9.4 Issues and recommendations
9.4.1 Introduction
The Bermudian system of notification and vetting
of proposed beneficial ownership puts it at the highest level
of compliance with good practice in this area, as it substantially
exceeds the minimum requirement that the beneficial owner of a
company can be identified.
Furthermore in a wide range of other areas relating
to companies Bermuda meets the requirements of good practice.
Nevertheless, as is the case in any system, some enhancements
are still necessary and these are detailed in the relevant sections
below.
As stated in the Guidance Notes, a review of company
law as a whole is beyond the scope of this review. In the circumstances,
our specific recommendations should not be considered to be exhaustive.
9.4.2 Publicly traded companies
The preamble to the OECD Principles states that
"The Principles focus on publicly traded companies".
Similarly, we consider that the G22 report and IMF guide are primarily
focused on publicly traded companies.
The Companies Act places additional requirements
on those companies whose shares are to be offered to the public.
These companies should, under international standards be subject
to the OECD Principles, together with the G22 and IMF standards.
In our opinion two views can be taken of this, the
first is that the duty should fall upon an exchange and the exchange
should not list a company from a jurisdiction whose companies
legislation fails to meet the OECD Principles. A second argument
is that a jurisdiction that permits its companies to be publicly
traded should ensure that its legal framework (taking the legislation
and case law together) fully meets the Principles.
In our opinion, a jurisdiction should not rely on
exchanges in other jurisdictions to "police" the principles
on its behalf. In our view, good practice dictates that a jurisdiction
that permits its companies to be publicly traded should ensure
that its legal framework complies with the OECD Principles. We
consider that the same standards should apply where the shares
of a company can be offered for sale to the public, even if those
shares are not publicly traded.
Furthermore the recommendations of the G22 Working
Group on transparency and accountability include that "national
standards for the private sector disclosures reflect five basic
elements; timeliness, completeness, consistency, risk management
and audit and control processes.
In the circumstances, we consider that companies,
registered under the Companies Act, which issue their shares to
the public should be subject to a legal framework that meets the
Principles.
9.4.3 Private companies
The preamble to the OECD Principles states that the
Principles "to the extent that they are deemed applicable
... might also be a useful tool to improve corporate governance
in non-traded companies, for example, privately held and state
owned enterprises".
In respect of non-publicly traded companies we have
assessed those aspects of the Principles that it is reasonable
to apply.
We consider that the sections of the Principles that
should, in the most part, apply to private companies are:
- The rights of shareholders (Section I);
- The equitable treatment of shareholders (Section
II); and
- The responsibilities of the Board (Section V).
9.4.4 Audit
9.4.4.1 Audit of public companies and publicly
traded companies
We consider that all public and publicly traded companies
should, in line with OECD Principles, be required to prepare and
submit annual audited accounts to the Registrar. Bermuda is in
line with the former but not fully with the latter requirement.
This is because Bermuda only requires companies listed on the
Bermuda Stock Exchange and those which continue to offer their
shares to the public to file audited statements.
Furthermore, their accounts should be prepared in
accordance with International Accounting Standards or an equivalent.
Bermuda is in compliance with this requirement.
9.4.4.2 Audit of private companies
We do not consider that, unless it is a regulated
institution, a private company should be required to prepare and
submit audited accounts as the cost and burden of such a requirement
would outweigh the benefits.
We consider that it is open to the shareholders in
a company which is other than a public company to require the
accounts of the company to be audited. We consider it appropriate
that the choice should be for the shareholders to make. Similarly
it is a matter for potential creditors and others who do business
with such companies to determine whether they wish to require
an audit as a condition of entering into a business relationship.
We therefore support the continued practice in Bermuda
that non-publicly traded companies should be required to prepare
(unless waived in accordance with the provisions of the Companies
Act 1981 as amended) but not submit audited accounts as the administrative
burden of such a requirement would outweigh the benefit.
We consider that the current practice exceeds the
minimum expected for good practice.
9.4.5 Beneficial ownership
The existence of a central register of beneficial
ownership of companies is, without doubt, a representation of
good practice in this area. Furthermore the existence of a vetting
process to help prevent ownership by undesirable persons adds
further to this as does the requirement that an applicant to form
a company signs a declaration that the information provided is
true.
It should be noted, however, that the effectiveness
of these checks depend upon the accuracy of the information relating
to beneficial ownership supplied to the BMA. This is dependent
upon industry practice of obtaining confirmation of beneficial
ownership as there is no legislative or regulatory requirement.
Whilst there is no evidence that this practice is not being followed,
there is the possibility of persons providing false names, therefore
verification of identity is needed. If this does occur there is
no regulatory requirement available to require compliance.
Assurance of identity can be achieved through the
client identity verification procedures which should be in operation
under the anti-money laundering regulations or via the regulation
of those engaged in the provision of certain services to companies.
This will ensure that identity checks of beneficial owners are
made by the service provider incorporating the company prior to
the beneficial ownership details being submitted to the BMA.
Whilst there is already a legal obligation for companies
to seek consent under the Exchange Control Act we consider that,
to maximise the robustness of the identification system, an obligation
could also be placed upon those company service providers who
provide registered office services to identify changes in the
beneficial ownership of shares registered, unless the free transfer
exemption applies, as this may occur without a change in the registered
shareholder. This information would then be forwarded to the BMA.
Recommendations in respect of this are contained
in the next Section to this Report.
9.4.6 Directors
We consider that, whilst Bermuda is substantially
in compliance with the OECD Principles in this area, a number
of steps need to be taken to enhance this compliance.
Firstly, provision should be made in legislation
for the disqualification by the Court of directors who are not
fit to be involved in the management of a company. This will reduce
the risk of so called "nominee" directors, as a director
can be held accountable for a failure to fulfil his duties.
Additionally, in Bermuda there is no regulation relating
to the provision of company services including the provision of
directors. Therefore, unless such regulation is introduced, there
is no vetting of suitability. We therefore recommend, that, as
with beneficial owners there should be a requirement for a company
to file details of its directors and that they should be subject
to a similar vetting process.
We also consider that, in the absence of a regulatory
structure, a code of conduct for directors should be developed
and given statutory force.
We also consider that the names of directors should
form part of the publicly available information held on the companies
registry. This would permit transparency as the directors of companies
would become a matter of public record.
This approach would also be in accordance with the
OECD Principles of Corporate Governance, Section iv, "disclosure
and transparency".
9.4.7 Insolvency
We consider that the insolvency and winding up provisions
in the CIA are inadequate as they do not contain many of the features
that we would expect to see in a modern piece of insolvency legislation.
Areas in which we consider that the insolvency provisions are
inadequate include the following:
- there are no rescue procedures, such as the administration
and company and individual voluntary arrangement provision, in
the UK Insolvency Act 1986;
- there are inadequate provisions for the avoidance
of pre-liquidation transactions, such as those made at an undervalue;
and
- the cross-border insolvency provisions are inadequate.
Consequently, we consider that the provisions in
place for dealing with insolvent companies are inadequate. We
note however that Bermuda propose to update their insolvency laws.
