On 18 November 2009, Directive 2006/46/EC was implemented in Ireland by the European Communities (Directive 2006/46/EC) Regulations 2009 (the Regulations). These Regulations set out a number of provisions that increase the reporting and disclosure obligations on companies incorporated in the EU. The Regulations in their entirety, including the provision introducing a requirement for a corporate governance statement (discussed in more detail below), came into effect on 18 November 2009 and should be taken into account by listed companies for any accounts produced or any AGM going forward.
The Regulations implement Directive 2006/46/EC on Company Reporting (the Directive), in Ireland. Directive 2006/46/EC amends four other Directives; namely Directive 78/660/EEC (the 4th Company Law Directive), Directive 83/349/EEC (the 7th Company Law Directive), Directive 86/635/EEC (the Credit Institutions Directive) and Directive 91/674/EEC (the Insurance Undertakings Directive).
Commencement and timing
As previously mentioned, these Regulations were signed into law on 18 November 2009. Unfortunately, they were only made publicly available on 23 November 2009. The Regulations commenced in their entirety when they were signed into law on 18 November 2009, even though they were not publicly available on that date.
The Regulations do not provide expressly for a commencement date after which companies affected by them will be required to comply with their provisions, and accordingly we would recommend that any such companies, whose financial year has ended but which have yet to lay their balance sheets and accompanying directors' reports before the annual general meeting, should seek specific legal advice as to their obligations.
The following are the key provisions in the Regulations:
- Corporate Governance Statement
Which companies need one?
Irish-incorporated companies (public or private), including parent undertakings, credit institutions and insurance undertakings, whose securities are admitted to trading on a "regulated market" (in Ireland this is the Main Market of the Irish Stock Exchange) must now include a corporate governance statement in their annual (directors') report.
The expression "securities" is, unfortunately, not defined, but is appears that it covers both equity and non-equity (debt) securities, although companies which only have debt securities listed on an EU/EEA "regulated market" will be exempt from a large number of the content requirements, unless (and this would be rare) they also have shares traded on a "multilateral trading facility" such as the ISE's Global Exchange Market or the Irish Enterprise Exchange).
What is required?
Unless an exemption applies (see further below), the Corporate Governance Statement must include:
- Reference to the corporate governance code to which the company is subject, including all relevant information concerning corporate governance practices applied in respect of the company which are additional to any statutory requirement, and details of where the text of the relevant corporate governance code is publicly available. If the company departs from the corporate governance code, details of this, and of the reasons for such departure, should be included;
- a description of the main features of the company's internal control and risk management systems in relation to the financial reporting process;
- information already required by the Takeovers Directive (2004/25/EC) relating to the company's share and control structures (where the company is subject to this Directive);
- the operation of the shareholder meeting and its key powers and a description of shareholders' rights and how they can be exercised; and
- the composition and operation of the board and its committees.
Separate report: The Regulations allow for this information to be made in a separate report published in conjunction with the director's report, provided it is attached to the relevant balance sheet, laid before the AGM of the company and signed on behalf of the directors by two directors of the company. In addition, a copy must be published on the website of the company (and reference made to this, and the website address) or annexed to the annual return, and certified by a director and the secretary to be a true copy of the statement as laid before the AGM.
The company's auditors, when preparing their report to the members to be read at the AGM, must establish that the corporate governance statement addresses the information required under these Regulations, and provide an opinion on certain aspects of the report.
Exemptions: As indicated earlier, companies with securities other than shares admitted to trading on a regulated market (e.g. companies which only have "debt listings") are not required to comply with (a),(d) and (e) above, unless they have issued shares which are traded on a multilateral trading facility.
Practical implications: Even though much of the required information contained in the Corporate Governance Statement is already produced by public companies whose shares are traded on an EU/EEA Main Market, they will now be legally obliged to produce it in one single statement in their annual directors' report. The Regulations effectively put the principle of collective responsibility for corporate governance on a regulatory footing. Relevant companies, who are preparing for their next AGM, should take steps now to ensure that they will be in compliance with this new provision.
- Fair Value Accounting
To whom does it apply?
This provision (in Regulation 3) applies to all public and private limited companies, (including credit institutions and insurance undertakings), who prepare Companies Act accounts (both individual and group accounts).
What is required?
These companies are now permitted but not required to use fair value accounting in accordance with IAS 39/FRS 26 for a much wider category of financial instruments in both their individual and consolidated accounts. The Regulations amend Part III A of the Schedule to the Companies (Amendment) Act 1986 by broadening the categories of financial instruments which may be accounted for at fair value.
- Disclosure of off-balance sheet transactions
To whom does it apply?
This provision applies to all Irish companies preparing their individual or consolidated accounts in accordance with the Companies (Amendment) Act 1986, the European Communities (Companies Group Accounts) Regulations 1992, the European Communities (Credit Institutions: Accounts) Regulations 1992, the European Communities (Insurance Undertakings: Accounts) Regulations or IFRS. As a result, it is not a requirement that any securities of the company be admitted to trading on any stock exchange.
What is required?
Regulation 6 amends Part IV of the Companies (Amendment) Act 1986 by providing that, subject to certain exceptions, off-balance sheet arrangements with the company which have a material risk or benefit to the company are required to be disclosed in the notes to the company's accounts.
- Disclosure of related party transactions
To whom does it apply?
This provision applies to all Irish companies preparing their individual or consolidated accounts in accordance with the Companies (Amendment) Act 1986, the European Communities (Companies Group Accounts) Regulations 1992, the European Communities (Credit Institutions: Accounts) Regulations 1992, the European Communities (Insurance Undertakings: Accounts) Regulations. Again, it is not a pre-requisite that the company's securities be admitted to trading on any stock exchange.
What is required?
Regulation 6 again amends Part IV of the Companies (Amendment) Act 1986 by providing that, subject to certain exceptions, related party transactions, which are material and have not been concluded under normal market conditions, are required to be disclosed in the notes to the company's accounts.
Under Regulation 7, the notes on the consolidated accounts prepared in respect of a parent undertaking and its subsidiary undertakings must set out information similar to that required in Regulation 6, relating to the nature, business purpose and financial impact (if appropriate) of any arrangement that is not included in the consolidated balance sheet.
- SME thresholds / audit exemptions
Under the Directive, Member States were granted an option to increase the maximum turnover and balance sheet thresholds for small and medium-sized companies by 20%. Many Member States, including the UK, exercised this option. However, Ireland has opted not to increase the thresholds. Rather, the Regulations amend Section 8 of the Companies (Amendment) Act 1986 by providing that private companies whose securities are admitted to trading on a regulated market (such as private companies which have issued listed debt securities) do not qualify to be treated as an SME. Companies defined as "small" are permitted to file only an abbreviated balance sheet for filing in the Companies Registration Office. Medium-sized companies also have the option to file less detailed accounts.
The DETE have confirmed that it is planned to increase the SME thresholds in the Companies Consolidation and Reform Bill which is expected to be published in September 2010.
In addition, these companies have been removed from the group of companies who enjoy an exemption from the requirement to have their accounts audited under Section 32 of the Companies (Amendment) (No. 2) Act 1999.
- Penalties for non-compliance
It is already a criminal offence for a director to fail to take all reasonable steps to comply with the legal requirements relating to the production and content of directors' reports. However, the Regulations also provide that anyone who breaches the provisions in relation to (1) off-balance sheet transactions, (2) the obligations of parent undertakings preparing consolidated accounts in relation to their corporate governance statements, and (3) the duties of auditors in relation to corporate governance statements prepared by such parent undertakings, is guilty of an offence and liable to a fine of up to €50,000 or 3 years imprisonment or both, if convicted on indictment (i.e. before a judge and jury). In relation to companies, if it can be proved that an offence under these provisions was committed with the consent or connivance of or is attributable to neglect on the part of a director, manager or secretary of the company (or where the company is managed by its members, those members), that person is guilty of an offence.