Auditor liability: FRC publishes guidance on use of auditor liability limitation agreements

On 30 June 2008, the Financial Reporting Council (FRC) published final guidance on auditor liability limitation agreements (for background see PLC Practice note, Liability limitation agreements). The guidance was the subject of a consultation process. It seeks to provide practical assistance to companies and directors on the legislation and:

- Explains what is permissible under the Companies Act 2006 in relation to liability limitation agreements.

- Looks at some of the factors that may be relevant to any decision by the directors as to whether a company should enter into a liability limitation agreement.

- Looks at what matters should be covered in the agreement

- Examines the process to be followed to seek shareholder approval for the agreement, including for subsidiaries (and provides specimen resolutions).

- Examines the additional considerations that may be relevant to directors of private companies (but not to companies with institutional shareholders).

- Includes specimen principal terms and clauses for inclusion in liability limitation agreements.

One of the key considerations when directors are assessing whether to enter into a liability limitation agreement will be the likely views of the shareholders. On 30 June 2008 the Institutional Shareholders' Committee issued a statement setting out what institutional investors are likely to expect from companies proposing to enter into an auditor liability limitation agreement.

The FRC will review the impact and content of the guidance in the second half of 2010.

PLC Corporate will produce a new practice note on liability limitation agreements shortly.