News

Company Law, Corporate Governance & Corporate Finance - January 2010

Implementation of Amendments to the Takeover Code
The amendments to the Takeover Code adopted in Response Statement 2009/2 (Miscellaneous Code amendments) and made by Instrument 2009/5 took effect on 25 January 2010. Both the Response Statement and the Instrument were published by the Code Committee on 16 December 2009.

The copy of the Code on the Panel's website has been updated so as to reflect these amendments.

Amended pages of the Code have been published incorporating, in addition to the amendments referred to above:

(a) the minor amendments, principally in relation to the Companies Act 2006, which came into effect on 1 October 2009; and

(b) the amendment which took effect on 2 November 2009 to reflect the formation of the Association for Financial Markets in Europe following the merger of the London Investment Banking Association and the European operations of the Securities Industry and Financial Markets Association.

Source: www.thetakeoverpanel.org.uk
© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
NAPF Corporate Governance and Voting Policy - 2009/10 updates
On 19 January 2010, the National Association of Pension Funds (NAPF) approved a number of amendments to its Corporate Governance and Voting Guidelines policy which it is intended should apply during the 2010 AGM voting season.

The outcome of the FRC review of the Combined Code is likely to prompt further changes to NAPF's Corporate Governance policy later on. The amendments are based on the Combined Code and apply only to those companies whose primary listing is on the London Stock Exchange.

NAPF's policy amendments deal with the following:

Short notice general meetings;
Director independence;
Director suitability;
Director re-election;
Executive termination payments;
Investors' responsibilities.

Source: NAPF Corporate Governance and Voting Policy - 2009/10 updates
© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
Classification of Rights Issues - amendment to FRS 25
On 25 January 2010, the Accounting Standards Board (ASB) issued an amendment to FRS 25 (IAS 32) Financial Instruments: Presentation 'Classification of Rights Issues'.

By way of background:

In December 2004, the Accounting Standards Board (ASB) issued Financial Reporting Standard (FRS) 25 (IAS 32) 'Financial Instruments: Presentation'. FRS 25 implemented the requirements of International Accounting Standard (IAS) 32 'Financial Instruments: Presentation' for those applying UK financial reporting standards;
In November 2009, the ASB published a Financial Reporting Exposure Draft (FRED) 'Classification of Rights Issues'. The FRED proposed an amendment to FRS 25 in line with the amendment to IAS 32 issued by the International Accounting Standards Board (IASB) in October 2009. The objective of that amendment is to keep FRS 25 converged with IAS 32;
The amendment requires a rights issue involving the exchange of a fixed number of an entity's own equity instruments for a fixed amount of cash denominated in a foreign currency to be classified as an equity instrument.

The amendment applies to rights, options or warrants issued pro rata to all existing owners of the same class of shares.

The amendments need to be applied for annual periods beginning on or after 1 February 2010.
Source: http://www.frc.org.uk/asb/press/pub2220.html
The amendment to FRS 25 is available for free download from: Free Download of FRS 25 Amendment© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
Reduction of share capital
The Companies Act 2006 introduced a new solvency statement procedure which allows private companies to effect a reduction of share capital without court approval. The purpose of introducing a new procedure was to make it simpler, quicker and less costly for private companies to reduce their share capital. The new solvency statement procedure can also be used as an alternative to a private company purchase of own shares out of capital because the procedure is more flexible and less onerous.

Reasons for a reduction of share capital
Where a private company reduces its capital, the reserve arising from a reduction is treated as a realised profit and is distributable immediately.

This is a very useful and relatively simple way for private companies to create a distributable reserve which can be used for the following reasons:

To eliminate a deficit on the company's profit and loss account and thereby enable the company to pay dividends;
To return excess capital to the shareholders;
A means of paying cash to shareholders where the company does not have sufficient distributable reserves to pay a dividend;
The procedure can also be used to simplify the capital structure of the company by eliminating certain classes of shares which have no valuable rights attached to them.

For the purposes of the new solvency statement procedure, the company's share premium account and capital redemption reserve count as part of its paid up share capital and therefore may also be reduced.

What does the procedure involve?
The solvency statement procedure involves:

Passing a special resolution;
A statement of solvency by the directors which is a written statement signed by every director stating that they are of the opinion that at the date of the statement, there are no grounds on which the company could be found to be unable to pay its debts; and the company will be able to pay or discharge its debts as they fall due for the next 12 months or, if the company is to be wound up in the next 12 months, in full within 12 months of commencing the winding up;
A statement of capital which reflects the company's share capital as reduced;
A statement by the directors confirming that the solvency statement was made not more than 15 days before the date on which the special resolution was passed.

In respect of the solvency statement no auditors' report is required and creditors have no right to object to the reduction requirements. This simplifies the process and it is worth noting that this is still required in connection with a private company purchase of own shares out of capital. However, if the solvency statement is made without reasonable grounds, it is a criminal offence, therefore the directors should exercise caution and may seek comfort from their professional advisers in respect of the company's solvency.

Conclusion
Overall, the new solvency statement procedure offers private companies the opportunity to create distributable reserves using a flexible and less costly procedure as an alternative to going to court. In addition, there is no requirement for the company to obtain creditor consent or to put in place creditor protection measures.

However, the new solvency statement procedure may not be appropriate in all circumstances, particularly where there may be an issue with the directors giving a statement on the ability of the company to pay its debts, or the company has insufficient share capital and share premium to cover the amount of capital to be returned. In addition, existing finance documents should always be checked to ensure those providing finance have not imposed restrictions on such reductions.
For more information please contact Francesca Messina at ASB Law.
Source: ASB Law eNews
-----------------------------------------------------------------------------------------------------------------------------------------
FRC consults on Stewardship Code for Institutional Investors
On 19 January 2010, the Financial Reporting Council (FRC) began a consultation on a stewardship code that will outline good practice for institutional investors when engaging with the UK listed companies. The areas covered will include the content, operation and oversight of the code.

At the request of the Government, the FRC agreed to take on responsibility of oversight of the code following the November 2009 report from Sir David Walker on the corporate governance of banks and other financial institutions.

It is hoped that the code will make a significant contribution towards a more effective engagement between companies and shareholders, with improvements in the governance and performance of UK listed companies.

Views being sought by the FRC include:

Whether the November 2009 published by the Institutional Shareholders' Committee (ISC) provides a suitable basis for the Stewardship Code;
Clarification on the responsibilities for engagement of institutional shareholders and their agents to the beneficial owners whose money they manage;
How to encourage use of the code by UK and foreign investors;
Content of disclosure by investors on their engagement policy and practice;
Guidelines on monitoring code application

TUC General Secretary, Brendan Barber, welcomed the consultation as a way to strengthen the current Stewardship Code for Institutional Investors (ISC code) and sees any improvement as a method of holding companies to account with closer shareholder engagement, in light of the past financial crisis.

The consultation will end on 16 April 2010 and the outcome of the consultation is expected to be released in May or June 2010.
The full consultation document is available at: Financial Reporting Council January 2010 Consultation
Source: Financial Reporting Council (FRC) and TUC
© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
Restoring boardroom leadership through governance
On 19 January 2010, it was announced that the Chartered Institute of Management Accountants (CIMA) is to publish 'Enterprise governance - restoring boardroom leadership'. It will look at how management can support boards in a drive to make them become more effective, with the ultimate aim being long term sustainable business performance.

This comes in response to the damage that the recent global economic and financial crisis has caused and in answer to the questions raised regarding the effectiveness of company boards and executive management. In addition, FRC chief executive Stephen Haddrill has previously made clear his intention to better engage with investors in the wake of the financial crisis, encouraging investors to take a stronger interest in and push to influence the companies in which they invest.

As well as the processes and structures, the human element will be considered, looking at behavioural issues.

CIMA says it will look at ways for an organisation to challenge boards by robustly scrutinising management proposals with a view to improvement rather than criticism, while maintaining a consistent approach to risk.

The ethos of the report is for management to provide support to its governing board, utilising high quality management information and the use of tools such as strategic scorecards, to promote effective board oversight of strategy.
The full discussion paper is available at: CIMA Discussion Paper January 2010
Source: Chartered Institute of Management Accountants (CIMA) and Financial Director
© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
EC study on Monitoring and Enforcement practices of Corporate Governance Codes in Member States
On 14 January 2010, the EC published a Study on monitoring and enforcement practices in corporate governance in the member states. It considers the distribution of corporate governance related principles between national legislation and non-legislative "comply or explain" codes in each of the member states.

This Study provides an overview of the various monitoring and enforcement mechanisms in the Member States of the European Union concerning corporate governance rules that are laid down in codes of corporate governance. It assesses the level of compliance of companies with the provisions of corporate governance codes and examines the availability and quality of explanations for deviations from these codes for a sample of 270 listed companies from 18 Member States. Two surveys were conducted in the framework of this Study. They aimed at evaluating the perception of corporate governance codes by director institutes and business associations on the one hand, and EU shareholders on the other hand. On this basis, the Study evaluates the effectiveness of the different monitoring and enforcement systems and presents suggestions to improve their effectiveness.

The comply-or-explain approach formally adopted by the European Commission in 2006 enjoys wide acceptance by the corporate as well the institutional investor community. However, its practical implementation suffers some deficiencies, mainly in the form of an unsatisfactory level and quality of information on deviations by companies and a low level of shareholder monitoring. These issues could be remedied by strengthening the role of market-wide monitors and statutory auditors, by creating a reporting framework to ensure comprehensive and qualitative disclosure by companies, and by developing a comply-or-explain regime for institutional investors. The comply-or-explain regime should not be abandoned but rather should be strengthened.
Source: Study on Monitoring and Enforcement practices in Corporate Governance in the Member States
© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
Committee of European Securities Regulators: FAQs on Prospectuses
The Prospectus Directive 2003/71/EC and the EC's Regulation on Prospectuses (EC 809/2004) became effective on 1 July 2005. The Prospectus Directive and accompanying Regulation establishes a harmonised format for Prospectus in Europe and allows companies to use their Prospectus to list on all European markets without having to re-apply for approval from the local regulator and by doing so, it is intended to help companies avoid the inherent delays and cost that this may involve. As a result of this new legislation, consumers can also be assured of more consistent and standardised information which will enable them to compare more effectively the various securities offers available from a wider number of European companies.

On 15 January 2010, the Committee of European Securities Regulators (CESR) published its updated Frequently Asked Questions (FAQs) regarding prospectuses: common positions agreed by CESR members. The FAQs, originally published in July 2006 and regularly updated since, are intended to provide market participants with responses in a quick and efficient manner, to "everyday‟ questions which are commonly posed to the CESR secretariat or CESR Members.
Source: www.cesr.eu/data/document/09_1148.pdf
© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
EU trade balance with the rest of the world: November 2009
On 15 January 2009, Eurostat published the first estimate for the euro area (EA16) trade balance with the rest of the world:

In November 2009 there was a €4.8 billion surplus, compared with €-7.0 billion in November 2008. The October 2009 balance was €+6.6 billion, compared with €-1.2 billion in October 2008;

In November 2009 compared with October 2009, seasonally adjusted exports fell by 0.4%, while imports rose by 0.3%;

The first estimate for the November 2009 EU27 trade balance was a €5.8 billion deficit, compared with €-24.4 billion in November 2008. In October 2009 the balance was €-4.8 billion, compared with €-18.3 billion in October 2008. In November 2009 compared with October 2009, seasonally adjusted exports rose by 1.9% and imports by 1.5%.

EU27 January-October 2009 detailed results:

The EU27 deficit decreased for energy (€-191.8 billion in January-October 2009 compared with €-323.5 billion in January-October 2008) and for raw materials (€-15.5 billion compared with €-36.1 billion). The surplus fell for machinery and vehicles (€+88.6 billion compared with €+130.1 billion), but rose for chemicals (€+66.9 billion compared with €+63.6 billion);
EU27 trade flows with all of its major partners fell, except for exports to China which remained stable. The largest decreases were recorded for exports to Russia (-40% in January-October 2009 compared with January-October 2008), Turkey (-25%), Brazil (-23%), South Korea (-21%) and the USA (-20%), and for imports from Russia (-40%), Norway (-30%), Brazil (-29%), Japan (-28%) and Turkey (-25%). The smallest falls were observed for trade with Switzerland, for both exports (-12%) and imports (-9%);
The EU27 trade surplus fell with the USA (€+35.9 billion in January-October 2009 compared with €+55.9 billion in January-October 2008) and Switzerland (€+11.0 billion compared with €+15.0 billion). The EU27 trade deficit decreased with China (€-111.3 billion compared with -€138.8 billion), Russia (€-39.5 billion compared with €-65.2 billion), Norway (€-26.4 billion compared with €-43.8 billion) and Japan (-16.7 billion compared with €-28.6 billion);
Concerning the total trade of Member States, the largest surplus was observed in Germany (€+105.2 billion in January-October 2009), followed by Ireland (€+32.6 billion), the Netherlands (€+32.1 billion) and Belgium (€+11.4 billion). The United Kingdom (€-77.9 billion) registered the largest deficit, followed by France (€-42.5 billion), Spain (€-40.7 billion), Greece (€-23.7 billion) and Portugal (€-15.2 billion).

Euro areaannual inflation was 0.9% in December 2009, up from 0.5% in November. A year earlier the rate was 1.6%. Monthly inflation was 0.3% in December 2009. The annual average rate of inflation in 2009 was 0.3%, down from 3.3% in 2008;
EUannual inflation was 1.4% in December 2009, up from 1.0% in November. A year earlier the rate was 2.2%. Monthly inflation was0.2% in December 2009. The annual average rate of inflation in 2009 was 1.0%, down from 3.7% in 2008.

Inflation in the EU Member States

In December 2009, the lowest annual rates were observed inIreland(-2.6%),Estonia(-1.9%) andLatvia(-1.4%), and the highest in Hungary (5.4%), Romania (4.7%) and Poland (3.8%). Compared with November 2009, annual inflation rose in twenty Member States, remained stable in four and fell in two;.
The lowest 12-month averagesup to December 2009 were registered inIreland(-1.7%),Portugal(-0.9%) andSpain(-0.3%), and the highest inRomania(5.6%),Lithuania(4.2%),HungaryandPoland(both 4.0%).

Inflation in the Euro area

The main components with the highest annual rates inDecember 2009werealcohol & tobacco (4.8%), transport (3.5%) and miscellaneous goods & services (2.4%), while the lowest annual rates were observed forfood (-1.3%), communications (-0.8%) and housing (-0.3%). Concerning the detailed sub-indices,fuels for transport (+0.42 percentage points) and tobacco (+0.13)had the largest upward impacts on the headline rate, whilegas(-0.33) and cars (-0.10)had the biggest downward impacts.
The main components with the highest monthly rates wererecreation & culture (2.0%) and hotels & restaurants (1.0%),while the lowest wereclothing (-0.5%) and communications (-0.2%). In particular,package holidays (+0.18 percentage points) and accommodation services (+0.08) had the largest upward impacts, whilefuels for transport and garments (-0.05 each)had the biggest downward impacts.

Source: Eurostat Press Release
© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
European car sales levels rose in December
On 15 January 2010, figures released by the European Automobile Manufacturers Association (ACEA) showed that European car sales rose by 16 percent in December.

This was an encouraging sign of recovery after a difficult year, although total sales for 2009 were down by 1.6 percent compared to 2008.

France and Germany were among those countries with scrappage schemes that saw rises in sales in 2009. For the UK however, sales dropped by 6.4 percent for 2009 although December figures showed an increase on the same period in the previous year. Germany saw the biggest rise in sales last year - up more than 23 percent compared with 2008. A total of 14.5 million cars were sold across 28 European countries in 2009.

It is believed that manufacturers will suffer as scrappage schemes end. The UK's scheme is due to end in February 2010.
Source: ACEA Figures
© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
Distributable profits: additional guidance on the determination of realised profits and losses
The Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland have published proposed additional guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006 (under reference ICAEW TECH 03/09)

When developing TECH 01/09, the Institutes gave consideration to some additional issues where there appeared to be a demand for additional guidance. It was not possible to develop full proposals at that time without unduly delaying the publication of TECH 01/09. Such proposals have now been fully developed and are set out in this Technical Release. These proposals, which have now been fully developed and are set out in this TECH 03/09, include:

Foreign currency share capital and use of presentation currencies;
Linked transactions/circularity;
Cash box structures;
Section 846, Companies Act 2006.

Other matters in respect of which TECH 03/09 gives guidance include: reclassification of financial instruments, distributions settled by set off, reduction of a liability, group treasury balances, goodwill written off, surplus shares in an ESOP Trust, IFRIC 12 (service concession arrangements) and IFRIC 16 (hedging relationships involving more than one company).
Source: ICAEW TECH 03/09
© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
Improvements needed in M&A accounting
Recent economic conditions have constrained the number of mergers and acquisitions (M&A) undertaken by UK companies. Many are now forecasting a return to more normal levels of transaction activity. Merger and Acquisition (M&A) activity is likely to grow as economic conditions improve. The Financial Reporting Council (FRC) announced on 7 January 2010 the undertaking of a study of accounting for acquisitions to assess the quality of acquisition accounting and to see whether there is a need for significant improvement.

Traditionally, companies gave an account of their most significant mergers and acquisitions in the front part of their annual reports to help investors and other annual report users to understand the impact of such transactions. However, the Companies Act 2006 expanded the mandatory content of the business review included in the directors' report. Directors of quoted companies now have to report explicitly, to the extent necessary, on the main factors likely to affect the company's future development which should include the impact of major acquisitions.

Companies have told the Financial Reporting Council (FRC) that M&A accounting is costly and difficult, yet investors say that the resulting information is not useful.

This FRC study of the quality of accounting and reporting on acquisitions suggests a possible reason for this is that the International Financial Reporting Standard (IFRS) on business combinations has been poorly applied by companies due to unfamiliarity with its requirements and the complexity of valuing intangible assets such as brands and customer relationships.

The study found that companies had provided insufficient or inconsistent information about material acquisitions in their audited accounts when compared to the rationale for these acquisitions and supporting explanations given in their business reviews.

Companies frequently expend resources on development, maintenance and enhancement of intangible resources but IFRS prohibits the recording (known as recognition in accounting language) of most internally developed intangible resources. However, IFRS 3 'Business combinations' which was published in 2004 (IFRS 3 2004)2 contains specific accounting requirements to be applied to all business combinations. Many UK companies are still developing their understanding of the requirements of this standard. The most significant difference between IFRS 3 2004 and previous UK financial reporting requirements is that all business combinations (whether mergers or acquisitions) must be accounted for as acquisitions.

FRS 3 "business combinations" was first applied by UK Listed companies in 2005 and by AIM companies in 2007. IFRS 3 (revised) applies to annual reporting periods beginning on or after 1 July 2009. The FRC will publish the results of this work and will provide feedback to the International Accounting Standards Board as part of its planned post implementation review of IFRS 3 (revised).
Source: www.frc.org.uk/press/pub2205.html
Related Document: FRC Study: Accounting for Acquisitions
© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
Publication of Issue 23 of List!
On 30 December 2009, the FSA, in its capacity as the UK Listing Authority (UKLA), published issue 23 of its newsletter List!.

The newsletter attempts to provide a broad coverage of topical issues of both a technical and non-technical nature. The FSA isare

limited in the way they can address technical matters by the requirements of the Financial Services and Markets Act 2000 (FSMA), which restricts the scope for issuing guidance without prior consultation. The contents of the newsletter are not intended to be guidance as contemplated by FSMA, and the contents should neither be interpreted, nor relied upon, as guidance. You should refer to the Listing Rules (LRs), Prospectus Rules (PRs) and Disclosure and Transparency Rules (DTRs) for general guidance. Technical explanations provided in this newsletter are illustrative only and are intended to provide an indication of how the UKLA may expect certain issues to be addressed.

This edition of List! Includes information on:

Share buybacks (a mix and match facility);
Mix and match facilities in the context of a scheme of arrangement;
The practical measures that will be taken by the FSA to implement the new regime of Listing Categories;
The documents that need to be put on display under the Prospectus Regulation;
Applying LR13.5.27 and LR13.5.28 to acquisitions of publicly traded companies
Communications on structured products;
The handling of leaks or rumours;
Listing categories;
"Ordinary course" arguments in the context of LR 11.1.5(2) (co-investment and co-financing arrangements as related party transactions).

Source: www.fsa.gov.uk/pubs/ukla/list_dec09.pdf
© Copyright Bizezia Limited, publisher of LEARNEZIA
-----------------------------------------------------------------------------------------------------------------------------------------
Rights issues: European Commission adopts amendment of accounting classification
On 23 December 2009, Commission Regulation (EU) No 1293/2009 (the Amending Regulation) was published in the Official Journal. The Amending Regulation amends Commission Regulation (EC) No 1126/2008 (the Consolidation Regulation).

The Amending Regulation amends the Consolidation Regulation to adopt the amendment to IAS 32, which will apply for annual periods beginning on or after 1 February 2010. Earlier application of the amendment to IAS 32 is permitted provided that any such earlier application is disclosed.
Source: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:347:0023:0025:EN:PDF
© Copyright Bizezia Limited, publisher of LEARNEZIA

Bizezia making your business easier

News

Company Law, Corporate Governance & Corporate Finance - January 2010