Contents
- Corporate Governance - Raising the Bar for Compliance on Two Fronts
- The Central Bank's Enforcement Directorate
- ISP records a hit in the High Court
- The Arbitration Act 2010
- The Akzo Nobel Case – Forgive Me Father!
Corporate Governance - Raising the Bar for
Compliance on Two Fronts
By Gerry Beausang
On 17 December 2010, the Irish Stock Exchange ('ISE') published new listing rules requiring all companies with a primary listing on the Main Securities Market of the ISE to comply with a new annex to the rules focussed on corporate governance matters (the 'ISE Annex'). This development follows the publication last year of the new UK Corporate Governance Code ('UK Code'). The UK Code has been incorporated into the ISE's listing rules. Gerry Beausang considers the implications of the heightened compliance standards on both fronts for ISE listed companies.
The UK Corporate Governance Code
In May 2010, the Financial Reporting Council in the United Kingdom published the UK Code, a document updating and amending the earlier Combined Code on Corporate Governance 2008 (the 'Combined Code'). The revisions to the Combined Code came about in the wake of economic decline since the last review which was finalised in 2007.
Some of the key changes contained in the UK Code are:
- Annual re-election of the members of the board of directors.
- External board evaluations at least once every three years. Any connection between the company and the body conducting the review must be disclosed.
- Ensuring the performance-related elements of executive directors' remuneration are designed to promote the company's long term success, while discouraging performance-related remuneration packages for non-executive directors.
The adoption of the UK Code is important, not only to provide for higher standards in corporate governance in Ireland, but also to boost international investor confidence in the Irish market. This is because the UK Code is internationally regarded as the pre-eminent corporate governance standard, a fact which the ISE has specifically acknowledged.
The ISE listing rules oblige every company listed on the Main Securities Market to state in its annual report whether it has complied with all of the provisions of the UK Code and to set out the nature, extent and reasons for non-compliance. In a veiled shot across the bows of listed companies, the ISE has stated that it feels that companies could do more to 'enhance the quality and meaningfulness' of their corporate governance disclosures in annual reports. Specifically, the practice of recycling descriptions that replicate the wording of the UK Code or the ISE Annex is now frowned upon. Companies should now aim to provide shareholders with more insight into the company and the environment in which it operates.
ISE Annex - Not Just 'Painting the Letterbox Green'
The ISE had issued a consultation paper in July 2010 regarding the proposed changes to the corporate governance elements of the ISE listing rules. Considering the feedback received, the ISE decided not to adopt a distinct Irish Corporate Governance Code. However, given the increased concentration in recent times on corporate governance in Ireland, it was felt that the recommendations contained in a joint ISE and Irish Association of Investment in Managers' report were a worthy addition to the corporate governance regime in Ireland. This report, which was released in March 2010, reviewed ISE listed companies levels of compliance with the Combined Code (as was then in force) (the 'Report'). The ISE Annex introduces nine recommendations in the Report which are mainly concerned with board composition, board evaluation, remuneration and the role of and work carried out by the audit committee. It also contains interpretive provisions for companies that are of equivalent size to companies that are included in the FTSE 100 and FTSE 350 indices.
The key proposals set out in the feedback statement which the ISE issued in September 2010 are generally mirrored in the ISE Annex. Several additional provisions have been included, however, concerning remuneration. Interestingly, companies are now required to describe any arrangements designed to achieve the recovery of variable compensation which has been awarded on the basis of assessments or data which are subsequently found to be materially inaccurate or provide an appropriate negative statement.
Practical Implications
ISE listed companies and their boards will now need to review the quality of their corporate governance disclosures in their annual reports, particularly with respect to the remuneration of corporate officers and the question of whether the current board is genuinely fit for purpose given its size and structure. It will be interesting to observe how this affects the Annual Reports of listed companies in the near future. The new ISE listing rules became effective for all relevant companies with accounting periods commencing on or after 18 December 2010. The requirement to comply with the UK Code is already in place and applies to the relevant companies with accounting periods beginning on or after 30 September 2010.
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The Central Bank's Enforcement Directorate
– Taking a Tough Line
By Declan Sheehan
The Central Bank's increased appetite to take enforcement action is examined by Declan Sheehan, who recently joined us from the Enforcement Division of the UK's Financial Services Authority (the 'FSA').
Following last December's headline fines of €2,000,000 and €100,000 respectively imposed upon AIB and NCB Stockbrokers, regulated firms will be looking closely at the newly formed Enforcement Directorate of the Central Bank (the 'Bank').
Administrative Sanctions Procedure
The Bank's 'administrative sanctions procedure' outlines the method by which enforcement action is usually taken arising from a suspected breach of any law or requirement coming within its remit.
Should an initial examination confirm that the suspicion of a contravention is reasonably held, the Bank may hold a formal public hearing called an 'inquiry'. Its purpose is to determine whether a breach has occurred and decide upon the appropriate sanction(s). The matter is appealable to the Financial Services Appeals Tribunal and to the High Court.
No enforcement cases have been contested yet in Ireland, with regulated firms seemingly willing to take their medicine. This is unlikely to remain the case.
Fines
The Bank may only impose a fine of up to €5,000,000 (or €500,000 in the case of a natural person).
The FSA, in contrast, is not bound by any such limits. Last year, it levelled fines totalling £89 million in comparison with €2.2 million imposed in Ireland.
Unsurprisingly, therefore, the Bank is seeking to double its maximum fine levels to €10,000,000 (or 10% of turnover (whichever is the highest)) for firms and to €1,000,000 for natural persons.
The FSA found it necessary, in response to stakeholders' views that fines were being inconsistently applied and unclearly calculated, to introduce a transparent new framework for deciding upon fines. The Bank may find itself under similar pressure to articulate its own framework for determining financial penalties.
Settlement
In recognition of the advantages that result from early settlement, the FSA operates a formal settlement discount system. A discount of up to 30% will be given, depending on how early settlement is reached.
The Bank does not operate any equivalent formal discount system. In the absence of specific incentives for early settlement, it is debatable whether regulated persons in Ireland have much to gain by settling early.
Moreover, the Bank has said that it only envisages facilitating one settlement meeting in each case, which would appear to exclude the possibility of mediation to help negotiate an agreed settlement. In contrast, the FSA is committed to using mediation, unless urgent action is required or criminal conduct is alleged.
Skilled persons reports
The FSA frequently uses its power to require a firm to appoint 'skilled persons' to examine and report on matters in respect of which expert analysis is needed. The costs of such reports are significant and must be borne by the firm.
The Central Bank has sought an extension of its powers so that it too may require the production of 'skilled persons reports'.
Prevention better than cure
Firms ought to ensure that their compliance procedures stand up to scrutiny and proactively attempt to resolve any concerns. If any issues arise, firms should obtain advice early on, given the considerable reputational damage and penalties that formal enforcement action can bring.
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ISP Records a Hit in the High Street
By Kate Colleary
The Commercial Division of the High Court recently refused to grant an injunction to EMI and other record companies against UPC, an Internet Service Provider (ISP). Kate Colleary examines the decision and its consequences.
The record companies involved sought an order forcing UPC to implement measures to prevent copyright infringement on its broadband facilities and to block user access to 'The Pirate Bay', a popular file-sharing website. Although Mr. Justice Charleton believed that this type of order would be just and proportionate in the circumstances he found that the court lacked the jurisdiction to make it.
The court was presented with evidence of various preventative solutions which are available and which are used in other countries, including a graduated response system involving 'detection, notification and termination'. Under this system, persistent copyright infringers would have their internet access terminated using 'a three strike' policy.
The court was also told that following legislative developments in other countries, including the UK, USA and France a graduated response system now operated successfully. Mr. Justice Charleton noted the different legislative approaches in those countries but held that they merely reinforced his view that the remedies sought in this case were not available under the Irish Copyright and Related Rights Act 2000 (the 'Copyright Act').
The record companies sought to rely on Section 40(4), which essentially makes ISPs liable for copyright infringement if they fail to operate a notice and takedown policy. It provides that where an ISP 'is notified by the owner of the copyright in the work concerned that those facilities are being used to infringe the copyright in that work and that person fails to remove that infringing material as soon as practicable thereafter that person shall also be liable for the infringement'.
Mr. Justice Charleton found that UPC's customers were using its broadband facilities to download pirated music. He said that he was 'satisfied that the business of the recording companies is being devastated by internet piracy... This not only undermines their business but ruins the ability of a generation of creative people in Ireland, and elsewhere, to establish a viable living... It is destructive of an important native industry'. However, he found that the legislative basis enabling him grant the relief sought does not exist in Irish law as it exists in other European jurisdictions.
He found that section 40(4) granted the Court powers where an ISP hosted copyright material but did not deal with a situation where an ISP merely permitted the transit of such material.
Mr. Justice Charleton concluded that while effective solutions to the problem of internet copyright piracy are in use in other countries the only relevant power that the courts have here is to require an ISP to remove copyright material. The court could not grant injunctive relief to the recording companies, even though the relief was justified on the facts. He ended his judgment with a call to the legislature to address the issue of internet copyright piracy.
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The Arbitration Act 2010 - A Significant
Reform
By Ronan McGoldrick
The Arbitration Act 2010 (the 'Act') came into effect on 8 June last year. It applies to all arbitrations beginning on or after that date. Ronan McGoldrick outlines the Act's key features. The Act replaces the Arbitration Acts 1954 to 1998 and adopts the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. The UNCITRAL Model Law represents a global consensus on principles to be applied in respect of international arbitration.
While the Act applies to both international and domestic arbitration agreements it will be of particular benefit to parties involved in international arbitration and one of the primary goals of the legislation was to make Ireland a more attractive jurisdiction for parties seeking a location in which to arbitrate their dispute. Some of the more interesting features of the Act are:
- Parties to an arbitration dispute are now able to agree a great deal of matters between themselves, including matters relating to procedure and to the powers that can be given to an Arbitrator (or Arbitral Tribunal).
- Arbitrators have the power to make such awards on costs as they see fit in circumstances where there is no express agreement between the parties on costs.
- The Act distinguishes between international commercial arbitrations and domestic arbitrations in relation to the issue of costs. While domestic arbitrations can still be referred to the Taxing Master of the High Court on the issue of costs, this does not apply to international commercial arbitrations.
- Arbitrators now have the power to award interest and security for costs. However, security for costs will not necessarily be granted or denied on the same terms as would apply under civil procedure in the Courts.
- Arbitrators are also empowered to make an award requiring specific performance (unless otherwise agreed between the parties). However, arbitrators may not make an order for specific performance in relation to 'a contract for the sale of land'.
- Arbitrators are required to give written reasoned awards unless it is specifically agreed by the parties that they are not to do so. In addition, the parties to a dispute may now agree in advance how the costs of the arbitration are to be apportioned.
- Arbitrators are immune from suit. The Act provides that the Arbitrators will no longer be liable in any proceedings for anything done or not done by them in the discharge of their duties. This immunity applies equally to any experts appointed by the tribunal and to institutions designated or requested by the parties to appoint an Arbitrator.
- The Act provides that consumer claims for less than €5,000 can be excused from arbitration. Similarly, where consumers have not expressly negotiated the individual requirement to submit to arbitration, the arbitration requirement can be set aside.
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The Akzo Nobel Case - Forgive me
Father!
By Sean Ryan
Following the judgement of the European Court of Justice in Akzo Nobel v Commission, parent companies can expect to be held jointly and severally liable for any infringements of EU competition law committed by their subsidiaries.
The Akzo Nobel case established that a 100% shareholding owned directly or indirectly by a parent company in a subsidiary is sufficient to create a presumption that the parent company exercises decisive influence over the commercial policy of that subsidiary, and so can be held liable for any infringement(s) committed by that subsidiary.
The concept that a parent company and its wholly owned subsidiaries (even if they have distinct legal personalities) are considered a form of single economic unit is used by the European Commission in taking a tough stance on hard core infringements of EU competition law – and to direct fines at the highest level of a corporate group. In the Akzo Nobel case (which involved a cartel), even though the infringements were committed by four distinct subsidiaries, the Commission was able to hold the parent company liable for these infringements and take account of the worldwide consolidated turnover of the entire Akzo Nobel group in imposing a fine of over €20m.
This approach takes account of the economic reality of such groups (where large undertakings operate on the market through subsidiaries) and sends a strong signal to the business community. By imposing fines at the highest level of the corporate group, the potential liability increases significantly.
The fact that a parent company and its subsidiaries constitute a single entity under EU competition law allows the Commission to fine the parent company even though the parent company might not have committed any infringement itself. To prevent this from happening, it will be up to the parent company to demonstrate the subsidiary's autonomy. That the subsidiary has the power to take day-to-day pricing / production decisions and so forth will not be sufficient – what matters here is the overall distribution of responsibilities within the group and the financial and legal links between the parent and the subsidiary. The crucial factor will be whether the parent company by reason of the intensity of its influence can direct the conduct of its subsidiary to such an extent that the two must be regarded as an economic unit.
In light of the recent Akzo Nobel judgement, and given the potential to be held liable for the infringements of a subsidiary, it is very important that a parent company put an effective competition compliance / corporate governance structure in place throughout its entire group. Sean Ryan examines how a parent company can be held liable for the anti-competitive sins of its subsidiary.
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Signature of Auditors' Report
New requirements in relation to the signature and dating of auditors' reports were introduced by the Statutory Audit Directive in 2010. The Companies Registration Office has indicated that the new requirements will be rigorously enforced with immediate effect.
Previously it was sufficient for the audit firm to print their firm name in auditors' report. In respect of accounting periods commencing on or after 20 May 2010, auditors' reports are now required to contain the name as well as the signature of the individual auditor primarily responsible for carrying out the statutory audit. The signature on the audit report is required to be the individual auditor's own name for and on behalf of the audit firm. The signature is also required to be dated.
For further information, contact Anne Murphy in our Company Secretarial Department by email: akmurphy@eversheds.ie
Disclaimer
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