Corporate Blawg UK

CBUK snubs CBLG with company formation facts

Where there should be unity, there is fracture. Where there should be love, there is cruelty. And where there should be forgiveness there is only isolation. 
            What is this tragic tale you may wonder?
            It began with the birth of Corporate Blawg UK on 13 August 2006.  A happy day - A day of laughter and disclaimers.  Corporate Blawg grew rapidly, nurtured and entertained by the wit and wisdom of his fellow bloggers. It was only a few days later, just after losing his google-virginity, as blogjoy piled on blogjoy, as Corporate Blawg discovered analytics, widgets and technorati; it was on this busy trail that Corporate Blawg UK discovered he had a little brother, a little brother in the EU. 
            Corporate Blawg was delighted at the opportunity to use his GCSE and reach out to his German Blogmate.  A few days younger, a few words of disproportionableness length, this German counterpart called himself Corporate BLawG -  a strangely English title to one so German in substance ("Korporativ BlGezetzG" would have been more appropriate, though less catchy).
            This oddity was overcome by the glee in Corporate Blawg's microchip.  What a splendid day to discover a short-lost younger sibling - what a joyous day to know he had been one of two minds, several thousand miles apart, who had thought of more or less the same thing at more or less the same time. 
            Thrilled by the prospect of trading sausages and ale with his doppelganger (a German word) Corporate Blawg contacted his kleine bruder.  But it was not to be.  Time and time again, over and over, Corporate Blawg wept as his long emails of love and light were met with darkness and silence… not even a stale schwartzwalderkirschtorte of a reply. 
             Despite therapy, massage and an all over body rub of seaweed and cucumber, the relationship smelt none the sweeter. It is with this ardent sadness that Corporate Blawg UK wishes to gloat over the fact that it is widely recognised that setting up a company in the UK is easier than setting up a company in Germany (a small victory, admittedly, but one which quickens the breath of both Corporate Blawg and Corporate BLawG). 
             Corporate Blawg read recently that German legislators are now amending their domestic legislation to encourage German entrepreneurs to be German and not to start up as a UK company, thus taking their auditor's business abroad.  Corporate Blawg UK has only one thing left to say to Corporate BLaWG – put that in your post and smoke it.
            Apparently (because I am not a German lawyer) in order to set up a German GmbH Company, the prospective company must have a minimum paid up equity capital of € 25,000. The UK has no such minimum equity requirement and due to EU law, may trade throughout the EU.  The UK also has considerably less bureaucracy than in Germany and other parts of the EU. 
            In March this year, the Council of Europe discussed the vital role that small and medium-sized enterprises play in creating jobs and growth. The faults they pointed out were that on average it takes 24 working days to set up a company in the EU.  Worthy of special note were Portugal at 54 days and Slovenia at 60 days. 
            The Commission set out in its formal submission to the EU leaders’ meeting – Time to move up a gear – that among the fundamental obstacles preventing Europe’s business sector from realising its full potential were the problems of start-up.  In its report the Commission decided that:

• By 2007, Member States should each set up a “one-stop shop” to assist future entrepreneurs so that businesses can fulfil all administrative requirements in one place.
• The average time for setting up a business should be cut by half by the end of 2007 and then to one week or less.
• Every Member State should set up a system to properly measure administrative burdens. The Commission will launch a major exercise of its own to identify and propose how to reduce costs arising from EU rules or their implementation at national level.
• The Commission will remove the obligation to notify certain categories of small state aids, which should help SMEs.

Although the gloat may have got his goat, it's not all roses in the UK - the UK has number of particular provisions which help businesses start and grow, but also the highest VAT registration threshold in Europe at about a £60,000 turnover. 
           There are signs that the Commission's push has worked.  On 6 October 2006, José Manuel Barroso, President of the European Commission, Moving up a gear for Growth and Jobs: Progress on implementing the new Lisbon Strategy, Seminar "Excellence and Partnerships for an Innovative Europe, pointed out that in Protugal, the "Empresa na hora" project (a company in one hour) had by mid-2006 led to eight thousand companies being set up in an average time of 55 minutes. This is a big improvement on 54 days.  Corporate Blawg is sceptical of any statistic that sits so imperfectly perfect as a reduction of 54 days to 55 minutes. 
           It shall be noted that Corporate Blawg does not hold grudges or chips or candles in the wind.  Corporate Blawg wishes Corporate BLawG all the best for the future, a happy life in the Blogosphere, and to know, deep down, that Corporate Blawg will always be there if Corporate BLawG ever needs him. 

A Musing

Corporate Blawg was pondering in the hazy mists between drafting a US$ 2.5billion restructuring agreement, and amending some poorly worded Standard T's and C's for a shoe company:

• If Corporate Blawg was a mega-don of law he would be a Law Lord.
• If Corporate Blawg was a legend of military law he would be an expert in War Law.
• So what is a mega-don legendary expert of military law? 
• Is it a "War Law Law Lord"? 
• Or do two laws cancel each other out and make a "War Lord"?

• 

The appropriate response is not "haw haw".

Written resolutions go cyber

Are your directors or members lounging in Kathmandu, Ulaanbaatar or the South Peninsula of Sulawesi? What happens if you don't have any rich tea biscuits left?  Does the sight of the finance director make your feet sweat?  Have you recovered from the falling off the pier after the meeting in Brighton? 
           For whatever reason it may be, sometimes a company or its members just doen't want to hold a general meeting.  In this circumstance there is one time-travelling, internet-friendly warrior of administrative process – the written resolution.
          Currently, there are two mechanisms for a written resolution.  The first is under s.381 of the Companies Act 1985, which includes a requirement to send notification to auditors prior to the resolution (s.381B).  The second more sly mechanism is under Article 53 of the Table A, and no auditor notification is necessary. 

          Nevertheless, where a company has excluded Article 53 from their Articles, the company may use the s.381 route, and save all the shareholders catching the no.73 bus on a rainy Tuesday afternoon. Who cares if Stoke Newington is trendy now?

          The written resolution is a tough cookie which may be applied to all types of resolutions, except those to remove a director or auditor during their term in office.  Written resolutions are just as effective as formal resolutions made at a meeting duly convened (Re Express Engineering Works Ltd [1920] 1 Ch 466).  The reason written resolutions are currently not used for companies with large numbers of members is that agreement of 100% of members is required to pass it.  Written resolutions may all be signed at the same time, since the signatures do not have to be on the same page, and the resolution is dated the last date of the last signature.  Under s.380 of the Companies Act, written resolutions that replace a special or extraordinary resolution must be filed at Companies House within 15 days of being passed. 

          The Companies Law Reform Bill, as of July 2006, makes a number of changes to the nature and procedure of written resolutions (s.295 – 307).  The key new developments are:

• written resolutions must be sent or submitted to every eligible member in hard copy form, in electronic form or by means of a website;
• the resolution must explain how it may be signed and the date on which it will lapse;
• agreement to the resolution may be in hard copy or electronic form (why don't they just say email? Perhaps voting buttons on websites will become all the range for written resolutions of the future);
• a written resolution may be agreed when the required majority of eligible members have signified their agreement to it (s.303).  This means that if the Articles of a company state that certain written resolution require 75% of the company (for replacing special resolutions) or over 50% (for ordinary resolutions) this may be permitted;
• if no period is specified a written resolution will lapse within 28 days of it being circulated.

There are also a number of circumstances where 5% or less (as provided for in the Articles) of members can insist that a resolution is passed as a written resolution.  This applies of the resolutoin proposed for a board meeting is frivolous or vexatious.  Whatsmore, the members could require the company to give a 1000 word description on the subject matter of the resolution.  In this situation, a company has 21 days to circulate such a written resolution after it becomes required by the members.  However, the costs of this circulation must be born by the members (how costly is an email?).  The court or an aggrieved person may prevent the mechanism.

          The Company Law Reform Act ignores the Article 53 of Table A except to say that the Articles cannot prevent a written resolution being proposed and passed where an enactment provides for such a resolution.

          Corporate Blawg UK believes that these reforms are excellent and should lead to a lot less electric lighting in large town halls.  There is also a risk that a minority group of shareholders could themselves become vexatious, frivolous and a downright nuisance - if allowed to insist every resolution is passed as written. 

          Corporate Blawg also questions the wisdom behind allowing written resolutions to "submitted" by website, since unless members regularly check their investment's homepage every month, there is no obligation on the company to go to reasonable endeavours to notify them.  This could be a disadvantage for minority shareholders, and one that could lead to litigation by that minority! 
          Ultimately, the Company Law Reform Act (s.516) still requires the company to notify the Auditor prior to any proposed written resolution where the statutory route is followed.  It therefore seems highly likely that the mighty Article 53 of Table A will remain the chief of these two brothers in Company proceedings.  The question is, how will companies modify Article 53 to introduce more of the statutory wording yet avoiding the auditor provision?  How indeed, drafting pens ready to squirt...

Hedging bets against regulation

After recent criticism of the FSA, Corporate Blawg UK is glad to have found an area where the pragmatic and cool judgement of the FSA sets them apart from their U.S. counterparts.  Although the need for debate and development has clearly been promulgated from the U.S., the FSA have responded with practical steps that may actually benefit the market, and not simply be a bamboo-crunching panda to the U.S. giants.
             The key point is that hedge funds are largely secretive in their investments and operation.  Since the failure of large hedge funds, or hedge fund clusters, have the potential for impacting the confidence in a capital market as a whole, there are calls for greater disclosure and industry regulation. But how to go about this when the secrecy in the investments, strategy and portfolio gives hedge funds their industry advantage?  The U.S., FSA and IOSCO are still working on this issue, but the detail below should give a summary of the current standing:

The U.S. debate

The risks faced by the hedge fund industry have been apparent since the collapse of Long-Term Capital Managament in 1998.  In 1999 the U.S. Federal Reserve considered the policy issues raised and releaed a report entitled "Hedge Funds, Leverage, and the Lessons of Long Term Caputal Management".  The lessons of this report have since been reviewed by the Chairman of the Federal Reserve, Ben Bernanke in May this year.  BB found that the main mechanism for regulating highly leveraged investors and other aspects of risk taking in the market is the creditors, counterparties and investors.  As a result of the 1999 report, regualtory authorities in the U.S. issued guidance on risk management practices, and bank sueprvisors now actively monitor and conduct targetted review of banks' dealings with hedge funds.  This paper did not recommend direct regualtion of the hedge fund market.  This is because direct regulation is throught to impose costs in the form of moral hazard, the likely loss of private market discipline and the possible limits on the funds ability to provide market liquidity.
           BB Chairman said that this approach has been found to be largely effective.  The general perception is that hedge funds are less highly leveraged than in 1998.  Some of this progress is due to industry-led efforts such as the report by the Counterparty Risk Management Policy Group (CRMPG) that lay out the principles that institutions should use in measuring, monitoring and managing risk.  Despite this progress there are four concerns that BB highlighted in his speech:

• competition for hedge fund business has eroded initial margin levels
• increasingly complex transactions increase counterparty exposures and may not be measured accurately
• more extensive stress-testing should be done
• the assessment of counterparty risks should be better tied in to the amount of transparency offered by hedge funds.

Concerns about hedge fund opacity and possible liquidity risk have motivated a range of proposals for regualtory authroities to create and maintain a database of hedgefund postions.  BB remains sceptical of the value of such databases.
          The day after this speech, Cynthia Glassman, the Commissioner of the U.S. Securities and Exchange Commission ("SEC") noted that in December 2004 the SEC adopted its rule to requiring certain hedge funds to register with the SEC.  The paper points out that in June 2005, the FSA published a discussion paper entitield "Hedge Funds a discussion of risk and regulatory engagement",  In March 2006 the FSA published feedback on the potential next steps.
           When the Chairman of the the SEC, Mr Cox, spoke on 27 July 2006 on the benefits of hedge funds being "capital formation, market efficiency, price discovery and liquidity", he added that "there should be no portfolio disclosure provisions".  This directly aims to conserve the secrecy of the hedge funds in the US, but will they leave themselves open to another 1998 Long Term Capital Management debarcle?

The U.K. solutions

On 21 September, Hector Sants spoke at the IOSCO meeting in Shanghai.  He pointed out that the FSA authorised firms manage at least $256bn representing over three quarters of hedge fund assets.  The FSA see five key areas of risk:

1. The failure or significant disterss of a large and highly exposed hedge funds, or a cluster of smaller hedge funds can cause serious market disruption.
2. Some hedge funds may be testing the boundaries of acceptable practice, creating incentives for market abuse.
3. Problems such as late trade confirmations, non-notified trade assignments and novations add significantly to market-wide operational and credit risk levels.
4. Mis-valuation of complex illiquid instruments / fraud.
5. Some hedge funds issue undisclosed side-letters which offer enhanced liquidity and other preferential benefits to selected investors.

Now the FSA certainly seem a lot more focussed on the issues that the U.S. counterparts, except where the FSA then state "Firstly, I must emphasize the FSA is not seeking to authorise and regulate the funds themselves which are outside our jurisdiction".  Well that's okay.
           In order to prevent market disruption the FSA suggest supervisor discourse, and six-monthly surveys of exposures to hedge funds.  The FSA are also undertaking further work with banks on collateral and margin arrangements even though they recognise tthat this approach may have severe limitations on the value of the content, and may cause moral hazard.
           The FSA maintain that Market integrity can be maintainted by "credibled deterrance".  There are four key components to this:

(a) pro-active surveillance on likely 'hot spots'
(b) modern transaction analysis system
(c) an effective enforcement proposition and
(d) industry cooperation to ensure a steady flow of information.

The FSA notes that the US Federal Reserve have assisted in establishing a co-ordinated global response, especially in relation to the concern for significant trade information backlogs in credit derivative markets.  Following from Cynthia Glassman's comments, it appears that mutual backslapping is never amiss.
          Close work with IOSCO on the valuation of hedge funds have helped, and a project on the hedge fund valuations will be completed in April 2007.  The FSA have presented views on good practice to IOSCO valuations working group and intend to write a more formal letter outlining the views, which will become public later this month.
          And finally, the FSA believes that failure by hedge fund managers to make adequate disclosures is a  breach of Principle 1 of their Principles for Business ("A firm must conduct its business with integrity").   The FSA is working to produce material and non material side letters (e.g. special redemption rights are material, but preferential fees are non-material) and possible methods of disclosure (e.g. update in monthly news letters).
         The FSA also point out the risk that hedge fund positioning and momentum under certain conditions can be self-fulfilling.  Fundamentally, efficient capital markets need to embrace diversity, whilst ensuring good behaviour by all market participants.
         Corporate Blawg UK expects that the amount of regulation of hedge funds will depend on whether future hedge fund failures can be boiled down to regulatory inefficiencies.  If so, greater regulation will be forthcoming. If the status quo is maintained, and hedge funds do not find themselves on the wrong side of the market abuse fence, it will take a particular risk-averse regulatory authority to push through new measures for greater disclosure.  It is likely that the hedge fund industry will only have itself to answer to, in regard to the destination of its navigation through these turbulent regulatory waters.