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Ia If Il In Ir Is It

If an audit committee has been set up under S.167 and the independent non-executive director appointed is a previous employee with a small shareholding, does this comply with the requirements of S.167?

Question

We have a group which are required to have an Audit Committee under Section 167 of the Companies Act 2014. The Group decided to establish an Audit Committee.

The group, in an attempt to fulfil Section 167 (4) – appointed a Non-Executive Director [Mr A] who was considered to be independent (all other members of the Audit Committee are either not directors/ not independent).

However, in my opinion Mr A is not independent for the following reasons:

  1. Mr A held a position of employment (not as a NED or executive Director) within the Group for 16 months prior to his appointment as Audit Committee member/NED.

 

  1. Mr A holds an indirect shareholding of c. 2.4% in the Group. This shareholding was held for 16 months prior to his appointment as Audit Committee member/NED

 

  1. Mr A is a director (& minority shareholder) in an investment company (‘InvestCo’) that directly owns c. 60% of the Group. There are 6 directors on the board of InvestCo.
  2. The shareholding held by Mr A indirectly in the Group – may not represent a material relationship with the company. However, for Mr A, this investment may be a material personal investment for him.
  3. Mr A is also a member of a separate Finance Committee within the Group.  The role of the Finance Committee (stipulated by the Shareholders Agreement) includes amongst others – setting executive salary levels, bonuses, proposing payment or declaration of any interim or final dividend by the Group. It has been confirmed to us that Mr A does not have a vote within this committee, however from our audit work we can see that the meeting agendas and meeting minutes have been prepared by Mr A (and not the committee chairman).

Can you please let me know if you agree that Mr A is not independent – Section 167 (5) Companies Act 2014.

 

Answer

Section 167 requires that once the limits of turnover (€50m) and balance sheet total (€25m) have been breached, either
– an audit committee is set up that meets the requirements of section 167, or
– such a committee is not established, with the reasons disclosed in the directors report

In the situation you have presented, it would appear that an audit committee has been set up, just not one that fully complies with S.167 as the person referred to as Mr A was previously employed by the company (and potentially due to the fact that he holds a material business relationship with the company).

So as a result of this, it would appear that this company has set up an audit committee, just not one that meets the requirements of section 167.

If this is the case then it may be appropriate to either appoint someone who fully meets the “independence” requirements of S.167 (5) to the committee or else state in the directors report that an audit committee has been set up but that this has not been established in accordance with S.167 of CA 2014.