4
THE CITY OF LONDON LAW SOCIETY
COMPANY LAW COMMITTEE
Minutes of the 249th meeting
at 9.00 a.m. on 25th January 2011
at Slaughter and May, One Bunhill Row, EC1Y 8YY
(Tel: 020 7600 1200; Fax: 020 7090 5000)
1. Apologies for absence
Attending: Lucy Fergusson, Simon Griffiths, Michael Hatchard, Nicholas Holmes, Alan Karter (as alternate for Mark Curtis) Eileen Kelliher, Vanessa Knapp, James Palmer, Christopher Pearson, David Pudge, Richard Spedding, Patrick Speller, Keith Stella, William Underhill (chairman), Victoria Younghusband, Tom Carey (secretary)
Apologies: Simon Jay, Robert Boyle. Richard Brown also did not attend.
2. Approval of minutes of previous meeting
It was reported that the minutes of the previous meeting had been approved by the chairman and would be circulated after the meeting.
3. Matters arising
3.1 Corporate governance: updated NAPF Corporate Governance Policy and Voting Guidelines
On 30 November 2010, the NAPF had published the updated version of its Corporate Governance Policy and Voting Guidelines 2010, to take account of the publication of the UK Corporate Governance Code. The secretary reported that the NAPF had recently confirmed by email to him that it would not sanction companies which did not comply with the disclosure requirements of the FRC UK Corporate Governance Code until 2011/12.
3.2 Narrative reporting: BIS consultation: summary of responses
On 23 December 2010, BIS had published a summary of responses to its consultation on the future of narrative reporting. It was noted that the responses were mixed. It was also noted that on 22 November 2010, the European Commission had published a consultation paper on ways to improve company disclosure of non-financial information, which focussed on CSR issues. It was decided not to submit a response.
3.3 Long Term Focus for Corporate Britain
It was noted that the committee had jointly with the Law Society made a submission in respect of the BIS call for evidence on the existence of short-termism and market failures in UK equity markets.
3.4 SEC request for comments: Anti-fraud provisions of the US Securities Exchange Act
Michael Hatchard reported that a skeleton draft response had been prepared and that it incorporated a number of the points made in the UK and France’s amicus submissions to the US authorities. It was suggested that the response should also contain analysis of the UK system of remedies for investors in respect of securities transactions.
3.5 Mix and match schemes/prospectus requirement
It was reported that it had been agreed that the UKLA and the committee would jointly instruct Counsel in relation to the question of whether a prospectus was required where securities are to be issued pursuant to a scheme of arrangement involving a mix and match election. The UKLA preferred to instruct a Counsel who had not previously opined on the question, so that his or her advice would not be a foregone conclusion. The UKLA had also asked Nigel Farr of Herbert Smith, who has investment trust experience, to be involved in the process of drafting/approving the instructions in order to address certain issues relating to investment trusts.
The chairman suggested Laurence Rabinowitz QC. Members were asked to submit any other suggestions to the secretary.
Vanessa Knapp agreed to draft instructions and asked members to provide her with any experiences they or their colleagues had of how authorities in other Member States deal with a situation comparable to a scheme, e.g. a merger, and in particular how they deal with the withdrawal right.
3.6 Securities Law Directive
It was noted that a submission had been made to the European Commission Consultation: Legislation on Legal Certainty of Securities Holdings and Dispositions.
4. The Institutional Investor Council (IIC): report on rights issue underwriting fees
It was noted that on 14 December 2010, the Institutional Investor Council (IIC), which was established by the Institutional Shareholders Committee, published its report from the Rights Issue Fees Inquiry.
It was noted that the report recommended that, unless confident of their own expertise and experience, companies’ boards should take advice from an independent financial adviser (i.e. from an adviser which is not part of the underwriter’s group). It was thought that the costs involved would make this unattractive to companies outside the FTSE 100.
The report recommends that issuers consider using sub-underwriting with offset. It was noted that this would give existing shareholders a fee for taking up the rights offered to them as part of a pre-emptive offer and when viewed in that way may not be acceptable to other shareholders not invited to participate.
The meeting noted the report’s recommendation that there should be no automatic assumption that issues should be fully underwritten but that issuers should decide what proportion of the issue should be underwritten, by whom, and at what price. It was noted that the company would need to have underwritten at least that part of the fundraising that was required for the working capital statement to be given; it also would raise the question, if the rest is not required for the working capital, why does the company need it anyway?
5. FRC paper “Effective Company Stewardship: Enhancing Corporate Reporting and Audit”
It was noted that on 7 January 2011 the Financial Reporting Council (FRC) had published a report, ‘Effective Company Stewardship: Enhancing Corporate Reporting and Audit’. The following general points were discussed:
· It was noted that the report was in part a response to calls by investors who want accounts to give a more detailed description of the significant issues which have been considered when compiling accounts and to disclose any material judgments that have been made in their preparation. Those recommendations which were similar to US requirements were likely to be generally welcomed.
· Some of the FRC’s proposals calling for lengthier descriptions of the procedures by which the accounts had been compiled may be less welcome; long descriptions of procedures would be unhelpful for investors and might also dilute the responsibilities of the board and the auditors, since it would require users of the accounts to take a view about how reliable those procedures were.
· The FRC’s proposal that auditors should make an expanded audit report that includes confirmation of no inaccuracies in the business review/OFR was considered unrealistic and unhelpful.
· The suggestion that there should be a requirement for directors to explain the steps taken to ensure accuracy and integrity of their financial information was thought likely to lead to unhelpful formulaic disclosures.
· The proposal for greater investor involvement in the appointment of auditors was another example of a special role for “major investors” and raised issues regarding equal treatment.
It was decided that a working party should submit a response. It was also agreed that before submitting its response, it would be useful to speak with the ICAEW.
6. Annual re-election of board: current trends
It was noted that, although the preface to the UK Corporate Governance Code provides that "companies are free to explain if they believe ... that a transitional period is needed before they introduce annual re-election", nearly three-quarters of FTSE 350 trading companies that have posted their 2011 AGM notices are proposing annual re-election of the full board.
However, it appears that most companies are not hard-wiring annual retirement of the entire board into their articles of association, and the meeting agreed that it was better for companies to retain the flexibility not to put up all directors for re-election, especially given the fact that some investors are not in favour of annual re-election and also that the constituency of the FTSE350 changes over time. It was noted that some companies are changing their articles to deal with the possibility of the number of directors falling below the minimum due to resolutions being lost at the AGM.
7. Statements of capital: announcement following BIS' consultation on content
It was noted that on 22 December 2010, BIS hade announced its proposals with regard to simplifying the information required in statements of capital. At the same time, it also published a summary of responses to its November 2009 consultation on the financial information requirements in statements of capital as required by the Companies Act 2006.
Although the committee had advised BIS in October 2010 that it would be better to simplify as many of the forms as possible now, given that primary legislation appears a long way off, BIS had eventually decided that the changes to statements of capital should be introduced simultaneously to minimise further confusion for companies. The only exception was the annual return, which BIS had decided to amend sooner, as they believe this will go a long way to reducing the burden for most companies. BIS has said that they will consult on draft regulations to amend the annual return in early 2011.
8. Companies Act 2006: BIS publishes evaluation of the main provisions of the Act
It was noted that on 22 December 2010, BIS had published the findings of its project to evaluate the main provisions of the Companies Act 2006. In relation to auditor liability limitation agreements, it was noted that according to the BIS report, among medium and large private, public and quoted companies, 19% had entered into an agreement or taken steps towards one (slightly higher for public companies). Independent research has also apparently found 17% of accountants have entered into LLAs.
It was thought that these statistics were surprising. Committee members had not advised any companies which had entered an LLA with their auditors.
9. Government response to BIS consultation on security registration regime
It was noted that on 8 December 2010, the government had published its response to the consultation by BIS on the Companies House regime for the registration of charges created by companies and limited liability partnerships. The chairman reported that the Financial Law Committee would be taking a lead role in monitoring the progress of the proposals on behalf of the CLLS. There are some concerns about the scope of the exclusion for overseas companies.
10. Listing Rules: FSA consultation on proposed changes
It was noted that on 6 January 2011, the FSA had published its Quarterly Consultation Paper No. 27 CP11/1 (No. 27), on proposed changes to various parts of the FSA Handbook, including the Listing Rules. It was noted that some of the proposed rule wording for the Listing Rules left room for improvement and so it was decided that a response would be submitted. The secretary agreed to prepare a draft and circulate for comments.
11. Takeover Panel extends dealing disclosure requirements beyond the end of an offer period
The meeting noted that the Panel had, on a recent transaction, and in a departure from usual practice, extended the requirements under Rule 8 of the City Code for dealings in shares to be disclosed to the market beyond the end of an offer period. On 11 January 2011, a day before the expiry of a put-up-or-shut-up deadline imposed by the Panel, Simon Group Property, Inc. (Simon) had announced that it did not intend to make a firm offer for Capital Shopping Centres Group plc (Capital), following its indicative offer under Rule 2.4 of the Takeover Code on 15 December 2010. Also on 11 January 2011, the Takeover Panel announced in Statement 2011/3 that, although the offer period in respect of Simon and Capital had ended, the dealing disclosure requirements of Rule 8 of the Code and the restrictions on dealings by connected exempt principal traders under Rule 38 of the Code should continue to apply to market activity in Capital securities for a specified period following the end of the offer.
The background was that, in its indicative offer announcement, Simon had stipulated as a non-waivable pre-condition to making a firm offer for Capital that Capital’s proposed acquisition of the Trafford Centre had not been completed. In its Rule 2.8 announcement, Simon had announced that, although it had decided not to make a firm offer, it continued to oppose Capital's proposed acquisition of the Trafford Centre and that it reserved the right to sell Capital shares and/or acquire and/or offer to acquire Capital shares, subject to it and its concert parties not increasing their interest in Capital to more than 29.9%.
It was thought that the Panel had taken the unusual step of extending dealing disclosure requirements beyond the end of the offer period in order to allow the market to continue to monitor the size of Simon’s interest in Capital until the general meeting to approve the acquisition of the Trafford Centre. It was not clear on what basis the Panel considered it had jurisdiction to impose these requirements.
12. Mergers and divisions: BIS consults on draft Companies (Reporting Requirements in Mergers and Divisions) Regulations 2011
It was noted that on 13 January 2011, BIS had published the draft Companies (Reporting Requirements in Mergers and Divisions) Regulations 2011, together with an Explanatory Statement for comments. Although the committee had not had time to review the draft regulations, it was decided that they should be reviewed to see if a working party was needed in order to make a submission.