Ruth Galea, Partner, has written the Chapter for Malta in the International Comparative Legal Guide to Corporate Governance.
1 Setting the Scene – Sources and Overview
1.1 What are the main corporate entities to be discussed?
The corporate entities to be discussed in this overview are the following:
- Limited Liability Companies (private and public) under the Companies Act, Chapter 386 of the Laws of Malta (‘Companies Act’). A private company can have up to 50 shareholders and therefore corporate governance regimes and practices are arguably also relevant in such context.
- Listed Companies are public entities whose equity securities are admitted to listing on a regulated market. There are presently two regulated markets authorised under the Financial Markets Act (Chapter 345 of the Laws of Malta): the Malta Stock Exchange (the Official List and Alternative Company List) and the European Wholesale Securities Market. The Malta Financial Services Authority (MFSA) is the sole regulator for financial services in Malta and also acts as the Listing Authority in Malta being responsible for the listing process and ongoing supervisory functions of the local capital market.
- Public Interest Companies are defined under the Corporate Governance Guidelines for Public Interest Companies issued by the MFSA as companies whose operations impact a substantial sector of society. A public interest company is any one of the following:
- A regulated company, meaning a company authorised to provide a financial or a utility service and which is either a large private company or a public company, but excluding collective investment schemes, companies which do not hold or control clients’ money, and companies which already have an obligation to segregate clients’ funds in separate accounts.
A ‘large private company’ is a private company as defined under the Companies Act and which exceeds certain minimum balance sheet and turnover thresholds.
- A company that has issued debt securities to the public and whose securities are not admitted to listing on a recognised investment exchange.
- A government-owned entity established as a limited liability company.
- Investment Companies and Collective Investment Schemes as defined under the Investment Services Act, Chapter 370 of the Laws of Malta.
- What are the main legislative, regulatory and other corporate governance sources?
The principal source of corporate governance may be said to be the Companies Act itself. This piece of legislation regulates all companies and is the primary source for the division of authority between the board of directors on the one hand, and the general meeting of shareholders on the other hand. Directors’ duties and accountability also find their source in the Companies Act together with shareholder redress mechanisms and disclosure and transparency requirements (in the form of annual financial reporting and shareholder information/access rights).
The memorandum and articles of association of a company is also an important source of corporate governance under Maltese law. Whilst the memorandum of association describes the essential features of a company targeted at the outside world, the articles of association deal with the internal relationship of a company with its members and the relationship between the members themselves, and may serve as an important tool to supplement the corporate governance provisions found under the Companies Act.
Public companies listed on a regulated market are required to comply with the Listing Rules issued by the MFSA. The Listing Rules require listed entities to comply with a number of obligations including disclosures and notifications to the market, and include specific provisions on shareholders’ rights.
Listed companies should also comply with the Code of Principles of Good Corporate Governance forming part of the Listing Rules issued by the MFSA (‘the Code of Good Corporate Governance’). The Code of Good Corporate Governance is a non-binding Code designed to enhance the legal, institutional and regulatory framework for good governance in the Maltese corporate sector. The Code adopts a ‘comply or explain’ approach by encouraging a listed company to ‘comply’ with its provisions and thereby establish parameters for the board of directors and management to pursue objectives that are in the interests of the company and its shareholders, or ‘explain’ to shareholders why it has chosen not to so comply.
In 2006, the MFSA issued the Corporate Governance Guidelines for Public Interest Companies (‘Corporate Governance Guidelines’) targeted at companies having an impact on the public in general. The Corporate Governance Guidelines are similarly non-binding in nature. Public interest companies should highlight their adherence to such corporate governance principles in their annual reports.
Against the backdrop of the global financial crisis and resulting regulatory initiatives in the financial and investment funds industry, the MFSA issued a Corporate Governance Manual for Directors of Investment Companies and Collective Investment Schemes (‘Corporate Governance Manual’), the purpose of which is to provide general guidance to a director of an investment company or a collective investment scheme on how to implement good corporate governance practice. The guidance set out in the Corporate Governance Manual is not exhaustive and directors are encouraged to develop their own ‘best’ corporate governance practice tailored to the particular investment company/fund.
1.3 What are the current topical issues, developments, trends and challenges in corporate governance?
The ongoing challenge faced by directors is that of striking a balance between establishing good corporate governance practices aimed at enhancing investor confidence through implementation of disclosure mechanisms and adequate ‘checks and balances’, and ensuring that the board is not hindered from performing its activities in a commercially efficient manner.
Corporate governance remains at the forefront of the funds industry, where investor confidence still needs to be strengthened. In this area, the expectations of institutional investors to have sound corporate governance structures in place, including a board composed of a majority of independent directors, are increasingly influencing the board composition of investment funds and their corporate governance practices.
2.1 What rights and powers do shareholders have in the operation and management of the corporate entity/entities?
Under Maltese law, the general principle is that the board of directors is vested with all the powers of the company that are not reserved to the general meeting under the Companies Act or the memorandum or articles of association of the company. Therefore, in order to determine the division of powers between the two organs of the company, a review of the particular company’s memorandum and articles of association is important, in addition to an assessment of the provisions of the Companies Act.
Perhaps the most significant powers reserved to the general meeting of shareholders under the Companies Act are: the power to remove directors; the power to alter the memorandum and articles of association; and the power to dissolve the company. Other important powers reserved to the shareholders are: the power to increase/reduce share capital; the power to approve annual financial statements; the power to convert the company into another form of commercial partnership; the power to amalgamate/divide the company; and the power to appoint and remove auditors.
Shareholders of a company exercise their powers at a general meeting of shareholders where they are called to vote on matters requiring their consent. In the case of a private company, shareholders may exercise such powers by means of a unanimous written resolution without the need to convene a meeting (unless the decision relates to the removal of a director or auditor).
2.2 What responsibilities, if any, do shareholders have as regards the corporate governance of their corporate entity/entities?
Whilst the Companies Act reserves certain fundamental powers to the general meeting, it does not impose any obligations on shareholders as regards the exercise of such powers and the responsibilities connected therewith.
The Corporate Governance Guidelines provide that shareholders are required to appreciate the significance of participation in the general meetings of the company and particularly in the election of directors. Shareholders are expected to continue to hold directors to account for their actions, their stewardship of the company’s assets and the performance of the company.
The Code of Good Corporate Governance requires institutional shareholders to make considered use of their votes, and to take an active role in the attainment of their voting objectives, including attendance at annual general meetings, without substituting themselves for the company’s board and management. Shareholders are also required to carefully consider board composition and other governance arrangements.
2.3 What shareholder meetings are commonly held and what rights do shareholders have as regards them?
Shareholder meetings may be of two kinds: (i) annual general meetings; and (ii) extraordinary general meetings. A company must hold an annual general meeting not later than fifteen months after the previous meeting. Whilst the Companies Act does not prescribe what business is to be transacted at an annual general meeting, the following matters are generally covered at such meetings: approval of annual financial statements; declaration of dividend; re/appointment of the members of the board; and re/appointment of the auditors. Any business which is not transacted at an annual general meeting may be transacted at an extraordinary general meeting.
Under the Companies Act, shareholders enjoy a number of rights in connection with general meetings including, in particular, the right to receive at least fourteen days’ written notice of a general meeting, the right to vote at a general meeting, the right to appoint a proxy to attend and vote in his stead, the right to move an ordinary resolution where the notice gives an indication of the business to which it relates, and the right to demand a poll. In addition, a member/s of a company holding not less than ten per cent of the issued paid-up share capital of a company has the right to requisition an extraordinary general meeting. In the event that the board fails to convene an extraordinary general meeting of the company within twenty-one days of the deposit of the requisition, the requesting members have the right to convene the meeting themselves within three months from the deposit of the requisition.
Decisions are taken by shareholders at general meetings either by means of an ordinary or extraordinary resolution. The nature of the two kinds of resolutions are rather tied to particular voting thresholds as stipulated under the Companies Act, which may be increased under the company’s articles of association.
Under the Listing Rules, listed entities are subject to further requirements concerning the calling of general meetings including requirements concerning contents of notice, minimum notice period, and publication of information ahead of the general meeting. In addition, a shareholder or shareholders of a listed company holding not less than five per cent of the voting issued share capital of the company may request the company to include items on the agenda of the general meeting provided certain conditions are met.
2.4 Can shareholders be liable for acts or omissions of the corporate entity/entities?
The principle of separate legal personality of a company is enshrined in Article 4 of the Companies Act, which provides that a company ‘has a legal personality distinct from that of its member or members’. Accordingly, the established principle is that a shareholder is not responsible for the actions or omissions of a company and a shareholder is only liable to the extent of any amount unpaid on his shares.
There are, however, a few statutory inroads to the concept of separate legal personality on the basis of which a member or members may be held responsible for the actions of a company. The law allows for the ‘lifting of the corporate veil’ to attach liability to shareholders in instances where: (i) there is a reduction in the number of members below the minimum statutory requirement of two members for more than six months; (ii) the business of the company is carried on with the intent to defraud creditors of the company, or of any other person, or for any fraudulent purpose; or (iii) a prospectus contains untrue statements and a person who relied on the same for subscribing to the shares of a company sustains damages.
2.5 Can shareholders be disenfranchised?
Shareholders can forfeit their shares in instances where they fail to pay any call or instalment of a call on the day appointed by the board of directors for payment thereof, provided such provision to that effect is catered for in the memorandum or articles of association of a company. A shareholder may also be forced to sell the shares held by it under an order issued in connection with a claim of unfair prejudice under the Companies Act (see below).
The articles of association may also contain ‘drag-along’ rights which may force shareholders to sell their shares together with other shareholders in particular instances. The Listing Rules themselves contain mandatory ‘squeeze-out rules’ which apply to takeovers of listed companies.
2.6 Can shareholders seek enforcement action against members of the management body?
The general rule under Maltese law is that the directors owe their duties to the company and not to the individual shareholders. As a corollary to such rule, and similarly to the position under English law, Maltese law follows the ‘Foss vs. Harbottle’ principle that the proper plaintiff in an action in respect of a wrong alleged to be done to a company is the company itself.
The Maltese courts have broadly acknowledged an exception to the proper plaintiff principle in the form of a derivative action; an action brought by a shareholder in respect of a wrong done to the company where the directors, or the majority shareholders who control the composition of the board, fail to take action to institute the necessary legal proceedings to remedy the wrong suffered by the company. The benefit of the action would accrue not to the benefit of the shareholder instituting the action but to the company.
The popularity of the derivative action has decreased as a result of the introduction of the unfair prejudice remedy now available to shareholders under the Companies Act, which has afforded shareholders more legal certainty than the former remedy. This action allows a shareholder who complains that the affairs of the company have been, or are being, or are likely to be, conducted in a manner that is oppressive, unfairly discriminatory against, or unfairly prejudicial, in relation to a shareholder or shareholders, or in a manner that is contrary to the interests of the members as a whole, to apply to the court to make an order as the court thinks fit. The law does not specify who the action may be brought against, however in practice the persons responsible for the conduct complained of would vary from the majority shareholder, to the managing director, other controlling directors and liquidators.
It is relevant to note that the Maltese courts have also acknowledged the possibility for shareholders to enforce ‘personal rights’, so that if a shareholder can establish the existence of a right appertaining to him personally, as opposed to the company, he may sue to have that right enforced, either through the remedy of specific performance, or that of injunction.
2.7 Are there any limitations on, and disclosures required, in relation to interests in securities held by shareholders in the corporate entity/entities?
The Companies Act does not impose any limitations on the number of securities held by members.
Under the Listing Rules, a shareholder who acquires or disposes of holdings to which voting rights are attached is required to notify the company and Listing Authority of the proportion of voting rights of the company held by such shareholder as a result of the acquisition or disposal, where the proportion reaches, exceeds or falls below certain thresholds.
3 Management Body and Management
3.1 Who manages the corporate entity/entities and how?
A company acts through two principal organs: the general meeting of shareholders and the board of directors. As explained above, the board is vested with all the powers of the company that are not, by the Companies Act or by the memorandum or articles of association of the company, required to be exercised by the company in the general meeting. Whilst certain key decisions are reserved by law to the shareholders, in practice the memorandum and articles of association do not generally assign powers beyond those under the Companies Act to the shareholders, thereby leaving the directors with very wide powers.
A public company is required to have at least two directors. Directors’ powers are to be exercised by the directors acting collectively and collegially as a board. The Code of Corporate Governance provides that at least one third of the board should be composed of non-executive directors (the majority of which should be independent). Similarly, both the Corporate Governance Guidelines and the Corporate Governance Manual place emphasis on the board, including non-executive independent directors.
The articles of association of a company very often empower the board to delegate its powers to committees of directors, or to directors individually, or even to persons who are not members of the board (such as CEOs, CFOs and other members of the senior management team). In addition, the articles of association often allow a director to appoint an alternative director who is entitled to perform all the functions of his appointer as director in his absence.
3.2 How are members of the management body appointed and removed?
In terms of the Companies Act, the power to appoint directors (other than the first directors) is vested in the general meeting of shareholders, unless otherwise provided under the memorandum or articles of association. Accordingly, the memorandum or articles of association may in theory reserve the right to appoint directors to the board itself or to a particular person (such as the managing director). In practice, however, this allocation of authority is rarely seen, as shareholders usually want to retain such a fundamental right.
The removal of a director is a matter reserved to the shareholders under the Companies Act. The Act lays down a mandatory rule that a director may be removed from office before the expiration of his period of office by means of a resolution taken at a general meeting of the company and passed by a member or members holding a simple majority of votes. The affected director must be notified of the intention to pass a resolution for his removal, and must be given the opportunity to attend and be heard at the general meeting.
3.3 What are the main legislative, regulatory and other sources impacting on contracts and remuneration of members of the management body?
The Companies Act does not contain mandatory provisions regulating executive pay. It does, however, include a provision in the model regulations contained in the Act itself (which are essentially model articles which companies may opt into under their own articles of association – ‘Model Regulations’) which provides that the remuneration of the directors shall from time to time be determined by the company in a general meeting.
Under the Code of Good Corporate Governance, the boards of listed companies should set up formal and transparent procedures for developing a remuneration policy and for establishing the remuneration packages of individual directors. To that end, remuneration committees should be set up and should be composed of ‘independent non-executive directors with no personal financial interest other than as shareholders in the company’. Transparency in relation to executive pay is also achieved via disclosure requirements under the Listing Rules, in terms of which listed companies are required to disclose the terms of service contracts between themselves and directors.
3.4 What are the limitations on, and what disclosure is required in relation to, interests in securities held by members of the management body in the corporate entity/entities?
A company’s memorandum and articles of association may require a director/s to hold a minimum number of shares in the company. This is not a mandatory requirement, however. In addition, there is no restriction or limitation on the number of shares a director may hold in a company whose board he forms part of.
Directors of a company whose financial instruments are admitted to a regulated market must comply with the restrictions and obligations under the Prevention of Financial Markets Abuse Act (Chapter 476 of the Laws of Malta) when dealing in instruments issued by the company. Against this backdrop, the Listing Rules impose an prohibition on a director of a listed company from dealing directly or indirectly in any of the securities of the issuer company in certain instances as follows:
- at any time when he is in possession of unpublished price-sensitive information in relation to those securities;
- prior to the announcement of matters of an exceptional nature involving unpublished price-sensitive information in relation to the market price of the securities of the issuer;
- on considerations of a short-term nature;
- without giving advance written notice to the Chairman, or one or more other directors designated for this purpose; or
- during such other period as may be established by the Listing Authority from time to time.
3.5 What is the process for meetings of members of the management body?
In contrast to meetings of shareholders, meetings of directors are only lightly regulated by the Companies Act. The Model Regulations provide that ‘the directors may meet together for the despatch of business, adjourn and otherwise regulate their meetings, as they think fit’. Accordingly there are no mandatory requirements regarding frequency of meetings or notice requirements. In practice, the articles of association of a company will: (i) provide that a director may at any time summon a meeting of the directors; (ii) include a notice period for calling of meetings and the form of notice required; (iii) stipulate a quorum for board meetings; and (iv) stipulate voting majorities required for adoption of resolutions. The articles of association will also invariably include a provision which will allow the board to resolve matters by virtue of a unanimous written resolution instead of at a meeting of the directors.
The Listing Rules require the boards of listed companies to meet regularly to discharge their duties effectively, and prescribe that the boards should set procedures to determine the frequency, purpose, conduct and duration of meetings, and meet regularly in line with the nature and demands of the company’s business. This position is echoed in the Code of Good Corporate Governance, the Corporate Governance Guidelines. The Corporate Governance Manual goes a step further and provides that in respect of the fund industry, regular board meetings should be held on at least a quarterly cycle.
- What are the principal general legal duties and liabilities of members of the management body?
The duties of directors find their source in the Companies Act. These may be broadly classified into two categories: duties of loyalty; and duties of care and skill. The duty of loyalty covers the duties to act honestly and in good faith in the best interests of the company, not to make secret profits, to exercise powers for the proper purposes, and to avoid conflict of interests. The duties of care and skill establish both an objective and subjective test against which the competence of a director is measured. The Code of Good Corporate Governance, the Corporate Governance Manual and the Corporate Governance Guidelines all include provisions which mirror the statutory duties of directors.
Directors are personally liable for breaches of duty. Under the Companies Act, there is no distinction between executive and non-executive directors. Therefore, for as long as there are no specific provisions which delineate and limit the powers of a director, a director is to be considered executive, and is jointly and severally responsible for any breach of duty together with the other directors.
3.7 What are the main specific corporate governance responsibilities/functions of members of the management body and what are perceived to be the key, current challenges for the management body?
As discussed above, in terms of the Companies Act, the board is the organ of the company which is responsible for exercising all powers vested in the company as a separate juridical entity which are not reserved to the general meeting of shareholders.
The Code of Corporate Governance provides that the board has the first-level responsibility of executing four basic roles of corporate governance namely; accountability, monitoring, strategy formulation and policy development.
3.8 What public disclosures concerning management body practices are required?
Under the Companies Act, the directors are required to prepare a report (directors’ report) in respect of each accounting period which is to be presented to the shareholders at the annual general meeting for approval together with the audited financial statements. The principal purpose of the report is to review the progress of the company’s business and should state, in relation to the particular accounting period, the names of the directors, the principal activities of the company and any significant changes in those activities, and a fair review of the development of the business of the company. Shareholders of a company also have a statutory right to inspect the minutes of board meetings which a company is required to keep at its registered office.
Besides having an obligation to comply with the above disclosure requirements, a listed company is required by the Listing Rules to adhere to a number of notification obligations to the market including the publishing of company announcements and also ensuring that all necessary facilities and information are available to enable holders of securities to exercise their rights.
3.9 Are indemnities, or insurance, permitted in relation to members of the management body and others?
In terms of the Companies Act, any provision, whether contained in the memorandum or articles of a company or in any contract with a company, or otherwise for exempting any officer of the company from, or indemnifying him against, any liability which by virtue of any rule of law would in the absence thereof have been attached to him in respect of negligence, default or breach of duty or otherwise of which he may be guilty in relation to the company, shall be void.
This prohibition is not extended to instances where such officer obtains a judgment in his favour or in which he is acquitted. In these cases, a company may indemnify such officer against liability incurred in defending such proceedings. The Companies Act also clarifies that nothing shall prohibit companies (or directors) from purchasing directors’ and officers’ insurance to cover liabilities as aforesaid, and in practice it is very common for companies to do so (such D&O insurance would not however cover willful or dishonest actions of the directors). The Corporate Governance Manual recommends that fund directors should be covered by D&O insurance.
4 Transparency and Reporting
4.1 Who is responsible for disclosure and transparency?
The directors are responsible for ensuring that the annual accounts of a company are prepared, audited and tabled at a general meeting for approval together with a directors’ report thereon. They are also responsible for ensuring that minutes of board of directors’ meetings are properly kept in minute books and are made available to shareholders for inspection. On the basis of the principle of joint and several responsibility of directors under the Companies Act, the board of directors as a whole is collectively responsible for complying with disclosures and transparency obligations. Where, however, responsibility is delegated by the board to a particular individual/s for compliance with such obligations, then then it may be argued that only such persons shall be responsible for any breach of duty.
4.2 What corporate governance related disclosures are required?
As stated above, a company is required to prepare and publish annual financial statements in accordance with the requirements of the Companies Act. The annual accounts are accompanied by a directors’ report and an auditors’ report and are presented to the shareholders for approval.
In the case of listed companies, the Listing Rules require the directors to include a statement in the annual financial report explaining the extent of compliance with the Code of Good Corporate Governance. The Listing Rules also require listed entities to make certain additional disclosures such as interim directors’ reports, half-yearly directors’ reports and company announcements relating to specific matters such as, for example, price-sensitive facts which are not public knowledge, the date fixed for any board meeting of the Issuer at which a dividend on securities is expected to be declared or recommended, and the filing of a winding-up application.
4.3 What is the role of audit and auditors in such disclosures?
The annual financial statements of a company must be audited by a qualified auditor. The duty of the auditor is to examine and verify the original accounting records of the company, to discover any inaccuracies or omissions therein, to examine the company’s annual balance sheet and profit and loss account so as to ensure that they agree with the company’s original accounting records, and to subsequently report to the members of the company on the original accounting records and on the company’s annual accounts. This latter function serves as a shareholders’ safeguard against inaccurate, misleading or incomplete annual accounts being presented to them by the directors.
Under the Listing Rules the listed company’s auditors are to include a report in the annual financial report to shareholders on the corporate governance statement issued by directors relating to the extent of compliance with the Code of Good Corporate Governance. The Listing Rules also require listed companies to establish an audit committee consisting of a majority of non-executive directors. The members of the committee should meet at least four times a year and have a number of responsibilities including the monitoring of the financial reporting process, monitoring of the effectiveness of the company’s internal control and risk management systems, and monitoring of the audit of the annual and consolidated accounts.
4.4 What corporate governance information should be published on websites?
There is no mandatory requirement for a company to have a corporate website. The Companies Act does however lay down certain requirements which need to be satisfied by a company when dealing with, or issuing notifications to, third parties. Accordingly, a company is required to mention in legible characters its name, type of commercial partnership, registered office and registration number in all its business letters and order forms, whether they are in paper form or in any other medium, as well as on its internet website (if any). Listed companies are permitted by the Listing Rules to publish certain information on their websites such as company announcements and general meeting notices.
5.1 What, if any, is the law, regulation and practice concerning corporate social responsibility?
Maltese company law is based on an Anglo-Saxon shareholder/market-oriented corporate governance system as opposed to a Continental stakeholder-oriented system. Accordingly, Maltese company law does not afford stakeholders particular rights and remedies in the corporate setup. Stakeholders will find sources of action under other bodies of legislation such as civil, employment and environment legislation.
Under the Code of Good Corporate Governance and Corporate Governance Guidelines, boards should seek to adhere to accepted principles of corporate social responsibility in their day-to-day management practices, and are expected to work closely with ‘suppliers, customers, employees and public authorities’.
5.2 What, if any, is the role of employees in corporate governance?
Following an Anglo-Saxon corporate governance model, Maltese legislation does not cater for two-tier board structures under which employees are given a forum to exercise control over the management of the company, nor are employees given a right to representation on the unitary board.
As stated above, companies covered under the Code of Good Corporate Governance and the Corporate Governance Guidelines are expected to give due consideration to employees and work closely with such stakeholders.