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Directive proposals on company reporting, capital maintenance and transfer of registered office

Comments from ACCA
June 2005

ACCA is pleased to comment on the consultation document on the above. We welcome the opportunity that the Department has provided via this consultation exercise to enable stakeholders to submit feedback which could be helpful during the negotiation processes of the instruments concerned. In the following paragraphs we set out our comments on selected questions posed by the Department in the document.

Company reporting

Directors’ responsibility

Q1. Do you think it is helpful to have the issue of directors’ responsibility clarified in EU law or should it be dealt with at national level only?

We do not believe that the proposed wording would cause any problems to the UK at present, so we have no major problem with its being dealt with on a pan-EU basis. The wording could, though, have implications for the two-tier board, the adoption of which the Commission separately proposes to extend to companies throughout the EU. Where the management and supervisory boards have separate responsibilities in relation to the approval of the accounts, the wording in the Directive must make provision for each board to be held collectively responsible only for its allotted functions. One other point we would make is that, while we support the concept of collective responsibility with regard to the accounts, this should not preclude individual directors from being able to record any reservations they may have with a view to protecting their interests at some future stage.

Q2. Do you agree that board members should be responsible to their company?

Yes.

Off Balance Sheet and Related Party Disclosures

Q4-5 Do you agree with the proposal to require new disclosures on off-balance sheet arrangements? Do you think the proposal is clear enough?

We support the general objective of ensuring that material SPEs are disclosed for the benefit of users. We agree that, in the light of recent events, there is a need for measures to be introduced as part of an overall EU strategy to combat corporate fraud.

The proposal is to require the specific disclosure in the notes to the accounts of material off-balance sheet arrangements, including SPEs. We consider, however, that the term ‘arrangements’ proposed to be inserted into article 43(1)(7a) is vague and inappropriate for verification purposes. The term would be likely to be applied inconsistently across member states because interpretation of it could be different, particularly given that the term is not used elsewhere in the Fourth and Seventh Directives. We accept that draft recital 7 provides some further help as to which types of arrangements are intended to be covered, but still consider that more work is needed on the definition. A workable definition should be capable of encompassing comprehensively all off balance sheet arrangements save for matters such as sales orders or employee contracts which are part of normal company business.

Related party transactions

Q8. Do you agree with the proposal in principle?

We support the objective of improving transparency with regard to related party transactions. These are often of particular significance in privately owned companies, especially SMEs. Notwithstanding this, we welcome the Commission’s apparent acceptance of the need to avoid imposing disproportionate burdens on non-listed companies.

The text of the proposed new article 43(1)(7b) would require disclosure of the nature, business purpose and amount of transactions with related parties. This disclosure would go beyond the requirements of IAS 24, in particular as regards the disclosure of the nature and business purpose of the transactions concerned. This would seem to contradict the Commission’s own statement in its explanatory memorandum to the effect that the level of transparency required by IAS 24 is satisfactory. We would accordingly prefer the new disclosures not to go beyond the IAS 24 benchmark. The need to identify, explain and corroborate the purposes of all material related party transactions is likely to involve preparation and audit costs for unlisted companies which would outweigh the potential benefits to users.

We appreciate that the reference in the proposed to ‘under normal commercial considerations’ suggests that the Commission is aware of the need to avoid unnecessary burdens on unlisted companies. However, the danger is that companies may circumvent the disclosure requirement by treating most if not all of their transactions as being ‘normal’. One option to avoid this problem would be to require the disclosure of all related party transactions as per IAS 24 and then to disclose similar transactions on an aggregated basis. Alternatively, it would be helpful if the Directive could elaborate on what is meant by ‘under normal commercial conditions’ – such elaboration could usefully adopt the expression ‘at arm’s length’ which is generally understood within the accounting profession.

The corporate governance statement

Q11. Do you think the introduction of a new corporate governance statement would contribute to the objectives set out in the document?

The introduction of a new minimum standard corporate governance statement will help to raise the importance of corporate governance as a compliance issue. In itself we do not consider that it will have a great impact but by cross-referring to domestic governance codes it will at least provide investors with an indication of the benchmark which a given company has chosen to conform to.

Q13. Are there any elements in the corporate governance statement which should be excluded?

Sub-section 3 requires companies to provide a description of their internal control and risk management systems. As it stands, this would not require companies to provide any meaningful information to users and may engender bland, boilerplate responses. As such we query its likely usefulness. If the revised eighth Directive contains a requirement for audit committees to monitor the effectiveness of the company’s internal controls etc, the corporate governance disclosure could conceivably be cross-referred to that. The elements of sub-section 5, on the operation of the shareholder meeting and a description of shareholders’ rights, are essentially educational in nature. Shareholders should be able to acquire this information from other sources. We query therefore whether they should be included in the statement.

Q14. Is the directors report the correct place for the new statement?

We had reservations originally about the proposal in the draft Directive that the new statement should be included in a separate part of the directors’ report. We understand that the draft Directive has subsequently been amended to provide that the new statement should be a free-standing report. We agree that this would be more appropriate.

Capital maintenance

Q12-Q13. Do you agree that the conditions governing the changes proposed will be a disincentive for companies to take advantage of relaxed financial assistance rules?

We agree with the Department’s analysis that the requirement to certify solvency over five years is impractical. We consider that article 23 could be improved by requiring a company’s directors to consider its solvency for the coming year and to report that, on the strength of their consideration of this, they are satisfied that the company will remain solvent for at least the succeeding twelve months.

Q29. Do you agree that a fundamental review of the capital maintenance system and of alternative approaches is a high priority for the EU?

Yes. We would encourage the Department to press the Commission to show a greater appreciation of the importance of this issue.

Transfer of registered office

Q1. Would it be useful to have provisions which enabled companies in the UK and other member states to transfer their registered office to another member state?

Since the proposal to introduce legislation on this matter has been adopted as a priority measure by the Commission, it seems clear that there is to be a Directive on this matter. We do not have any objections to the provision of an option for companies to transfer their registered offices, and are only concerned to ensure that there are suitable safeguards to ensure that the interests of creditors, shareholders and other stakeholders are protected.

As regards the specific question of whether it would be useful to have such provisions, we are not aware of the existence of any great demand for this legislation from businesses themselves.

Q2 Do you agree that the scope of the Directive should be sufficiently broad to include both public and private companies?

We do not see why both types of UK company should not come within the scope of the new Directive. LLPs too would appear to come within it.

Q3 Should the proposal only address the cross-border transfer of the registered office?

Yes. There is nothing at present to restrict the transfer of a ‘head office’ or to prevent companies from operating in other member states.

Q5 Do you think that the proposed approach in relation to the taking of a decision by a company to transfer is the right one?

Yes. But we suggest that there should be an additional requirement that, following agreement by members, companies should publish their intentions via the Gazette and/or newspapers. Creditors should be entitled to object to the planned transfer within a specified period. The members’ resolution, and ideally a follow up notice to confirm that no objection has been received, and details of the new registered office, should be filed with the national information agency.

Q7 Are the outline proposals sufficiently clear concerning which national law will govern the transfer decision?

There are two issues which we suggest need to be clarified. Firstly, it should be understood that, following a transfer, while the company loses the legal identity it had in its home state and acquires a new one in its new host state, this does not affect the company’s continuing status. Therefore, all contracts and commitments entered into prior to transfer will continue in force and the rights and responsibilities associated with those contracts and commitments will continue as they existed at the outset. Secondly, attention needs to be given to how the company’s public record is to be dealt with. Interested parties in both the home state and the host state will have an interest in a transferring company’s details. In the home state, the information agency will need, at the very least, to disclose the details of the company’s new registered office and details of how information on the continuing activities of the company can be accessed. In the host state, we suggest that, as well as the documents which are required to be filed to incorporate the company there, there should be a requirement for the company to file its constitutional documents.

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