Maltese law has had the benefit of absorbing influence from both 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 joined the European Union as a full sovereign member in 2004, and Maltese law has consequently also drawn much influence and direct adaptation through EU Regulations and Directives since that time.
Maltese principles of corporate governance reflect its cultural context. The legal system is generally organised following continental logic, with the Civil Code regulating a large number of socio-economic and commercial relationships, but particular economic sectors are regulated through direct statute, 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. 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 (Chapter 16 of the Laws of Malta) 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), which regulates partnerships as well as limited liability companies.
Pursuant to Article 209 of the Companies Act, a private company is one which by its Memorandum and Articles of Association 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 are defined as those which are not private companies. A public company may be listed on a stock exchange, including the Malta Stock Exchange.
Limited liability companies
Limited liability companies may also be investment companies either with variable share capital (SICAV) or with fixed share capital (INVCO). In the context of the insurance industry, a protected cell company (PCC) may also be registered.
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 Companies Act is the principal source for corporate governance requirements in Malta. The Malta Stock Exchange introduced a Code of Principles of Good Corporate Governance in 2001, which has been periodically revised and amended since then (the “Code”). Although relevant for all companies, the Code has thus far 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 Malta Financial Services Authority. The Code is generally recognised as having been primarily influenced by developments in the UK, but has also been influenced by EU developments over the years, as well as the OECD Principles of Corporate Governance.
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 Companies Act 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
Article 3A of the Companies Act makes further reference to several EU Directives and Regulations, some of which are also directly relevant to corporate governance issues. The Capital Requirements Directive 2013/36/EU and the Capital Requirements (EU) Regulation 575/2013 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 to focus on.
The Code is annexed to the Listing Rules issued by the Malta Financial Services Authority (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”.
It is mandatory for listed companies to comply with the principles of 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 Malta Stock Exchange.
The law as well as the Code principally regulate the conduct and standards of behaviour required of directors, given their central fiduciary role in companies. It goes beyond the relationship between directors and shareholders, by promoting effective communication with the market.
The Code also places particular focus on “institutional investors”, adopting a wide interpretation of such term. The Code assumes that such investors will be seen as having significant influence at General Meetings and in the market, given their perceived knowledge and expertise. They are therefore enjoined 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
It should also be noted that Corporate Governance guidelines have also been published by the Malta Financial Service Authority for public interest companies, intended to apply to companies whose operations affect a “substantial sector of society”. These companies should not only act in the interests of their shareholders but “also in the community interest”. A public interest company includes a regulated company, a company that has issued debt securities to the public but which are not admitted to listing on a recognised investment exchange, or a Government-owned entity established as a limited liability company.
The Guidelines are, however, non-mandatory in nature.
Government Owned Entities
There is some overlap in respect of Government owned entities, as there is also a code of ethics for Board Directors in the public sector which was most recently revised in 2008. There is further possibility of overlap in this sector, given that the Public Administration Act of 2009 includes its own code of ethics. The common thread remains that of appropriate standards of integrity and competence demanded from the relevant persons occupying such office.
Commentators are of the view that the healthy discussion on corporate governance issues in Malta may tend to include wider ethical issues and to more interaction between boardroom and shareholders. The discussion will likely be influenced, and perhaps driven, by developments within the European Union and the United Kingdom on such staple issues as corporate social responsibility, gender and ethnic diversity on the Board, the introduction of performance targets for Board members and other similar topics will continue to feature prominently.
The important debate whether to go beyond “comply or explain” principles to more mandatory requirements will also feature. This may in turn stimulate debate on the fundamental principles of company law.
The MFSA Consultation document 2020
The MFSA will likely figure as an important aggregator of views and has already taken the lead by launching a stakeholder consultation document in February 2020. This document sets out several proposals for the possible promulgation of a comprehensive principles-based Corporate Governance Code which is applicable to all entities authorised by the MFSA and listed companies, including possible sector specific rules and guidance notes. The MFSA is considering "apply and explain" rules besides "comply or explain" rules.
In essence, the document seems oriented towards instigating debate more than indicating a clear policy orientation of the MFSA. The consultation also puts forward possible principles which would also cover the Board of Directors, the responsibilities of functionaries and officials, engagement with stakeholders, committees, corporate culture, ethics framework, risk management and other topics. This consultation period closed on the 25th March 2020. The outcome of this consultation is still pending, nor is it clear whether the MFSA has decided on any clear orientation of initiative going forward.
It is clear that the COVID-19 pandemic experience of 2020 will influence the thinking and debate on all these issues, although it is still too early, at the time of writing, to identify any particular trends.
This is still a developing area of market practice and law, and legal developments will largely depend on how social conventions and attitudes will develop. Commentators have stated that any developments in this direction will likely be articulated as integrated core strategy developments which will be seen as closely connected to the mission of the relevant companies.
Some commentators have argued that ESG considerations should be seen as an integral part of a wider fiduciary duty owed by corporations and their top executives to stakeholders, but there are no known cases where such an argument has been tested within the jurisdiction. The subject is viewed as a reflection of the developing cultural milieu and is not an area which is free from controversy.
The Malta Financial Services Authority has issued a number of circulars in the context of the COVID-19 pandemic, starting on 13 March 2020, where listed companies were advised to disclose any relevant information regarding the impact of the pandemic on their fundamentals, prospects or financial situation. Licence holders were addressed in a circular on contingency planning on the same date, such as the holding of meetings through electronic means and other related subjects. Other circulars have addressed issues such as the timing of regulatory reporting, clarifying issues relating to the application of MIFID and other matters.
The government has also implemented measures as a direct response to the pandemic, but these are not directly related to corporate governance issues.
The law 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. It is, however, important to note that, the law defines a “director” as any person occupying such position “by whatever name he may be called”. Therefore, so-called “shadow directors” will be considered as directors at law, depending on the degree of control actually exercised.
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.
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 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 memorandum and articles of association.
The decisions typically taken by the shareholders in a general meeting include alterations to the memorandum and articles of association, 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 board of directors’ 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 Companies 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 Companies Act provides general rules concerning meetings of shareholders and resolutions, but also allow wide latitude for the articles of association to provide otherwise. The Companies Act distinguishes between ordinary and extraordinary resolutions 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 Companies Act as having clear duties to act in the best interests of the company. The Companies Act does not refer to the board of directors, but to the directors in general, and to the office of director, in terms of the responsibilities shouldered by persons accepting such office.A board of directors will typically include a chairman as well as the company secretary. The role of chairman is not specifically contemplated in the Companies 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.
The position of company secretary is on the other hand specifically imposed by the Companies Act as a company’s “administrative officer”, as opposed to anything directly connected with carrying on the company’s business. Jurists have occasionally questioned the breadth of actual responsibility shouldered by the company secretary, particularly since Article 150 of the Companies Act provides that anything required to be done by a company under any provision of the Companies Act “shall be deemed also to be required to be done by the officers of the company”. Having stated this, it is however generally believed that the intention of the legislator wasn’t so broad as to make the responsibilities of company secretary and director indistinguishable.
The responsibility of the company secretary is therefore 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 ("Registrar"), where required. Other specific functions and responsibilities relate to the proper handling of meetings of the board of directors as well as general meetings of the company.
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.
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 of association then 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 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 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. A balance of skills, know-how and experience should be sought to be created.
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 memorandum of association of a company specifies the identity of the directors of the company 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 eighteen 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.
The Companies 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:
The memorandum of association of the company identifies the first directors of the company. The Companies 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 Companies 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.
The office of director may become vacant for several reasons, such as expiration of term of office, death, resignation, disqualification or removal. The memorandum and articles of association 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.
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.
A director may become disqualified from continuing to hold office in terms of law and/or pursuant to the memorandum or articles of association. In such circumstance, such office is automatically vacated, and no act of resignation is required.
Furthermore, the 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 50% of the voting rights attached to the shares represented and entitling them to vote at a general meeting. The Companies Act makes it clear that removal by resolution shall remain effective notwithstanding any contrary provision in the memorandum and articles of association or any agreement with the director concerned. Any such intended resolution must however be brought to the prior notice of the individual concerned.
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.
In the event of any change in the composition of the board of directors, including any change of company secretary, the company must notify the Registrar for registration of such change by means of appropriate form, which must be filed within fourteen days of the change and must specify the date of the change, together with the required details of the newly appointed officer. This form is usually signed by the company secretary or by any one of the directors.
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 chief executive officer, 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 chief executive 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.
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 Companies 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 Companies 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 Companies Act captures the essence of this rule in a three-fold manner. It prohibits the director from:
The Companies 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 Companies Act.
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. For instance, a director must file any changes which are made to the memorandum and articles of association with the Registrar as well as any change in the issued share capital of a company.
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 established also in case law, notably in 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 Companies 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 Companies 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 is “oppressive, unfairly discriminatory against or unfairly prejudicial, to a member or members or in a manner that is contrary to the interests of the members as a whole”. Where the court sees that such a demand is well founded, and considers it equitable to do so, the court can make a wide range of orders in terms of the management of the company going forward, including ordering transfers of shares, as well as the dissolution of the company.
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 Companies 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 of the Companies Act.
There are several avenues of action and remedy available to wronged parties as a result of abusive action by the directors of a company.
The general principle under the Companies 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, as well as 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.
The Companies Act clearly stipulates that any provision, whether found within the memorandum and articles of association 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 contained in the First Schedule to the Companies Act 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.
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 included in the First Schedule to the Companies Act 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.
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 in effect renders shareholders immune from action by third parties.
Such a veil can be lifted in very limited circumstances, such as instances where fraudulent or wrongful trading can be established in the context of insolvency.
The Code provides that the Board of Directors 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. However, 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”.
The Companies 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 memorandum and articles of association 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 Companies 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).
The Companies 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.
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.
The memorandum and articles of association, being contractual in nature, can articulate the foregoing general principle in different manners. As already discussed, 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.
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 necessarily for the benefit of the shareholders but are in the interest of the market as a whole, since listed companies have dispersed share ownership.
Public Interest Companies
In the Corporate Governance Guidelines for Public Interest Companies issued by the Malta Financial Services Authority, the board is also required to protect and enhance the interest of both the company and its shareholders present and future and requires the board to make available for inspection certain information to shareholders in order to ensure participation in the general meetings. Shareholders are directly encouraged to participate in general meetings, particularly in the election or appointment of directors and hold them accountable for their actions.
Article 128 of the Companies 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 of the company are referred to as extraordinary general meetings.
Articles of Association
The memorandum and articles of association 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.
A general meeting of the company must be called with at least 14 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 Companies Act provides that, unless the articles of association of a company provide otherwise, “two members personally present shall be a quorum”. The model articles provided for in the First Schedule to the Companies Act 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.
If a quorum is not reached, the meeting shall be reconvened to 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 as will be seen in 5.4 Shareholder Claims. Shareholders 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 Listing Rules include 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. The Listing Rules also give 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 Corporate Governance Guidelines for Public Interest Companies, 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. A shareholder may sue a director or directors under Article 402 of the Companies 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:
The Companies 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 Companies Act provides that a qualified minority of the shareholders may:
Where a proposed change in class rights is unfairly prejudicial, Article 116 of the Companies 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.
The memorandum and articles of association may also confer rights on individual members and qualified minorities. Shareholders may also avail themselves of certain general provisions in the Companies 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 Listing Authority (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.
A company is duty bound to file 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 company is also duty bound to file on annual return, which should be in the form set out in the Seventh Schedule to the Companies Act and 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
The Listing Rules include the requirements for financial reporting 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. The Listing Rules also require listed companies to make a half-yearly financial report which includes a condensed set of financial statements, an interim directors’ report, statements by directors, the auditors’ report or where the report has not been audited, a statement by the listed company that the financial report has not been audited.
There are no requirements for publication of any corporate governance arrangements for private and public companies.
However, listed companies must include a corporate governance statement in their annual financial report. The statement must contain various details, including a reference to the corporate governance code to which it is subject, all relevant information about the corporate governance practices applied, any departure from the application of any provision of a corporate governance code and a description of the internal control and risk management systems of the company in relation to the financial reporting process. Other details include information required to be disclosed in terms of EU Directive 2004/25/EC on takeover bids, the manner in which a general meeting is conducted, shareholders’ rights and how they can be exercised, the composition and operation of the board of directors, details on the audit committee and of any other committee established by the board.
In case of a company having an average of five hundred employees during the relevant financial year, the Code requires 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. The auditors shall furthermore include a report on the corporate governance statement in the annual financial report.
Every company, including listed companies, is required to make certain filings with the Registrar, which requirements are listed in various provisions of the Companies Act. The filings are publicly available at the Malta Business Registry, 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 (when a shareholder transfers or transmits (upon death) their shares to a new shareholder).
Furthermore, listed companies are required to submit their prospectus or any changes thereto with the Malta Stock Exchange, which although is not a "registry" or a "regulator", its role is to supervise that the obligations due by a listed company to its investors are being honoured. Company announcements of listed companies are uploaded on the Malta Stock Exchange portal and disseminated through its dissemination system. The Malta Stock Exchange 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 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.
Subsequently, the auditors are appointed by ordinary resolution adopted by the shareholders at the annual general meeting. If directors do not exercise their right, then the company may appoint the auditor at the general meeting. If no auditor is appointed, the court can order the Registrar to appoint someone to fill the vacancy on application from any of the directors or any member of the company. In public-interest entities, the appointment of auditors should not exceed the maximum periods as established by law.
A company may remove an auditor 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 therefore to report to the shareholders on a number of issues. The opinion must state whether the annual accounts
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 Companies 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. The Listing Rules provide 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. 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.