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 multi-jurisdictional guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corpgov-mjg
Private limited company
A private company can either be limited by guarantee or limited by shares. A company limited by shares is the typical corporate form for profit seeking entities in England and Wales. The liability of its members is limited to the amount, if any, unpaid on the shares held by them. A guarantee company is more suitable for not-for-profit organisations.
Public limited company (PLC)
A public company must be limited by shares, and the nominal value of a public company's allotted share capital must not be less than GB£50,000 (or EUR57,100). Unlike private companies, public companies are permitted to offer their securities to the public (but are not required to do so). Companies listed on the London Stock Exchange are PLCs.
Private and public companies
The regulatory framework which applies to private and public companies is primarily set out in:
The Companies Act 2006, which governs all companies registered in the UK. The Companies Act also sets out a range of general and specific directors' duties.
The Insolvency Act 1986, which governs company insolvency and winding up (including the winding up of companies that are solvent).
The Financial Services and Markets Act 2000 (FSMA), which regulates the public offering and listing of shares and other securities. It applies to both private and public companies and includes the UK's civil market abuse regime.
The City Code on Takeovers and Mergers (Takeover Code), which regulates the conduct of takeovers and mergers of all UK-incorporated public companies (and certain private companies in very limited circumstances).
Public companies listed or traded on any stock market
In addition, the following regulations apply to a public company that is listed or that has shares traded on a UK market:
The Code of Market Conduct, which supplements the FSMA provisions on civil market abuse, setting out a non-exhaustive list of descriptions of behaviour that may amount to market abuse.
The Prospectus Rules, which set out the form, content and approval requirements for prospectuses issued in relation to public offers of securities and introductions to public markets.
The Disclosure and Transparency Rules (DTRs), which set out the disclosure requirements applicable mainly to companies that are admitted to the Official List and traded on the Main Market (with some parts applying also to companies quoted on AIM).
The Criminal Justice Act 1993, which sets out the criminal regime in relation to insider dealing.
The Financial Services Act 2012, which sets out the criminal offences of making false and misleading statements, creating false or misleading impressions, and making false or misleading statements or creating a false or misleading impression in relation to specific benchmarks.
Public companies listed (or applying to be listed) on the Main Market
If a public company is listed (or applying to be listed) on the Main Market, the following regulations must be considered:
The Listing Rules prescribe minimum requirements for the admission of securities to listing on the Financial Conduct Authority (FCA)'s Official List, the content, scrutiny and publication of listing particulars, and the continuing obligations of issuers after admission to trading on the Main Market.
The Admission and Disclosure Standards contain the admission requirements and the ongoing disclosure requirements that companies with securities admitted to the Main Market must observe.
The Corporate Governance Code applies to all public companies with a premium listing of shares on a comply-or-explain basis. The Corporate Governance Code is supplemented by guidance in key areas.
The Stewardship Code sets out good practice for institutional investors when engaging with UK listed companies.
Institutional Investor Guidelines. Various institutional interest groups, such as the National Association of Pension Funds, have issued corporate governance guidelines in order to assist institutional shareholders in interpreting the Corporate Governance Code.
Public companies traded (or applying to be traded) on AIM
AIM is governed primarily by the AIM Rules for Companies, although certain parts of the Prospectus Rules and the DTRs also apply. The Quoted Companies Alliance Code for Small and Mid-Size Quoted Companies (companies outside the FTSE 350) sets out voluntary corporate governance guidelines for AIM quoted companies.
The Corporate Governance Code is published by the Financial Reporting Council (FRC). The Corporate Governance Code covers the following areas:
Relations with shareholders.
Within each of these areas, the Corporate Governance Code consists of main and supporting principles and provisions as to good corporate governance. The Corporate Governance Code applies to public companies with a premium listing on the Main Market (with certain exemptions for companies that are smaller than the largest 350 companies in the FTSE share index). The Corporate Governance Code is not a rigid set of rules and compliance is not mandatory. Instead, the Listing Rules require a company with a premium listing to make a disclosure statement in its annual financial report, explaining how and whether it complies with the Corporate Governance Code and justifying any non-compliance with the Corporate Governance Code. Failure to comply or explain carries penalties under the Listing Rules and may lead to FCA disciplinary action.
Board composition and remuneration of directors
English company law does not distinguish between a management board and a supervisory board. All directors form one board and each has the same obligations and accountability to the company regardless of whether they are executive (employees) or non-executive.
The articles of association of most companies provide that the directors are responsible for the management of the company's business. The board of directors may decide to delegate certain powers to a committee of directors or non-directors, individual directors, or general day-to-day management to a CEO or managing director.
The directors of the company constitute the board of directors. The articles of association of a company may designate a chairman with a casting vote, but not all chairmen have casting votes.
Employees do not have a right to board representation. However, some companies have agreements with trade unions which provide for employee representatives on the board.
Number of directors or members
Private companies must have at least one director, and public companies must have at least two directors. At least one of the directors must be an individual. The Companies Act does not prescribe a limit on the number of directors a company can have (although the articles of association may set a maximum).
A director must be at least 16 years of age. There is no maximum age limit at law.
There are no nationality requirements. However, some companies' articles of association require, for example, non-UK residency for tax purposes.
The UK has not imposed any mandatory gender quotas. However, the Corporate Governance Code requires companies with a premium listing to report on their diversity policy.
There is no statutory definition of an executive director or a non-executive director. A non-executive director is generally understood to be a director on the board who does not form part of the executive management team and is not an employee of the company.
Non-executive directors are expected to devote part, but not all, of their time to the company and their role is generally to provide an advisory or supervisory element to the board, scrutinising and challenging the company's strategy and management. By contrast, an executive director is typically an employee of the company who holds a senior management and executive role within the business.
The Corporate Governance Code provides guidance on the appropriate composition of a board of a UK listed company. For FTSE 350 companies, for example, over half the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent. A smaller listed company should have at least two independent non-executive directors.
Independence of thought is of particular importance to non-executive directors, part of whose role is to provide an independent viewpoint on the board and, when necessary, to challenge the executive directors.
Non-executive directors are considered to be independent when the board determines that they are independent in character and judgement, and that there are no relationships or circumstances which are likely to affect, or could appear to affect, their judgement. The Corporate Governance Code sets out various relationships or circumstances that would usually be relevant to the board's determination of independence, including, for example, if the director:
Has been an employee of the company or group within the last five years.
Has, or has had within the last three years, a material business relationship with the company either as a director, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company.
Has received or receives additional remuneration from the company apart from a director's fee, participates in the company's share option or a performance-related pay scheme, or is a member of the company's pension scheme.
Duties and liabilities
In law, no distinction is recognised between the role and responsibilities of a non-executive director and those of an executive director. Both types of director are subject to various statutory obligations, duties and responsibilities.
While the articles of association (or a shareholders' agreement) may restrict the authority of individual directors, UK company law does not impose any such restrictions.
The Corporate Governance Code provides guidance on the separation of responsibilities for directors of listed companies. For example, the Corporate Governance Code recommends that no one individual should have unfettered powers of decision, and that there should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for running the company's business. The Corporate Governance Code therefore provides that the roles of chairman and chief executive should not be exercised by the same individual.
Appointment of directors
The procedure for appointing directors is governed by the company's articles of association (and, in some cases, by a shareholders' agreement or an investment agreement). Most private companies' articles provide that a director may be appointed by a decision of the board or by an ordinary resolution of the company's shareholders.
For listed companies, the Corporate Governance Code recommends that a nomination committee, made up predominantly of independent non-executive directors, should lead the process for board appointments and make recommendations to the board. The board must support the appointment, which has to be confirmed by shareholders at the next annual general meeting following the appointment.
Removal of directors
The Companies Act provides that shareholders may remove a director by ordinary resolution, which must be passed at a general meeting with the company (and where practicable the shareholders) being given 28 days' notice of the intention to pass such a resolution. The director can then protest against the removal at the general meeting. However, a company's articles (or a shareholders' agreement) may provide for a different or simpler procedure. A director may still have employment rights in relation to termination of his employment contract regardless of his proper removal as a director within the requirements of the Companies Act.
The Companies Act does not impose any restrictions on the term of appointment of directors. The articles, however, may provide for retirement by rotation. In fact, for listed companies, the Corporate Governance Code stipulates that all directors of listed FTSE 350 companies should be re-elected annually by shareholders and that directors of listed companies outside the FTSE 350 should be subject to re-election every three years.
Directors employed by the company
Directors are not required by law to be employed by the company. While directors are usually employed under an employment contract (also referred to as a service contract, service agreement or contract of service), non-executive directors are normally engaged under a contract for services (see Question 6).
The Companies Act requires companies to keep a director's service contract available for inspection for shareholders without charge. The Corporate Governance Code provides that the terms and conditions of appointment of non-executive directors should be made available for inspection by any person at the company's registered office during normal business hours and at the annual general meeting.
While the Companies Act does not require directors to own shares in the company, directors of private companies are generally (subject to the provisions of the articles of association or a shareholders' agreement and so on) free to own shares in the company.
Listed company directors may also hold shares in the company and will often be granted options under approved schemes. See Question 22.
Determination of directors' remuneration
Subject to the company's articles, the remuneration of directors is set by the board. Remuneration of private company directors is decided by the board unless there is a shareholders' or investment agreement in place with other requirements.
The Corporate Governance Code provides that the boards of listed companies should establish a remuneration committee, which should follow formal and transparent terms of reference for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. Directors of listed companies should not be involved in deciding their own remuneration.
The annual accounts of all companies (other than small companies) must include details of directors' remuneration and benefits. Listed companies are required, under the Listing Rules and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, to provide shareholders annually with a detailed remuneration report.
For financial years ending before 30 September 2013, the Companies Act gives shareholders an advisory vote on the directors' remuneration report, meaning a director's remuneration is not conditional on shareholders' approval.
For financial years ending on or after 30 September 2013, the Enterprise and Regulatory Reform Act 2013, which amended the Companies Act, introduced a new voting and disclosure framework for directors' remuneration. In addition to an advisory vote on the directors' remuneration in the relevant financial year, shareholders must pass a binding vote on the directors' remuneration policy every three years.
According to the Department for Business, Innovation & Skills, a company has three options if shareholders fail to approve the remuneration policy:
Continue to operate according to the last remuneration policy to have been approved by shareholders.
Continue to operate according to the last remuneration policy to have been approved by shareholders and seek separate shareholder approval for any specific remuneration or loss-of-office payments that are not consistent with the policy.
Call a general meeting and put a remuneration policy to shareholders for approval.
The Companies Act provides that remuneration payments made without shareholder approval are unauthorised (and the underlying contractual obligation is deemed unenforceable). In addition, any non-compliant payments made will be held on trust by the recipient on behalf of the company.
Management rules and authority
The articles of association of a company regulate the company's internal management (although a shareholders' agreement or an investment agreement may impose additional rules). Subject to certain statutory exceptions (for example, an ordinary resolution to remove a director from office cannot be passed by a written resolution), companies are generally free to adopt their own procedural rules. Articles of association of private companies typically provide that:
The quorum for a board meeting is two, unless otherwise determined by the directors.
Board resolutions are passed by a majority of the directors attending.
The board may pass written resolutions in lieu of a board meeting.
Subject to provisions to the contrary in the company's articles and/or any shareholders' agreement, directors must be given reasonable notice of a board meeting.
In practice, private companies tend not to give long notice of board meetings, while listed companies tend to have a programme of board meetings set at the outset of the year.
Any director can call a board meeting, and the company secretary can call a board meeting if asked to do so by a director. The meeting must be called on reasonable notice (what is reasonable depends on the circumstances). Unless the company's articles specify otherwise, there is no requirement for the notice to be in writing, but notice must include the meeting's proposed date, time and location. If the directors are not all going to be physically present in the same location then the notice must specify how they are to communicate during the meeting, for example through a teleconference (to the extent permitted by the articles). See Question 13.
Apart from single-director companies, the minimum quorum for a board meeting is two directors, although the company's articles or the directors themselves may increase the quorum requirement. The articles may also dictate that directors with a personal interest in a matter do not count towards the quorum for voting on that matter.
Unless varied by the company's articles, voting is on a simple majority basis, with each director having one vote. In the event of a 50/50 vote split, which would defeat the proposal, some companies allow for the chairman (if appointed) to have a casting vote.
An alternative to a board meeting is for the directors to pass a written resolution, for which there must be unanimous agreement among all those directors who would have been entitled to vote if the resolution had been raised at a board meeting.
The articles of association of a company usually provide that the directors can exercise all the powers of the company. English company law does not distinguish between, for example, a management board and a supervisory board. However, the directors' powers are restricted by the articles of association, shareholder resolutions and statute (and any provisions contained in a shareholders' agreement, an investment agreement or service contract).
See Question 26.
Section 40 of the Companies Act protects persons dealing in good faith with a company. It provides that the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company's constitution (which would include shareholders' agreements and so on).
The directors' ability to delegate powers is regulated by the articles. Typically, directors can delegate any of the powers which are conferred on them under the articles to individual directors/persons or committees. While delegation is not a legal requirement, it is common practice for day-to-day management of the business to be delegated to a CEO or managing director, or an executive committee.
The Corporate Governance Code provides, in relation to listed companies, that there should be a schedule of matters specifically reserved for the board's decision. In addition, the directors of premium-listed companies should also set up:
A nomination committee (for director appointments).
An audit committee (for monitoring financial statements and internal controls).
A remuneration committee (for determining directors' remuneration policy and packages).
Duties and liabilities of directors
Directors of UK companies have a fiduciary duty (meaning to be in a position of trust) owed to the company. In summary, directors owe a duty to:
Act within the powers conferred by the company's constitution.
Promote the success of the company.
Exercise independent judgement.
Exercise reasonable care, skill and diligence.
Avoid conflicts of interest.
Not accept benefits from third parties.
Declare interests in (proposed) transactions or arrangements.
These duties are codified in the Companies Act and are (save for the duty to exercise reasonable care, skill and diligence) enforceable as a fiduciary duty. The remedies for breach of a fiduciary duty include:
Setting aside the transaction (at the company's request).
Restitution and account for profits.
The remedy for a breach of the duty to exercise reasonable care, skill and diligence is damages for losses suffered.
For derivative actions, see Question 28.
Theft and fraud
A director can be held criminally liable for theft under the Theft Act 1968, but a company cannot.
A company, and any director who consented to or connived in the act, may be held criminally liable for fraud under the Fraud Act 2006.
Criminal market abuse. It is a criminal offence under the Financial Services Act to make, knowingly or recklessly, a materially misleading, false or deceptive statement, promise or forecast in order to induce a person to buy or sell securities. It is also a criminal offence under the Criminal Justice Act if an individual who has inside information (information that is not yet publicly known and which would affect the price of the shares if it were made public) deals in price-affected securities in relation to that information on a regulated market. It is also an offence if he encourages another person to deal or discloses such information (outside the proper performance of his employment).
Civil market abuse. FSMA sets out the civil market abuse regime, under which the FCA can impose penalties (unlimited in extreme cases) on persons who are engaged in, or have encouraged other persons to engage in, insider dealing, tipping off, misuse of information, manipulating transactions or devices, disseminating false or misleading information, and market manipulation.
Fraudulent trading. It is a criminal offence under the Companies Act to knowingly carry on the business of a company with the intention of defrauding creditors (or for any other fraudulent purpose). In addition, a director may be liable under the Insolvency Act to make a contribution to the company's assets on a winding up.
Wrongful trading. If, before the start of the winding up of the company, a director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, he may be liable to make a contribution to the company's assets on a winding up.
Misfeasance or breach of fiduciary duty. Under the Insolvency Act, a director may be liable to repay, restore or account for misapplied money or property, or pay compensation in respect of misfeasance or a breach of fiduciary duties.
Fraud and misconduct offences. The Insolvency Act also imposes the following offences:
Fraud in anticipation of winding up.
Transactions in fraud of creditors.
Misconduct in the course of winding up.
Falsification of company books.
Material omissions from statement relating to company's affairs.
False representation to creditors.
Transactions defrauding creditors. Directors may also be liable to pay the difference in respect of gifts made or undervalue transactions entered into by the company before winding up.
Health and safety
The Health and Safety at Work etc Act 1994 creates various health and safety related offences for employers. If a company is guilty of a health and safety offence, and the offence was committed with the consent or connivance of, or was attributable to any neglect on the part of, the director or manager, the director or manager may be held criminally liable.
The Corporate Manslaughter and Corporate Homicide Act 2007 creates a criminal offence for private and public companies where a corporate management failing has led to a death. Importantly, this does not apply to individuals. However, a director may be liable for common law manslaughter if his gross negligence leads to a death.
There are numerous environmental offences that can be committed by a company. A director who consented or connived to actions or omissions leading to the commission of an environmental offence may be criminally prosecuted.
A director may be held criminally liable for the following breaches of EU and UK competition law:
Anti-competitive agreements (including price fixing).
Dishonestly limiting production and supply.
In certain circumstances, directors may be held criminally liable for the company's breach of the Data Protection Act 1998.
Bribery Act 2010. It is a criminal offence for a company to bribe another person (including a foreign public official) or to accept a bribe. If the offence was committed with the consent or connivance of a director, the director may also be held criminally liable.
Companies Act. A director may be held criminally liable for a number of offences under the Companies Act (such as for failing to make certain regulatory filings).
Company Directors Disqualification Act 1986. A director may be disqualified from acting as a director for a variety of reasons (such as breaches of competition law). Acting as a director while being disqualified is also a criminal offence.
The Companies Act provides that any provision that seeks to exempt or limit a director from any liability for negligence, default, breach of duty or breach of trust in relation to the company is void. However, a company may indemnify a director in respect of costs and expenses relating to proceedings brought by third parties (although not in relation to criminal or regulatory proceedings).
The Companies Act provides that a director includes any person occupying the position of director, by whatever name called. Therefore, directors duties (see Question 16) are also owed by de facto directors.
Transactions with directors and conflicts
The Companies Act provides that directors have a statutory duty to avoid situations in which their personal interests (actual or potential) conflict (directly or indirectly) with the company's interests. Such conflicts can be authorised by the rest of the board provided that:
The other board members who authorise the conflict are independent of that conflict.
The conflicted director (or any other interested director) does not vote on the authorisation.
Either the company's articles of association permit the directors to authorise the conflict (in the case of a public company) or the articles contain nothing that would prevent such authorisation (in the case of a private company).
In addition, private companies incorporated before 1 October 2008 must pass a shareholder resolution if they are going to rely on the board's authorisation of a conflict.
The Companies Act also imposes a duty on directors to declare the nature and extent of their interest in a proposed (or an existing) transaction or arrangement with the company. The articles of association of the company may provide that a director who has disclosed an interest will not be counted for quorum and voting purposes.
The Companies Act imposes restrictions on the following transactions between a company and its directors:
Directors' service contracts with a guaranteed term of more than two years.
Substantial property transactions involving the acquisition of non-cash assets by the director from the company (and vice versa).
Loans and giving a guarantee or providing security in connection with a loan.
Quasi-loans or other credit transactions (this applies only to public companies or companies associated with public companies).
Payments for loss of office in connection with a share or business transfer.
The Listing Rules also impose restrictions on listed companies in relation to transactions with directors or their associates.
Directors of private companies are not subject to any statutory restrictions in relation to the purchase or sale of shares or other securities. However, a director may be subject to restrictions contained in the articles of association, a shareholders' agreement or an investment agreement.
Directors of listed companies (including on AIM) are subject to the civil and criminal market abuse regime (see Question 16). Directors of companies with a premium listing must comply with the Model Code of the Listing Rules, which further restricts the ability of directors to deal in their company's shares. The AIM Rules also impose restrictions on directors in relation to share dealing.
In the context of a public takeover offer, the Takeover Code imposes restrictions on directors of PLCs in relation to the purchase or sale of shares.
Disclosure of information
The Companies Act requires directors of private and public limited companies to disclose to the public certain information about the company (for example, the identity of the shareholders, names of directors and company secretary, accounts and directors' reports, and so on). Shareholders are also entitled to inspect records of general meetings, including all passed resolutions.
Directors of companies listed on the Main Market must comply with DTR 2, which requires prompt and fair disclosure of inside information to the market and sets out specific circumstances when an issuer can delay public disclosure of inside information. The Listing Rules also impose further disclosure obligations on premium listed companies.
Directors of AIM companies must give notification, without delay, of any new developments which are not public knowledge concerning a change in the company's financial condition, sphere of activity, performance of its business or expectation of its performance which, if made public, would likely lead to a substantial movement in the price of its AIM securities.
Private companies formed under the Companies Act are not required to hold an annual general meeting (AGM) of shareholders unless obliged to do so under their articles of association. Public companies must hold an AGM every year, with the meeting taking place no more than six months after the company's end of year.
Public companies must lay their annual accounts and reports before a general meeting, and this is usually done at an AGM. The re-election of directors must also take place via a shareholder vote at an AGM of public companies. Typical business conducted at an AGM includes:
Annual reports and accounts.
Directors' remuneration report.
Re-election of directors.
Re-appointment of auditors and fixing of their remuneration.
Capitalisation or bonus issue.
General meetings of a company are generally called by directors. Shareholders have the power to require directors to call a general meeting (and if the directors do not call a general meeting on the shareholders' request, shareholders have the power to call a general meeting directly).
A general meeting of a company must be called with at least 14 days' notice (or 21 days in the case of an annual general meeting of a public company). However, the shareholders may agree to a shorter notice period, provided that 90% (in the case of a private company) or 95% (in the case of a public company) of the shareholders who have a right to attend and vote at the meeting consent.
The quorum of a general meeting is two qualifying persons, that is, two shareholders of the company (single member companies require only one). Qualifying persons also include proxies and representatives of corporate shareholders.
Voting can be conducted on a show of hands, where each shareholder has one vote. On a show of hands, an ordinary resolution is passed by simple majority of the votes cast by those entitled to vote. A special resolution is passed by a majority of not less than 75% of the votes cast by those entitled to vote. See Question 26.
Alternatively, shareholders may request that a poll is taken, in which case a shareholder has one vote for every ordinary share it holds. For example, a special resolution on a poll is passed by members representing not less than 75% of the total voting rights of the members who vote.
Shareholders of private companies can also pass resolutions via a written resolution (although certain important decisions, such as removing a director, cannot be taken with a written resolution). On a written resolution every member has one vote in respect of each ordinary share in the company held by him.
Shareholders can appoint another person as their proxy to exercise all or any of their rights to attend, to speak and to vote at a general meeting.
The Companies Act requires shareholder approval for a number of corporate actions, either by an ordinary resolution (simple majority required) or special resolution (requiring at least 75% of the votes cast).
Actions requiring a special resolution include:
Changing the company's constitution or name.
Re-registering a private company as public or a public company as private.
A reduction in the notice period for a general meeting of a listed company from 21 days to 14.
Various actions regarding the disapplication of pre-emption rights.
Certain activities to reduce (and increase) share capital or the purchase of the company's own shares from capital.
Actions requiring an ordinary resolution include:
Removal of a director or the company's auditor.
Approval to give a director a service contract of two years or longer.
Election of a chairman at a general meeting.
Redenomination of share capital.
Shareholders with at least 5% of the company's paid-up share capital (with voting rights) can require a general meeting of the company. However, they must first ask the directors to call a meeting on their behalf. If the directors fail to act within the deadlines specified by the Companies Act, then the shareholders may call a general meeting themselves, reclaiming reasonable expenses from the company. This power is used very rarely in practice. If a general meeting is convened by the shareholders in this way, then they can put their own resolutions before the meeting.
Alternatively, shareholders can ask the company to circulate a written resolution and accompanying statement.
There is an additional right for shareholders of a public company to put their own resolutions before the company's AGM, if the shareholders either:
Hold at least 5% of the total voting rights.
Are made up of 100 or more shareholders who hold an average of at least GB£100 paid up share capital and who would all be entitled to vote at the AGM on that resolution.
Minority shareholder action
Minority shareholders have two main causes of action if they believe the company is being mismanaged.
Unfair prejudice claim
Under the Companies Act, shareholders can bring a claim for unfair prejudice against the company where the company's affairs are, or have been, conducted in a way that is unfairly prejudicial to all or some of the shareholders. Unfair prejudice claims may also be brought by shareholders in relation to proposed actions or omissions.
Remedies available to the court include, for example:
Ordering the company to provide for the sale and purchase of the aggrieved shareholders' shares (a buyout).
There is no minimum level of shareholding required for such claims.
Shareholders can also bring a derivative claim against the directors. However, derivative claims are made on the company's behalf and therefore any remedy granted will be to provide relief to the company. There is no minimum level of shareholding required for such claims.
A derivative claim can only be brought with the court's permission. The basis for the claim must be an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.
Minority shareholders may also apply under the Insolvency Act to wind up the company on "just and reasonable grounds". Mismanagement can in some circumstances constitute such grounds. Shareholders may also have additional rights under a shareholders' or investment agreement.
Internal controls, accounts and audit
Under the Corporate Governance Code, the board of a listed company is responsible for risk management and internal control systems and should regularly review the effectiveness of these.
The DTRs require listed companies to provide a description of the company's internal control and risk management systems in the corporate governance statement.
The FRC requires many companies in the banking and financial services sector to establish risk committees for regulatory purposes. However, the trend for most public companies is for risk to be the remit of the audit committee. In fact, the FRC's guidance on audit committees recommends that audit committees of listed companies should review the company's internal financial controls and the company's internal control and risk management system.
Directors are responsible for the preparation, approval and filing of company accounts. The directors must not approve accounts unless they are satisfied that they give a true and fair view of the company's assets, liabilities, financial position and profit/loss.
The Corporate Governance Code requires a statement from directors that the company's accounts are fair, balanced and understandable. Under the Listing Rules and AIM Rules, directors may also be responsible for sending out copies of the annual accounts to shareholders.
Directors may be criminally liable where accounts filed are not reasonably accurate or where accounts do not conform to the requirements of the Companies Act. Where directors make misstatements or fail to include information in the company accounts they may be liable to investors.
Auditors are appointed by an ordinary resolution of the shareholders. Directors may also appoint auditors in certain circumstances.
There is no limit on the length of an auditor's appointment. In private companies, where no alternative auditor is appointed at the end of each financial year, the auditor in office is deemed to be re-appointed. However, in public companies, auditors need to be re-appointed every financial year.
It is good practice for companies to change auditors every five years. The Corporate Governance Code stipulates that FTSE 350 companies should put the external audit contract out to tender at least every ten years.
The auditors of a company must be:
Members of a recognised supervisory body and eligible for appointment under the rules of this body.
A person cannot be an auditor of a company if he is an officer or employee of the company being audited, or if he is the partner or employee of such an individual. A partnership in which an officer or employee of the company is a partner also cannot act as an auditor.
There are no legal restrictions on the non-audit work that auditors can do for a company whose accounts they audit. However, FRC's Ethical Standard 5 - non-audit services provided to audited entities provides some guidance on the best practice approach to be adopted by audit firms in relation to non-audit services.
The Corporate Governance Code requires the audit committee to develop and implement policy on the engagement of the external auditor to supply non-audit services. In addition, the audit committee should explain to the board how auditor objectivity and independence is safeguarded.
Auditors are criminally liable if they knowingly or recklessly allow an auditor's report to include something that is materially misleading, false or deceptive, or if they omit any statements that are required in such reports.
Auditors are liable to the company if they act negligently or if they breach the terms of the engagement letter. Auditors may also be liable to shareholders if they act negligently and the shareholders can prove that they suffered loss as a result of relying on the auditor's report.
It is very difficult for third parties to bring a successful negligence claim against auditors.
Under the Companies Act, auditors can enter into liability limitation agreements with companies. These limit an auditor's liability for negligence, default or breach of duty or trust. However, liability can only be limited to that which is fair and reasonable. Shareholders must approve liability limitation agreements by ordinary resolution (unless the company is a private company and waives this requirement).
In practice, it is unusual for companies to enter into liability limitation agreements with auditors.
Corporate social responsibility
Many companies engage in corporate social responsibility (CSR) initiatives. While it is not a legal requirement for companies to undertake CSR activities, companies are required to report on some social, environmental and ethical issues. Some public companies have a standalone CSR committee and/or a director with responsibility for CSR.
For financial years ending before 30 September 2013, all companies (except small companies (see Question 2)) must include a business review in their directors' report. This business review should include an analysis using non-financial key performance indicators (including indicators relating to environmental and employee matters, unless the company is a "medium-sized company"). Business reviews of listed companies must also include social and community issues.
To qualify as a small company, two of the following three criteria must be met:
Annual turnover of less than GB£6.5 million.
Fewer than 50 employees.
A balance sheet total of less than GB£3.26 million.
A company must meet these criteria in both its current and previous financial years. Certain types of companies are automatically excluded from being small companies (including public companies, e-money issuers, banking companies and insurance companies).
A company will qualify as a medium-sized company where two of the following three criteria are met:
Annual turnover of less than GB£25.9 million.
Fewer than 250 employees.
A balance sheet total of less than GB£12.9 million.
As with the small company regime above, aside from any company's first financial year, it must meet this criteria in both its current and previous financial years to successfully qualify as a medium-sized company. Certain companies are automatically excluded from the medium-sized regime, as with small companies.
For financial years ending on or after 30 September 2013, the Companies Act (Strategic Report and Directors' Report) Regulations 2013, which came into force on 1 October 2013, replace the business review with a standalone strategic report. The strategic report is largely the same as the business review except that listed companies will also have to consider human rights issues and report on greenhouse gas emissions.
All companies can have a company secretary, although this is not a mandatory requirement for private companies. The role of the company secretary in corporate governance can include, but is not limited to:
Ensuring that the board understands shareholder opinion.
Understanding audit and internal control provisions.
Updating and maintaining statutory records and filing matters with Companies House.
Arranging board and shareholder meetings and other administrative tasks.
Ensuring statutory and regulatory compliance.
For listed companies the Corporate Governance Code provides that the company secretary's responsibilities include ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as facilitating induction and assisting with professional development. The Corporate Governance Code also states that the company secretary should advise the board (through the chairman) on all corporate governance matters. In public companies, the chairman and non-executive directors should have a strong relationship with the company secretary.
Institutional investors and shareholder groups
Institutional investors are very influential in the UK, in particular, the National Association of Pension Funds, the Association of British Insurers (which together have formed the Institutional Investor Committee), the Pensions and Investment Research Consultants and the Investment Management Association.
The Corporate Governance Code states that there should be a dialogue with shareholders based on mutual understanding of objectives. In addition, the Stewardship Code sets out good practice for institutional investors when engaging with UK listed companies. Certain institutional investor groups also have their own guidelines.
Integrated Code Guidance
The FRC proposes to publish new integrated guidance on risk management, internal control and the going concern basis of accounting (Integrated Code Guidance) in the first half of 2014, which would replace the existing guidance in this area (guidance in relation to risk management and internal control is also known as the Turnbull Guidance). Notable changes include, for example:
A more detailed list of specific responsibilities of the board in relation to risk.
More detailed guidance on board disclosures in the annual reports and accounts.
A summary of the relevant regulatory requirements that directors should be aware of and the key relevant sections of the Corporate Governance Code.
Guidance on solvency and liquidity risks, considering what information is available about the future, and stress testing and sensitivity analysis.
A set of warning signs intended to assist boards to identify indicators that might suggest failure or weakness in the risk management and internal control system.
It is also proposed that certain associated amendments would be made to the Corporate Governance Code. It is anticipated that these changes would apply to reporting periods beginning on or after 1 October 2014.
Following a report by Professor Kay on UK equity markets and long-term decision making, the House of Commons Business, Innovation and Skills Select Committee recommended in July 2013 that the Stewardship Code be enhanced to take account of strategic issues as well as those around corporate governance. In addition, the Select Committee recommended that the government should publish clear, measurable and achievable targets for implementation of the Stewardship Code and outline actions it will take if targets are not met.
The government has questioned some of the recommendations of the Select Committee. In particular, the government does not want to specify target levels of sign-up to the Corporate Governance Code. The government believes this will result in a “tick box” mentality. The governments expects the FCR to publish its proposals in early 2014.
Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013
These regulations, which came into force on 1 October 2013, concern the content of directors' reports. Changes include the following:
Abolition of the business review.
A new requirement for a separate standalone strategic report (which will cover, for example, disclosures of the number of persons of each sex who are, respectively, directors, managers and employees).
A new requirement for quoted companies to make certain disclosures in relation to greenhouse gas emissions (pursuant to the Climate Change Act 2008).
The changes only affect directors' reports in relation to financial years ending on or after 30 September 2013.
Enterprise and Regulatory Reform Act 2013
The Enterprise and Regulatory Reform Act 2013, which came into force on 1 October 2013, introduces a new voting and disclosure framework for directors' remuneration (see Question 12).
On 6 December 2013 the FRC concluded a consultation on possible changes to the sections of the Corporate Governance Code dealing with directors' remuneration. Amendment proposals are expected in the first quarter of 2014.
Since 30 September 2013, new rules apply for:
Determining the companies that are subject to the Takeover Code.
Profit forecasts, quantified financial benefits statements and material changes in information.
On 20 May 2013, the Takeover Code was amended in relation to the rights of pension scheme trustees.
The Takeover Panel issued practice statement 27 on 17 January 2014 in relation to Rule 21.2 of the Takeover Code. Rule 21.2 of the Takeover Code provides that, except with the consent of the Takeover Panel, neither the offeree company nor any person acting in concert with it (which includes directors of the offeree company) may enter into any offer-related arrangement with either the offeror or any person acting in concert with it during an offer period or when an offer is reasonably in contemplation. Practice statement 27 lists a number of obligations that the Takeover Panel has seen in irrevocable commitments given by shareholders who are also directors of the offeree company that breach Rule 21.2 of the Takeover Code.
The FCA has proposed amendments to Listing Rule 9.8.6R (the provision requiring premium listed companies to comply or explain non-compliance with the Corporate Governance Code). Following the FCA’s feedback on the first round of consultations, the FCA has published revised/new proposals – the consultation deadline on these proposals was 5 February 2014. The FCA intends to publish its feedback in the first half of 2014 and implement the full and final rules by the middle of 2014.
Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013
The directors' remuneration report for financial years ending on or after 30 September 2013 must be split into two parts:
A mandatory future remuneration policy report (to be updated every three years).
An implementation report (to be updated every year).
See also Question 12.
Description. Carries most types of legislation and their accompanying explanatory documents.
FCA and PRA Handbooks
Description. The official handbook of the FCA (which includes the Listing Rules, the Prospectus Rules and the DTRs) and the Prudential Regulation Authority (PRA) (which contains regulatory rules for banks, among other things).
Financial Reporting Council (FRC)
Description. The official website of the FRC, which publishes the Corporate Governance Code and the Stewardship Code.
London Stock Exchange (LSE)
Description. The official website of the LSE, which hosts the AIM Rules and the Regulatory News Service.
Corporate governance authorities and bodies
Financial Conduct Authority (FCA)
Description. The FCA supervises the conduct of retail and wholesale financial firms and regulates their prudential standards.
Prudential Regulation Authority (PRA)
Description. The PRA is part of the Bank of England and is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms.
Financial Reporting Council (FRC)
Description. The FRC is the UK's independent regulator responsible for promoting high quality corporate governance and reporting.
Description. The Takeover Panel administers the Takeover Code, and supervises takeovers.
Stephen Nash, Partner
Professional qualifications. Solicitor, England and Wales, 1997
Areas of practice. Mergers and acquisitions of public and private companies, IPOs and secondary fundraisings, corporate governance and directors' duties.
- Acted for Apollo Group on its GB£304m acquisition of BPP Holdings plc.
- Acted for Dimension Data Holdings plc on its takeover by NTT for GB£2.1 billion.
- Acted for Waterlogic plc on its AIM IPO, raising GB£45m and valuing Waterlogic at GB£112 million.
- Acted for Greencore on its GB£113 million takeover of Uniq and associated GB£80 million rights issues.
- Acted for JLT on the GB£166 million partial offer from Jardine Matheson.
- Acted for May Gurney on the competing offers by Costain Group and Kier Group, valuing May Gurney at GB£221 million.
Aleen Gulvanessian, Partner
Professional qualifications. Solicitor, England and Wales, 1983
Areas of practice. Acquisitions and disposals, mergers, joint ventures and corporate reorganisations as well as fund raisings, corporate governance and boardroom advice. Head partner responsible for the Eversheds Board Report on The Effective Board issued in April 2013.
- Acted for Dairy Crest Group plc on the sale of St Hubert to Montagu Private Equity for EUR430 million.
- Various fundraisings in connection with acquisitions and joint ventures for NewRiver Retail including the most recent fundraising of GB£67 million on AIM.
- Acted for Titan Europe on its GB£122 million recommended takeover by Titan International.
- Acted for Cityhold on its acquisition of a vehicle owning The Peak from Heron International, the Co-operative Insurance Society and AXA Real Estate Investment Managers.
Ben von Maur, Associate
Professional qualifications. Solicitor, England and Wales, 2013
Areas of practice. Corporate, mergers and acquisitions.
Recent transactions. Acted for Pinstripe, a US-based recruitment process outsourcing business and its private equity backer Accel-KKR on the cross-border acquisition of UK-based Ochre House.