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NEWS ROUND-UP |
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Consultation on taxation of foreign profits of companies See CLM ¶1790 Under UK law, UK companies have to pay tax on foreign dividends (i.e. dividends from a non-UK company). They can claim credit for the amount of foreign tax paid by the non-UK company but this may still result in some UK tax to pay (note, however, that the courts have recently found that this dual system of taxation infringes Article 43 of the EC Treaty (freedom of establishment) where the dividends are received from member states (Test Claimants in the FII Group Litigation v the Commissions for Her Majesty's Revenue & Customs [2008] EWHC 2893 (Ch)). This dual system has been considered by many businesses as administratively burdensome and, as a result, the Government is proposing a foreign profits reform package, under which certain businesses (usually medium-sized and large businesses) will be exempt from tax for dividends received (regardless of whether such dividends are from a foreign source), unless the exemption is used for tax avoidance purposes. To cater for this proposal, Revenue and Customs and the Treasury have recently published for consultation draft legislative provisions which will amend the proposed Corporation Tax Act 2009 to include this dividend exemption. The draft provisions also deal with various other issues, including for example the introduction of a worldwide debt cap on deductible interest (to prevent large tax deductions being taken by group companies for intra-group interest payments). The consultation is available at: http://www.hmrc.gov.uk/consultations/index.htm. The deadline for public responses is 3 March 2009. Proposed EC Directive to cut cost of compliance See CLM ¶3199 In 2008, the European Commission proposed to alter four of the European Company Law Directives to reduce the administrative burden and cost to companies in complying with company accounting and disclosure requirements (See CLM 2008 Newsletter Issue 3). The Commission regards this as important for boosting the European economy, particularly in relation to the benefits it could bring for small and medium-sized companies. The Commission has now published a draft Directive to amend: » the Fourth Company Law Directive (EC Directive 1978/660) by removing the requirement for medium-sized companies to explain their formation expenses in notes on their accounts and to break down their turnover by activity and geographical market (these exemptions are already available to small companies in the UK); and » the Seventh Company Law Directive (EC Directive 1983/349) by exempting a parent company from having to prepare consolidated accounts and reports if it only has non-material subsidiaries. The draft Directive has had its first reading in the European Parliament. It is proposed that member states will be required to implement the Directive by 31 December 2010. ICSA guidance: accessing the register of shareholders See CLM ¶3932 The Institute of Chartered Secretaries and Administrators (ICSA) has updated its guidance for companies on how to assess whether a request to inspect or be sent a copy of the register of shareholders under the new Companies Act is for a “proper purpose”. If any person (including a shareholder) wishes to inspect or receive a copy of part or all of the register of shareholders, he must submit a request to the company containing specific information, including the purpose for which the information will be used. The company must comply with the request within 5 working days, unless it believes that the request has not been made for a proper purpose, in which case it can apply to court for an order directing the company not to comply (s 117 CA 2006). The new guidance updates and revises the previous version published by ICSA in June 2007 (see CLM 2007 Newsletter Issue 4). It includes: » new examples of the industry view on what is likely to be a “proper purpose” such as requests from: - Revenue and Customs; - a regulated provider of financial services, or a credit institution, for the purpose of carrying out identity checks or as an anti-fraud measure in connection with providing credit services; - creditors or potential creditors, before accepting security over shares; - persons seeking the information with a view to enforcing a judgment against a shareholder; and - an insolvency practitioner seeking to determine the ownership of assets; » new examples of the industry view on what is likely to be an improper purpose, such as: - any representation or communication to shareholders that the company considers would be an unwarranted misuse of the shareholder’s personal information; and - requests from agencies which specialise in identifying and recovering unclaimed assets for their own commercial gain where the company is not satisfied that this is in the interests of the shareholders; » recommended best practice where access to the entry of one or more shareholders, rather than the entire register, would suffice; » a reminder that companies should have regard to their obligations under the DPA 1998 when considering requests. However, exemptions allowing for the lawful disclosure of personal information, for example for the prevention or detection of crime, may justify the company complying with the request; and » guidance on the procedure a company should follow in applying to court (para 1 CPR PD 49). This requires proceedings to be started by a Part 8 claim form. As there are not yet any reported cases of applications being made, it is unclear whether the rest of the procedure set out in Part 8 will apply. ICSA recommends that the application should be supported by a witness statement giving an explanation of the relevant events and the reasons for the company not complying with the request. The company should send a copy of the claim form and supporting evidence to the person making the request as soon as reasonably practicable after the claim form has been issued. The guidance also applies to companies considering requests for access to the register of debenture holders (see CLM ¶4006+) and the register of interests in shares held by public companies (see CLM ¶2043+, ¶3990+). The full guidance note can be found on ICSA’s website: www.icsa.org.uk. EC recognition of non-EU GAAP See CLM ¶4212 The European Commission has accepted the recommendation of CESR to grant equivalence to the generally accepted accounting principles (GAAP) of certain third countries (see CLM 2008 Newsletter Issue 6). From 1 January 2009 the GAAP of the US and Japan are considered to be equivalent to International Financial Reporting Standards as adopted by the EU (IFRS) for the purposes of listed companies preparing their consolidated financial statements. For a transitional period of three years, the GAAP of China, Canada, South Korea and India will also be considered equivalent to IFRS. These countries have undertaken to adopt IFRS or converge their own accounting standards with IFRS by 31 December 2011. During the transitional period the EC will continue to monitor the development of their GAAP towards IFRS. New guidance on financial reporting challenges in the current economic conditions See CLM ¶4226+, ¶4312+ The FRC and the APB have both published new guidance for directors and auditors to assist them in preparing for their forthcoming end of year reporting requirements. The FRC’s “Update for Directors of Listed Companies: Going Concern and Liquidity Risk” will be useful to all directors in preparing for their company’s year end and meeting their reporting responsibilities. It provides guidance on: » the assessment of the company’s viability as a going concern including the review period and relevant disclosures. This will require more rigour and formality than in normal circumstances; and » the business review element of the directors’ report (required for large and medium-sized companies). The FRC’s guidance on “Challenges for Audit Committees arising from current economic conditions” will be helpful to all auditors in highlighting potential challenges that they may need to address. It identifies some suggested questions which may need to be considered in four key areas: » year end planning considerations; » liquidity risk and going concern; » reliance on models for cash flow analysis and valuation information; and » significant accounting and reporting judgments. Neither document published by the FRC imposes any additional requirements on directors or auditors. They bring together existing guidance under UK GAAP and IFRS in the context of the current economic climate and draw attention to several challenges that may arise. For example, bankers may be reluctant to provide positive confirmation that existing facilities will continue to be available. The FRC confirms that this would not in itself necessarily cast doubt on a company’s ability to continue as a going concern, nor would it necessarily require auditors to qualify their reports. The APB has issued additional guidance for auditors emphasising that the current economic situation does not of itself justify modification of auditors’ reports in every case (APB Bulletin 2008/10 “Going Concern Issues During Current Economic Conditions”). The Bulletin highlights that auditors will need to carefully consider the economic situation at all stages of forthcoming audits and pay particular attention to directors’ disclosures and assessment of going concern. However, it also makes clear that auditors should only refer to going concern in their reports if appropriate based on the particular facts and circumstances of the company concerned. They should take into account and assess the effectiveness of any strategies identified by the directors that may mitigate any adverse factors. The Bulletin also discusses parts of the FRC update for directors which may be relevant to auditors and includes an updated summary of the key factors and issues that can affect going concern and risk which may have increased in significance. It is based on existing standards and does not impose any new requirements. The FRC documents and the APB Bulletin can be freely downloaded from their websites: http://www.frc.org.uk/press/pub1781.html http://www.frc.org.uk/apb/publications/pub1824.html. APB Bulletin 2008/10 is supplementary to and does not replace APB Bulletin 2008/1 “Audit Issues when Financial Markets are Difficult and Credit Facilities may be Restricted”. ASB amends Financial Reporting Standard on related party transactions See CLM ¶4238 The Accounting Standards Board (ASB) has amended the Financial Reporting Standard on “Related Party Transactions” to reflect changes to the law applying to accounts for financial years starting on and after 6 April 2008 (FRS 8). These were introduced by the accounting regulations for large and medium-sized companies under the new Companies Act (SI 2008/410); see CLM Newsletter 2008 Issue 2). The amended version includes: » a new definition of “related party” equivalent to that in international accounting standards, as required by the regulations. FRS 8 still requires the disclosure of all material related party transactions, whereas the regulations only require disclosure of those transactions that have not been concluded under normal market conditions. The ASB states that compliance with the amended FRS 8 will ensure compliance with the requirements of the law. The exemption for medium-sized companies regarding related party transaction disclosures is still reflected in FRS 8; » reference to “key management personnel” which is more specific than the previous reference to “key management”. International accounting standards require disclosure of key management compensation, whereas FRS 8 does not; and » a change to the exemption from providing disclosures in the financial statements of subsidiaries. The exemption will only be available to wholly owned subsidiaries, whereas before it was available to 90% subsidiaries. As a transitional arrangement, in the first year of adopting this amendment, the disclosure of corresponding amounts for 90% subsidiaries is not required where the information cannot be obtained. International accounting standards do not provide relief from disclosure of transactions entered into between wholly owned subsidiaries. FRS 8 is not yet fully converged with international accounting standards. The amendment applies to financial years starting on or after 6 April 2008 and can be freely downloaded from the ASB website: www.frc.org.uk/asb. New guidance on auditor liability limitation agreements See CLM: ¶4304 GC100 has published a guidance note on the issues that companies should consider before entering into agreements which seek to limit the liability of their auditors. Since 6 April 2008, companies have been able to restrict the liability of their auditors to what is fair and reasonable in the circumstances, provided the agreement is approved by an ordinary resolution of the shareholders (ss 534-538 CA 2006). The GC100 note draws together existing guidance published by the FRC and the Institutional Shareholders' Committee. It highlights the issues that a board should take into account when considering recommending such an agreement to the company’s shareholders, including: » ensuring that any relevant factors are properly documented in board papers and minutes; » the directors’ general duties, in particular their duty to promote the success of the company (s 172 CA 2006); » the context of any existing contractual relationship that the company has with its auditor, which may also limit the auditor’s liability; » the fact that there is an increased risk that the company may not be able to recover all of any loss suffered if it enters into the agreement; and » a detailed analysis of the company’s own position and why the agreement would benefit it. While companies are now allowed to enter into these agreements, they are not obliged to do so. GC100 recommends that shareholders approach them with caution, given the uncertainty of whether any claim against an auditor would succeed where an agreement is in place. EC consults on changes to the Prospectus Directive See CLM ¶4845+ The European Commission has published a consultation paper on proposed changes to the Prospectus Directive as part of its review of the Directive (EC Directive 2003/71). The commission aims to reduce excessive administrative and costs burdens for companies and simplify the application of the Directive. The proposals are only an indication of the approach the Commission may take to achieve these aims and are not a statement of its final policy position. The suggested amendments include: » extending the scope of the definition of “qualified investors”; » clarifying the responsibilities of drafting and supplementing a prospectus and the level of information required where securities are sold by an intermediary; » extending the exemption from preparing a prospectus for employee share schemes to include companies listed on third country exchanges or in EU exchange regulated markets or non-listed companies. Currently the exemption is only available to companies listed on an EU-regulated market; » removing the requirement to produce an annual disclosure document. There is a comprehensive periodic and ongoing disclosure regime under the Transparency Directive and therefore a duplication of this requirement (EC Directive 2004/109); » harmonising the period within which investors may withdraw previous acceptances to at least two days following the publication of a supplement to the prospectus; and » removing the threshold on the free denomination of the home member state for issues of non-equity securities. The Commission also seeks comments on other issues identified including: » whether or not the correct balance is achieved between the overriding standard that each prospectus should achieve and the need to ensure that it is comprehensible and user friendly; » disclosure obligations for small companies; » whether disclosure obligations should be exempted where a member state acts as guarantor; and » the possibility of exempting the obligation to publish a prospectus for rights issues, provided that a document is available containing the reasons for and details of the offer. Comments are invited by 10 March 2009. The Commission particularly welcomes the views of SMEs, investors and consumers. The consultation paper is available from the European Commission website at: http://ec.europa.eu/internal_market/consultations/docs/2009/prospectus/background_en.pdf. New merger remedy guidelines published See CLM ¶5507+ Under UK law, the OFT may refer a merger to the Competition Commission for investigation if it believes that the merger results in a “substantial lessening of competition” within a market for goods and services in the UK. If the Commission’s investigation concludes that a merger is likely to substantially lessen competition, then it will decide what actions it or other bodies should take to remedy any adverse effects resulting from it. In order to explain the Commission’s approach to remedies in merger investigations, it has, following consultation back in May 2008, published new guidelines on this topic. The guidelines provide an overview of the more common remedies, including divestiture (i.e. requiring the merger parties to dispose of certain assets to independent third parties to preserve the level of competition in the market), prohibition and behavioural measures (such as price caps). In addition, the guidelines also discuss the principles used by the Commission when selecting and implementing these remedies. The new guidelines aim to provide a single point of reference regarding merger remedies and will accordingly supersede the Commission’s various existing guidance notes on divestiture remedies, interim and remedial measures in the Commission’s general merger guidance. The new guidelines are available on the Commission’s website: http://www.competition-commission.org.uk/. Takeover Panel issues response statements to consultations See CLM ¶6872+ As reported in CLM 2008 Newsletter Issue 4, the Panel on Takeovers and Mergers issued two consultations in July 2008 (one of which was on the proposed amendments to the City Code on Takeovers and Mergers to facilitate the use of electronic communications to send out information in takeovers, and the other was on other miscellaneous amendments to the City Code). The Takeover Panel has recently published response statements to these consultations (RS 2008/2 and RS 2008/3). Amongst other things, the Panel has decided to adopt its proposed approach in relation to the issue of electronic communications and allow parties to send Code documents to a target’s shareholders via electronic means (e.g. websites and emails). Miscellaneous changes to the Code have also been adopted to clarify existing Code provisions or codify current practice in relation to matters previously not covered by the Code. The revised Code will apply to all takeover offers and possible offers from 30 March 2009. The response statements are available on the Panel’s website: http://www.thetakeoverpanel.org.uk/. Insolvency Service modernisation and consolidation project See CLM ¶7364, ¶7896, ¶8166, ¶8339, ¶8449, ¶8648, ¶8856, ¶9501 The Insolvency Service has laid a draft order before Parliament to implement its proposal to remove the requirement for the initial creditors’ meeting in a CVL to be advertised in local newspapers. This proposal is part of the Service’s wider project to reform insolvency law by modernising and consolidating various statutory instruments (including the Insolvency Rules) and making related amendments to the Insolvency Act 1986. Currently, the initial creditors’ meeting in a CVL has to be advertised in at least two newspapers published locally to the company, as well as in the Gazette. This is also the case where a company is in MVL and the liquidator has to call a creditors’ meeting to convert the procedure to a CVL because the company is in fact insolvent. At a cost of around £300 per advertisement, this requirement inevitably places a financial burden on CVLs. Following consultation, the Service came to the conclusion that this cost was no longer justified since very few creditors come forward as a result of these advertisements. It considered that most creditors would find out about the financial state of their debtors by other means, such as carrying out Companies House searches and checking debtors’ websites (which now have to state that the company has entered into an insolvency procedure). If the order is approved in its current form, companies entering into CVL will be able to advertise the creditors’ meeting in whatever way the directors think is appropriate. In many cases, it will not be necessary to advertise at all because the company’s list of creditors is reliably complete. The revised section also gives the company the freedom to advertise the meeting in forms other than a local newspaper advertisement, for example on the internet or in a national newspaper, if this would be necessary in the circumstances. Where an MVL is converted into a CVL, it is the liquidator who will make this choice. In reality, where the company is entering directly into CVL, the directors will take the prospective liquidator’s advice on the matter. As CVL is a voluntary procedure, the Insolvency Service did not consider that there was a significant danger of directors failing to follow the insolvency practitioner’s instructions. These changes are due to come into force on 6 April 2009, applying to CVLs where the resolution to wind up was passed on or after this date. The other changes due to be made to the Insolvency Act as part of the modernisation and consolidation project (see CLM 2007 Newsletter Issue 7) are due to be made on 1 October 2009. There are some exceptions, as the following proposals have been dropped since the consultation: » the proposal to remove the requirement for the Insolvency Services Account to be held at the Bank of England (the Service wishes to carry out further consultation before going ahead with this proposal, given the recent uncertainty in the banking sector); » the proposal to remove the requirement for two reports on the directors’ conduct to be filed where an administration is converted into voluntary liquidation, even where the circumstances have not changed (the Service has decided that such a change should not be made by Legislative Reform Order, and it plans to consider how to implement the proposal in another way); and » the requirement for creditors to opt-in to receive information during the insolvency process (the Service has decided that there is insufficient support for this). In addition, the proposal allowing insolvency practitioners to make information available via a website has been modified so that they can do so without having to obtain prior consent from creditors. Ethical code for insolvency practitioners See CLM ¶7424 The Insolvency Service has published the new “Insolvency Ethical Code”, which is designed to assist insolvency practitioners to undertake their work to high professional and ethical standards. The Code has been approved by the Joint Insolvency Committee following consultation, and is based on five fundamental principles (integrity; objectivity; professional competence and due care; confidentiality and professional behaviour). The Code covers various issues such as referral fees, obtaining work and the use of specialist agents. |
