Included in the July edition of Corporate News: FCA consults on changes to its guidance on financial and inside information; Public Register of Shareholder Dissent reveals directors in the firing line; Government proposes much tougher powers for Pensions Regulator
Business Contract Terms Regulations
The draft Business Contract Terms (Assignment of Receivables) Regulations 2018 (2018 Regulations) have been published. By way of reminder, the 2017 version of the regulations were withdrawn following a number of concerns that they were broader than was required to achieve their aim of allowing small businesses to access finance by prohibiting non-assignment provisions. 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.
The 2018 Regulations now appear to have addressed this concern given they specifically exclude 'a contract which is entered into for the purposes of, or in connection with, the acquisition, disposal or transfer of an ownership interest in a firm, wherever it is incorporated or established, or of a business or undertaking or part of a business or undertaking, and which includes a statement to that effect.
Equity Capital Markets
FCA consults on changes to its guidance on financial and inside information
The Financial Conduct Authority (FCA) has published a Special Edition (#19) of its Primary Market Bulletin consulting on a proposed change to its Technical Note FCA/TN/506.1 – 'Periodic financial information and inside information'. The proposed changes cover the delay in the disclosure of inside information under Article 17(4) of the Market Abuse Regulation in the context of an issuer preparing periodic financial reports. Feedback is sought by 23 July 2018.
The consultation follows the publication in 2016 of guidelines by the European Securities and Markets Authority (ESMA) which set out a non-exhaustive, indicative list of: (i) legitimate interests of issuers that are likely to be prejudiced by the immediate disclosure of inside information; and (ii) situations in which delay of disclosure is likely to mislead the public. Further detail on the consultation can be found in our Governance & Compliance update.
Changes to exemptions from the obligations to publish a prospectus
The Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) Regulations 2018 (FSMA Regulations) have been published. The Regulations implement Articles 1(3) and 3(2) of Regulation (EU) 2017/1129 (the Prospectus Regulation) by amending section 86 and Schedule 11A to the Financial Services and Markets Act 2000 as follows:
- increasing the scope of the exemption for offers to the public in section 86(1)(e) from offers with a total consideration in EEA States not exceeding €100,000 to offers not exceeding €8m; and
- limiting the scope of the exemption for offers to the public in paragraph 9, Part 2 of Schedule 11A to offers of transferable securities where the total consideration for the securities being offered in EEA States is less than €1m (down from the current €5m threshold).
The reason for the threshold for one exemption increasing significantly whilst the other is reduced flows from the approach taken in the Prospectus Regulation, which brings offers of securities where the total consideration exceeds €1m into the scope of the prospectus regime, but confers on Member States power to exempt offers up to the higher €8m figure. However, as different Member States may set different threshold under national laws, the €8m threshold should only be relied upon for UK domestic offers.
The changes in the FSMA Regulations come into effect on 21 July 2018.
Corporate Governance Reform
FRC publishes 2018 UK Corporate Governance Code and revised Guidance on Board Effectiveness
The Financial Reporting Council (FRC) has published the 2018 UK Corporate Governance Code (2018 Code) and revised Guidance on Board Effectiveness including feedback on the 275 responses it received to its December 2017 consultation. It has also published a version of the 2018 Code highlighting changes from the initial consultation draft. For an overview of the FRC's feedback, please read our Governance & Compliance update.
Governance reform: BEIS publishes draft secondary legislation
As part of its corporate governance reform agenda, the government confirmed its intention to drive greater transparency in reporting by introducing secondary legislation to, amongst other things, (i) require companies of a "significant" size to explain how their directors comply with the requirements of section 172 of the Companies Act 2006 to have regard to stakeholders in their decision-making; and (ii) require quoted companies to report annually the ratio of CEO pay to the average pay of their UK workforce. In June 2018, the Department for Business, Energy & Industrial Strategy (BEIS) published draft regulations - The Companies (Miscellaneous Reporting) Regulations 2018 (Reporting Regulations) - implementing these and other legislative changes. The Reporting Regulations were approved by Parliament on 17 July 2018, and the majority of the requirements contained in the Reporting Regulations come into force on 1 January 2019.
The Reporting Regulations also require the largest private companies (those with more than 2,000 employees and / or with turnover more than £200m and a balance sheet total of more than £2bn) to include in their directors' report a statement that sets out the details of any corporate governance code that the company has applied during each financial year, how they have applied it and the extent and reasons for any departure from it. If no code was applied, the directors' report must explain the reasons for that decision as well as the governance arrangements that were in place. The Reporting Regulations do not prescribe any particular code for relevant companies to follow, although see below in relation to The Wates Corporate Governance Principles for Large Private Companies.
BEIS has also published accompanying Q&As. For further information, see our Governance & Compliance update.
FRC publishes consultation on Wates Corporate Governance Principles for Large Private Companies
As alluded to above, the FRC, on behalf of James Wates CBE, has published a consultation on corporate governance principles for large private companies (Wates Principles). Large private companies will be encouraged to follow six principles to inform and develop their corporate governance practices and adopt them on an ‘apply and explain’ basis. Development of the Wates Principles follows the government’s 2016 Green Paper and the BEIS Select Committee’s report of April 2017, which considered the need for improved transparency and accountability in private companies. For further information, see our Governance & Compliance update.
The consultation is open until 7 September 2018. The final version of the Wates Principles will be published in December 2018.
Corporate Governance / AGMs
Public Register of Shareholder Dissent reveals directors in the firing line
The Investment Association (IA) has published statistical analysis of shareholder dissent in the 2018 AGM season based on an analysis of the Public Register of Shareholder Dissent. By way of reminder, the Register was established and is run by the IA and records those FTSE All-Share companies which have received 20%+ votes against any resolution at an AGM or general meeting. It also records details of any shareholder resolutions which were withdrawn by a company prior to such a meeting.
The data shows that:
- 94 companies have been added to the Register in 2018, 34 of which were added due to director-related resolutions - an increase of 62% when compared with the same point in 2017;
- the number of individual director-related resolutions included in the Register rose from 27 in 2017 to 54 in 2018, an increase of 100%;
- the number of companies on the Register due to pay related issues rose by 14%;
- there are 28 instances of companies appearing on the Register in 2017 and 2018 in relation to resolutions dealing with the same subject matter; and
- 74% of companies added to the Register so far in 2018 (55% in 2017) acknowledged shareholder dissent in their AGM results announcement and set out the actions they intend to take.
Andrew Ninian, Director of Stewardship and Corporate Governance at the IA, said "An emerging trend midway through this year’s AGM season is the increase in directors receiving high votes against their re-election. Directors are getting a very clear message from shareholders that they will be held accountable for their actions".
Hampton-Alexander Review publishes progress update
Figures have been released by the Hampton-Alexander Review to chart progress on the targets it set in 2016. The announcement revealed that:
- FTSE 100 firms are on track to reach the government-backed target of 33% of board positions going to women by 2020 but the FTSE 350 may fall short;
- approximately 25% of FTSE 350 board positions are held by women but there remain 10 all-male boardrooms;
- the online portal for FTSE 350 companies to submit their gender leadership data is now open; and
- progress made on women in executive and leadership roles will be revealed in November 2018.
The statistics show that if progress continues at the same rate as over the last three years, FTSE 100 companies are on track to meet the target of 33% of board positions going to women by 2020 (currently 29% of FTSE 100 board positions are held by women). However, while the number of women on boards has increased to 25.5% in FTSE 350 companies, around 40% of all appointments need to go to women in the next two years for companies in that bracket to achieve the 33% target.
ICSA publishes guidance on effective board reporting
ICSA: The Governance Institute (ICSA) and Board Intelligence have published guidance on effective board reporting. The guidance is intended to assist organisations with the preparation and presentation of their board reporting. A 'cost calculator' and self-assessment tool have also been launched to accompany the new guidance, which is organised into four sections:
- identifying the information the board needs;
- commissioning board papers;
- writing board papers; and
- collating and distributing the board pack.
The self-assessment tool enables organisations to assess the style, scope and content of their board reports and identify ways in which they can be improved. The cost calculator enables users to calculate how much time and money is being spent on producing board reports. The new resources are available to download from ICSA's website.
Narrative & Financial Reporting
FRC highlights key issues regarding compliance with reporting requirements
The FRC's latest Corporate Reporting Review Briefing sets out current 'hot topics', many of which will be relevant to forthcoming interim reports. Four key issues identified by recent FRC monitoring are:
- considerations of materiality - amounts should be determined in accordance with IFRS, not just management's alternative performance measures;
- the correct classification of cash flows - the Briefing reminds companies of the distinction between investing activities, financing activities and operating activities for these purposes;
- the determination of comparative earnings per share figures where there has been a change in the number of a company's shares outstanding following a share split or consolidation. All companies are reminded to follow the specific requirements of IAS 33 when calculating EPS; and
- the need to consider the requirements of the Companies Act 2006 when making a dividend payment – in particular the requirement for individual company interim accounts to be filed with the Registrar before paying a dividend in excess of the distributable profits shown in the relevant accounts (which is usually the company's most recent audited accounts).
FRC Lab Report: Reporting of performance metrics
The Financial Reporting Council’s Financial Reporting Lab (Lab) has published a new report which sets out investors’ views on the reporting of performance metrics. It also includes a framework, based on five key principles, and questions for companies and their boards to consider when deciding on how they report their performance.
The next phase of the project will seek to identify examples of how these principles can be put into practice. Investors and company representatives should contact: firstname.lastname@example.org to take part.
Government proposes much tougher powers for Pensions Regulator
The Government has published a consultation on proposals for a major overhaul of the Pensions Regulator's powers. The proposed changes could have a significant impact, particularly on the way in which pensions are dealt with on corporate transactions. The consultation, which runs until 21 August, fleshes out the proposals contained in the White Paper on Defined Benefit Pension Schemes published in March.
The proposed changes would amount to a significant increase in the Regulator's powers, giving it a very broad discretion to impose significant liability on persons associated with a defined benefit pension scheme. In many cases, liability can be imposed without any need to prove deliberate wrongdoing, and possibly with the benefit of hindsight years after a relevant event.
For further information, see this e-bulletin prepared by our Pensions team.
Principal Knowledge Lawyer, Corporate
Legal Director, Corporate Finance