Every organization has compliance obligations, from non-profits all the way up to major multinational, multi-entity businesses and entity management liability is buried within those obligations, especially for public entities. While those obligations differ depending on the type of entity and how it is set up – not to mention where it is based and how it interplays with local regulations – the fact remains that no one can escape entity management liability.
In reality, whether organizations meet that entity management liability is entirely up to them. They might decide to accept the penalties, be disorganized and unready, or they may genuinely be mistaken in what the local entity management liability entails and not file when they should. If this is the case, it’s the entity and its stakeholders that must deal with the consequences – which could be anything from a slap on the wrist to huge monetary fines and even jail time in some jurisdictions.
However, when the entity in question is a public one – when it is listed on the local stock exchange, and members of the public not involved in running the entity are able to take a monetary stake in its fortunes – then it becomes a different story. It’s no longer a case of the directors taking the risk; now, the interests of strangers are involved. Therefore, public entities take on greater entity management liability, and why local regulators set a strict regime of reporting and filing for entity management for these organizations.
To complicate matters, the entity management liability taken on by public entities can differ between jurisdictions. There’s no list of “10 things you must do” when managing a public entity, no bible for compliance and governance once you list. Entity management for public entities becomes a game of close monitoring, keeping an eye on updates from the exchange and local regulators, and ensuring your entity is ready to remain in compliance with whatever requirements are set for public entities.
Entity management liability can differ between jurisdictions
It’s true: Not all regulatory compliance is created equal, and the compliance obligations for public entities in various countries and on various exchanges can differ greatly. While there are the obligations you would expect – filing annual reports, providing updates on changes of directors, maintaining good governance and cybersecurity practices – you may also need to report on entity movements and give governance updates. There are also requirements that entities must meet before they can be listed.
The entity management liability can also extend to governance, the frequency and format of shareholder meetings, how to raise capital or undertake M&A, and the habits of continuous disclosure. Let’s take a look at some of the entity management liabilities required in three different jurisdictions to see how entity management liability can differ – but remember, it’s best to consult an expert in the entity management liability in your jurisdiction to ensure your entity is in compliance.
US: Multiple regulatory authorities dictate the rules
While there are multiple regulatory authorities, depending on an organization’s sector, that dictate the entity management liability in the US for any organization – from the Securities and Exchange Commission (SEC) to the Office of the Comptroller of the Currency (OCC), from the Federal Reserve Board to the Federal Deposit Insurance Corporation (FDIC), from the Commodity Futures Trading Commission to the Consumer Financial Protection Bureau (CFPB) – let’s focus on two specific US exchanges.
In order to list on the New York Stock Exchange (NYSE), an entity must have a minimum share price of $4 at the time of listing; there are two sets of listing standards for international companies, namely domestic standards and worldwide standards. The share distribution criteria determine which standards a company is eligible for.
The Nasdaq has four sets of listing requirements, and each listed company must meet at least one of the four requirement sets, as well as the main rules for all companies. These requirements include the minimum number of publicly traded shares, the regular bid price at the time of listing, that the company follows Nasdaq corporate governance rules, and other requirements including earnings, capitalization and assets.
In order to remain on the exchange, the entity management liability for public entities includes monitoring whether the entity remains within these requirements and reporting any changes to the exchange. These requirements are in addition to the expected annual reporting and disclosure requirements for public entities in the United States.
UK: Former light regulatory touch is getting more intense
Like with many exchanges, the entity management liability for public entities in the UK lies in updating the market on trading performance between the regular annual or half-yearly announcements. Until 1995, the London Stock Exchange’s listing rules obliged entities to “avoid the creation of a false market.” The UK regulators, though, try to limit the burden of reporting obligations for public entities on its markets.
Today, entity management liability in the UK is largely governed by the Financial Services and Markets Act 2000, which focuses on the duty of following the principles of good governance and the role of regulators, including the Financial Conduct Authority (FCA) and the Prudential Regulation Authority.
The FCA’s listing rules require public entities to inform it in writing as soon as possible if there are changes to its listed equity shares, and that the public entity must carry on an independent business as its main activity at all times. There are also strict rules around controlling shareholders, with one of the biggest entity management liabilities resting in the maintenance of a register of beneficial owners.
Australia: Highly regulated with a heavy reporting burden
Public entities in Australia are highly regulated, governed by the Corporations Act 2001 and Australian Securities Exchange (ASX) listing rules, and supplemented by the Australian Securities and Investment Commission (ASIC) policy and the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations.
For example, the financial reporting obligations of a public entity listed on the ASX depend on the type of company. According to ASIC, the following entity management liabilities fall on public entities:
- A company that is not a disclosing entity or a company limited by guarantee must prepare annual financial reports in accordance with Chapter 2M of the Corporations Act, and those financial reports must be audited, lodged with ASIC within four months of the financial year-end, and sent to members by the earlier of four months after year-end or 21 days before the next annual general meeting (AGM).
- A company that is not a disclosing entity is not required to comply with Part 2M.3 of the Corporations Act if all conditions of the ASIC Corporations (Wholly Owned Companies) Instrument 2016/785 are met, and it is also not a borrowing corporation, the guarantor of such a borrower or of a financial services licensee, and it is a wholly owned entity that has undertaken a deed of cross-guarantee with every other company in the closed group.
- A company that is limited by guarantee has differing compliance obligations depending on its size. A small company or a company with revenue of less than AU$1 million must prepare annual financial reports and a directors’ report with specific disclosures as set out in Section 300B of the Corporations Act, have those reports audited or reviewed, and notify members of the annual financial report. Companies limited by guarantee with revenue of more than AU$1 million must do the same but are required to have reports audited.
There are also requirements for public entities in terms of corporate governance, continuous disclosure, shareholder meetings, substantial shareholders and tracing ownership, raising capital, major acquisitions and disposals, related party transactions, takeovers and insider trading.
Track and manage compliance with entity management software
Wherever your public entities are based, it’s imperative to track and manage the corporate record and entity data to ensure that you can meet the entity management liabilities. Keeping on top of regulatory changes, though, can be difficult, and maintaining entity data to ensure its integrity can be a full-time job in itself.
Entity management software, such as Diligent Entities, is tailor-made to ease the burden of entity management liability and help compliance teams to communicate with regulators. By centralizing the corporate record, entity managers can more effectively structure and manage entity data to better ensure compliance, mitigate risk and improve decision-making. Plus, reporting requirements become easier with the ability to electronically file statutory forms into global regulatory bodies directly from within the system.
Only Diligent provides an integrated entity governance solution to fuel good governance practices across multiple business units. Get in touch and schedule a demo to discover how Diligent Entities can help ease the burden of entity management for public entities.