Irish Taxation Institute Seminar on Tuesday 6th April 2004 at 4:00 p.m. Recent Developments in Irish

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Irish Taxation Institute Seminar on Tuesday 6th
April 2004 at 400 p.m.Recent Developments in
Irish Company LawJohn Kehoe, Solicitor,
AITIFounder, KLW

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Agenda

• Position of Non-Executive Directors
• Directors and Officers Indemnity (DO)
  Insurance
• Directors Compliance and Responsibility
  Statements
• (IV) Audit Committees
• Auditor Independence Provisions
• IAASA Oversight of Accounts
• item (I) arises from an October 2003 UK court
  decision
• items (II) (V) arise from new statute (the
  Companies (Auditing and Accounting) Act 2003)
  none of which has yet been commenced
• as with the previous seminar, the emphasis is
  practical rather than theoretical (questions
  welcomed throughout)

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(I) NEDs

Recent Case Law Non-Executive Directors To Be
Judged By Higher Competency Standards
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NEDs

• Historical Background
• No statutory demarcation, so that a NED has all
  the statutory duties of a director (e.g.
  corporate compliance with Companies Acts)
• But, classically, competency duty has been
  subjectively tested and has adjusted to
  management structure and individuals background
• 1911 case Sir Arthur Aylmer was absolutely
  ignorant of business. He only consented to act
  because he was told the office would give him a
  little pleasant employment, without incurring any
  responsibility. HW Tugwell was a partner in a
  firm of bankers in a good position in Bath he
  was 75 years of age and very deaf he was induced
  to join the board by representations made to
  him
• Catastrophic investment in speculative Brazilian
  rubber plantations
• Neither of them found negligent they were not
  bound to bring any special qualifications to the
  officeand could undertake the management of a
  rubber company in complete ignorance of
  everything connected with rubber without
  incurring responsibility
• An idiot, provided he was honest, could avoid
  liability

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(I) NEDs

• fast forward to 2003

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(I) NEDs

• Equitable Life
• In October 2003, 9 former Equitable NEDs lost a
  preliminary High Court action to have personal
  negligence/breach of duty actions against them by
  the company struck out on grounds of no real
  prospect of success
• Negligence/breach of duty alleged is that NEDs
  failed to take legal advice on time as to
  appropriateness of their differential terminal
  bonus policy, and then failed to mitigate the
  companys loss when they realised they had
  proceeded unlawfully
• NEDs (unsuccessful) argument was that they had
  expected the actuaries to flag the legal issues,
  that the need to take legal advice was apparent
  only on a very technical analysis of a 1996 board
  paper (and that some of them had not even been
  required to attend the 1996 board meeting)

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(I) NEDs

• reference in judgement to Barings precedent
  directors have a duty to acquire and maintain
  sufficient knowledge of the company to allow them
  to discharge their duties
• indicated that unquestioning reliance
  unacceptable
• and that extent to which a non-executive
  director may reasonably rely on the executives
  and other professionals was a developing area
  and fact sensitive
• private investigators retained to track
  directors personal assets
• trial costs (April 2005) estimated at 30m
• DO cover reportedly capped at 5m NEDs now
  representing themselves
• recent Penrose Report (NEDs criticised for
  failing to stand up to management)

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(I) NEDs

• In summary with respect to NEDs
• Need for diligence on part of NEDs increasing
• Due to a change both
• In legal theory to some extent, in the sense that
  the competency duty appears to be hardening
• In practice to a greater extent, in the sense
  that directors these days are better qualified
  and more experienced (and so, will be tested
  accordingly)

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(II) DO Insurance

CA 2003 seeks to address a long-standing
difficulty with the enforceability under Irish
law of Directors and Officers Liability (DO)
Insurance s56 CA 2003, inserting s200(2) CA63
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(II) DO Insurance

• Historical Context
• public hostility towards articles forgiving
  directors unintentional/honest negligence
  shareholders were unable to obtain redress,
  particularly with then more relaxed view of
  competency duty
• prohibition on certain contracts of indemnity re.
  directors negligence etc first introduced in UK
  in 1929
• but it was found to have been too widely cast
• DO exception first introduced in UK in 1989

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(II) DO Insurance

• but Irish law never amended
• .. any provision whether contained in the
  articles of a company or in any contract with a
  company or otherwise for exempting any officer of
  the company or any person employed by the company
  as auditor from, or indemnifying him against, any
  liability which by virtue of any rule of law
  would otherwise attach to him in respect of any
  negligence, default, breach of duty or breach of
  trust of which he may be guilty in relation to
  the company shall be void
• s200 CA63

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(II) DO Insurance

• What has s200 precluded?
• contracts of indemnity/liability waivers
• DO/auditor(?!) insurance
• some corporate indemnities
• some provisions in Articles
• liability caps, etc
• A (very limited) exception has been available
• company may indemnify its officers and auditor
• ..but only if and when officer wins his case
  (obvious cashflow implications Equitable
  Life).

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(II) DO Insurance

• notwithstanding anything in this section, a
  company may, in pursuance of any such provision
  as aforesaid, indemnify any such officer or
  auditor against any liability incurred by him in
  defending proceedings, whether civil or criminal,
  in which judgment is given in his favour or in
  which he is acquitted, or in connection with any
  application under section 391 in which relief is
  granted to him by the court.
• s200(b) CA 1963

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(II) DO Insurance

• Other points to note re. original s200 CA63
• only applies to Irish-incorporated companies
• and only renders void as a matter of Irish law
• - market for onshore DO has developed, but
  without legal basis and directors funding
  offshore policies have been vulnerable at common
  law/equity

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(II) DO Insurance

• the impending law-change
• the company may now validly purchase and maintain
  insurance related to the negligence etc of any of
  its current/former officers or auditors
• retroactive effect (so that pre-Commencement
  Order contracts of insurance will be validated on
  commencement)
• Notwithstanding subsection (1), a company may
  purchase and maintain for any of its officers or
  auditors insurance in respect of any liability
  referred to in that subsection.
• s200(2) CA63, as inserted by s56 CA2003

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(II) DO Insurance

• important to understand that material
  restrictions and doubts remain
• no progress on long-standing issues relevant to
  company indemnities
• limited nature of new DO exemption
• limited nature of CA 2003 exemption
• only applies where policy is bought by the
  company (continuing risk of unenforceability of
  personal DO policies)
• in relation to its officers (not group
  officers)
• and of course in case of insurance the terms and
  conditions of the policy itself (e.g. excess,
  cap, often a personal obligation to run defence
  and claims-made basis - watch run-off issues)
  need attention

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(II) DO Insurance
Analysis Irish-law enforceability of DO
insurance and corporate indemnities/liability
waivers, post commencement s56 CA 2003
Though of course insurer may pay ex gratia
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(II) DO Insurance

• Practical Points for Tax Advisers
• Think hard before accepting directorships
• Advise your clients to get DO and an Indemnity
• Note that the Combined Code now provides that
  appropriate insurance should be arranged by the
  Company
• Understand their respective limitations
• Understand when the litigation risk is most
  likely to present
• Situations of doubtful solvency
• Higher-risk sectors/phases (treasury/financial
  services, overseas growth, staff cuts, new
  technology)
• Domineering CEO
• and keep an eye on the Equitable Life story
• Questions on this topic?

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(III) Compliance/Responsibility Statements

CA 2003 will oblige directors of some Irish
companies to issue new statements related to
the companys compliance with certain laws (and
oblige auditors to issue annual fairness opinions
with respect to the statements) s45 CA 2003
inserting s205E,205F CA90
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(III) Compliance/Responsibility Statements

• Background
• domestic (PAC/RGA direct prompt was concerns as
  to role of external auditor in ensuring
  compliance with law)
• international (Enron etc wider
  corporate-governance context)
• Application
• public limited companies
• large private companies limited by shares (with
  gross assets greater than 7,618,428 or turnover
  greater than 15,236,856 in relevant financial
  year)
• so doesnt apply to
• smaller private companies lbs
• unlimited companies (public or private) or
• non-public companies limited by guarantee

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(III) Compliance/Responsibility Statements

• Compliance Statement
• an information item, describing the companys
• policies regarding compliance with its relevant
  obligations
• where relevant obligations mean Irish Companies
  Acts, Irish revenue law, and any other
  enactments that provide a legal framework within
  which the company operates and that may
  materially affect the companys financial
  statements
• procedures (internal, financial and other) for
  securing such compliance
• arrangements for implementing and reviewing
  effectiveness of such policies and procedures
• must be prepared (in writing) ASAP after
  commencement of obligation
• then approved by board
• then reviewed (and if necessary revised) every 3
  years (commencing first approval)
• and included within annual directors report
• statutory penalty (offence by director) is for
  failure to prepare/cause to be prepared and/or
  publish the statement

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(III) Compliance/Responsibility Statements

• Responsibility Statement
• more editorial/subjective than Compliance
  Statement
• acknowledgement by directors of their personal
  responsibility for securing compliance by the
  company with its relevant obligations
• confirmation of whether appropriate compliance
  procedures exist, and whether directors have
  carried out necessary review of effectiveness
  during the year
• clarification that procedures considered/deemed
  to be appropriate and effective if provide a
  reasonable assurance of such compliance in all
  material respects with relevant obligations
• opinion as to whether, based on these procedures
  and their annual effectiveness-review, directors
  used all reasonable endeavours to secure such
  compliance during relevant financial year
• again, must be included within annual
  directors report
• and again, statutory penalty (offence by
  director) is for failure to prepare/cause to be
  prepared and/or publish the statement

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(III) Compliance/Responsibility Statements

• Auditors Fairness Opinion
• auditor must determine whether
• in its opinion
• the Compliance and Responsibility Statements
• are fair and reasonable
• having regard to the information in the
  possession of
• the auditor itself, or
• any affiliate of the auditor
• auditor must then include in its annual report
  its conclusions as to whether the statements are
  fair and reasonable (with additional statement to
  directors if auditor concludes not
  fair/reasonable)
• separately, if auditor believes that statements
  not prepared or published as required, it must
  report this to the DCE
• auditor guilty of an offence if it doesnt comply
  with above

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(III) Compliance/Responsibility Statements

• Practical Points
• relatively few companies will be caught (contrast
  earlier drafts/RGA recommendation) note that no
  grouping provisions in the thresholds
• practical importance of these statements will
  probably be more one of perception/awareness (of
  directors duties/compliance) than a substantive
  increase in duties
• materially higher litigation risk
• if your clients company is caught
• identify the relevant obligations applicable to
  your particular enterprise
• material impact on financial statements required
  (distinguish intangibles)
• other enactments undefined but best view is
  that these are limited to Irish law (statutes and
  SIs)
• follow the (relatively prescriptive) requirements
  to the letter
• get in place the necessary, written compliance
  policies and procedures
• carry out and carefully minute the necessary
  review of their effectiveness
• carefully minute the steps taken by the board to
  arrive at their opinion
• focus on due diligence on the company side and
  avoid the need for a shadow diligence process by
  the auditor (it is under no obligation of enquiry
  with respect to information not otherwise
  provided to it/its affiliates)
• kinds of things we find

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(IV) Audit Committees

• New Audit Committee
• Requirements for PLCs and Large-Private
  Undertakings
• s42 CA2003, inserting s205B CA90

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(IV) Audit Committees

• Application
• public limited companies (other than wholly owned
  plcs)
• directors obliged to establish
• large private companies limited by shares and
  Regulation 6 undertakings (some unlimited
  companies and limited partnerships), with
• gross assets greater than 25,000,000 and
  turnover greater than 50,000,000
• either individually or together with their
  subsidiaries
• in both relevant and preceding financial year
• directors must either establish or explain in
  annual report why havent

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(IV) Audit Committees

• 16 Specific Responsibilities, including
• annual accounts
• accounting records
• monitoring quality and independence of external
  auditors work
• internal audit

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(V) Auditor Independence
New Disclosure and Reporting Obligations related
to Use of Audit Firms for Non-Audit Work s44
CA2003, inserting s205D CA90
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(V) Auditor Independence

• CA 2003 will oblige Irish companies/their
  directors to
• disclose (in notes to their annual accounts)
  amounts of remuneration for work done
• for the company or its connected undertakings
• by the companys auditors or its affiliates
• with respect to audit, audit-related and
  non-audit matters (categorise)
• in both the relevant and the immediately
  preceding financial year
• and also to disclose the nature of any
  non-audit work
• report to shareholders, where remuneration for
  non audit gtremuneration for auditaudit-related,
  on
• whether non-audit work has affected auditors
  independence, and
• (if independence unaffected), why the auditors
  firm was selected to carry out the non-audit work
• Application
• all companies
• Regulation 6 undertakings (some limited
  partnerships)

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(VI) IAASA Oversight
New Oversight Rights of IAASA related to
Accounts of PLCs and Large-Private Undertakings
Subsidiaries s26 CA 2003
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(VI) IAASA Oversight

• Application
• PLCs
• large-private companies lbs (similar definition
  as applies for Audit Committee purposes) and
  certain other large undertakings
• certain of each of their subsidiaries
• IAASA may
• notify these entities of perceived
  non-compliances with Companies Acts
• if complaint not satisfied to IAASAs
  satisfaction, it may apply to court and court may
  compel revision of accounts and grant certain
  other relief including payment of costs by
  directors personally

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KLW

• KLW is a new Dublin-based law firm.
• We specialise in relatively difficult or complex
  corporate/MA and commercial-law
• matters.
• Our client base is predominantly international
  and includes leading players from most
• industry sectors, as well as numerous private
  equity funds, international law firms,
• investment banks and other intermediaries.
• For further information, please call John Kehoe
  on 353 1 631 9306/john.kehoe_at_klw.ie
• or visit http//klw.ie.