In late January, the Chancellor Alistair Darling announced a concession in the government’s proposals to simplify the Capital Gains Tax regime, CGT. There will be “entrepreneur’s relief” of a lower rate of 10% on lifetime gains of up to £1 million. This is against the general proposed rate of 18%. The current regime is a rate of 40% but with reliefs such as taper relief which increases with the period for which the assets were owned, and retirement relief. The announcement seems to have raised as many questions as it solves. For example, full-time employees of trading companies who own shares through share-incentive arrangements will not apparently qualify for the new relief unless they own more than 5% of the share capital of the company. Most investors in private equity funds will not meet the new criteria either. |
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Prosecution for alleged insider dealing See CLM: ¶6685, ¶6793 |