1 SETTING THE SCENE – SOURCES AND OVERVIEW
1.1 What are the main corporate entities to be discussed?
The responses to the questions in this chapter relate primarily to Irish incorporated companies with shares listed on the Main Market of the Irish Stock Exchange (which is a regulated market) or listed on the Enterprise Securities Market (ESM) of the Irish Stock Exchange.
1.2 What are the main legislative, regulatory and other corporate governance sources?
The law is stated as of 1 April 2011. As regards all companies, the primary corporate governance legislation is contained in the Companies Act 1963 to 1990 (the "Companies Acts"). Additional corporate governance requirements apply to Irish incorporated companies which are listed on a regulated market as a consequence of the Shareholders' Rights (Directive 2007/36/EC) Regulations 2009, European Communities (Directive 2006/46/EC) Regulations 2009, European Communities (Directive 2006/46/EC) (Amendment) Regulations 2010, European Communities (Statutory Audits) (Directive 2006/43/EC) Regulations 2010, European Communities (Statutory Audits) (Directive 2006/43/EC) (Amendment) Regulations 2011, Transparency (Directive 2004/109/EC) Regulations 2007 and the Market Abuse (Directive 2003/6/EC) Regulations 2005.
The activities of all Irish incorporated companies are also governed by the memorandum and articles of association of the company. The memorandum of association sets out the principal objects of the company, together with the powers of the company and it is important that the company conducts itself in accordance with its memorandum of association since otherwise there can be negative consequences under Irish company law. The articles of association of the company constitute a contract between the company and its shareholders and contain restrictions and requirements regarding such things as shareholder meetings, voting rights, powers and duties of directors, the composition of the Board and communications between the company and its shareholders.
Irish company law also includes many requirements regarding the duties and responsibilities of directors which have been set out in Court decisions.
Companies listed on the Main Market of the Irish Stock Exchange are expected to adhere, on a comply or explain basis, to the corporate governance principles set out in the UK Corporate Governance Code as supplemented by the Annex published by the Irish Stock Exchange (together the "Corporate Governance Code"). Irish companies listed on the ESM will generally seek to comply insofar as possible with the Corporate Governance Code and to the extent that they are unable to do so will also disclose their noncompliance.
Financial institutions are also required to comply with the Corporate Governance Code for Credit Institutions and Insurance Undertakings published by the Central Bank of Ireland. In the private sector, there is a significant number of companies which are State owned and all of these must comply with the Corporate Governance Guidelines published by the Department of Finance.
From time-to-time Irish listed companies will also consult with the Irish Association of Investment Managers which has issued guidelines and pronouncements over the years in regard to corporate governance matters. These guidelines and pronouncements do not have the force of law but generally reflect the requirements of Irish institutional investors.
1.3 What are the current topical issues, developments and trends in corporate governance?
As far back as the publication of the Cadbury Report in 1992, Irish listed companies have sought to follow the developments in UK corporate governance practice.
Irish companies with a listing on a regulated market are now required by law to disclose which corporate governance code is being applied by the company and the extent to which there is any non-compliance. This requirement, which first became law in 2010, has indirectly made corporate governance compliance a legal requirement in the sense that a company must now disclose, and may not mis-represent, the extent to which it complies with the prevailing corporate governance code.
As a result of the global financial crisis of 2008 to 2009, the Central Bank of Ireland has devoted significant resources to reviewing corporate governance practices in Irish financial institutions and in doing so has introduce a stringent corporate governance code for all Irish credit institutions and insurance undertakings.
The other significant development has been the role which is now played by the various shareholder advisory services which review corporate governance practices in companies prior to their annual general meetings each year. This has caused most Irish listed companies to consult on a private basis with one or more key shareholder advisory services with a view to ensuring that their corporate governance standards meet the relevant requirements.
The UK Stewardship Code for institutional investors is also applicable to Irish listed companies and this will therefore be an additional encouragement for Irish companies to ensure compliance with the Corporate Governance Code.
2 SHAREHOLDERS
2.1 What rights and powers do shareholders have in the operation and management of the corporate entity/entities?
Under both company law and the applicable governance codes, the day-to-day operation and management of an Irish company is entrusted to its board of directors and the ability of shareholders to remove and appoint directors is the principal power of shareholders to influence the operation and management of the company.
Company law and various requirements in the Listing Rules of the Stock Exchange, as well as the Corporate Governance Code require certain rights and powers to be reserved to shareholders, largely through the requirement for shareholder approval by a resolution at a general meeting of shareholders. For instance, under Irish company law, directors do not have an absolute right to issue shares and must therefore seek prior approval from shareholders in addition to seeking shareholder approval for the dis-application of pre-emption rights where necessary. Under Irish company law, shareholders also have the ability to control the buy-back and reissue of shares by a company.
The Listing Rules of the Irish Stock Exchange impose various requirements for shareholder approval in respect of significant corporate transactions. An important difference between companies listed on the Main Market and the ESM is the fact that these requirements for shareholder approval are more relaxed in the case of the ESM.
Company law also protects shareholders against potential conflicts of interests in that transactions between a company and its directors and persons connected with them must be approved by shareholders where they exceed certain thresholds. Shareholders also have the right to convene shareholder meetings for the purpose of proposing resolutions which can direct the board to undertake certain actions. In the case of companies listed on the Main Market, it is possible for a shareholder or a group of shareholders holding at least 5% of the issued share capital of the company to convene such meetings. For other companies, the threshold is 10% of the issued share capital. The ability of shareholders to direct the board to undertake certain actions is limited to the extent that the matter is already reserved for the exclusive determination of the board under the articles of association. Where this is the case, the shareholders cannot direct the board unless they first amend the provision in the articles of association.
The recent changes in the Corporate Governance Code has increased the influence of shareholders in that most Irish companies will hold an advisory "say-on-pay" vote at their annual general meeting, as well as seeking the re-election of all directors.
2.2 Can shareholders be liable for acts or omissions of the corporate entity/entities?
All companies listed on the Irish Stock Exchange have been incorporated with limited liability, with the consequence that shareholders can generally be assured that they will have no liability for the acts or omissions of the company.
Where a company has a significant shareholder which can be shown to exercise significant influence over the board of the company, it is possible under Irish law for the shareholder to be regarded as a shadow director with the consequence that the shareholder will then have the same liability as a director on certain issues including potential personal liability.
In the context of takeovers, there are also provisions which can result in liability for shareholders where they are shown to be acting in concert with the board of the company in undertaking an activity in breach of the Rules of the Takeover Panel.
Liability can also arise where assets are transferred improperly to shareholders. For example, a shareholder will be liable where they knowingly receive an unlawful dividend or where an asset has been transferred to the shareholder in breach of company law. Liability can also arise where a shareholder deals in the company's shares after receiving confidential price-sensitive information from the company.
2.3 Can shareholders be disenfranchised?
For Irish companies listed on a regulated market, it is possible for shares to be compulsorily acquired by an offeror for the company where the offeror has received acceptances from at least 90% of the shares to which the offer relates. If the company is quoted on a non-regulated market, the threshold is lower at 80%.
Where shareholders are required to disclose their interest in the company under Irish company law, failure to comply with these requirements can result in the shareholders losing the rights attaching to their shares, though it is possible for these rights to be restored by a court order. A similar loss of rights can arise where a shareholder refuses to respond to an enquiry from the company in respect of the beneficial ownership of the shares. Certain companies also have provisions in their articles of association which can restrict rights in certain limited circumstances. For example, some companies have such provisions in order to ensure that the company can comply with any nationality requirement associated with licences required for their business.
Where a company holds shares in itself as treasury shares, no rights can be exercised by the company in respect of those shares.
2.4 Can shareholders seek enforcement action against members of the management body?
The Director of Corporate Enforcement has significant powers under the Companies Acts to enforce compliance with company law by the directors of a company. Accordingly, shareholders can make formal complaints to the Director of Corporate Enforcement where they believe that the board of the company is not complying with their statutory obligations.
While shareholders can bring proceedings by way of a derivative claim for the purpose of enforcing a wrong done to the company, the requirements for such proceedings are strictly enforced as the basic premise is that the proper claimant in an action in respect of a wrong done to the company is the company itself. Derivative actions are therefore very rare and shareholders will more likely bring a claim for minority oppression.
2.5 Are there any limitations on, and disclosures required, in relation to interests in securities held by shareholders in the corporate entity/entities?
In the case of a company listed on a regulated market, shareholders are required to make a disclosure where they acquire control of voting rights equal to 3% or more of the voting rights in the company. Further disclosures are required whenever the shareholder increases or reduces his/her interests in the voting rights of the company by a further 1%. In the case of companies which are listed on non-regulated markets, the threshold is higher at 5% and the interests which are required to be disclosed are wider than just the exercise of voting rights attaching to shares.
The articles of association of certain companies also impose restrictions on the number of shares which may be acquired by certain persons. These restrictions usually relate to the nationality of the shareholder and are designed to protect the interests of the company where there are nationality requirements associated with licences required for the business of the company.
Under the Rules of the Irish Takeover Panel, there are very detailed restrictions and disclosure requirements regarding the acquisition of shares in a company while an offer for the company is in contemplation.
2.6 What shareholder meetings are commonly held and what rights do shareholders have as regards them?
All Irish companies must hold an annual general meeting within 18 months of their incorporation and thereafter the gap between annual general meetings may not exceed 15 months, in addition to the requirement that an annual general meeting be held in each calendar year.
Under the articles of association of the company, certain business is specified as constituting ordinary business of the annual general meeting. The items of ordinary business specified in the articles of association would usually include the consideration of the annual report and accounts, the declaration of dividends, the re-election of directors, fixing of the remuneration of the auditors and fixing of the ordinary remuneration of the directors. Where this is the case, shareholders have some rights in regard to proposing resolutions at the meeting in respect of these items of ordinary business. This is so, whether or not the company itself has proposed a resolution on the item of ordinary business. All other matters are regarded as constituting special business and may only be considered at the meeting where notice of the resolution has been circulated to all shareholders at least 21 days prior to the meeting. As mentioned above, shareholders in companies listed on a regulated market who hold 5% or more of the issued share capital of the company have the right to propose resolutions at the annual general meeting, though this is subject to the requirement that notice of the resolution be sent to all shareholders at least 21 days before the meeting. Unless provided for in the articles of association, this is not possible in the case of the annual general meetings of companies listed on non-regulated markets.
In addition to being able to require resolutions to be voted on at an annual general meeting, a shareholder or group of shareholders holding 3% or more of the issued share capital of a company listed on a regulated market can require the company to include a matter for discussion on the agenda of the meeting. Separately, any shareholder can ask any question at the annual general meeting and the company is expected to answer unless there are reasons such as trade secrets or confidentiality obligations which preclude the company from responding to the question.
It has now become customary for companies to propose additional items of special business at the annual general meeting which include resolutions to authorise the directors to allot shares, to dis-apply statutory pre-emption rights, to authorise the company to buy back its own shares and to authorise the company to re-issue treasury shares. With the exception of the first of these items, all of these other items require the approval of shareholders by way of a special resolution which has an approval threshold of 75% of the shareholders voting on the resolution whether in person or by proxy.
An extraordinary general meeting of the company will also be convene by the directors where a company is undertaking a transaction which requires shareholder approval. Shareholders holding at least 5% of the issued share capital of the company in the case of companies listed on a regulated market, or 10% of the issued share capital of the company in all other cases, can also requisition the convening of an extraordinary general meeting of the company.
Most Irish listed companies have instituted arrangements whereby the company is permitted to communicate with their shareholders electronically via their website or by email with the consequence that unless a shareholder specifically requests written documentation, the general meeting can be convened by an email or a notice on the company's website.
All Irish companies allow shareholders to attend their meetings by way of proxy and in most companies they can appoint multiple proxies, instruct their proxy to vote for or against the resolution, or instruct the proxy to withhold their votes.
Voting at general meetings either requires an ordinary resolution (requiring a simple majority of those voting in person or by proxy) or a special resolution (requiring a majority of not less than 75% of those voting in person or by proxy).
3 MANAGEMENT BODY AND MANAGEMENT
3.1 Who manages the corporate entity/entities and how?
All companies are managed by a single, one tier board of directors. All companies must also have two directors but there is no limit on the number of directors that may be appointed, unless this is specified in the articles of association of the company. In the case of companies listed on a regulated market, there is now a legal requirement for the board to have an audit committee which must be composed of persons who are regarded by the legislation as independent non-executive directors and one of whom must have competence in auditing or accounting. With the exception of this requirement, there is no legal requirement for a board to be composed of persons with any particular background or skills. Nevertheless, the requirements regarding board composition in the Corporate Governance Code is widely applied by Irish listed companies so that most companies will seek to have a majority of independent non executive directors on their boards. These persons will in turn constitute the directors who are then appointed to the audit, remuneration and nomination committees of the board. The Annex issued by the Irish Stock Exchange in respect of the Corporate Governance Code puts additional emphasis on the requirement for a board and its committees to have an appropriate balance of skills, experience, independence and knowledge of the company to enable the directors to discharge their respective duties and responsibilities effectively.
3.2 How are members of the management body appointed and removed?
Most boards will have a nomination committee which will have responsibility for identifying and recommending to the board suitable candidates for appointment to fill any vacancies on the board from time-to-time. While the board will have the power to fill such vacancies, any director appointed by a board during the year is required to retire at the next annual general meeting and if willing, may offer him/herself for re-election by the shareholders. Where there is a vacancy on the board, shareholders can appoint directors by way of an ordinary resolution though this is often subject to certain notice requirements in the articles of association regarding the proposal of persons for appointment who have not been recommended by the board. There is also a statutory provision which allows shareholders to remove any director by way of an ordinary resolution. Increasingly, companies listed on the Main Market of the Irish Stock Exchange are adopting the practice of offering their entire boards for re-election at each annual general meeting. For companies listed on other markets, their articles of association will normally provide that one third of the board will retire by rotation at each annual general meeting and will be eligible for re-election. Under the Corporate Governance Code, boards are expected to evaluate the performance of their directors on an annual basis and to confirm this to shareholders in their annual report.
It is also common for the articles of association to provide that an individual director may be required to resign by the unanimous decision of all of the other directors.
There is currently no legal requirement for boards to have a minimum number of women directors. Irish companies are increasingly acknowledging the recent recommendations in respect of diversity on boards.
3.3 What are the main legislative, regulatory and other sources impacting on contracts and remuneration of members of the management body?
The Companies Acts provide for all companies that any director's service contract with a fixed term of over 5 years must be approved by shareholders. In practice, most companies follow the recommendation in the Corporate Governance Code which suggests that notice periods be set at 1 year or less. While the Companies Acts require companies to disclose the aggregate remuneration and benefits payable to all directors, most companies go further and disclose remuneration and benefits on an individual basis in respect of each director. A company's annual report will also frequently contain a report from the remuneration committee of the board which will usually provide information on a historic basis in respect of the company's policy on directors' remuneration including performance related conditions and compensation received in the form of share options, share incentive schemes and pensions. While there is no legal requirement, it is now becoming increasingly common for Irish companies to ask shareholders to vote on an advisory non-binding say-on-pay resolution.
3.4 What are the limitations on, and what disclosure is required in relation to, interests in securities held by members of the management body in the corporate entity/entities?
Directors are permitted to own shares in their companies. In addition, subject to obtaining prior shareholder approval, directors can be granted options or other forms of equity based incentive awards. Directors may not, however, purchase or sell options over existing shares in their company.
All companies listed on the Main Market of the Irish Stock Exchange are required to adopt a share dealing code which is in accordance with the Model Code set out in the Listing Rules. This share dealing code imposes restrictions as well as consent requirements for share dealings which directors may wish to undertake in their company shares. The purpose of these requirements is to ensure that directors do not abuse, or place themselves under suspicion of abusing, inside information. Separately, share dealings by directors are subject to the share dealing restrictions in the Market Abuse Regulations which apply to Irish companies listed on a regulated market. Irish companies listed on the ESM are subject to similar insider dealing restrictions contained in the Companies Act, 1990.
For companies listed on a regulated market, all members of the senior management who are regarded as being "persons discharging managerial responsibilities", which includes directors and their connected persons, are required within 4 business days of any share dealing to notify the company of the dealing. The company, in turn, must notify the market by way of a regulated announcement as soon as possible and not later than the end of the business day following receipt of the information. For companies listed on the ESM, there is a similar obligation in the Companies Act, 1990 except that the notification must be made within 5 business days of the dealing. If a director has a large shareholding which is equal to or exceeds 3% of the issued share capital of the company, this must be notified to the company, as well as any 1% change in such interest. The company must in turn notify this to the market.
3.5 What is the process for meetings of members of the management body?
It is common for the articles of association of a company to provide that a board meeting can be convened by reasonable notice by any director. In practice, boards will agree at the start of each year the schedule for board meetings throughout the rest of the year and additional board meetings may be convened by the chairman where particular issues arise which need to be dealt with at short notice. It is also the practice of companies to set out in their annual report the number of board meetings held during the year (and committee meetings) and indicate the attendance levels of each director.
3.6 What are the principal general legal duties and liabilities of members of the management body?
There are a large number of statutory requirements which must be complied with by directors in the discharge of their duties. These include obligations under health and safety legislation, employee rights legislation, insolvency law and the Companies Act. In the case of the Companies Act the principal duties of the directors include the obligation to maintain proper books and records that accurately record the affairs of the company, as well as the duty not to knowingly carry on the business of the company in a reckless manner so that loss could be caused to creditors of the company. In addition to these statutory duties, directors are subject to fiduciary duties that they owe to their company. These duties apply to all directors irrespective of whether they are employees of the company. These fiduciary duties can be summarised as follows:
- a duty to act in good faith;
- a duty to exercise powers of the company for a profit purpose;
- a duty to avoid conflicts of interests;
- a duty not to misuse company property;
- a duty to exercise reasonable care, skill and diligence; and
- a duty to attend diligently to the affairs of the company.
These duties are owed to the company and ordinarily a Court will not seek to second guess the exercise by a director of his power where it is shown that he did so in way that he believed was in the best interests of the company. However, the Courts may determine that a director has failed in his duties if it is shown that he did not exercise the skill and care expect of a person with his qualifications or where it is shown that the director failed to inform himself about the affairs of the company and did not seek to supervise and control those affairs albeit in conjunction with his fellow directors.
3.7 What are the main specific corporate governance responsibilities/functions of members of the management body?
A company's financial statements must correctly record its transactions and enable the financial position of the company to be determined with reasonable accuracy. This is the primary corporate governance duty of all directors and a director who deliberately or negligently fails to ensure compliance with this requirement can be guilty of an offence. For companies listed on a regulated market, directors are also under a statutory obligation to describe in their annual report the internal control and risk management systems which operate in the company. Furthermore, they must review the effectiveness of the company's risk management and internal controls and report to shareholders that this has been done.
In addition to the statutory obligations referred to above, the Corporate Governance Code expects all directors to be collectively responsible for the success of the company by providing entrepreneurial leadership within a framework of prudent and effective control. In addition, the Corporate Governance Code requires the directors to maintain dialog with shareholders based on the mutual understanding of objectives.
3.8 What public disclosures concerning management body practices are required?
As mentioned above, companies listed on a regulated market are required to state in their annual report what governance code has been adopted by the company and how have they complied with the code during the financial year. Most companies comply with this obligation by setting out a lengthy corporate governance report in their annual report. This report will deal with the structure and role of the board, the division of responsibilities between the board and its committees.
The annual report will also include a separate Remuneration Report by the Remuneration Committee which will report on a historical basis in respect of the remuneration policy and practices in the company.
3.9 Are indemnities, or insurance, permitted in relation to members of the management body and others?
Companies are permitted to maintain insurance for directors and officers in respect of liability which they may incur as a consequence of being a director of the company. This insurance can cover defence costs but may not cover any criminal fines or regulatory penalties which may be imposed on a director. It is also standard in the articles of association of Irish companies to provide an indemnity for directors of the company. However, this indemnity may only be called upon where a judgment has been given in favour of a director which either exonerates him or relieves him from any liability in respect of his actions. The indemnity does not therefore allow the company to pay defence costs while the director might still have potential liability.
4 CORPORATE SOCIAL RESPONSIBILITY
4.1 What, if any, is the law, regulation and practice concerning corporate social responsibility?
While it is not a legal requirement, many Irish companies voluntarily report to their shareholders on an annual basis on CSR issues.
4.2 What, if any, is the role of employees in corporate governance?
With the exception of a limited number of companies which are or have been owned by the Irish Government, there is no requirement to have employee representatives on the boards of Irish companies. Senior executives and members of internal audit have a key role to play in the corporate governance of all Irish companies. It is also important for the directors of an Irish company to have a well-established chain of authority within the company so that they can discharge their fiduciary duties. While it has been promised, there is no whistle blowing legislation in respect of Irish incorporated companies.
5 TRANSPARENCY AND REPORTING
5.1 Who is responsible for disclosure and transparency?
The board as a whole has a statutory obligation to ensure that the company complies with its transparency and disclosure obligations set out in the Companies Acts, the Market Abuse Regulations and the Transparency Regulations. These obligations are less onerous for companies which are not listed on a regulated market. Both the annual report and the half yearly report to shareholders will contain a responsibility statement on behalf of all of the directors of the company confirming the company's compliance with its obligations under the Transparency Regulations.
5.2 What corporate governance related disclosures are required?
As regards financial reporting, all companies must prepare and publish annual accounts in accordance with the Companies Acts. In addition to the financial information required by Companies Acts, the annual report will contain a detailed narrative which describes the business of the company and its subsidiaries during the financial year.
The directors' report must contain the following information: a fair review of the development and performance of the company's business and of its position during the financial year together with a description of the principal risks and uncertainties that the company faces. This review must provide a balanced and understandable assessment of the company's position and prospects, as well aa providing a balanced and comprehensive analysis of the development and performance of the company's business and of its position consistent with the size and complexity of the business; and to the extent necessary for an understanding of the company's development, performance or position, the review shall include an analysis of financial, and, where appropriate, nonfinancial key performance indicators relevant to the particular business, including information relevant to environmental and employee matters. The financial key performance indicators are factors by reference to which the development, performance or position of the issuer's business can be measured effectively.
The report must also contain references to, and additional explanations of: amounts included in the company's annual financial statements, where appropriate; particulars of any important events affecting the company or any of its subsidiaries, if any, which have occurred since the financial year end; an indication of likely future developments in the business of the company; an indication of the activities, if any, of the company, in the field of research and development; and an indication of the existence of branches of the company outside the State and the country in which each such branch is located.
Furthermore, the board should, at least annually, conduct a review of the effectiveness of the company's system of internal controls and should report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance controls and risk management systems.
5.3 What is the role of audit and auditors in such disclosures?
A company must ensure that its auditors state in their annual audit report whether, in their opinion, the description, in the corporate governance statement, of the main features of the internal control and risk management systems of the company, in relation to the process for preparing the company's consolidated accounts is consistent with the consolidated accounts for that financial year. An auditor is required by law to report to the audit committee on key matters arising from the statutory audit, and, in particular, on material weaknesses in internal control in relation to the financial reporting process.
The Corporate Governance Code also requires the company to ensure that the auditors review a number of issues before the annual report is published. This review includes the statement by the directors that the business is a going concern, as well as the board's corporate governance report insofar as it relates to the duty of directors to explain in the annual report their responsibility for preparing the accounts.
5.4 What corporate governance information should be published on websites?
Under the Shareholder Rights Regulations, companies listed on a regulated market are required to provide a summary of the rights of shareholders in respect of voting and attending shareholder meetings, as well as their rights to propose resolutions and ask questions at the meeting.
Companies must also maintain on their website, for a period of 5 years, regulated disclosures which they may make from time-to-time.
As it is a requirement in the Corporate Governance Code, most companies also publish on their website the terms of reference of their nomination, remuneration and audit committees.
After any shareholder meeting, it is a legal requirement for a company listed on a regulated market to publish on its website the results of any voting conducted at the meeting. In addition to the above, companies will also voluntarily provide other information such as a copy of the articles of association of the company, as well as notices issued in respect of shareholder meetings.
Previously published by Global Legal Group Ltd
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