Read on for the latest news and updates in corporate governance, equity capital markets, narrative financial reporting, regulation in practice, executive remuneration, takeover, audit, case law, and Brexit. 

Corporate Governance

Hampton-Alexander Review update: FTSE 350 urged to keep up the pace of change

The Government has announced that the Hampton-Alexander Review has published an update suggesting that, for the first time, the FTSE 250 could meet the 33% target for women in senior leadership positions if the current rate of progress is maintained. 

The figures published by the Review reveal that:

  • 32.1% of FTSE 100 board positions are held by women, up from 12.5% in 2011 – thus the FTSE 100 is also on track to meet the 33% target by 2020;
  • 27.5% of FTSE 250 board positions are now held by women, up from 24.9%;
  • there remain four all male FTSE 350 boards (albeit that is down from 152 in 2011); and
  • 14 companies in the FTSE 350 are named as having not responded to the joint letter from the Investment Association (IA) and the Hampton-Alexander Review written in March 2019 to 69 companies in the FTSE 350 with one woman or less on their board and which sought clarification of the actions those companies intended to take to ensure progress was made towards the 33% target.

The 2019 Hampton-Alexander Report will be published in November 2019.

Gender pay gaps narrowing but still firmly favours men

The Government Equalities Office has published a summary of reported gender pay gap (GPG) reporting for 2018–19. The data reveals that:

  • 78% of reported median and 88% of reported mean GPGs favoured men;
  • 82% of employers had more women than men in their lowest 25% of earners; and
  • 17% had more women than men in their highest 25% of earners.
ICSA consultation on effectiveness of independent board evaluation in UK listed sector

The Governance Institute (ICSA) has published a consultation aimed at assessing the quality of independent board evaluation, as well as ways in which it might be improved. The review is being carried out at the request of the Department for Business, Energy and Industrial Strategy (BEIS).

ICSA seeks views on whether there is a need for:

  • a code of practice for board evaluers, and formal arrangements for implementing and monitoring such a code;
  • voluntary principles to be applied by listed companies when engaging external evaluers; and
  • guidance for listed companies on disclosure of the conduct and outcomes of their board evaluation.

The consultation document includes draft versions of a code of practice for independent reviewers and voluntary principles and guidance on disclosure for listed companies.

Investment Association calls for companies to state dividend distribution policy

The IA has published a report: 'Shareholder votes on dividend distributions in UK listed companies’, which calls for companies to be more transparent on their approach to paying dividends. The report forms part of an investigation into dividend payment practices carried out by the IA at the request of the Government as part of its consultation on 'Insolvency and Corporate Governance'. Other Government proposals in this area include strengthening the 'net asset' test that applies when a public company pays a dividend; requiring companies to state their level of realised profits as a separate line item in their accounts; and introducing an ability for companies to declare and pay dividends based on an assessment of their solvency by directors, rather than on the level of their distributable profit.

Revised UK Stewardship Code to be published in October

The Financial Reporting Council (FRC) has confirmed that it will publish the revised Stewardship Code in October and not, as previously announced, in July 2019. The volume of responses received is one reason for the delay. Details of the consultation can be found in our February Governance & Compliance update.

Risk Coalition launches consultation on risk guidance in FS

The FRC has announced that the Risk Coalition is consulting on the principles and guidance for board risk committees and risk functions in the UK financial services sector. The consultation closes on 20 September 2019.

Corporate Governance Factbook published by OECD

The Organisation for Economic Co-operation and Development (OECD) has published a comparison of the corporate governance frameworks of 49 jurisdictions.

Equity Capital Markets

Prospectus Regulation to come into full effect on 21 July 2019

On 21 July 2019, the new EU Prospectus Regulation comes fully into force. For more detail on its impact on equity issuance and supporting technical standards and guidance - click here.

NEX Exchange publishes revised Growth Market Rules

NEX Exchange has published a response following its Market Consultation on proposed changes to the Growth Market Rules for Issuers (Growth Market Rules). The changes reflect the EU Growth Market Prospectus regime for SME companies, which apply from 21 July 2019 when the final provisions of the Prospectus Regulation came into effect. For a summary of the changes proposed, please read our July Corporate Finance News.

The new regime for SME companies will allow small and growing companies the option of drawing up an EU growth prospectus under the Prospectus Regulation instead of a full prospectus.

Clean and marked-up copies of the revised Growth Market Rules, and of the NEX Exchange admission document requirements against the EU Growth Market Prospectus Annexes, are available here.

FCA publishes final rules implementing the revised Shareholder Rights Directive

The Financial Conduct Authority (FCA) has published a policy statement (PS19/13) following its consultation paper (CP19/7) on proposals to implement requirements of the revised Shareholder Rights Directive (SRD II).

SRD II makes various changes of relevance to FCA-regulated asset managers and life insurers, including requiring them to disclose details of their stewardship and engagement policies. In addition, proxy voting agencies come within the FCA's remit, in effect empowering the regulator to require the provision of information and apply its enforcement regime. As a result of SRD II, the Proxy Advisors (Shareholders’ Rights) Regulations 2019 also requires proxy advisors to make certain disclosures about how they conduct their business.

Of particular significance are the changes SRD II makes to the related party transaction regime. New rules are located in Chapter 7.3 of the Disclosure Guidance and Transparency Rules (DTR) and require the independent board approval of 'material related party transactions'.

The rules apply to all UK companies with securities traded on EEA-regulated markets, such as the London Stock Exchange's (LSE) main market, whether an issuer has a premium or a standard listing. They also apply to issuers with securities that are not 'listed' but are admitted to a regulated market, such as issuers admitted to the LSE's High Growth Segment or Specialist Fund Market.

A transaction is considered material if it exceeds 5% on the application of various tests (located in Annex 1 to DTR 7), namely relative to an issuer's profits, assets, market capitalisation and gross capital. Twelve month rolling aggregation rules also apply. Issuers should note that the definition of a related party transaction is wider than that contained in Chapter 11 of the Listing Rules as it is, subject to certain exceptions, given the meaning in EU-adopted IFRS. Limited carve-outs exist for transactions in the ordinary course of business on normal market terms and, for UK companies, in relation to directors' remuneration arrangements in line with a company's approved remuneration policy.

A relevant transaction of a UK incorporated issuer to which the new rules apply must be the subject of board approval before the transaction is entered into. Any director interested in the transaction should not take part in the approval process. Details of the transaction must then be announced to the market and include sufficient information for shareholders to assess whether the transaction is 'fair and reasonable'. Issuers incorporated elsewhere in the EEA will need to comply with their local rules implemented as a consequence of SRD II.

In practice, UK incorporated issuers with a premium listing should have little to do given the more onerous LR 11 regime to which they are already subject, although they should note the wider definition of 'related party transaction'. For those with a standard listing, the regime will present new regulatory challenges.

The new rules are now in force.

FCA publishes Primary Market Bulletin 23

The FCA has published Primary Market Bulletin 23 in which it concludes the consultation it launched in June 2018 on its Technical Note dealing with the ability of issuers to delay the publication of inside information under the EU Market Abuse Regulation (MAR) whilst producing periodic financial information (e.g. annual and interim results). A summary of the proposals was contained in our Governance & Compliance update issued at the time. In short, few changes of note have been made to the consultation draft other than to add a clarification that for an issuer to delay the disclosure of inside information in line with Article 17 of MAR, it must be able to ensure the confidentiality of the information in question. The final Technical Note can be found here

QCA publishes MAR poll

The Quoted Companies Alliance (QCA) in association with Thomson Reuters Practical Law has published the results of a survey of QCA members which looks at how small and mid-size companies have implemented MAR. 

FCA publishes Market Watch with focus on controlling access to inside information

The FCA has published the latest edition of Market Watch in which it focuses on the control of access to inside information. While this is of particular relevance to investment banks, there are issues of note for all issuers and advisers as regards such access and any insider lists created and maintained as a result.

Narrative Financial Reporting

Government develops proposals on prompt payments

In the response to its call for evidence on how to improve corporate payment practices, the Government has confirmed a number of outline proposals including the requirement for audit committees of certain large companies to report in their annual report on their payment practices. The Government’s preference is that this requirement will be implemented through guidance, but it will consider legislating to ensure that the issue of late payments is given sufficient board attention. In order to inform its thinking on this issue, the Government is asking the FRC to review how well payment practices are reflected when the first reports are published under the Companies (Miscellaneous Reporting) Regulations 2018 which requires large and medium sized companies to include a statement in their directors’ report summarising how directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the effect of that regard.

The Government also plans to reform and strengthen the Prompt Payment Code and to shift responsibility for it to the Small Business Commissioner.

FRC and ICAEW publish guide for smaller listed companies

The FRC and the ICAEW have published a guide to help audit committees and boards of smaller listed and AIM quoted companies improve their financial reporting. The guide addresses issues raised by the FRC about the quality of financial reporting in this sector, and provides practical tips and questions for audit committees to consider, with a view to driving up the quality of smaller quoted company financial reporting. The guide builds on key themes that emerged from the FRC’s 2015 Discussion Paper: ‘Improving the Quality of Reporting by Smaller Listed and AIM Quoted Companies’.

Single Electronic Financial Reporting Format published

The European Commission has published a new regulation which introduces the new single electronic financial reporting format. This will apply to all annual financial reports published by issuers with securities admitted to trading on an EU regulated market such as the main market of the London Stock Exchange (LSE) and the NEX Exchange Main Board.

The regulation requires a relevant annual report to be prepared in extensible hypertext mark-up language (XHTML). In addition, should an annual report contain consolidated financial statements prepared in accordance with IFRS, an issuer will need to annotate them in extensible business reporting language (XBRL).

The regulation is now in force and applies to the annual reports of relevant issuers for financial years beginning on or after 1 January 2020.

FSB Task Force publishes status report on climate-related financial disclosures

The Financial Stability Board (FSB) has issued a press release noting that the Task Force on Climate-related Financial Disclosures (TCFD) has published its 2019 Status Report.

The status report provides an overview of the extent to which companies' reports included information aligned with the core TCFD recommendations on climate-related financial disclosures, over the period from 2016 to 2018.

The Task Force's key findings include:

  • Disclosure of climate-related financial information has increased since 2016, but is still insufficient for investors.
  • More clarity is needed on the potential financial impact of climate-related issues on companies.
  • Of companies using scenarios in their disclosures, the majority do not disclose information on the resilience of their strategies.
  • Mainstreaming climate-related issues requires the involvement of multiple functions within organisations.
Green Finance Strategy: disclosure requirements

The Government has launched its Green Finance Strategy. The Green Finance Strategy report states that the government expects all listed companies and large asset owners to be disclosing in line with the TCFD recommendations by 2022. The Government is also establishing a joint task force with UK regulators, which it will chair, in order to examine the most effective way to approach disclosure, including the appropriateness of mandatory reporting.

European Commission guidelines on climate-related information reporting

The European Commission has published new guidelines on corporate climate-related information reporting, as part of its Sustainable Finance Action Plan. The guidelines aim to provide companies with practical recommendations on how to better report the impact that their activities are having on the climate as well as the impact of climate change on their business. The Commission also notes the publication of three new reports by the Technical Expert Group on sustainable finance. These include key recommendations on the types of economic activities that can contribute to climate change mitigation or adaptation.

Strengthening transparency in supply chains – possible changes to the Modern Slavery Act

The Government has published a consultation on proposed measures to strengthen the transparency in supply chain provisions in section 54 of the Modern Slavery Act 2015 (2015 Act). The consultation includes proposals on the content of modern slavery statements and how the Government can improve enforcement of non-compliance. The consultation seeks views on the mandating of content requirements, confirms the development of an online registry for published statements, proposes the introduction of a single reporting deadline and explores options for improving the process and tools for tackling non-compliance. For further analysis, please read this article published by our Commercial team here. Responses are requested by 17 September 2019.

The Government has also announced the establishment of a £10m Policy and Evidence Centre for Modern Slavery and Human Rights as part of its response to the Independent Review of the 2015 Act. The research centre will bring together academics, businesses and charities to drive forward new studies, share knowledge, and improve collaboration at home and overseas.

Consultation on draft Code of Practice for internal auditors

The Chartered Institute of Internal Auditors has published a consultation on the development of an Internal Audit Code of Practice, which, once implemented, will provide the first comprehensive benchmarks to be met by organisations outside of the financial services sector. The consultation closes on 11 October 2019.

The draft Code makes 30 recommendations to strengthen internal audit including:

  • unrestricted access for internal audit;
  • full access for internal audit to senior meetings; and
  • full access for internal audit to key management information.

Regulation in Practice

FCA fines Cathay International, its CEO and Finance Director for breaches of the Listing Principles and DTRs

The FCA has published decision notices concerning Cathay International Holdings Limited (Cathay) and two of its directors, Mr Jin-Yi Lee, its CEO, and Mr Eric Siu, its Finance Director. The FCA considers that Cathay breached the FCA’s Listing Principles and DTR by:

  • failing to have adequate systems and procedures in place to monitor its financial performance and being reckless as to the need to take reasonable steps to put such systems and procedures in place (in breach of Listing Principle 1);
  • recklessly failing to inform the market of a material change to its actual and expected performance relative to market expectations (in breach of Premium Listing Principle 6 and DTR 2.2.1R); and
  • failing to deal with the FCA in an open and co-operative manner (in breach of Listing Principle 2) in providing information in relation to forecasting procedures which was materially different to the actual procedures undertaken.

The FCA also considers that the relevant directors were knowingly concerned in some of the breaches, including as regards co-operating with the FCA's investigation. The FCA has imposed fines of £411,000 on Cathay, £214,300 on Mr Lee and £40,200 on Mr Siu. The FCA has subsequently issued final notices and confirmed that the firm and the individuals concerned have decided not to refer the matter to the Upper Tribunal.

LSE disciplines Real Good Food plc for breaches of AIM Rules

The LSE has published a Disciplinary Notice in relation to the public censure and fine of £450,000 (discounted to £300,000 for early settlement) of Real Good Food plc for breaches of Rule 10 (Principles of disclosure), Rule 13 (Related party transactions), Rule 17 (Disclosure of miscellaneous information), Rule 19 (Annual accounts), Rule 21 (Dealing policy) and Rule 31 (AIM company and directors’ responsibility for compliance) of the AIM Rules for Companies (AIM Rules). For further detail, please read our July Corporate Finance News.

LSE disciplines Telit Communications plc for breaches of AIM Rules

The LSE has published a Disciplinary Notice in relation to the public censure and fine of Telit Communications plc (Telit) for breaches of Rules 3 (Admission document) and 31 (AIM company and directors’ responsibility for compliance) of the AIM Rules.  

The LSE states that is had agreed settlement terms with the Company for a public censure and fine of £350,000, but has decided to waive the fine in light of the particular circumstances of the case. Nevertheless, details of the public censure have been published to educate the market on expected standards of conduct for AIM companies under the AIM Rules, including as regards directors and proposed directors.

Telit failed to disclose the former name of one of its directors and CEO (Mr Oozi Cats), which previously had a different spelling, in its Admission Document published in 2005. The Admission Document also failed to refer to the fact he had been indicted in the US under that former name. This information had also been withheld from Telit's Nomads and only came to light when Telit conducted a subsequent review in August 2017. The LSE noted Telit's swift action when the matter came to light and the current board's full co-operation in the subsequent investigation. 

ICO issues first fines for security breaches under GDPR 

The Information Commissioner's Office (ICO) has issued notice of its intent to impose its first fines for security breaches under GDPR. More detail is contained in our Data & Privacy News

Executive Remuneration

Government implements Shareholders' Rights Directive Remuneration aspects

The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 (Remuneration Regulations) have been published. They amend the regulations and legislation governing the disclosure of directors' remuneration and are being implemented to enact SRD II. A full summary can be found in our Governance & Compliance update. The Remuneration Regulations came into force on 10 June 2019. The Government has also published a Q&A document to explain various aspects of the regime. A full list of the new measures, and the extent to which they were already given effect in previous UK law prior to the Regulations, has also been made available.

GC100 and Investor Group publishes revised directors’ remuneration reporting guidance

The GC100 and Investor Group has published an updated version of its Directors’ Remuneration Reporting Guidance to reflect the Remuneration Regulations.

Government responds to BEIS Select Committee proposals on pay

The Government has published its response to the recommendations of the BEIS Select Committee. Of particular note are that the replacement body for the FRC (the Audit, Reporting and Governance Authority or 'ARGA') will be responsible for monitoring directors' remuneration reports and section 172(1) statements made in accordance with the Companies (Miscellaneous Reporting) Regulations 2018 i.e. the statement of how directors have satisfied their Companies Act 2006 duty to promote the success of the company while taking into account various factors and stakeholder interests.

The Government has, however, rejected various other proposals from the Select Committee including its call for remuneration committees to be augmented with at least one employee representative and requiring such committees to put a cap on CEO pay. 


Takeover Panel publishes Takeover Code amendments for Brexit

The Takeover Panel has issued Panel Statement 2019/8 announcing the publication of amendments to the Takeover Code (Code) with regard to the United Kingdom’s withdrawal from the European Union in a ‘no deal’ scenario. The amendments will take effect on 'exit day' as defined in the European Union (Withdrawal) Act 2018.

Takeover Panel Statement 2019/6 – Minor amendments to the Code

As a result of the FCA announcing that it will no longer be using the name 'UK Listing Authority' or 'UKLA', the Code has been amended to replace any such references. Minor amendments have also been made to Note 2 on Rule 9.1 (Collective shareholder action), to refer to 'general meetings' instead of 'annual general meetings' and 'extraordinary general meetings'. The amendments are now in force. 


BEIS launches consultation on CMA’s recommendations for reform of the statutory audit market

BEIS has launched a consultation on the Competition and Market Authority’s (CMA) proposed reforms to the statutory audit market. This follows the CMA’s report on the statutory audit market, which was published on 18 April 2019 – for more detail, please read our Governance & Compliance update. The consultation closes on 13 September 2019.

This consultation seeks views on proposals to:

  • enhance regulatory oversight of audit committees by the successor body to the FRC, the Audit, Reporting and Governance Authority / ARGA, as regards the appointment of auditors;
  • mandate joint audits of FTSE 350 companies and peer reviews of audits conducted for firms not in scope of the joint audit proposals;
  • mitigate the effects of the distress or a failure of a ‘Big Four’ firm;
  • give the regulator powers to design an ‘operational split’ between the audit practices and non-audit practices of the ‘Big Four’ firms; and
  • require a five-year review of progress by ARGA.

BEIS also confirms that, following this consultation, it proposes to bring forward detailed proposals on the CMA’s recommendations later in 2019, in addition to a further consultation on the recommendations of the Kingman review.

Case Law

High Court considers concepts of de facto director and shadow director

In Popely and Popely v Popely [2019] EWHC 1507 (Ch), which concerned a dispute between two brothers and their respective family trusts and related companies, the High Court considered the concepts of de facto and shadow director in order to determine whether the defendant's brother was liable in relation to acts by a company of which he was not a director.

Having considered previous cases, the judge went on to set out what he believed to be the principles applicable when considering whether a person might be a de facto or shadow director:

  • The question requires an assessment of the corporate governing structure of the company and whether he assumed a role in the company which imposed on him the fiduciary duties of a director, which is a question of fact and degree to be assessed objectively.
  • An individual can be both a de facto director and a shadow director, but an act cannot be carried out simultaneously in both capacities. The capacity in which they act in relation to specific actions depends upon the nature of the act.
  • Where an individual performs an act of a nature that the corporate governance of the company requires can only be done by a de jure director, that individual will be a de facto director.
  • An act which takes the form of directions or instructions to de jure directors will be an act done in the capacity of shadow director.
  • Mere involvement in the management of the company or exercising a degree of influence over its decision making is not, in itself, enough.

Whilst in many situations the distinction between an individual acting as a de facto director or a shadow director may be somewhat academic (for example, where statutory provisions expressly state that obligations or liabilities extend to shadow directors), in certain situations liability may only attach to de jure and de facto directors but not to shadow directors (under section 212 of the Insolvency Act 1986, for example, which was the provision at the heart of Revenue and Customs Commissioners v Holland).

Recovery under tax covenant not possible until enforceable obligation to pay tax arises

In Minera Las Bambas SA v Glencore Queensland Limited [2019] EWCA Civ 972, the Court of Appeal upheld the finding at first instance that a buyer was not able to recover an amount of unpaid VAT from the sellers under a tax covenant because the VAT in question had not become 'payable'.

The case involved the buyer of a group of companies that operated a mine in Peru. As is customary on share purchase transactions, the SPA included a tax covenant under which the sellers agreed to indemnify the buyer in relation to 'any Tax payable by a Group Company to the extent the Tax has not been discharged or paid on or prior to' completion. After completion, the Peruvian tax authorities conducted a number of audits on the target group and found that it had wrongly claimed certain VAT refunds. Under Peruvian law, the effect of the assessment was to create an actual – and not merely contingent – liability that continues unless and until there is a decision of the tax court which sets it aside. Crucially, however, the tax authorities cannot take any action to enforce payment of such tax while the assessment is under appeal to the tax court.

In response to a claim from the buyer seeking to recover the amount of the VAT liability, the sellers asserted that no obligation to pay under the indemnity had arisen as yet, because the VAT liability was not 'payable'. The Court of Appeal agreed, noting that the word 'payable' is not a legal term of art but that in the context in which it appeared in the SPA it was reasonably understood to mean that there is an enforceable obligation to pay an amount of tax and not merely that a liability to pay an amount of tax has been established. In reaching this conclusion, the Court of Appeal set out two main factors:

  • Under English law, an indemnity is a promise to prevent the indemnified person from suffering loss. If the existence and amount of a debt have been established but no enforceable obligation has arisen, no loss has been suffered which the indemnifier has failed to prevent.
  • It does not make commercial sense to require the sellers to pay an amount of money to the buyer which is not at present needed, and may never been needed (if the appeal to the tax courts was successful), to satisfy a liability to pay tax.

Whilst the judgment makes clear that the meaning of the word 'payable' needs to be construed in the context of the provision in which it appears, the case is a reminder to think very carefully about the specific trigger events for any indemnities in SPAs and other commercial contracts and to ensure that the clause reflects the parties' expectations as to when the indemnified party can recover under the indemnity.

Supreme Court rules on validity of non-compete covenant and severability

The Supreme Court has upheld the decision of the Court of Appeal that a non-compete covenant (in an employment contract) was 'impermissibly wide and in restraint of trade' but, unlike the Court of Appeal, held that the offending words could be severed from the remainder of the restrictive covenant to render the balance of the covenant enforceable.

Tillman v Egon Zehnder [2019] UKSC 32 involved a senior employee of the appellant executive recruitment firm, who resigned from her role and sought to commence employment with a competitor. The post termination restrictions in the (former) employee's employment contract prohibited her from being engaged, 'concerned or interested in' any competing business. At the Court of Appeal, the employee successfully argued that the reference to 'interested in' was unreasonably wide as it meant that she could be prevented from holding even a single share in a competing business (it being immaterial whether the employee actually had any intention to acquire a share in a competing business); the non-compete covenant was not subject to any carve-out for a small percentage holding in a listed company, which is often seen in such contracts and SPAs.

The Supreme Court agreed with this conclusion, but having considered the authorities on severability it held that the words 'or interested' could be severed from the covenant and the balance of the provision was enforceable. In doing so, the Supreme Court departed from the approach in Attwood v Lamont that parts of a single covenant could not be severed, in favour of the three criteria set out in Beckett Investment Management Group Ltd v Hall, namely:

  • First, the blue pencil test must be applied, with the unenforceable provision being capable of removal without the necessity of adding to or modifying the wording that remains.
  • Second, the remaining terms must continue to be supported by adequate consideration.
  • Third, the removal of the unenforceable provision must not change the character of the contract such that it becomes 'not the sort of contract that the parties entered into at all'.

This should be welcomed by employers and purchasers alike, although the judgment does sound a note of caution that they should not seek to include extremely wide restrictive covenants in the belief that any offending aspects can always be severed if challenged at a later date – and that it may well be that the courts rule that legal costs incurred when such provisions are challenged fall predominantly on the employer / purchaser.


FCA publishes final instruments and guidance in relation to Brexit

The FCA has announced that it has published final instruments and guidance that will apply if the UK leaves the EU without a deal or an implementation period. The final instruments are largely unchanged from the near final forms published earlier in the year, although the instruments now commence on ‘exit day’, rather than 11pm on 29 March 2019.

Nicky Higginbottom

Nicky Higginbottom

Principal Knowledge Lawyer, Corporate
Leeds, UK

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