The global financial crisis has sharpened the international focus on systems of corporate governance, not least in an effort to mitigate some of the systemic factors which may have contributed to the onset of the financial crisis. The governance of financial institutions and listed companies has been the subject of recent careful assessment both in the UK and internationally: new recommendations which flow from these reviews, and institutional investors' expectations arising out of such recommendations, merit close consideration by listed companies.
This article examines how companies which are incorporated in the British Virgin Islands ("BVI") and listed in London may take full advantage of the flexibility of BVI company legislation to meet the expectations of their institutional investors when it comes to complying with new UK corporate governance recommendations.
UK Corporate Governance Code
In June 2010, the Financial Reporting Council published the UK Corporate Governance Code (the "Code"), which contains broad principles and specific provisions relating to the development of effective board practice. One provision of the Code more than any other has sparked debate amongst issuers, institutional investors and advisers: the recommendation that “all directors of FTSE 350 companies should be subject to annual election by shareholders” in the interests of “greater accountability”.
Companies with a Premium Listing of equity shares are required to report on how they have applied the main principles of the Code, and either to confirm that they have complied with the Code’s provisions or to provide an explanation where they have not (the so-called “comply or explain” approach).
The preface to the Code makes clear that companies are free to explain rather than comply if they believe that their existing arrangements ensure proper accountability, or if they require a transitional period before the annual re-election is introduced,and certain institutional investors even went so far as to state in a letter to the Financial Times that they considered the annual re-election provision to be unnecessary and potentially damaging.
This said, major groups representing institutional investors expect that, by 2012, listed companies will comply with the annual re-election provision. In its 2011 UK Shareholder Voting Guidelines, PIRC advocates a more general application of the annual re-election provision than that recommended by the Code, stating that it will look to all listed companies (rather than only FTSE 350 companies) to hold full elections on an annual basis (although suspending implementation of across-the-board voting recommendations until 2012). The Code itself recommends that the boards of smaller companies should “consider their policy on director re-election.”
Although the application of the Code does not extend to AIM-quoted companies, compliance with the Code is often regarded as a benchmark of best practice, having regard to the size of the company. Accordingly, if AIM companies choose to comply with these principles, then the annual re-election provision is potentially of broader relevance than only to companies listed on the Main Market.
Some companies are taking the view that annual re-election need only commence at the AGM after the first financial year to which the Code applies. However, a high proportion of listed companies which have held an AGM so far in 2011 have nevertheless submitted their entire board for re-election, and some BVI domiciled companies similarly plan to do so.
Amendments to articles of association
From a mechanical company law perspective, companies are taking different approaches to complying with the annual re-election provision.
Some companies have chosen not to incorporate a provision into their articles of association requiring all directors to submit themselves for re-election at each AGM, deciding instead to leave the matter to the board’s discretion each year. Other companies, however, have proposed the inclusion in their articles of an annual retirement provision for every director.
The BVI Business Companies Act, 2004 (the “Act”) does not take a prescriptive approach to board composition, quorum, vacancies or the appointment and removal of directors. The practical effect of the flexible provisions of the Act is that the memorandum and articles of association of a BVI company may contain bespoke provisions governing the appointment, removal and re-election of directors. For BVI domiciled companies which choose to comply with these corporate governance principles, this makes it extremely straightforward to reflect in a BVI company’s articles of association corporate governance recommendations regarding re-election of directors.
Key provisions of the Act regarding the appointment and removal of directors are that:
- directors can be appointed by resolution of members (unless the memorandum or articles provide otherwise), or by the directors if permitted by the memorandum or articles, for such term as may be specified in the resolution;
- the directors may fill a vacancy on the board unless the memorandum or articles provide otherwise; and
- subject to the memorandum or articles, a director may be removed by a resolution of members (although, again subject to the memorandum or articles, such a resolution may only be passed either at a meeting of members specifically called for the purpose of removing a director or whose purposes include the removal of the director or by a written resolution passed by at least 75% of the members entitled to vote).
Subject to any bespoke provisions in a company’s articles, the approval of a simple majority of shareholders is typically sufficient to amend the provisions of the articles which deal with the appointment and removal of directors.
A legitimate concern for some companies, including some BVI domiciled companies, has been how to deal with the possible scenario in which all directors submit themselves for re-election but either none of them are re-elected or the board is left inquorate if an insufficient number of directors are re-elected. For BVI domiciled companies which choose to comply with these corporate governance principles, the flexibility of the Act means that it is simple to incorporate into the articles of a BVI company provisions to address this scenario.
One approach would be to fall back on provisions commonly found in some companies’ articles which provide that, in the event that the number of director(s) falls below the minimum number prescribed by the articles, the continuing directors or sole continuing director may act for the purpose of filling vacancies or of calling a general meeting (or granting any two shareholders the power to call a general meeting in the event that there are no directors willing or able to act).
An alternative approach would be to set out in the articles a specific process to deal with the scenario in which the board is left inquorate if an insufficient number of directors are re-elected. Such a mechanism could operate as follows:
- in the event that an insufficient number of directors are re-elected, a sufficient number of directors required to meet the minimum number prescribed by the articles shall continue as directors (the “Retiring Directors”); and
- the Retiring Directors form a nomination committee to nominate new directors and, once the new directors have been appointed (by the Retiring Directors or by the members), the retirement of the Retiring Directors would take effect.
Alternatively, the mechanism could operate such that:
- in the event that an insufficient number of directors are re-elected, all retiring directors who stood for re-appointment at the AGM would be deemed to have been re-appointed as directors and remain in office, but they may only act for the purpose of convening general meetings of the company and other duties as are essential for the company to continue as a going concern, but not for any other purpose; and
- those directors would convene another general meeting and would retire from office at that meeting (the process being repeated until a sufficient number of directors have been elected).
The flexibility of companies legislation in the BVI has long been employed to enable BVI companies to incorporate into their articles of association legal or non-statutory requirements of foreign jurisdictions, such as the mandatory bid provisions contained in Rule 9 of the City Code on Takeovers and Mergers. The flexible provisions of the Act are equally useful in assisting BVI companies to comply with new and more stringent corporate governance requirements brought about since the onset of the global financial crisis.