Included in this month's Corporate News: Business Contract Terms (Assignment of Receivables) Regulations 2018 come into force; Streamlined energy and carbon reporting; ISS updates its EMEA Proxy Voting Guidelines and more.
Business Contract Terms (Assignment of Receivables) Regulations 2018 come into force
The Business Contract Terms (Assignment of Receivables) Regulations 2018 will apply to any term in a business contract governed by the laws of England and Wales or of Northern Ireland entered into on or after 31 December 2018. There were no changes from the draft version published on 6 July 2018. From a corporate perspective, there was concern that the drafting could capture non-assignment provisions in share and business sales and transitional service agreements, which was not the intention – this has now been addressed.
By way of reminder, the Regulations are meant to facilitate access to finance for businesses, by nullifying terms in business contracts that prohibit or restrict the assignment of receivables including terms which prevent an individual to whom a receivable is assigned from enforcing it or determining its validity or value.
Narrative Financial Reporting
BEIS publishes revised Q&A on Companies (Miscellaneous Reporting) Regulations 2018
The government has updated the Q&A document that it first published in June 2018 which provides guidance on the forthcoming reporting requirements under the Companies (Miscellaneous Reporting) Regulations 2018 (2018 Regulations). The 2018 Regulations were approved by Parliament in July 2018 with the majority of the requirements applying to companies with financial years beginning on or after 1 January 2019. A summary of the key proposals in the 2018 Regulations can be found in our Governance & Compliance update issued at the time of their publication.
Streamlined energy and carbon reporting
The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (ECR Regulations) have been finalised and, as previously reported, come into force on 1 April 2019. They provide for a simplified energy and carbon reporting framework for energy-intensive businesses following the abolition of the CRC energy efficiency scheme and the introduction of increases in rates of climate change levy. The ECR Regulations make changes to reporting requirements for quoted companies and introduce new reporting requirements for large unquoted companies and LLPs to report annually in directors’ reports on emissions, energy consumption and energy efficiency. Detailed guidance on how to comply with the new obligations is expected to be published in January 2019. This will build on the current guidance on mandatory greenhouse gas reporting.
FRC publishes thematic review of reporting by smaller companies
The Financial Reporting Council (FRC) has published a thematic review of reporting by smaller listed and AIM quoted companies to highlight where reporting needs to improve. Topics covered by the review include the use of alternative performance measures, cash flow statements and tax disclosures. Examples of good reporting are provided throughout.
FRC reviews quality of corporate reporting under IFRS 9 and IFRS 15
The FRC has also published two thematic reviews to help companies improve the quality of corporate reporting in relation to IFRS 9 (financial instruments) and IFRS 15 (revenue from contracts with customers). The reviews analyse the disclosures in a sample of company interim reports from June 2018 and explain their effect, providing examples of better practice for other companies to follow. The FRC will challenge companies who fail to provide an adequate level of disclosure about the impact of IFRS 9 and IFRS 15 when undertaking its annual reporting review work in 2019.
FRC Financial Reporting Lab publishes guidance on the presentation of performance metrics
The FRC’s Financial Reporting Lab (Lab) has published guidance for companies on the presentation of performance metrics. This builds on the Lab's June Report which outlined that investors want metrics to be 'aligned to strategy', 'transparent', 'in context', 'reliable' and 'consistent'. The guidance follows these principles and provides examples of current practice which 'resonated' with the Lab team and investors.
FRC finalises Wates Principles for Larger Private Companies
The Wates Corporate Governance Principles for Large Private Companies (Principles) have been published in final form. This follows the consultation launched by the FRC in June 2018 on behalf of James Wates' Coalition Group and the publication of the 2018 Regulations which require companies with more than 2000 employees and / or with a turnover of more than £200m and a balance sheet total of more than £2bn to report on their corporate governance arrangements in relation to financial years beginning on or after 1 January 2019. For more detail on the changes made to the Principles, please read our Governance & Compliance update.
FRC publishes FAQs on the UK Corporate Governance Code 2018
The FRC has published a series of frequently asked questions in relation to the 2018 version of the UK Corporate Governance Code (Code). The FAQs will be used alongside the FRC's guidance (and, in particular, the FRC's Guidance on Board Effectiveness) to issue clarifications on the interpretation of the Code. The FRC will also monitor early adopters and issue a statement on progress in late 2019. For more detail, please read our Governance & Compliance update.
ISS updates its EMEA Proxy Voting Guidelines
Institutional Shareholder Services (ISS) has published an updated version of its EMEA Proxy Voting Guidelines, which apply to shareholder meetings held on or after 1 February 2019. For more detail on the key issues to be aware of, please read our Governance & Compliance update.
Glass Lewis updates its Corporate Governance Policy Guidelines
Glass Lewis has published its latest UK corporate governance policy guidelines. For more detail on the key changes, please read our Governance & Compliance update.
Investment Association publishes 2018 update of its ‘principles of remuneration’
The Investment Association (IA) has published the 2018 update of its ‘principles of remuneration’ and, in advance of the 2019 AGM season, highlighted certain items of focus. For a summary of the changes made, please read our Employee Incentives update. The IA has also published an open letter to the chairs of remuneration committees of FTSE 350 companies, in which it expressed growing frustration that many companies were not listening to investor views which was leading to negative votes on certain remuneration-related resolutions.
FTSE 350 companies must do more to meet Hampton-Alexander Review’s targets on gender balance
The Hampton-Alexander Review (Review) has published its third annual report which finds that if progress on female appointments continues at a similar rate, the FTSE 100 is 'on track' to achieve the 33% target for women on boards but elsewhere there needs to be a step-change in pace for the targets to be achieved.
In the FTSE 100, 30.2% of board positions are now occupied by women, up from 27.7% in 2017. In the FTSE 350, almost 25% have one woman on their board (there remain five all-male boards), up from 22.8% in 2017. This means that 50% of appointments to board positions will have to be filled by women over the next two years for FTSE 350 companies to meet the target.
By way of reminder, the Review's aspirational targets are:
- 33% target for women on FTSE 350 boards by the end of 2020.
- 33% target for women on FTSE 350 executive committees and in the direct reports to the executive committee on a combined basis by 2020.
- FTSE 350 companies to increase number of women chairs, senior independent directors and executive directors.
Equity Capital Markets
ESMA updates MAR Q&As
The European Securities and Markets Authority (ESMA) has published a further update to its Q&A on the EU Market Abuse Regulation (MAR) which includes a new question (Q7.10) which deals with whether the prohibition on PDMR dealing in a closed period in Article 19(11) of MAR encompass transactions of the issuer relating to its own financial instruments. The response clarifies that Article 19 of MAR prohibits PDMRs within an issuer, and not the issuer itself, from conducting ‘any transactions on its own account or for the account of a third party, directly or indirectly, relating to the share or debt instruments of the issuer […] during a closed period of 30 calendar days’ before the announcement of a financial report.
However, the Q&A states that any transaction undertaken by the issuer during a closed period should be treated carefully, because the issuer remains subject to Article 14 of MAR (the prohibition of insider dealing). Accordingly, where an issuer possesses inside information regarding its own financial instruments, it will be prevented from trading in them unless it had established, implemented and maintained the internal arrangements and procedures specified in Article 9(1) of MAR (legitimate behaviour).
Public censure and fine for AIM company failing to update market and keep Nomad informed
The London Stock Exchange (LSE) has published an AIM Disciplinary Notice publicly censuring and fining Bushveld Minerals Limited (Bushveld) £700,000 (reduced to £490,000 for early settlement) for failing to discharge its obligations of market disclosure under AIM Rule 11 and to provide its nominated adviser (Nomad) with all relevant information under AIM Rule 31.
In the context of a transaction which would have constituted a reverse takeover for Bushveld, the Nomad advised that, on payment of a material fee in relation to an exclusivity undertaking, the company would have committed itself to a binding obligation which required announcement to the market without delay in accordance with AIM Rule 11. The Nomad also advised that Bushveld would need to announce the fact of the transaction as a whole at the same time which, as a reverse takeover, would lead to the suspension of its securities under AIM Rule 14.
Bushveld wanted to avoid a suspension so as to enable it to complete a fundraising to fund the transaction, fund development of its existing assets and reduce the materiality of the exclusivity fee. The company received legal advice which conflicted with that of the Nomad and entered into the exclusivity undertaking on 7 April 2016 without informing the Nomad or the market. When the Nomad discovered the arrangement had been entered into, an announcement was made on 22 April 2016 and the company's securities were suspended from trading.
In censuring Bushveld, the LSE has emphasised that AIM Rule 11 should not be approached in a narrow way and stressed the importance of advice from, and experience of, a Nomad in these circumstances. In particular, the fact that a company had received separate advice does not override that of its Nomad’s nor justify or mitigate a breach of the AIM Rules. The company knew or ought to have known that, given the Nomad's advice, it was relevant to inform the Nomad that the exclusivity undertaking had been given not least because it withheld that information at a time when it knew the Nomad was seeking the LSE's guidance as regards the transaction.
FCA's Market Watch focuses on the MAR
The Financial Conduct Authority (FCA) has published a Market Watch magazine focusing on a review of the industry's implementation of MAR. Key conclusions and observations include:
- The FCA has not observed any impact on the ability of issuers to raise capital on UK markets following the introduction of the market soundings regime.
- Issuers, their advisors, the sell-side and the buy-side, have an obligation to identify when they are in possession of inside information and to control it as well as to ensure those in possession of it are properly trained.
- The FCA ascribe importance to receiving the mandated insider list template in a complete and timely fashion, not least as a means of an issuer demonstrating that robust systems and procedures are in place to comply with MAR.
- The quality of insider lists received to date has been varied. The FCA encourages issuers to ensure that all those with access to inside information, including those who have accessed information according to electronic access logs, are included on insider lists. The FCA also expects all insider list fields, including relevant personal information, to be completed.
- The number of employees on permanent insider lists should not be 'disproportionately large' and should be restricted only to employees who have access at all times to inside information – those that do not have such access should be captured in a deal-specific or event-based insider list.
- The FCA expect completed insider lists to be provided within two days of a request and any chronology of events be provided within five days.
- Issuers should ensure that they can identify and assess whether they have inside information outside of normal reporting timetables and in an accelerated manner. By way of example, the FCA states that where information that may not be in line with market expectations comes to light, such as in weekly sales reports or when preparing monthly management reports, this should be immediately investigated.
- If information is deemed to meet the conditions of inside information, issuers are required to maintain an insider list. Using 'confidential' / 'project' / 'prohibited' dealing lists to record individuals who may have access to confidential information that has not been deemed inside information can be an important tool to aid compliance and ease the transition where a change in circumstance means that information is, in fact, inside information.
Further draft legislation published in anticipation of a 'no deal' Brexit
The government has published further draft statutory instruments to cater for a possible 'no deal' Brexit on 29 March 2019. These include in relation to:
- Laws applying to contract – The draft Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2018 seek to ensure that the Rome I and Rome II Regulations which currently establish the rules to determine which country’s laws apply in contractual and non-contractual matters where there are cross-border issues are incorporated into UK domestic law so that the rules will continue to apply (as amended). An explanatory memorandum has also been published.
- The Listing regime – The draft Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019 will amend EU law relating to securities, prospectuses and transparency requirements to ensure the relevant legislation operates effectively on exit. The explanatory information provides further detail, particularly as regards the status of prospectuses that straddle the date of exit.
- The Market Abuse regime – The draft Market Abuse (Amendment) (EU Exit) Regulations 2018 will amend retained EU law relating to market abuse to ensure that the relevant legislation continues to operate effectively. This includes MAR and associated UK legislation. In short, the regulations seek to maintain the same systems of regulation and market oversight by the FCA as currently exists. An explanatory information has also been published. The draft Regulations will transfer the powers of ESMA to the FCA; retain the existing scope of MAR in UK law; and retain the requirements as regards certain notifications, disclosures and suspicious transaction reports. The FCA is currently consulting on changes to its Handbook to cater for a 'no deal' scenario.
Kingman review recommends replacement of the FRC
The independent review of the FRC, led by Sir John Kingman, has published its report to government. While many of the 83 recommendations will require primary legislation to take forward, the report recommends a number of issues that the government and the FRC might accelerate.
Significant recommendations include:
- The replacement of the FRC with an independent, statutory regulator: the 'Audit, Reporting and Governance Authority'. This would be accountable to Parliament, with its Chair and CEO pre-approved by the BEIS Select Committee and funded by statutory levy.
- As part of its work on corporate reporting, the new regulator should have jurisdiction over, and stronger powers in relation to, the entirety of the annual report, including the governance statement. Such powers should include the ability to require the restatement of accounts without the need for a court order.
- The government, working with the FCA and the new regulator, should consider whether there is a case for strengthening qualitative regulation around a wider range of investor information than is currently covered by the FRC's existing corporate reporting work.
- The government should review the existing definition of a public interest entity, noting that this definition has been more broadly construed in other countries to include major private companies and pension funds. With the new regulator, it should also develop detailed proposals for an effective enforcement regime that holds all relevant directors to account for their duties to prepare and approve true and fair corporate reports.
- The new regulator should promote brevity and comprehensibility in annual reports and be more sparing and disciplined in promulgating guidance and discussion documents, only issuing them if they are 'genuinely useful'.
- A 'fundamental shift' in approach is required to ensure that the revised Stewardship Code more clearly differentiates excellence in stewardship, focusing more on outcomes and effectiveness, not on policy statements.
As regards corporate failure:
- The new regulator should develop a robust market intelligence function to identify emerging risks and be able to deploy a range of responses including requiring a company to make a rapid formal response, providing additional assurance on any aspect of the annual report, including its viability statement (a concept which needs to be made 'more effective' in any event), and requiring an independent board performance evaluation or examination of the audit committee. The regulator should be able to require the production of a recovery plan, the prompt restatement of accounts, or other disclosure to the market.
- New powers should allow the regulator to order the removal of the auditor or to require an immediate retendering. In the most serious cases, the regulator should also be able to recommend that shareholders consider a change of CEO, CFO, Chair or audit committee chair, or that they reconsider the payment of dividends.
- The government should consider introducing a duty of alert for auditors to report viability or other concerns. It should also give serious consideration to strengthening the framework around internal controls, learning relevant lessons from the operation of the US Sarbanes-Oxley regime.
Other publications of note:
- Sir John has also published his letter to the Secretary of State setting out his case for change as to who appoints company auditors and how their fees are set.
- The government has announced the independent Brydon Review into standards and requirements for the UK audit profession. This will consider:
- how far audit can and should evolve to meet the needs of investors and other stakeholders, putting the UK at the forefront;
- how auditors verify the information they are signing off;
- how to manage any residual gap between what audit can and should deliver; and
- what are the public's expectations from audit.
- The Competition and Markets Authority (CMA) has published an update paper in relation to its study of the statutory audit market outlining serious concerns about the audit sector and the quality of audit. Concerns focus particularly on the lack of choice of auditor, the fact that companies select their own auditor often preferring a "cultural" fit rather than choosing the candidate that will offer the toughest scrutiny; and the fact that the auditor's focus on quality can often be diluted by its provision of non-audit services. The CMA proposes the following remedies:
- regulatory scrutiny of auditor appointment and management;
- mandatory joint audits to break down the barriers to 'challenger firms';
- separating audit and advisory businesses; and
- peer reviews of audits, commissioned by and reporting to the regulator.
Responses to the proposals are requested by 21 January 2019.
Both the Kingman and the CMA reviews will feed into, and inform, a wider inquiry on the future of UK audit to be undertaken by the BEIS Select Committee in 2019.
Principal Knowledge Lawyer, Corporate
Legal Director, Corporate Finance