Corporate Governance 2021 Comparisons

Last Updated June 22, 2021

Law and Practice

Authors



Fenech Farrugia Fiott Legal is a Malta-based law firm which provides a comprehensive range of services to high-calibre individuals and businesses. The practice of Fenech Farrugia Fiott Legal is international in both reputation and reach, adapting over the years to complement the changing requirements of its clientele. The work that the firm undertakes is versatile, but includes a specialist focus on the area of corporate and commercial law as well as corporate finance and M&A work. The firm’s other principal areas of practice include financial services law, asset and project finance law, maritime and aviation law, the law of trusts, foundations and other organisations, estate planning and private clients' work.

Maltese law has had the benefit of absorbing influence from both of the major legal systems in Europe. Its foundation is the civil law as codified in the Code Napoleon but it has also been heavily influenced and enriched by Anglo-Saxon inspiration, having been an English colony between 1800 and 1964. Malta has been a full member of the European Union (EU) since 2004.

The forms of corporate and business organisations permissible reflect the rich heritage of the Maltese legal system, with the Civil Code regulating a large number of socio-economic and commercial relationships. This is complemented by separate statutes regulating particular forms of association and organisation, often with strong Anglo-Saxon inspiration.

Maltese company law and practice is primarily of Anglo-Saxon derivation, and the logic for market organisation and development has generally tended to follow UK developments. The same is true also for principles of corporate governance, with local practices generally following UK rather than continental trends, albeit against a backdrop of increasing EU activity.

The Maltese economy has had a traditional preponderance of family controlled private companies, but the backdrop is characterised by an increasing influx of foreign controlled companies together with a growing Malta Stock Exchange (MSE). These developments, together with progressive differentiation between capital control and corporate management, has made the discussion of corporate governance principles increasingly relevant in Maltese corporate circles.

Second Schedule to the Civil Code

The Second Schedule to the Civil Code provides a general backdrop for forms of organisation in general, contemplating legal organisations defined as a universality of persons who associate or a universality of things which are appropriated to achieve any lawful purpose. Various forms of legal organisations are contemplated, whether for public or private benefit, registered or unregistered and whether granted separate legal personality or otherwise. It also provides for registered organisations lawfully establishing segregated cells to achieve particular purposes with particular assets.

Foundations as well as associations are also specifically regulated. Trusts and other fiduciary relationships have also been specifically regulated through statutory intervention.

The Companies Act

The principal forms of corporate/business organisations in Malta are regulated by the Companies Act (Chapter 386 of the Laws of Malta) (the “Act”), which regulates commercial partnerships as well as limited liability companies (LLC).

Commercial Partnerships

The two types of commercial partnership regulated by the Act are:

  • limited partnerships, or partnerships en commandite, where obligations are covered by the unlimited and joint and several liability of general partners and by the liability of limited partners which is limited to the amount of their contribution; and
  • partnerships en nom collectif, where obligations are guaranteed by the unlimited and joint and several liability of all partners.

An association en participation is another form of business organisation, which the Act defines as a contract whereby a person assigns to another person, for a valuable consideration contributed by the latter, a portion of the profits and losses of a business or one or more commercial transactions. Such associations do not have a separate legal personality from that of their members.

Private companies

Pursuant to Article 209 of the Act, a private company is one which by its Memorandum and Articles of Association (M&As) restricts the right to transfer its shares, limits the number of its members to not more than fifty and prohibits any invitation to the public to subscribe for any shares or debenture of the company. A private company may also hold the status of private exempt company or a single member company if certain conditions are met.

Public companies

Public companies are defined as those which are not private companies. A public company may be listed on a stock exchange, including the MSE.

Limited liability companies (LLCs)

LLCs may be investment companies, either with variable share capital (SICAV) or with fixed share capital (INVCO). LLCs can also qualify as shipping companies, in which case a separate set of regulations (Merchant Shipping (Shipping Organisations – Private Companies) Regulations S.L.234.42) would apply.

In the context of the insurance industry, a protected cell company (PCC) may also be registered. A PCC and an Incorporated Cell Company (ICC) are two kinds of cell companies. Whilst both are made up of a non-cellular part (the “Core”) and protected cells, only ICCs have protected cells with full segregation from other cells and the parent cell company.

With the introduction of the Companies Act (Shipping and Aviation Cell Companies) Regulations S.L.386.22 in 2020, shipping and aviation businesses can now also be set up or converted into cell companies.

Public interest companies

Public interest companies are companies which have an impact on the public in general and whose operations affect a substantial sector of society.

The Companies Act

The Act is the principal source for corporate governance requirements in Malta, but other legal or authoritative instruments have developed as part of an integrated system.

The Code of Principles of Good Corporate Governance (the “Code”)

The Malta Financial Services Authority (MFSA) first introduced the Code in 2001, with regular improvements and updates on periodic basis since then. Although relevant for all companies, the Code has been made directly applicable only to listed companies.

As stated in its preamble, the Code’s provisions are designed to enhance the legal, institutional and regulatory framework for good governance in the Maltese corporate sector. A separate Corporate Governance Manual has been developed for Investment Companies and Collective Investment schemes, while Public Interest Companies have separate guidelines issued by the MFSA. The Code is generally recognised as having been primarily influenced by developments in the UK, but has increasingly been influenced by EU developments over the years, as well as the OECD Principles of Corporate Governance.

The MFSA’s Consultation Document

In February 2020, the MFSA published a consultation document which included proposals for a comprehensive, principle-based Corporate Governance Code which will be applicable to all entities. The MFSA had proposed that this comprehensive code would then be supplemented by sector-specific rules and guidance notes.

Following numerous comments and suggestions triggered by such process, the MFSA published a Feedback Statement in May 2021 wherein it indicated its intentions and policy orientation. Without mentioning timelines or dates for next developments, it stated that it intends to proceed with issuing a list of main principles applicable on a "best effort basis", that will be supplemented by supporting provisions for guidance and sector-specific codes and/or guidance notes. The MFSA has also hinted that a set of rules and guidance on ESG Considerations are expected within the new framework.

Articles of Association

A company’s articles of association are a crucial element and corner stone of its corporate governance rules, as they prescribe the company’s internal workings. It is, however, worth noting that the promoters of a company need not prepare specific articles of association, as the law provides that the model articles of association in the First Schedule to the Act (the “Model Articles”) will in such cases apply by default. The Model Articles can also complement any particular articles of association drawn up by the promoters, unless they are specifically excluded.

EU Directives and Regulations

The Act implements and gives effect to the provisions of several EU directives and regulations, some of which are also directly relevant to corporate governance issues. The Capital Requirements Directive 2013/36/EU, as amended by Directive 2019/878/EU, and the Capital Requirements (EU) Regulation 575/2013, as amended by Regulation 2019/876, deal with corporate governance and remuneration provisions for financial institutions, while the Commission Action Plan (COM(2012)740) on financing and sustainable growth identifies corporate governance as an important area of focus.

The Code is annexed to the Listing Rules issued by the MFSA (the “Listing Rules”) and is targeted at “companies whose equity securities are admitted to listing on a Regulated Market but are not applicable to Collective Investment Schemes”.

Listing Rule 5.94 holds that listed companies should endeavour to adopt the Code on a "comply or explain" basis. In the event that a company chooses not to comply with any of the provisions of the Code, it is required to give its shareholders a clear explanation in the Annual Report illustrating how its actual practices are consistent with the Code and how this departure from the provisions contributes to good governance. One of the principles that appeared in the original Code, being the requirement for an audit committee, has since become mandatory, having been transposed into the Listing Rules of the MFSA.

The key corporate governance rules include, various laws, the Code, the Corporate Governance Guidelines for Public Listed Companies (the “Guidelines”) and Corporate Governance Manual for Directors of Investment Companies and Collective Investment Schemes (the “Manual”).

Institutional Shareholders

The Code also places particular focus on “institutional shareholders”, adopting a wide interpretation of such term that includes any person who by profession, whether directly or indirectly takes a position in investment as principal, manager or holds funds for or on behalf of others. Such investors are seen as having significant influence at general meetings and in the market, given their perceived knowledge and expertise. They have a responsibility to “make considered use of their votes” and are further expected to give due weight to “all relevant factors” drawn to their attention when evaluating a company’s governance arrangements.

Public Interest Companies

The MFSA Guidelines are applicable to companies whose operations affect a “substantial sector of society”. The MFSA Guidelines identify public interest companies as being any one of the following three types:

  • a regulated company; or
  • a company that has issued debt securities to the public and whose securities are not admitted to listing on a recognised investment exchange; or
  • a government-owned entity established as a limited liability company.

A "regulated company" is a reference to companies authorised to provide a financial or a utility service, 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.

Public companies should not only act in the interests of their shareholders but “also in the community interest”.

The MFSA Guidelines are non-mandatory in nature however, companies are encouraged to implement these guidelines to support good governance within the local financial sector.

Government-Owned Entities

In addition to the MFSA Guidelines, the First Schedule of the Public Administration Act (Chapter 595 of the laws of Malta) includes its own code of ethics, which is applicable to all public employees and board members. A common thread between the two instruments remains that appropriate standards of integrity and competence are demanded from the relevant persons occupying such office.

Inspired in part by the many proposals put forth by the European Commission as part of its plan "Towards a Sustainable Europe", and the adoption of the Paris Convention on climate change, the Maltese jurisdiction has endeavoured to adopt more sustainable paths for both the planet and the economy.

As evidenced by the by-laws for the Green Market approved by the MSE and the Corporate Governance feedback statement issued by the MFSA in May 2021, there appears to be general consensus that ESG considerations have become a crucial element to help ensure that business is conducted in an ethical manner. Whilst some participants raised concerns on the competitive disadvantage that ESG disclosures could possibly create amongst different sized entities, both the MSE and the MFSA have confirmed that they will both continue to contribute towards, environmentally sustainable measures and adhere to social commitments.

There is also an initiative being undergone by the European Commission on sustainable corporate governance in aims of encouraging businesses to frame their decisions in terms of environmental social, and human impact for the long-term, rather than on short-term gains. Following periods of feedback and public consultation, this initiative is set for Commission adoption in the second quarter of 2021.

Directors

Article 137 (3) of the Act provides that the business of a company is managed by the directors who may exercise all relevant powers of the company which are not required to be exercised by the company in general meeting. Directors are responsible for the general governance of the company and its proper administration and management, as well as the general supervision of its affairs.

Corporate governance, therefore, rests principally on the shoulders of the directors. The Act defines a “director” as being any person occupying such position “by whatever name he may be called carrying out substantially the same functions in relation to the direction of the company”.

Shadow directors will therefore shoulder all duties of directors, including all fiduciary duties, as most recently decided in GBCom Limited vs Dr. Nicolai Vella Falzon (30/11/2020) FHCC.

In proceeding with their duties, the directors may or may not delegate executive management functions and roles to a management team. Furthermore, the board of directors often appoints committees to assist with the development of policies, executive oversight, risk management and other areas pertinent to the direction of the business.

Maltese law provides for a single tier structure for the board of directors. The law prescribes at least two directors for public companies, whereas a single director would suffice for private companies.

Shareholders

The law does not provide for any direct involvement by the shareholders in the management of a company. However, the members do have a role in a company’s governance through general meetings. In practice, this is principally done through the possibility of electing and removing directors.

All other controls are remedial in nature, in that they provide for remedies to hold the directors accountable for their actions, as opposed to giving the shareholders any direct involvement in the management of the company.

The Board of Directors (BOD) bears responsibility for all decision-making powers of the company other than those reserved for the shareholders in general meeting by law or by the M&As.

The decisions typically taken by the shareholders in a general meeting include alterations to the M&As, appointment and removal of directors, amalgamation and reconstructions of the company, dissolution of the company, increasing the authorised capital of the company, approval of annual financial statements, and appointment of financial auditors.

Board of Directors

At BOD level, decisions are normally taken through resolution. The articles of association generally state that questions arising during a meeting should be decided by majority vote and in the case of a tie, the chairman would normally, but not necessarily, have a casting vote. The Act provides that minutes of all board meetings be kept in appropriate minute books, for proper recording purposes. 

Alternatively, a resolution in writing, signed by all directors is also valid and effective as if it had been passed at a meeting of the directors duly convened and held. 

Shareholders' Meetings and Resolutions

The Act provides general rules concerning meetings of shareholders and resolutions, but also allows wide latitude for the articles of association to provide otherwise. The Act distinguishes between ordinary and extraordinary resolutions, normally on the basis of the percentage of votes required for the resolution to be considered carried. This allows for the categorisation of decision-taking in terms of strategic or structural importance, which would in turn allow for the leadership of the company to enjoy more certainty of direction.

Shareholders of a private company may also exercise their powers through unanimous written resolution of all shareholders without the requirement of a meeting provided that the decision does not relate to the removal of a director or auditor.

Board of Directors

The directors of a company are referred to collectively in the Act as having clear duties to act in the best interests of the company. The Act does not refer to the BOD specifically, but to the directors in general, and to the office of director, in terms of the responsibilities shouldered by persons accepting such office. A BOD will typically include a chairman as well as the company secretary.

The role of chairman is not specifically contemplated in the Act but is described in the Code as the person generally having responsibility to lead the board, setting its agenda, as well as ensuring that the directors receive precise, timely and objective information. The chairman is also normally responsible for ensuring effective communication with shareholders, as well as encouraging all board members to engage actively in discussion of complex and contentious issues.

The Code draws a clear distinction between the roles of chairman and chief executive officer, stating that there should be a clear division between the running of the board and the executive responsibility for running the company’s business.

Executive and Non-executive Directors

The law does not distinguish between executive and non-executive directors, but the Code lays down that the board of a listed company should be composed of executive and non-executive directors, including independent non-executives.

De Jure and De Facto Directors

The distinction between de jure directors and de facto directors is normally drawn to stress the fact that all persons effectively acting as directors have clear responsibilities at law, irrespective of the manner in which they were appointed. De jure directors are formally appointed in terms of the M&As or the appropriate statutory provisions, while de facto directors act in such capacity in practice without being formally appointed. The Court in Wintrade Limited vs Aparthotels Limited et (27/06/2017), touched upon the fact that where the directors’ terms expire, the general meeting is to formally appoint or reappoint the directors, in order to avoid a situation of directors acting as de facto directors. Therefore, where the M&As stipulate that any director shall hold their office for a specific period of time and shall thereafter be eligible for re-appointment, any continuing directors are to be re-appointed by the general meeting or by means of shareholders’ resolutions.

Company Secretary

The position of company secretary is specifically imposed by the Act as a company’s “administrative officer”. Jurists have occasionally questioned the breadth of actual responsibility shouldered by the company secretary, particularly since Article 150 of the Act provides that anything required to be done by a company under any provision of the Act “shall be deemed also to be required to be done by the officers of the company”. This said, it is generally believed that the intention of the legislator was not so broad as to make the responsibilities of company secretary and director indistinguishable, and the responsibility of the company secretary is therefore normally seen as possibly limited to matters of a more administrative nature.

There are specific functions imposed by statute on the company secretary, and others which are more customary in nature. The principal statutory duties relate to the proper keeping of registers and minute books, as well as the filing of documentation with the Registrar of Companies (the "Registrar"), where required. Other specific functions and responsibilities relate to the proper handling of meetings of the BOD as well as general meetings of the company.   

The Law

As already indicated, the law deals with the role of directors in a collective manner in terms of their management role, but also specifies general norms of behaviour, given the fiduciary nature of any director’s obligations to the company. Thus, each director is bound to act honestly and in good faith in the best interests of the company, exercising such skill and knowledge as may be expected of a person accepting such a position, and avoiding conflicts of interest. The directors are furthermore collectively responsible for the general governance of the company and its proper administration and management, as well as the general supervision of its affairs.

Articles of Association

The Model Articles specify rules for the holding of meetings, decision taking, the election of a chairman, as well as the delegation of any executive powers to a managing director or any directors holding any other executive office. The directors normally have the power to revoke any such delegated authority originally conferred. The directors may also appoint committees selected from among themselves for the purposes of delegation of any of their powers.

The Code

The Code considers it important to have non-executive directors appointed, including independent non-executive directors, in order to avoid situations where an individual or small group dominate the board’s decision making. A non-executive director is described as one who is not engaged in the daily management of the company. 

The Code envisages non-executive directors as being in a position to exercise independent and impartial judgment. They should also constructively challenge and help to develop the application of the strategy and policy of a company. A non-executive director should furthermore effectively monitor the reporting of performance, which aims at better transparency and governance of the company, besides scrutinising the performance of management.

Finally, a non-executive director should be satisfied with the financial information presented and ensure that financial controls and risk management policies are in place and properly implemented.

The Code suggests that the board should not be so large as to prove cumbersome. The board should be made up of an adequate number of directors appropriate for the requirements and nature of the business carried out by the company, with a view to obtaining a proper balance of skills, know-how and experience.

The Code further provides that directors are required to provide good leadership, integrity and judgement in guiding the company to reach its aims and goals. In order to achieve this, directors should develop the necessary skills and hold relevant experience to make effective decisions whilst discharging their duties.

The M&As of a company specify the identity of the initial directors in office, while the articles of association will normally provide the mechanics of appointment, removal, number of directors to be elected and similar details.

The law does not provide any specific qualifications (academic or otherwise) for directors other than making reference to general standards for persons accepting fiduciary obligations. Any person who is at least 18 years of age can be appointed director. Moreover, a director can continue to hold his position after retirement. Additionally, there are no restrictions on the nationality or habitual residence of the directors.

However, companies that are active in specific sectors such as the financial services sector or other specialised sectors which are subject to specific regulation and licensing, are required to adopt specific “fit and proper” criteria when putting forward candidates for appointment as director. Furthermore, such laws often subject any nomination of a director to office to approval from the relevant sector-specific authority concerned.

Article 142 of the Act also provides for those elements which would disqualify any individual from becoming or remaining an officer. This is a reference to persons who are:

  • interdicted, incapacitated or undischarged bankrupt;
  • convicted in relation to crimes affecting public trust, theft, fraud or of knowingly receiving property obtained by theft or fraud; or
  • unemancipated minors.

Appointment

The M&As of a company identify the first directors of the company. The Act stipulates that the name and residence details of the directors should be specified therein. In the case of a director which is itself a corporation, the name of the entity as well as the registered address should be included.

Succeeding directors are then appointed by ordinary resolution of the company in general meeting, and all changes must be duly filed with the Registrar through appropriate form. In the case of public companies, the Act stipulates that a director of a public company must sign the memorandum indicating their consent to act as such. In the case of succeeding directors, the director has to sign and deliver to the Registrar for registration his consent in writing.

Removal/Vacancy

The office of director may become vacant for several reasons, such as expiration of term of office, death, resignation, disqualification or removal. The M&As may authorise the appointment of a director for any specified period of time. There is no limit to holding office as long as the appointment is made pursuant to the applicable rules. A director may even hold office for life. A vacancy on the board of directors is automatically created in case of death of any incumbent.

Resignation

A director is generally free to resign from office at any time. This is normally done through notice in writing delivered to the chairman or company secretary. Alternatively, a director may tender their resignation during a board or general meeting – in which case, the resignation would be recorded in the minutes of the relevant meeting.

Disqualification and/or removal

A director may become disqualified from continuing to hold office in terms of law and/or pursuant to the M&As. In such circumstance, such office is automatically vacated, and no act of resignation is required.

Furthermore, Article 140 of the Act holds that a company may seek to remove a director from office by resolution taken at a general meeting of the company and passed by the members having the right to attend and vote thereat, and holding in aggregate at least fifty per cent of the voting rights attached to the shares represented and entitling them to vote at a general meeting. The Act makes it clear that removal by resolution shall remain effective notwithstanding any contrary provision in the M&As or any agreement with the director concerned. Any such intended resolution must however be brought to the prior notice of the individual concerned.

Jurisprudence

A recent judicial affirmation of Article 140 is Dr Douglas Aquilina et noe vs LPTIC Services Limited et (First Hall Civil Court, 2020). The applicant and two other individuals were directors of the defendant-company. The other two directors were also defendants in this case.

The defendant company had a single corporate shareholder, in which all three directors were also involved. Tensions between the relevant individuals at shareholder-company level, led to the other two directors/defendants resorting to Article 140 of the Act. The applicant had conceded his original claims to challenge his removal, but the Court nevertheless remarked how a director does not have any right to halt actions intended to remove him from his role as intended by Article 140 of the Act.

Once a director is removed by the general meeting, a vacancy is created. Should the vacancy not be filled at the same meeting, it could be filled as a casual vacancy. Furthermore, the removal of the director in this manner, does not deprive him from the right to compensation or damages that may be payable to them in terms of general principles of law.

Registering changes

In the event of any change in the composition of the BOD, including any change of company secretary, the relevant company must notify the Registrar within 14 days through filing of appropriate form for registration of the change. Such form must specify the date of the change, together with the required details of the newly appointed officer. This form is normally signed by the company secretary or by any one of the directors.

The Code

Leadership responsibilities

The rationale behind the drafting of the Code is that of ensuring that there is appropriate leadership in terms of oversight of the executive management of the business concerned. It emphasises the importance of having a clear division of responsibilities between the executive responsibility for running the company’s business on the one hand, and the board on the other. Where it is not possible for the chairman of a listed company to be different from the CEO, the Code enjoins the company to provide an explanation to the market and to its shareholders through a company announcement explaining the decision to combine the two roles.

The Code also provides that a CEO should not become chairman of the relevant company, other than by way of exception, and only after consulting major shareholders in advance and providing reasons for such a decision to the shareholders in the directors’ annual report.

Non-executive directors

The Code furthermore provides for the appointment of non-executive directors, recommending that at least one third of the board be composed of non-executives, with the majority of these being independent. Non-executive directors are not engaged in the day-to-day management of the company and are expected to have an important role in overseeing executive directors, dealing with situations involving conflicts of interest and generally bringing “fresh perspectives” and a more objective contribution to support or constructively challenge the management team. They are seen as generally in a position to bring independent judgment to bear on the various issues brought before the company.

As such, non-executive directors should be free from relationships that could materially interfere with the exercise of their independent and impartial judgment. They are considered independent where there is no conflict of interest whatsoever.

The Companies Act

The Act buttresses the provisions of the Code in prohibiting conflicts of interest, including self-dealing. Directors may not enter into transactions in competition with the company itself, unless there is appropriate disclosure and approvals received. Nor can a director accept office with two companies in competition with each other.

In such circumstances, the aggrieved company has the option of either taking the necessary action for damages inclusive of interest against the relevant director or demand payment of any profits made. Article 143 (1) of the Act stipulates that a director shall declare any personal interest in any particular transaction. The company may choose to proceed with the transaction itself. The Act captures the essence of this rule in a three-fold manner. It prohibits the director from:

  • making secret or personal profits from his position without prior consent of the company;
  • making personal gain through the use of confidential company information; and
  • by using property, information or opportunity of the company for their own personal benefit.

Directors' Duties

In Article 136A, the Act binds any director of a company to act honestly and in good faith, in the best interests of the company. The directors shall promote the well-being of the company and shall be responsible for its general governance, its proper administration and management, as well as the general supervision of its affairs. The general duties of directors include the exercise of such degree of care, diligence and skill which would be exercised by a reasonably diligent person having both the knowledge, skill and experience that the director actually has, as well as the knowledge, skill and experience that may be reasonably expected of a person carrying out such functions.

Other duties specified in the law include that of ensuring no misuse of powers given, no conflict of interest or making secret or personal profits from their position without the consent of the company, nor the use of property, information or opportunity of the company for their own or anyone else’s benefit.

Directors are further considered as owing fiduciary obligations to the company they serve. Article 1124A of the Civil Code sets out the general rules underlying all fiduciary obligations, but these are further supplemented by the rules laid down in the Act.

Administrative Responsibilities

Apart from the above-mentioned duties, directors also shoulder various administrative responsibilities for the company, mainly revolving around the proper handling of registers, such as the register of members and the register of debentures, as well as appropriate minute keeping. Other administrative tasks relate to the filing of returns and documents with the Registrar.

Board Responsibilities

The Code bestows on the board the first level of responsibility for accountability, monitoring, strategy formulation and policy development. It fleshes out such responsibility by stating that the Board should regularly review and evaluate corporate strategy, major operational and financial plans, performance objectives and monitor implementation and performance It must apply high ethical standards and take into account the interests of stakeholders.

It is the task of the board to strike a balance between enterprise and control in the company.

Directors Owing of Duties

The general principle under Maltese law is that directors owe their primary duties to the company as opposed to the shareholders. This was re-affirmed in multiple judgments, notably Sant Fournier v Philip Attard Montaldo (First Hall Civil Court, 2001). Directors are considered to be fiduciaries as well as mandatories of the company, which has a distinct and separate juridical personality from that of its shareholders.

As its duly authorised officers, the directors exercise all powers of the company.

Having stated the foregoing, the directors also owe duties to the shareholders in important ways. Under the Civil Code, fiduciary obligations are generally owed by any person who, as a matter of fact, whether in contract or even through assumption of office “owes a duty to protect the interests of another person”. It is clear that the primary obligations owed are to the company itself, but it is also arguable that a general standard of care is owed to shareholders, whose enterprise has been entrusted to the general direction of the directors and the company’s management.

Remedies Available to Shareholders

The Act also provides specific remedies to shareholders in situations where any director acts in an unfairly prejudicial manner. In terms of Article 402 of the Act, any member of a company can make an application to the court for appropriate orders where the company or its management have acted, or are likely to act in a manner which has been or is likely to be oppressive, unfairly discriminatory against, or unfairly prejudicial, to the shareholder(s) or in a manner that is contrary to the interests of the shareholders as a whole. Article 402 puts various remedies at the disposal of the court, if it finds the demand to be well founded, and where the court considers it equitable to do so. These include issuing orders, among other things, regulating the affairs of the company going forward, ordering transfers of shares, as well as the dissolution of the company. In Borg vs Primrose Poultry Products, the Court noted that the law fails to provide a definition of what constitutes acts or omissions which are "oppressive" and/or "prejudicial", and therefore every case must be considered on its own merits and on a case-by-case basis. 

Crucially, the Court can also order the payment of compensation by the person responsible for whatever oppressive action or omission to the oppressed member or members. 

The Act also provides for the possibility that shareholders (holding no less than 10% of the share capital) of a company, or for the company itself to request investigations by the Registrar into the manner in which any company is being managed, provided that they provide appropriate evidence of abuse. The Registrar can, in such circumstances, appoint inspectors with wide powers of intervention and can also resort to the same action provided to the members pursuant to Article 402.

There are several avenues of action and remedy available to wronged parties as a result of abusive action by the directors of a company. These remedies include Article 140 (removal of directors and casual vacancies) and 402 (protection of shareholders against unfair prejudice) of the Act.

The general principle under the Act is that the personal liability of directors resulting in a breach of duty is joint and several.

If a director breaches any of their duties, both the company itself and any wronged member may, in addition to any other remedy available, take action for damages and interest against the director or directors in question. The Court has also other powers that can be imposed, including change of management personnel, change in shareholding as well as dissolution of the company.

The remedies against abuse of office committed by directors and other officers are wide.

Article 148 of the Act clearly stipulates that any provision, whether found within the M&As of the company or within any agreement made between the director and the company to exempt of indemnify a director against liability for negligence, default or a breach of duty, is void. However, a company may purchase and maintain insurance cover against certain liabilities and losses also for its officers.

The Model Articles recognise the directors’ right to remuneration as approved during the general meeting by ordinary resolution. Apart from remuneration, directors are typically also paid for any travel expenses incurred by them for business purposes, besides being offered appropriate insurance cover.

In the case of listed entities, the Code states that a remuneration committee must be established to develop a remuneration policy for directors and senior executives of the company. The principal role of the committee is to formulate an attractive package in order to attract, retain and motivate directors and senior executives.

The Model Articles provide that directors’ remuneration is actually determined by the company in general meeting. The Code provides for a “remuneration statement” which should disclose detailed information on the current policy, including various analyses, as well as disclose any intended changes for the coming year.

The Company

A company has a legal personality which is distinct from that of its members and is therefore an independent subject of rights and obligations at law. Any liability of a shareholder for losses incurred by the company is limited to any portion of share capital held to their name that they have yet to deposit. Incorporation therefore introduces what is commonly described as a "corporate veil", which can be lifted in very limited circumstances such as fraudulent or wrongful trading in the context of insolvency.

Company-Shareholder Relationship

Accountability

The Code and MFSA Guidelines, which include principles to be implemented on a best endeavours basis, provide that the BOD shall account to shareholders fully, utilising general meetings to regularly communicate with shareholders. Furthermore, the board must endeavour to protect and enhance the interests of both the company as well as the shareholders, present and future. Additionally, the Code invites shareholders to appreciate the significance of participation in general meetings of the company and particularly in the election of directors.

In particular, shareholders should “continue to hold directors to account for their actions, their stewardship of the company’s assets and the performance of the company”.

Shareholders' rights

The Act defines a "shareholder" as a person entered in the register of members of a company. Following incorporation, the relationship between a shareholder and the company is principally circumscribed by the terms of the M&As of the company, apart from specific rights conferred by law. Any further rights to be asserted by the shareholder are not against the company itself, but rather against the directors or officers, to the extent that an “unfair prejudice” remedy pursuant to Article 402 of the Act can be invoked, or to the extent a breach of fiduciary obligations claim can be sustained in terms of the Civil Code (see 4.7 Responsibility/Accountability of Directors).

Company Management

The Act makes it amply clear that “the business of a company shall be managed by the directors”. As already pointed out, this does not mean that the shareholders in a general meeting do not have any interest or say in the governance of the company. The key distinction to be made is therefore between the management of the business of the company, and the company’s proper governance.

Shareholder Influence

In terms of governance, it is the shareholders who appoint and can remove the directors. It is the shareholders who approve various matters, including the annual financial statements of the company as well as the appointment of auditors. It is also up to the shareholders to decide whether to increase the company’s share capital or otherwise, or to amend the M&As of the relevant company.

The M&As, being contractual in nature, can articulate the foregoing general principle in different manners. However, the actual facts are determinant, as the law imposes the legal duties of a director on whoever actually has such a role, even if not a “formal” director. In smaller companies, the influence of the shareholders naturally tends to be greater than in larger companies.

The extent to which individual shareholders or groups of shareholders are involved in the management of the company will in fact depend largely on whether or not they are acting as directors, or whether or not the directors have delegated or otherwise entrusted part of their management function to them. In all cases, factual considerations will trump formal documentation.

Listed Companies

In listed companies, the shareholders will have little opportunity to participate in the management of the company. By way of counter-balance, the Listing Rules include a number of disclosure requirements to shareholders. Such duties are not strictly for the benefit of the shareholders but are also in the interest of the market as a whole, given the dispersed nature of its share ownership. 

Public Interest Companies

Pursuant to the MFSA Guidelines, the board is required to protect and enhance the interests of both the company and its shareholders present and future. It requires the board to make available for inspection certain information to shareholders in order to ensure participation in the general meetings. Shareholders are encouraged to actively participate in general meetings, particularly in the election or appointment of directors and hold them accountable for their actions. 

Article 128 of the Act provides that every company registered in Malta must hold an annual general meeting, in addition to any other meetings. The first annual general meeting must be held within 18 months from registration. Other shareholder meetings, which may also be requested by members holding not less than one tenth of the paid up share capital of a company are referred to as extraordinary general meetings. Should the shareholders’ request to convene an extraordinary meeting be disregarded by the directors, the shareholders may convene such meeting of their own motion, at the earliest date and at the expense of the company.

Articles of Association

The M&As of a company will provide for the management of business which is to be considered at an annual general meeting. Shareholders are entitled to attend and vote at a meeting of the company or at a meeting of any class of shareholders, personally or via a proxy. The appointment of a proxy must normally be in writing.

General Meeting

A general meeting of the company must be called with at least fourteen days’ notice in writing. The notice must exclude the day on which it is served and specify the place, day and hour of the meeting. A meeting may be called with shorter notice if agreed by all the members entitled to vote and attend.

Article 131 of the Act provides that, unless the articles of association of a company provide otherwise, “two members personally present shall be a quorum”. The Model Articles provide that “a member or members” representing not less than one tenth in aggregate of the paid-up share capital of the company having the right to attend and vote shall be a quorum.

Generally, the M&As will provide for procedures which would have to be followed if a quorum is not reached. The Model Articles provide that the meeting shall be reconvened at a new time and place as the directors may determine and if at the adjourned meeting the quorum is not present within half an hour from the time appointed for the meeting, then the member or members present shall be a quorum.

At general meetings, shareholders manifest their wishes by voting for or against the proposed resolutions and as a rule, the will of the majority of those members having shares with voting rights will prevail. This principle, however, applies with certain safeguards at law intended to protect the rights of minority shareholders, see 5.4 Shareholder Claims. Shareholders exercise their vote on matters concerning the appointment of directors, the distribution of dividends, the approval of the accounts and balance sheet, the directors’ report and auditors’ report, as well as the appointment of auditors.

Listed Companies and Public Interest Companies

For listed companies, the Section 12.10 of the Listing Rules provides a list of requirements regulating the method of notifying shareholders, the contents of a notice of the general meeting, notice period, participation and voting, proxies and the publication of certain information prior to the general meeting. Section 12.14 of the Listing Rules also gives the right to a shareholder holding not less than 5% of the voting issued share capital, to request that items be included on the agenda of a general meeting (accompanied by a justification or drafted resolution to be adopted) and to table draft resolutions for items on the agenda. In the MFSA Guidelines, the requirements for notice are less prescriptive and more generic appealing to principles of equality and fair treatment between shareholders.

Shareholders have certain rights and remedies available to them as individual members of the company. Apart from the powers available to the general meeting, any shareholder may sue a director or directors under Article 402 of the Act, where the affairs of the company have been or are likely to be conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial against a member or members, or against the interests of the members as a whole. 

A shareholder also has the right to make an application in Court:

  • to appoint a director, where the number of directors falls below the minimum required by law;
  • to appoint auditors for the company;
  • to wind-up a company where certain conditions are met;
  • to appoint a liquidator when a liquidator is not appointed in the manner provided by law and summon creditors’ meetings; and
  • to remove a liquidator when there are sufficient grounds to warrant their removal.

Qualified Minority Rights

The Act grants protection to members who as a group qualify as representing “qualified minority rights” expressed in terms of a percentage of the issued share capital or as a minimum number of members. The Act provides that a qualified minority of the shareholders may:

  • require the directors to convene an extraordinary general meeting;
  • demand a poll;
  • request the Registrar to appoint inspectors to investigate and report on the affairs of a company; and
  • request the Registrar to investigate and report on the membership of a company for the purpose of determining the true persons who are or have been financially interested in the success or failure of the company or able to control or materially influence its policy.

Where a proposed change in class rights is unfairly prejudicial, Article 116 of the Act grants to the holders of not less than 15% of the issued shares of any class the right to request that a court order that such change not take effect.

M&As may also confer rights on individual members and qualified minorities. Shareholders may also avail themselves of certain general provisions in the Act which gives right to an interested person, and also to the protection granted by virtue of the general principles of law; such as for example, instituting judicial proceedings in case of fraud.

The Listing Rules require a shareholder who acquires or disposes shares to which voting rights are attached to notify the issuing company and the MFSA of the proportion of voting rights held by him as a result of the acquisition or disposal where that proportion reaches, exceeds or falls below certain thresholds established therein.

Annual Accounts

Pursuant to the Article 183 of the Act, company directors are tasked with filing with the Registrar a copy of the company’s annual accounts together with a copy of the auditors’ report on the accounts and a copy of the directors’ report in respect of each accounting period, within forty-two days from the end of the period for the laying of annual accounts. The law excludes "small companies" (ie, those that fulfil any two of the three criteria mentioned in Article 185 (1) of the Act), from making certain filings.

Annual Return

The company is also duty bound to file an annual return, which should be in the form set out in the Seventh Schedule to the Act. The annual return should include a summary of the share capital, divided into nominal and issued, shares in each class and the number and percentage which is paid up, the total number of shares of each class forfeited and the total amount paid. The annual return should also include a list of present members and members who have held shares or stock in the company since the date of the previous annual return and details of the directors and the company secretary of the company as at the date of the annual return.

The Listing Rules

Section 5.55 of the Listing Rules includes the requirements for financial reporting obligations of listed companies. The annual financial report of listed companies must include the annual financial statements together with the directors’ report and auditors’ report, a statement of responsibility drawn up by the directors on the financial statements and a fair review of the performance of the business, a report by the directors and a report by the auditors on compliance with the Code, information on material contracts and the name of the company secretary. In addition to the aforementioned, an auditor must draw up a report on the listed company’s compliance with the Code. 

Pursuant to Section 5.74 of the Listing Rules, listed companies are also expected to make a half-yearly financial report which includes a condensed set of financial statements and a statement therewith drawn up by responsible persons within the listed company, an interim directors’ report, statements by directors, the auditors’ report or where the report has not been audited, a statement to that effect.

Despite there being no requirements for the publication of any corporate governance arrangements for private and public companies, listed companies registered in Malta must include a corporate governance statement in their annual financial report. In terms of Section 5.97 of the Listing Rules, the statement must contain various details, including a reference to the Code rules implemented by the listed company and where such information is available to the public , all relevant information about the corporate governance practices applied, any reasons for departure from the application of any provision of a the Code and a description of the internal control and risk management systems of the company in relation to the financial reporting process.

Where the listed company is subject to EU Directive 2004/25/EC on takeover bids, the listed company must also make reference in its corporate governance statement to:

  • the direct and indirect shareholdings;
  • holders having special rights and a description thereof;
  • restrictions on voting rights;
  • rules governing the appointment and replacement of directors and their respective powers; and
  • any amendments to the M&As.

In addition to the above, the Listing Rules require the corporate governance statement to include a description of the diversity policy applied in relation to the board of directors and management and supervisory bodies of the company. It is also required that the auditors include a report on the corporate governance statement in the annual financial report.

Every company, including any listed company, is required to make certain filings with the Registrar, which requirements are listed in various provisions of the Act. All such filings are made at the Malta Business Registry (MBR), against a fee.

Amongst the most common filings are the annual return (which is submitted every year), the notification of changes amongst directors or company secretary or in the representation of a company, the notification of change in registered office of a company, the return of allotments of shares (when the company issues new shares) and the notice of transfer or transmission of shares.

Furthermore, listed companies are required to submit their prospectus or any changes thereto with the MSE. While the MSE is not a "registry" or a "regulator", its statutory role is to supervise the fulfilment of various obligations due by a listed company to its investors. Company announcements of listed companies are uploaded on the MSE portal and disseminated through its dissemination system. The MSE is not responsible for the contents of any company announcement, but it is empowered to report any non-compliance with the disclosure requirements to the relevant competent authority.

A company must in terms of Article 151 of the Act appoint an auditor or joint auditors and prepare audited financial statements and an auditor’s report to the shareholders for every financial year. The auditor is appointed at each general meeting where the annual audited accounts are laid and hold office from the conclusion of that meeting until the conclusion of the next general meeting at which accounts are presented. The first auditors are appointed by the directors before the first general meeting of the company at which the annual accounts are presented and they hold office until the conclusion of that meeting.

If directors do not exercise their right, then the company may appoint the auditor at the general meeting. If no auditor is appointed or re-appointed, any director, member or the Registrar can make an application for the court to fill the vacancy. The Registrar must be notified of the intervention of the Court, failure to do so may expose the officers of the company to liability.

Pursuant to Article 152 of the Act, the appointment of auditors for public-interest entities should not exceed the maximum ten-year period established by law.

Removal of Auditors

Notwithstanding anything in the company’s M&As, an auditor may be removed from office by a resolution taken at a general meeting and passed by a member or members holding more than 50% voting rights. If the resolution is passed, then the company must inform the Registrar within 14 days for registration. An auditor may also resign from office by depositing a notice in writing at the company’s registered office. In such case, the company must likewise notify the Registrar within 14 days from receipt of such notice of resignation.

The function of the auditor is to report to the shareholders on a number of issues. The opinion must state whether the annual accounts:

  • give a true and fair view of the financial position of the company;
  • have been properly prepared in accordance with the relevant financial reporting framework; and
  • have been prepared in accordance with the requirements of the Companies Act.

The auditor must also express an opinion as to whether the directors’ report is consistent with the accounts, has been prepared in accordance with legal requirements and whether any material misstatements have been identified. The auditor may also be required to express opinions on other matters, depending on the company’s size, whether it is licensed to undertake certain business categories, or whether it is listed.

The general duties of directors would include that of ensuring appropriate systems for the management of risk within the company, which would include a system of internal controls. However, such systems are not specified in the law. They are inferred from the general duties specified in the Act, as well as the Civil Code, making directors directly accountable to the company as well as its shareholders.

With listed companies, the corporate governance statement must include a description of the internal control and risk management systems of the listed company in relation to the financial reporting process.

A further source of risk management and internal control is the audit committee, which can fulfil a vital supervisory function over the board of directors. Section 5.117 of the Listing Rules provides that the committee should be composed solely of non-executive directors and having at least three members and the majority of such members have to be independent of the listed company and a chairman appointed by the BOD. At least one member of the audit committee needs to be competent in accounting and/or auditing.

The primary objective of the audit committee is to assist the board of directors in the company’s decision-making process and ensure qualitative reporting, in particular when managing the relationship between the company and its auditors. The members of the audit committee are required to have oversight on the effectiveness of the company’s internal quality control and risk management systems and of monitoring material transactions, including related-party transactions.

Fenech Farrugia Fiott Legal

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Birkirkara, BKR9034
Malta

+356 254 964 00

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info@fff-legal.com www.fff-legal.com
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Law and Practice in Malta

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Fenech Farrugia Fiott Legal is a Malta-based law firm which provides a comprehensive range of services to high-calibre individuals and businesses. The practice of Fenech Farrugia Fiott Legal is international in both reputation and reach, adapting over the years to complement the changing requirements of its clientele. The work that the firm undertakes is versatile, but includes a specialist focus on the area of corporate and commercial law as well as corporate finance and M&A work. The firm’s other principal areas of practice include financial services law, asset and project finance law, maritime and aviation law, the law of trusts, foundations and other organisations, estate planning and private clients' work.