Corporate governance and directors' duties in the UK (England and Wales): overview
A Q&A guide to corporate governance law in the UK (England and Wales).
The Q&A gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors’ duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals.
To compare answers across multiple jurisdictions, visit the Corporate Governance Country Q&A tool.
The Q&A is part of the PLC multi-jurisdictional guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corpgov-mjg
Limited liability companies are the most popular form of corporate entity in the UK, sub-categorised as companies where the liability of members is limited by shares or limited by guarantee, and also as public or private companies.
In a company limited by shares, the liability of members is limited to any amount unpaid on the issued shares. In a company limited by guarantee, the liability of members is limited to the amount they have undertaken to pay if the company is wound up. A company limited by guarantee cannot be a public company (with very limited exceptions).
It is more common for companies to be limited by shares than by guarantee.
A private company can also be unlimited, where there is no limit on the members' liability, although these are rare (0.2% of companies in 2010/2011).
A private company is any company that is not a public company. The name must end with "Limited" or "Ltd" (unless it is not-for-profit).
There are two major differences between public and private companies. A public company can offer its securities to the public and must have a minimum nominal value of GB£50,000 or Euro equivalent of allotted share capital. Therefore, only public companies can be listed or traded. Public companies are subject to various restrictions and formalities not applicable to private companies. The name must end with "Public Limited Company" or "plc".
The vast majority of UK companies are private. Public companies comprise only 0.3% of all active companies, but account for most of the value and economic activity.
All UK companies are subject to the Companies Act 2006 (Companies Act) and related regulations, which set out rules governing companies. The Companies Act requires each company to have articles of association and addresses other fundamental aspects of corporate governance. In many cases, the provisions of the Companies Act can be supplemented and in some instances contradicted in the articles.
The articles govern the internal management of a company and are a contract between the company and its shareholders. Model forms of articles are set out in regulations, which apply to newly incorporated companies unless modified or replaced by alternative articles.
All companies must make specified filings with the UK Registrar of Companies.
Major UK listed public companies are also subject to the Disclosure and Transparency Rules (DTRs) and Listing Rules (Listing Rules), regulated by the Financial Services Authority (FSA) and subject to the UK Corporate Governance Code (Governance Code) (see Question 3). The Takeover Code regulates acquisitions of public and/or UK listed companies and certain other companies that have been traded.
Except for the Governance Code, the above rules are all mandatory in the cases where they apply.
The general duties applicable to directors of all companies are set out in the Companies Act (see Question 16). The Companies Act also imposes specific obligations on directors. In addition, certain common law duties were not subsumed by the statutory duties.
The Financial Reporting Council publishes the Governance Code.
Its headings are Leadership, Effectiveness, Accountability, Remuneration, and Relations with Shareholders. Its content addresses:
The role of the board, chairman (as against the CEO) and non-executive directors.
Composition, appointments, training and performance of the board.
Risk management and financial audit/accountability.
Disclosure of corporate governance arrangements.
In each area, the Governance Code is structured as Main Principles with Supporting Principles and more specific Code Provisions. The Financial Reporting Council also publishes various pieces of guidance on how to apply the Governance Code.
All UK companies with a "Premium Listing" on the London Stock Exchange must report on how they have applied the Governance Code in their annual report. Certain provisions do not apply to companies smaller than the largest 350 companies in the FTSE share index (FTSE 350). Other listed companies can voluntarily adopt some or all of the Governance Code provisions as a mark of best practice.
The Listing Rules require listed companies to state how they have applied the Main Principles. They must also state that they have complied with the Code's provisions or explain where they have not. Deviations may result in shareholder pressure if they are seen as inappropriate. A failure to make the required statements would be a breach of the Listing Rules and may lead to FSA disciplinary action.
The Financial Reporting Council believes the "comply or explain" approach has general support.
Board composition and remuneration of directors
UK companies have a unitary board structure. Directors may be executives (employees) or non-executives. The Companies Act treats all directors as having the same obligations. All directors are equal and operate as a board, unless acting with delegated authority. The identity of directors usually depends on the type of company:
For non-listed companies directorships typically reflect the ownership of shares but they can have non-executive, unconnected directors.
For listed companies, the board will comprise some directors that have employment and/or ownership connections to the company and some that are independent (see Question 6).
The articles of most companies contain a provision stating that directors are responsible for the management of the company, for which purpose they may exercise all the powers of the company. The full board has responsibility for management (see Question 15). Senior executives are responsible for managing day-to-day operations.
The directors of a company comprise its board. One director is elected chairman, with the particular powers set out in the articles, in particular whether he has a casting vote on board decisions.
Employees do not have any right to board representation.
Number of directors or members
A private company must have at least one director; a public company at least two. A company's articles may increase the minimum number and may also set a maximum. Every company must have at least one individual as a director. Subject to that, a director does not have to be an individual.
A director must be aged at least 16. No maximum age limit is imposed by law but the articles can impose a limit.
There are no nationality restrictions for directors of UK companies but the articles may impose restrictions, for example to achieve a tax objective.
There are no mandatory gender quotas.
For many listed companies, the Governance Code states that director appointments should be made with regard for the benefits of diversity, including gender. For financial years starting on or after 1 October 2012, the Governance Code requires companies to publish and report against their policy on boardroom diversity.
UK company law does not recognise the difference between different types of directors. However, for many listed companies the Governance Code does recognise a difference and places great reliance on the separate role of independent, non-executive directors.
There is no restriction on board composition for unlisted companies. A Governance Code Provision recommends that FTSE 350 companies have at least as many independent non-executive directors as executive directors (not counting the chairman). The Governance Code recommends that other listed companies have at least two independent non-executive directors.
The Governance Code states the board as a whole should decide whether a non-executive director is independent. The Governance Code indicates that a director's independence could potentially be affected by having links to the company or its advisers or employees, such as from employment, business dealings, remuneration (other than directors' fees), family, shareholder representation or long-term service as a director. If the board determines that a director is independent notwithstanding the above (or other relevant circumstances), it should state its reasons in the annual report.
Duties and liabilities
All directors have the same duties and liabilities (see Question 16).
UK company law does not restrict the roles of the individual directors. No individual director has implied authority to act on behalf of the whole board or the company (see Question 15).
For many listed companies, the Governance Code provides guidance. A Main Principle recommends a clear division of responsibilities at the head of the company between running the board and executive responsibility for running the company's business, with no individual having unfettered powers of decision. The related Code Provision provides that the chairman and chief executive should be different people.
Appointment of directors
Provisions are usually included in a company's articles and/or any shareholders' agreement for appointment of directors. Articles frequently specify that directors may be appointed either by shareholder ordinary resolution or board decision. The Companies Act imposes requirements for directorship of companies and includes provisions enabling shareholders to propose a resolution to appoint a director but it confers no specific right of appointment.
The Governance Code requires that many listed companies appoint a nomination committee to lead the process and make recommendations for board appointments.
Removal of directors
Under the Companies Act, shareholders can remove a director by ordinary resolution although special notice (28 days) is required and the director is entitled to speak in his defence. A company's articles may stipulate more straightforward means of removal.
While the power to remove directors cannot be excluded, the Companies Act does not prevent the articles from granting enhanced voting rights to a director entitling him to defeat resolutions proposed to remove him.
The Companies Act is silent on a director's term of appointment. Instead, it is usual for restrictive provisions, such as retirement by rotation, to be included in a company's articles.
Retirement by rotation provisions are less common in private company articles. However, larger companies typically include provisions which require board appointments to be approved by shareholders at the first annual general meeting (AGM) following the appointment and enable shareholders to vote on the directors' re-election when they retire by rotation, commonly every three years.
Many listed companies are subject to the Governance Code's provisions, which specify that all directors of FTSE 350 companies should be subject to annual re-election by shareholders and that directors of listed companies outside the FTSE 350 should be submitted for re-election at the first AGM after their appointment and at least every three years thereafter.
Directors employed by the company
There is no statutory requirement for directors to be employees of the company.
The Companies Act requires that a company keep copies of every director's service contract (or, if no written contract, a memorandum of the terms) available for inspection by shareholders without charge.
The Governance Code, applicable to many listed companies (see Question 3), states that the terms of appointment of non-executive directors should be available for inspection at the company's registered office and for 15 minutes before and during each AGM.
Determination of directors' remuneration
The remuneration of directors is typically determined by the board (a director cannot vote on his own remuneration), subject to any limits in the articles.
For many listed companies, the Governance Code requires the establishment of a remuneration committee with delegated responsibility for determining remuneration for executive directors and the chairman. The remuneration for non-executive directors should be fixed by the whole board.
The Governance Code and various best practice guidelines suggest that remuneration policies should include challenging performance based criteria that promote the success of companies in creating long term shareholder value.
All UK companies (other than those categorised as being "small") must disclose information on directors' remuneration in their annual report and accounts. (Subject to certain exclusions, a "small" company is one that meets two of the following three criteria: turnover less than GB£6.5 million, a balance sheet total less than GB£3.26 million and/or less than 50 employees.)
In addition, listed companies must publish a report on directors' remuneration, which must be available to their members.
Shareholder approval is only required for a "quoted" company (being those listed on the NYSE or Nasdaq, officially listed in an EEA state or on the official list of the London Stock Exchange, which excludes AIM), which must propose a resolution to approve the directors' remuneration report at its AGM. Failing to pass the resolution has no effect on the report or the remuneration.
Management rules and authority
Internal management is principally governed by a company's articles. Additional provisions may be contained within any shareholders' agreement. With the exception of certain statutory requirements, a company is free to determine its internal management.
Subject to any specific requirement in a company's articles and/or any shareholders' agreement, a board meeting may be called with reasonable (in the circumstances) notice, which need not be written.
The quorum for a board meeting may be determined by the board. The Model Articles prescribes that the quorum is two directors unless otherwise fixed. For single director private companies the quorum is one. Where the articles are silent, a majority of directors constitutes a quorum unless the board's normal practice is different.
It is commonplace for the articles to permit directors to appoint alternates. An alternate director is a director as a matter of law and, subject to anything contrary in the articles or any shareholders' agreement, would count towards the quorum.
Unless otherwise provided for in a company's articles, any shareholders' agreement or board resolutions, a board resolution requires the support of the majority of the board attending at a quorate meeting.
When permitted by the articles, directors may pass resolutions in writing without a board meeting if the requisite number of directors approve the resolution.
Directors exercise all the powers of the company save those required by statute to be resolved upon by members. Shareholder resolutions and the articles may further restrict directors' powers, as may any shareholders' agreement and a director's service contract. For listed companies, the Listing Rules and AIM Rules each require shareholder consent for certain transactions. The directors will in any event seek shareholder approval for substantial, non-ordinary course matters.
The UK does not operate a two tiered-board structure; consequently, powers cannot be reserved to a supervisory board.
Third parties who deal with directors acting in breach of restrictions are protected by the Companies Act, which deems that the power of the directors to bind their company is free of any limitation under the company's constitution. The constitution is deemed to include restrictions from a shareholders' agreement or from a resolution of the company or of any class of shareholders.
A board can delegate responsibilities to a committee or individuals if delegation is reasonable and the delegate can reasonably be relied upon. However, the board cannot delegate its ultimate responsibility. The delegation may relate to a specific matter or be general in respect of a particular aspect of business.
It is recognised that some matters are better dealt with by committees. For many listed companies, the Governance Code requires audit, nominations and remuneration committees. Conversely, the Governance Code also requires many listed companies to produce a schedule of matters reserved for the approval of the main board.
Duties and liabilities of directors
Although directors' general duties are now found in sections 171 to 177 of the Companies Act, they originate from common law, which must still be considered when interpreting and applying these duties. They can be summarised as follows:
To act in accordance with the company's constitution and only exercise powers for the purpose conferred.
To act in a way most likely to promote the success of the company for the benefit of shareholders as a whole.
To exercise independent judgement.
To exercise reasonable care, skill and diligence.
To avoid a situation in which the director has, or could have, a direct or indirect interest that conflicts or possibly may conflict with the interests of the company.
Not to accept benefits from a third party.
To declare a direct or indirect interest in a transaction or arrangement with the company that is proposed or has already been entered into.
Additional duties are imposed by the Companies Act and other duties remain uncodified (such as the duty of confidentiality). Directors of listed companies must also consider a variety of regulatory requirements, such as the Listing Rules, Takeover Code, DTRs, Governance Code and/or AIM Rules.
Except in special circumstances, directors' duties are owed to the company and not to the company's shareholders or third parties. This principle is largely reflected in the Companies Act. A special circumstance would include, for example, during a takeover offer when directors are required to provide their views to shareholders and in doing so, incur direct obligations.
If a director breaches his duty, the company may ratify the breach or bring a claim against the director for damages.
Theft and fraud
A company cannot itself commit theft but may commit fraud under the Fraud Act 2006, in which case any director who consented to or connived in the act will also have committed the offence. If the business of a company is carried on with the intent to defraud creditors, every person who was knowingly party to the fraud will have committed an offence.
Directors will commit a criminal offence if they knowingly or recklessly make a materially misleading, false or deceptive statement, promise or forecast to induce a person to buy or sell shares. There are further offences of market manipulation and market abuse.
A director can be liable to make good creditor losses if he allows a company to continue trading when he knew or ought to have concluded that it had no reasonable prospect of avoiding insolvent liquidation. Such a claim may be brought by the company's liquidator and not directly by creditors.
A director may be disqualified from acting as a director for a maximum of fifteen years for fraud in connection with the winding up of a company.
Directors may also be sued by their company for misfeasance, that is, the misapplication or retention of the company's assets or a breach of a fiduciary or other duty. In addition, if a company goes into liquidation or administration, a court may set aside a gift made by the company or a transaction entered into at a significant undervalue and require a director to pay the difference.
Health and safety
UK companies have duties to ensure the health, safety and welfare of their employees, customers and third parties. If a company commits a health and safety offence, an individual director may be criminally liable if the offence was committed with his consent or connivance (that is, he was aware of the circumstances but turned a blind eye), or attributable to his neglect.
There are multifarious environmental offences that a company can commit, particularly in relation to pollution and waste disposal. A director may be liable where an offence is committed with the director's consent, connivance or neglect.
Directors can be personally liable for serious breaches of EU and UK competition law. It is a criminal offence for an individual dishonestly to agree to enter into certain anti-competitive agreements, including direct or indirect price fixing, limiting of production or supply and market sharing or bid-rigging arrangements. A director may face disqualification from acting as a director for up to fifteen years.
Information security is the responsibility of the board of directors and it should be an integral and transparent part of a company's governance and risk management.
Under the Data Protection Act 1998 (DPA), a director may be liable for recklessly disclosing personal data. There may also be consequences for a data controller (an individual or company that determines the process and means for processing personal data): the DPA requires the data controller to implement appropriate technical and organisational security measures against unauthorised or unlawful processing (such as by hackers), accidental loss, destruction or damage of personal data. A director may also be liable where a data protection offence is committed by a company with the director's consent, connivance or neglect.
The Bribery Act 2010 creates criminal offences for a company of bribing another person, accepting a bribe and bribing a foreign public official. It is a defence for a company to show that it had in place adequate procedures designed to prevent bribery. Directors of a company may also be guilty where the company's offence was committed with their consent or connivance.
The Pensions Act 2004 includes provisions that could make a director personally liable for a pension scheme deficit.
The Company Directors Disqualification Act 1986 provides that a director can be disqualified for a variety of offences, including persistent breaches of companies legislation.
A UK company cannot exempt a director from liability to the company for breach of duty, negligence or other default, although shareholders may ratify such a breach.
The scope for a company to indemnify its directors is limited to:
The director's legal costs, and any court award against the director, in civil claims brought by a third party, even where the director loses.
The director's costs in fighting civil proceedings brought by a regulator.
The director's legal costs in criminal proceedings in which he is acquitted.
An indemnity cannot cover the following:
Any liability the director has to the company itself.
Legal costs in civil cases brought by the company where the final judgment goes against the director.
Liability for fines for criminal conduct and civil fines imposed by a regulator.
Legal costs in criminal proceedings where the director is convicted.
Insurance is permitted but subject to limitations both as a result of deductibles and limits on cover and the practical delays in approving a claim.
A company can both:
Provide an infrastructure to cope with claims at corporate expense.
Provide information and other support.
The risk of ultimate liability can also be ameliorated by procedural standards and reliance on expert advice, both encouraged by the Governance Code.
The Companies Act contains no clear definition of the term "director", merely stating that it includes "any person occupying the position of a director, by whatever name called". The fundamental determinant of a director is not whether he has been duly appointed but whether he assumes the status and functions of a director.
A de facto director is someone who acts as a director without having been duly appointed or who continues to act after his appointment has ceased. The general duties of directors are owed by a de facto director in the same way as a properly appointed director.
A shadow director is different and is "a person in accordance with whose directions or instructions the directors of the company are accustomed to act". The definition excludes a parent company (but not a dominant individual at a parent company). A shadow director has some, but not all, of the responsibilities of board members.
Transactions with directors and conflicts
A director is a fiduciary of the company, with a common law duty of confidentiality to the company. It is not uncommon for the articles to address information flows regarding other directorships. Directors also have a statutory duty to act to promote the success of the company for the benefit of its members as a whole.
There are two specific statutory duties regarding conflicts.
The first is a duty to avoid a situation in which he can have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. A company's articles can make provision to deal with such conflicts, compliance with which precludes a breach of duty.
The duty is also not infringed if the particular conflict has been authorised. For a private company, authorisation can be given by other non-interested directors, unless the articles prohibit this. For a company existing before October 2008, this power can only be used if the members have so resolved. For a public company, authorisation must be permitted by the articles and then given by the non-interested directors.
The second duty requires any direct or indirect interest in a transaction or arrangement with the company to be declared. Provided a director has declared such interests he may, subject to the articles, participate in decision-taking relating to such a transaction.
For public and private companies, the duties above have effect subject to any authorisation given by shareholders.
There are restrictions on the following types of transactions between a company and its directors:
Payments to a director for loss of office or as consideration for retiring.
Contracts between a company and its sole member who is a director or shadow director.
Transfers of non-cash assets above a set value to or from a director (or connected persons).
Loans from companies to directors or similar transactions. There are additional restrictions for public companies or associated companies relating to quasi loans, credit transactions and loans to persons connected with a director.
Transactions and arrangements between a listed company or any of its subsidiary undertakings and certain group directors or their associates (or other persons if the purpose and effect is to benefit a director or associate).
A director of an unlisted company is not restricted at law from dealing in shares in that company, although restrictions could be imposed in any shareholders' agreement or the articles.
For listed securities, there are various restrictions.
Insider dealing is a crime. It applies where a director has inside information and he deals on certain markets or through an intermediary in securities whose price would be significantly affected by that information. Inside information is precise, non-public information regarding particular securities or companies that would be likely to have a significant effect on the price of any securities.
There is also a civil market abuse regime, which prohibits directors from insider dealing and other activities to manipulate the market or which fall below generally accepted standards. The definition of inside information for this regime is subtly different to the criminal regime, although the constituent elements are broadly the same.
The Listing Rules contain the Model Code on share dealing. This is mandatory for companies with a premium listing and is often adopted for companies with a standard listing or AIM listing. The Model Code and the AIM Rules prohibit dealings while inside information exists and also during a "close period", being roughly the period between the end of a financial year (or, where applicable, half year or quarter) and announcing the results for the relevant reporting period, subject to specified maximum timeframes for "close periods".
Under the Model Code, a director must seek clearance before any dealing. In addition to the restrictions above, clearance will not be given for a dealing with a maturity of one year or less. There are various exceptions to the Model Code.
The Takeover Code may apply further restrictions in the context of an offer for the company or other regulated transaction.
Disclosure of information
There are various disclosure requirements within the Companies Act, including:
The public's right to inspect the register of members.
A member's right to receive notice of general meetings, inspect records of resolutions and meetings and receive annual reports and accounts.
For listed companies, the Listing Rules and DTRs impose additional disclosure obligations. Indeed, one of the six listing principles for a premium listed company states that, "a listed company must communicate information to holders and potential holders of its listed equity shares in such a way as to avoid the creation or continuation of a false market in such listed equity shares". This principle is reflected in more detail in the DTRs which require a company to notify the market of any inside information concerning the company. There are similar obligations in the AIM Rules.
If a director is "knowingly concerned" in a breach of the Listing Rules or DTRs, the FSA can censure or fine the director.
A public company must hold an annual general meeting (AGM) within six months of its financial year end. Listed companies must make public their annual report and accounts within four months of the year end and usually call an AGM in that period.
The Companies Act does not require a private company to hold an AGM (although its articles may require it to) unless it is a "traded company" (those with shares admitted to trading on certain public markets in an EEA state with the company's consent). A traded company must hold an AGM within nine months of its financial year end.
The Companies Act requires the directors of a public company to put before a general meeting copies of its annual accounts and reports. This is usually done at the AGM. At this meeting, "quoted companies" (see Question 12) must propose a non-binding resolution on the directors' remuneration report. There is no statutory requirement for shareholders to approve the accounts but usually a resolution is proposed for them to be received and, for listed companies, this is recommended by the Governance Code.
AGM's commonly also address declaring dividends, auditors, director appointments, and, within limits, authorisations for issuing new shares and share buybacks.
The directors must call a general meeting if required by members representing at least 5% of the paid-up voting capital of the company (or 5% of the voting rights, if the company is limited by guarantee). A request must state the general nature of business to be dealt with and the text of any resolution that the members propose. The directors must call such a meeting within 21 days of request, to be held within 28 days of notice of the meeting. If the directors fail to call the meeting, the shareholders can do so at the company's expense.
For public companies, resolutions can be proposed by members for the AGM. For certain traded private companies, members can require a "matter" (other than a resolution) to be included in the business of the meeting. The level of shareholder support needed for both actions is the same as that noted in the following paragraph.
Members can also require the company to circulate a short statement on any business to be dealt with at a general meeting. The request must be submitted by either 100 members holding shares on which an average GB£100 per member is paid or members holding 5% of total voting rights.
Minority shareholder action
Any shareholder can take a derivative claim in the name of the company for a wrong done to the company, to obtain relief on behalf of the company. Such a claim can only be for negligence, default, breach of duty or breach of trust of a director. The director need not have benefited personally for a claim to be taken. The shareholder must file evidence establishing the basis for a claim and obtain the court's permission to continue. The court will not give permission if the impugned action has been or is likely to be authorised by a majority of independent shareholders.
Any shareholder can apply to court if the company's affairs are being conducted in a manner that is unfairly prejudicial to some or all of the shareholders including the applicant. If the claim is proved, the court may make such order as it thinks fit. The type of order could include, but is not limited to, an order regulating the future conduct of the company or, most commonly, providing for the sale or purchase of shares by the complainant. In contrast to a derivative action, an unfair prejudice action is designed to compensate the aggrieved shareholder.
Internal controls, accounts and audit
The requirement to manage business risks and implement appropriate internal controls is implicit in the Companies Act requirement that directors promote the success of their company and exercise reasonable care, skill and diligence.
For many listed companies, a Main Principle of the Governance Code applies, stating: "the board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems". The Financial Reporting Council's publications Internal Control: Guidance to directors and Going Concern and Liquidity Risk: Guidance for Directors of UK Companies provide further assistance on this area.
There are various requirements for disclosures in a company's report and accounts to show how the directors are meeting their responsibilities on risk and internal controls.
Directors have responsibilities to prepare, approve and file accounts that give a true and fair view of the affairs of the company. Directors of listed companies are required to explain these responsibilities in a statement in the annual accounts. For many listed companies, the Governance Code requires a statement that the annual report and accounts are fair, balanced and understandable and provide the information necessary for shareholders to assess the company.
If the accounts do not comply with the Companies Act and related regulations, every director who knew of the failure, or was reckless about it, and who failed to take reasonable steps to ensure compliance, commits an offence.
A director may be liable for misstatements in the company's accounts but liability for investment decisions made in reliance on the accounts is difficult to establish. Following the decision in Caparo Industries plc v Dickman  UKHL 2 (Caparo), directors are unlikely to be liable for negligent misstatement as there is no general duty of care owed to shareholders.
The Financial Services and Markets Act 2000 creates a liability on listed issuers for fraudulent or reckless misstatements or omissions amounting to a dishonest concealment of a material fact.
A company's annual accounts must be audited except in three cases, namely where:
The company is "small" for the year concerned (see Question 12). Public companies and a number of other entities are excluded from this exemption.
The company is dormant for the year, that is, it had no accounting transaction required to be entered in its accounting records.
The company is a subsidiary company that fulfils certain criteria, including obtaining unanimous shareholder approval and a parent company guarantee of all its liabilities.
In each case, shareholders with at least 10% in nominal value of the company's shares can nonetheless require an audit.
The auditor of a private company is appointed by the shareholders. Directors can appoint the auditor any time before the first accounts meeting, after a period of exemption or to fill a vacancy.
An auditor's term of office will usually run from the end of the 28 day period following circulation of the company's accounts until the end of the corresponding period in the next financial year. If no new auditor has been appointed, the auditor in office will be deemed to be re-appointed unless he was appointed by the directors, the members or directors have decided against re-appointment, or the articles require actual re-appointment.
The auditor of a public company is appointed by the shareholders at the general meeting at which the annual accounts are laid. There is no deemed re-appointment for auditors of public companies.
FTSE 350 companies should put the external audit contract out to tender at least every ten years (Governance Code). As this provision is to apply to financial years starting on or after 1 October 2012, there are transitional arrangements in place to avoid disruption to the audit market.
The auditors of a company must be statutory auditors under the Companies Act. This means that they must be members of a recognised supervisory body and be eligible for appointment under the rules of that body, as well as being appropriately qualified.
An auditor cannot be an officer or employee of the company being audited or of an associated undertaking, nor a partner or employee of such a person.
There are no statutory restrictions but professional rules and guidelines impose some constraints on other work that auditors can do for a company (see Auditing Practice Boards Ethical Standard 5 (Revised)).
Investors in listed companies are often wary of auditors carrying out such work and the Governance Code requires:
An audit committee to decide what work is permitted and what is not.
An explanation in the company's annual report as to how auditor objectivity and independence is safeguarded.
An auditor commits a criminal offence if he knowingly or recklessly allows an audit report to include anything that is materially misleading, false or deceptive or omit certain required statements. The auditors also have a liability to the company if their work is negligent or if they breach the terms of their engagement letter.
Following the decision in Caparo, it is difficult to establish a duty of care to shareholders and third parties (see Question 28).
The Companies Act makes it possible for auditors to limit their liability by agreement with the company providing the agreement is fair and reasonable. However, few companies have entered into such agreements given the tension with conflicting directors' duties.
Corporate social responsibility
All companies, except "small" companies (see Question 12), must produce a business review in their directors' report. This must include the following information to the extent necessary to understand business performance: except for medium-sized companies, it must analyse non-financial key performance indicators, where appropriate, including information on environmental and employee matters. For "quoted" companies (see Question 12), it must include information on environmental, employee, social and community matters and related policies.
Businesses in particular sectors or with certain permits may have further environmental reporting obligations. Various voluntary environmental reporting guidelines also exist.
The Governance Code requires many listed companies to state the company's values and standards and ensure that its obligations to shareholders and others are understood and met.
There are many bodies that publish reporting guidelines that touch on corporate social responsibility, such as the Accounting Standards Board, the Association of British Insurers (ABI) and the Pensions and Investment Research Consultants (PIRC) (an independent advisory consultancy).
There is a wide spectrum of practice for corporate social responsibility reporting, which is seen as more relevant for larger companies. Almost every FTSE 100 company reports on corporate social responsibility in some form.
The government has consulted on draft regulations to impose a duty on "quoted" companies to report on greenhouse gas emissions. The consultation period closed on 17 October 2012 and the draft regulation is now being finalised.
Private companies are no longer required to have a secretary, although this may be required by the articles. Public companies must have a company secretary.
The secretary is an officer and an authorised signatory of the company for the purposes of the Companies Act and is permitted to sign most of the forms to be filed publicly with the UK Registrar of Companies. It is not uncommon in smaller companies for the secretary also to be a director.
Legislation does not set out specific duties and the variety of responsibilities will vary from company to company. The types of tasks that a secretary may be responsible for include:
Arranging board and shareholder meetings.
Maintaining statutory records.
Implementing policies for regulatory compliance.
Certain administrative tasks.
For many listed companies, the Governance Code states the company secretary "should be responsible for advising the board through the chairman on all governance matters". Responsibilities set out in the Governance Code include ensuring good information flows among the persons running the company, director induction and professional development, and procedural compliance.
Institutional investors and shareholder groups
Vocal and active shareholding is increasingly a feature of UK public company life.
The Governance Code states that there should be a dialogue with shareholders and that all directors should be made aware of shareholder opinion. The Stewardship Code sets out the ways in which institutional investors and their asset managers should monitor and engage with investee companies to discharge their duties of stewardship towards their own investors.
The Kay Review of UK Equity Markets and Long-term Decision Making was published in July 2012. One of its principles is that asset managers can contribute more to business performance through greater involvement with investee companies. Overall, if the recommendations of the review are taken up, this will encourage an increase in the role and influence of investors in monitoring corporate governance. The government's first detailed statement in response to the Kay Review welcomes the report, accepting its analysis and conclusions.
Groups that are vocal on behalf of institutional investors include the Association of British Insurers (ABI), the National Association of Pension Funds (NAPF) and PIRC. In addition, there is the Institutional Investor Committee, comprising the ABI, NAPF and the Investment Managers Association (IMA).
In addition to the proposals identified above:
The Enterprise and Regulatory Reform Bill is currently before Parliament and is expected to come into force in spring 2013, providing for shareholder voting on pay policy and exit payments, and greater transparency on directors' remuneration. The government is also planning new legislation on narrative reporting. The Financial Reporting Council will continue to review the Governance Code based on the government's final decisions on changes to company reporting and it plans to consult on whether to amend the sections of the Governance Code dealing with executive remuneration after the legislation before Parliament is finalised.
On 30 January 2013, the Financial Reporting Council published a consultation paper on implementing the recommendations of its Sharman Panel on reporting going concern and liquidity risks. The consultation period ends on 28 April 2013. Future consultation is also planned on updates to the publication Internal Control: Guidance to directors.
The Takeover Panel has closed its consultation, and a response statement is due to be published, in respect of proposed amendments to the Takeover Code addressing:
which companies are subject to the Code;
profit forecasts, financial benefits statements and changes in information; and
pension scheme trustee issues.
The European Commission proposes to update the regulation of insider dealing and market manipulation, including related criminal sanctions. The proposals are due to be considered by the European Parliament in March 2013. Any changes adopted would affect the laws of member states of the EU, although at present the UK has chosen not to opt in to the criminal sanctions element.
The Financial Services Act 2012 was enacted on 19 December 2012. It will amend the Financial Services and Markets Act 2000 and make significant changes to the regulatory structure for UK financial services. The FSA will be replaced by new regulators, the Prudential Regulation Authority and the Financial Conduct Authority. This is expected to occur in April 2013. Accordingly, where the responses above refer to the FSA, in future, a different regulator will fulfil that role. Apart from certain general provisions and rule-making powers, the provisions of the Financial Services Act have not yet come into effect; commencement orders to do this will be issued by HM Treasury.
The nature of the corporate governance regime in England and Wales is such that it will continue to be subject to ongoing review and likely changes that may affect the responses above.
The regulatory authorities
Financial Services Authority
Main activities. Financial industry regulator with rule-making, investigatory and enforcement powers. Includes the UK Listing Authority, which regulates certain publicly traded securities. The Financial Services Authority will be replaced by the Financial Conduct Authority and the Prudential Regulation Authority during 2013.
Financial Reporting Council
Main activities. Sets codes and standards for corporate governance. Conduct Committee reviews annual reports of public and large private companies for compliance with the Companies Act.
Main activities. Issues and administers the Takeover Code; supervises and regulates takeovers and related matters.
Main activities. UK Registrar of Companies. Administers company formation and dissolution, and public filings (for example, accounts).
London Stock Exchange
Main activities. Operates several stock exchanges and supervises the AIM Rules.
Description. Official government website for UK legislation and regulations; up-to-date and maintained by The National Archives.
Description. Official corporate governance regulator website; includes the Governance Code and Stewardship Code; up-to-date and maintained by the Financial Reporting Council.
Description. Official financial regulator website; contains the FSA Handbook, which includes various financial and governance rules, including the Listing Rules and DTRs; up-to-date and maintained by the Financial Services Authority. In 2013, the FSA Handbook will be split between the Financial Conduct Authority and the Prudential Regulation Authority to form two new handbooks.
Description. Official stock exchange website; includes the AIM Rules; up-to-date and maintained by the London Stock Exchange.
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
Qualified. England and Wales, 1980
Areas of practice. Mergers and acquisitions; corporate finance; business affairs; corporate governance.
Recent transactions. Extensive experience advising companies, boards and individual directors on a broad range of corporate governance matters and legal and regulatory responsibilities, including contentious public meetings; disclosure; directors' duties and individual director liability and protection.
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
Qualified. England and Wales, 2010; New Zealand, 2005
Areas of practice. Corporate; mergers and acquisitions.
- Advising Upsher-Smith Laboratories, Inc. in its takeover of AIM-listed Proximagen Group Plc, a European biotech company. Deal value approximately US$550 million.
- Advising The Middleby Corporation in its takeover of AIM-listed Lincat Group plc, a manufacturer of commercial cooking equipment. Deal value approximately GB£58 million.
- Advising Visa, Inc. on its subscription for further shares in AIM-listed Monitise Plc.
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
Qualified. England and Wales, 2009
Areas of practice. Corporate; mergers and acquisitions.
Advising the board of directors of a UK plc on directors' duties; in particular, in relation to the delegation of directors' duties and conflicts of interest.
Advising the board of directors of a company with a dual listing on the Vienna and Amsterdam NYSE Euronext stock exchanges on the principal corporate governance requirements of a proposed listing on the Warsaw stock exchange.
Advising the joint bookrunners in the US$1.3 billion initial public offering and listing on the Hong Kong Stock Exchange of Samsonite International S.A.