Included in the October edition of Corporate News: GC100 publishes Guidance on Directors' Duties – s.172 and stakeholder considerations; Government publishes measures to tackle late payments and more...

Corporate Governance

GC100 publishes Guidance on Directors' Duties – s.172 and stakeholder considerations

The Association of General Counsel and Company Secretaries working in the FTSE100 (GC100) has published practical guidance for company directors on performing their duty in accordance with s.172 (section 172) of the Companies Act 2006 (2006 Act). This supplements the guidance published by the GC100 at the time of the codification of directors' duties in the 2006 Act.

The emphasis of the guidance is on practicality as opposed to providing formal legal advice and, as such, it:

  • provides a summary of the key suggestions of matters to be considered by directors when discharging their section 172 duty;
  • sets out practical steps which directors could take to assist in the discharge of their section 172 duty, including for directors on UK subsidiary and UK joint venture company boards;
  • summarises the key legal background to and aspects of section 172; and
  • provides a worked example of how directors in a specific business situation could discharge their duties.

The GC100s's publication forms part of the government's wider series of measures to improve the UK's corporate governance framework and coincides with the recent publication of the 2018 UK Corporate Governance Code and The Companies (Miscellaneous Reporting) Regulations 2018, both of which require disclosure of how directors have performed their section 172 duty. The guidance does not, as anticipated, deal in particular detail with the practicalities of these disclosure requirements. For more detail, please read our Governance & Compliance update.

ISS proposes new policy on auditor ratification

Institutional Shareholder Services has launched a consultation on adopting a policy where it would inform investors in circumstances where any lead audit partner is engaged by a public company having previously been linked with prior significant audit controversies. In turn, this may lead to a negative voting recommendation for auditor ratification where the lead audit partner had been linked with a corporate failure or other material destruction of shareholder value arising from fraud or other accounting issues.

ICSA poll: 70% oppose idea of workers on boards

ICSA: The Governance Institute and The Core Partnership have published a poll which reveals that 70% of companies feel that having workers on boards would not be a good idea. Conversely, only 13% think it would be a good idea. However the poll also reveals that many companies are yet to properly consider the recommendations of the 2018 UK Corporate Governance Code for promoting "employee voice" within the boardroom and decide on their preferred method for doing so.

PRA and FCA intensify focus on financial risks from climate change

The Prudential Regulation Authority (PRA) has published a consultation paper (CP23/18) on a draft supervisory statement on banks’ and insurers’ approaches to managing the financial risks from climate change. It sets out how effective governance, risk management, scenario analysis, and disclosures may be applied by firms to address the financial risks from climate change. Feedback is sought by 15 January 2019.

The Financial Conduct Authority (FCA) has also published a discussion paper (DP18/8) on the impact of climate change and green finance on financial services. The FCA is seeking input on the following issues where it believes that a greater regulatory focus is warranted:

  • climate change and pensions—ensuring that those making investment decisions take account of risks including climate change;
  • enabling competition and market growth for green finance;
  • ensuring that disclosures in capital markets appropriately give adequate information to investors of the financial impacts of climate change; and
  • establishing whether there is scope for the introduction of a new requirement for financial services firms to report publicly on how they manage climate risks.

Feedback on the discussion paper is sought by 31 January 2019.

Government publishes UK Annual Report on Modern Slavery

The Government has published its 2018 UK Annual Report on Modern Slavery and, at the same time, written to chief executives of 17,000 businesses on the issue of disclosure of modern slavery in their supply chains. The press release notes that the government will publish a list of non-compliant companies failing to publish a Modern Slavery Statement at the end of the financial year.

BSA publishes guidance on 2018 Code

The Building Societies Association (BSA) has published guidance for building societies on the 2018 UK Corporate Governance Code. While the Code is addressed to companies with a premium listing, the PRA expects building societies to have regard to the Code in their corporate governance arrangements, hence the BSA publishing this annotated version.

Company Law

Government publishes measures to tackle late payments

The government has published measures to tackle the issue of late payment of sums owed to small businesses. The call for evidence will be open until 29 November 2018. It seeks views on the best way company boards can put in place responsible payment practices throughout their supply chain, including for example giving a non-executive director specific responsibilities for the company's prompt payment performance. The proposals also include measures to empower trade bodies to highlight best and worst practices in payment behaviour in order to deliver practical improvements.


CMA launches immediate review of statutory audit market 

The Competition and Markets Authority has announced the launch of a study into the UK statutory audit market as part of which it will examine whether the sector is working well for the economy and investors and if it is competitive and resilient enough to maintain high quality standards. The study will focus on choice and switching, the long-term resilience of the sector and the incentives between audited companies, audit firms and investors.

FRC announces new strategic programme to serve the public interest

The Financial Reporting Council (FRC) has announced a strategic programme of work that aims to ensure that audit better serves the public interest. The programme encompasses work on auditor independence, audit quality, the future needs of investors and corporate viability. In light of recent company failures, the FRC will create proposals to strengthen requirements on auditors when considering if an organisation is a going concern, including whether the responsibilities of auditors in assessing companies’ statements on longer-term viability should be increased and whether auditors should publicly report on their views of the realism of assessments made by companies.

Narrative Financial Reporting

FRC publishes Annual Review of Corporate Governance and Reporting 2017/2018

The FRC has published its annual review of Corporate Governance and Reporting which is based primarily on its monitoring work in the year to 31 March 2018 and thematic reviews conducted more recently. The review focuses primarily on financial statements and strategic reports and also discusses other aspects of narrative reporting as well as providing, for the first time, information on compliance with, and reporting against, the 2016 UK Corporate Governance Code. As such it is required reading for drafting teams when preparing their annual report in 2019. Further sections provide information on reporting by companies using UK GAAP and the FRC's views on future developments.

The review also includes the FRC's open letter to audit committee chairs and finance directors dated 24 October 2018 which sets out the FRC's perspective on key matters relevant to the preparation of forthcoming annual reports and accounts. For more detail, please read our Governance & Compliance update.

FRC to undertake holistic review of corporate reporting

The FRC has announced the launch of a major project to challenge existing thinking about corporate reporting and consider how companies should better meet the information needs of shareholders and other stakeholders. In doing so it will review current financial and non-financial reporting practices, consider what information investors and other stakeholders require and, fundamentally, the purpose of corporate reporting and the annual report. The different types of corporate communications produced by companies will also be examined.

FRC Lab publishes report relating to business model and risk and viability reporting

The Financial Reporting Lab of the FRC has published a report which examines how companies have responded to suggestions for good practice as regards both business model and risk and viability reporting. The report includes practical examples from companies which have implemented previous FRC recommendations.

Government publishes report on first year of gender pay gap reporting

The Government has published a report reviewing the impact of The Gender Pay Gap Information Regulations 2017. This summarises data reported by employers in 2017/2018 along with findings from related research conducted by the Government Equalities Office.

Government opens consultation on mandatory ethnicity pay reporting

The government has published a consultation seeking views on how to take forward the manifesto commitment that large employers should be required to publish ethnicity pay information. For more detail, please read our Employment team's update.

Equity Capital Markets

LSE confirms changes to the AIM Disciplinary Procedures and Appeals Handbook

The LSE has issued AIM Notice 54 and published a revised AIM Disciplinary Procedures and Appeals Handbook (Handbook) on the back of its July consultation. The new rules are now in force. The Handbook sets out the procedures to be followed when the LSE wishes to start disciplinary proceedings against an AIM company or nominated adviser for breach of the AIM Rules for Companies or the AIM Rules for Nominated Advisers or when an AIM company or nominated adviser wishes to lodge an appeal against either a non-disciplinary decision or a warning notice issued by the LSE.

Minor consequential amendments have also been made to the AIM Rules for Companies.


Takeover Panel issues consultation on proposed Takeover Code amendments on asset valuations

The Code Committee of the Takeover Panel issued published a Public Consultation Paper (PCP 2018/1), setting out proposed amendments to Rule 29 of the Takeover Code which deals with asset valuations in the context of an offer.

The proposed amendments codify the current, unwritten practice of the Panel Executive in respect of asset valuations and do not result in any material changes to how Rule 29 has been applied on recent transactions.

The consultation paper anticipates that the type of assets for which the rules on valuations will most commonly apply will be property, natural resources reserves or unquoted investments. However, valuations of other types of assets may well also fall within the ambit of the revised rule, including the valuation of a standalone business division.

Responses must be received by 7 December 2018. Any changes to the Code are likely to come into effect in Q1 2019.


UK government publishes further technical notices on 'no deal' Brexit

The Department for Exiting the EU has published the fourth tranche of technical notices which focus on the implications of exiting the EU should there be 'no deal' in place. The technical notices follow the issue of the Government’s White Papers: The future relationship between the United Kingdom and the European Union and Legislating for the Withdrawal Agreement between the United Kingdom and the European Union, both of which were published in July 2018.

The latest documents cover a range of subjects, including:

  • Business structures - there will be no change in who can be an owner, senior manager or director of a UK company but the requirements for EU companies that operate branches in the UK will change. UK businesses that own or run business operations in EU Member States may face additional requirements or additional approvals to operate, depending on the sector and EU Member State. UK companies and limited liability partnerships that have their central administration or principal place of business in certain EU member states may no longer have their limited liability recognised in jurisdictions that operate the ‘real seat’ principle of incorporation.
  • Cross-border mergers involving UK companies - mergers involving UK companies will no longer be able to take place under the relevant EU Directive and EU Member States will no longer be required to give effect to cross-border mergers that do not complete prior to the UK exiting the EU.
  • Treatment of "EU" companies - European Economic Interest Groupings (EEIGs), Societas Europaea and European Groupings of Territorial Cooperation will no longer be able to be registered in the UK. Societas Europaea and EEIGs registered in the UK that do not make alternative arrangements before exit will be automatically converted into a new UK corporate structure.
  • Accounting and audit - parents of EU businesses and UK incorporated subsidiaries will continue to be subject to the UK's corporate reporting regime. Companies with parents or subsidiaries incorporated in the EU will not be able to benefit from certain exemptions in the Companies Act 2006 relating to the preparation of individual accounts. UK businesses with a branch operating in the EU will become third country businesses and will be required to comply with the specific accounting and reporting requirements in the Member State in which they operate, and UK companies listed in an EU Member State may be required to provide additional assurance to the relevant listing authority that their accounts comply with IFRS. 
  • Free trade agreements - the government will seek to bring into force bilateral UK-third country agreements from exit day. If that is not possible, trade would then take place on a ‘Most-Favoured Nation’ basis, or ‘World Trade Organization Terms’, until any such new arrangements have been implemented.

Key Contacts

Nicky Higginbottom

Nicky Higginbottom

Principal Knowledge Lawyer, Corporate
Leeds, UK

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