Included in this issue: Further AGM guidance published; FCA, FRC and PRA relax rules and provide guidance and more...
BEIS announces various COVID-19 measures, including as regards restructuring processes and AGMs
The Department of Business, Energy and Industrial Strategy (BEIS) has announced an intention to implement various COVID-19 related measures including:
- to amend insolvency law to give UK companies breathing space and continue trading while they explore options for rescue and thereby help them to avoid insolvency. This will include enabling companies to continue to buy much-needed supplies, such as energy, raw materials or broadband, while attempting a rescue, and temporarily suspending wrongful trading provisions with effect from 1 March 2020 to 1 June 2020 so that company directors can focus on keeping their businesses going without the threat of personal liability; and
- to ensure those companies required by law to hold annual general meetings (AGMs) will be able to do so safely, consistent with the restrictions on movement and gatherings. Legislative changes will temporarily grant companies greater flexibilities, including holding AGMs online or postponing the meetings.
As soon as further details are published, including as to the timing of any changes, we will issue another update.
Chartered Governance Institute publishes further AGM guidance
The Chartered Governance Institute (CGI) has published further guidance on AGMs in light of the COVID-19 outbreak which reflects its view of the implications of the government's "Stay at Home Measures" which prohibit, among other things, public gatherings of more than two people. The guidance is supplementary to the CGI's guidance on AGM contingency planning and has been reviewed by BEIS.
The latest guidance reiterates that postponement of an AGM remains an option but also acknowledges that many companies will also want to go ahead to refresh their AGM authorities, particularly as regards their share capital, before they expire, and there may be others which need to hold a general meeting on short notice to approve a capital raising or other urgent transaction. The guidance also reiterates that checking relevant provisions of a company's articles of association and coordinating with registrars and venue providers is key, as is ensuring that shareholders are kept regularly up to date and are given their right to vote.
The guidance offers advice on:
- Shareholder attendance – The CGI's view is that the Stay at Home Measures, in effect, prohibit shareholders from attending an AGM in person on the basis that, unless they are required to form the quorum of the meeting, their presence is "not essential for work purposes" (this being one of the limited exceptions from the prohibition on gatherings of more than two people). On that basis, companies should make it clear in their notice of meeting, or by RIS announcement or by updating the information on their website, that shareholders are not allowed to attend in person and that any seeking to do so will be refused entry. Instead, shareholders should vote by proxy. The guidance also rehearses the basis on which the chair of the meeting can prevent shareholders and their proxies from attending.
- Ensuring the meeting is quorate - Most companies should be able to form a quorum, including in circumstances where the original venue is no longer available. If the number required to form a quorum is more than two, numbers should be kept to the minimum required and appropriate social distancing measures observed.
- Who should chair the meeting – A company's articles should be checked in the first instance but will typically provide that the chair of the board should chair the meeting or, in his / her absence, another director. Therefore, it may be helpful for a director to attend as part of the quorum so that it is clear who shall act as chair.
- Appointment of proxies – Companies should make sure that the chair of the meeting can exercise the rights conferred by all proxy forms submitted. Where shareholders have appointed someone other than the chair of the meeting as proxy, they should be encouraged to submit a new proxy form appointing the chair instead on the basis that the original proxy is unlikely to be permitted to attend.
- Attendance of all directors – There is no legal requirement for all directors to attend and, indeed, their attendance would not be permitted under the Stay at Home Measures. A dial-in should be arranged if the company considers that director participation will help with the running of the meeting.
- Unavailability of the venue - If a meeting has already been convened for a venue that has become unavailable, and the articles allow the board to postpone the meeting or move it, they should consider moving it to a more controlled venue, such as the company's head office. Any security concerns should be mitigated by the fact that the meeting will, in effect, be held behind closed doors. Companies that do not have articles which permit postponement should adjourn the meeting to an alternative venue. If practicable, this could be achieved by the employees/others who plan to form a quorum attending the original venue and adjourning to another venue. Where this is not practicable, companies should take advice on the best course of action.
The CGI has also published guidance on the conduct of virtual board meetings while COVID-19 related social distancing measures are in place.
FRC, FCA and PRA publish joint COVID-19 statement
The Financial Reporting Council (FRC), Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have published a joint statement announcing a series of actions to "ensure that information continues to flow to investors and support the continued functioning of the UK capital markets". The actions include:
- a statement by the FCA which, among other things, allows listed companies an extra two months to publish their audited annual reports;
- FRC guidance for companies preparing financial statements. This is complemented by guidance from the PRA regarding the approach that should be taken by banks, building societies and PRA-designated investment firms in assessing expected loss provisions under IFRS 9; and
- further FRC guidance for audit firms seeking to overcome challenges in obtaining audit evidence.
The regulators believe that the timing and content of financial information and the audit work that is done to test and support it must change. These changes are likely to include:
- modified audit opinions where auditors have been unable to gather the necessary audit evidence to complete the audit in full: for example, by limiting the scope of the audit opinion;
- more audited financial statements that include disclosures that management is aware of material uncertainties which may cast significant doubt upon the entity’s ability to continue as a going concern; and
- changes to timetables for publication of financial information.
Investors, lenders and other users of financial statements are also encouraged to take into account the unique set of circumstances arising from COVID-19 which might result in uncertainty in companies’ financial positions, potential delays in the provision of financial information, the need for auditors to undertake additional work to support their audit opinions and the increased use of modified audit opinions, including qualifications arising from scope limitations.
The FCA, FRC and PRA have also strongly encouraged lenders and other parties to take into account these circumstances in responding to potential breaches of covenants arising directly from the COVID-19 pandemic and its consequences.
FCA extension of the period for the publication of audited annual reports
The extension of the period within which a listed company must publish its annual financial report, under Disclosure Guidance and Transparency Rule (DTR) 4.1.3R from four to six months is stated to be voluntary and temporary. That said, the FCA has urged all those companies that feel it appropriate to utilise the additional two months to do so and cautioned other market participants from drawing adverse inferences if they do. Note that the possible extension only applies to issuers for whom the UK is their Home Member State and does not apply to interim reports which, under DTR 4.2.2(2), must still be published within three months of a company's half-year-end. Further detail, including the application of the extension to debt issuers, can be found in an accompanying FCA Q&A.
The FCA reminds investors that they should still receive timely information on which to base their decisions given the need for companies to observe their other disclosure obligations, in particular those under the Market Abuse Regulation.
The FCA also recommends that listed companies review all elements of their reporting timetables in order to make appropriate use of the time available within regulatory deadlines to ensure "accurate and carefully prepared disclosures".
The FCA's announcement makes various suggestions and highlights other issues which may afford companies the ability to focus on such disclosures including:
- Delaying the filing of accounts – By way of reminder, Companies House has issued guidance to permit an application to delay the filing of accounts at Companies House, which, for those citing issues around COVID-19, will be granted automatically. Note that absent a relaxation of the Companies Act 2006 (2006 Act) requirement for a public company to hold an AGM within six months of its financial year-end, at which the company's accounts are likely to be laid, this will be of little practical benefit to those on the main market other than as regards the filing of subsidiary company accounts. If it is not possible for the audited accounts to be finalised before the AGM, a public company could apply to delay the filing of its accounts, hold the AGM in the required timeframe without laying the accounts, and then hold a further general meeting to lay the accounts before shareholders once they are finalised.
- Postponement of auditor tenders - Companies are encouraged to consider delaying planned tenders for new auditors, even when mandatory rotation is due. The FRC has a power to extend certain mandates, where the initial appointment commenced after 17 June 1994, by up to two years in exceptional circumstances.
- Postponement of audit partner rotation – Key audit partners are required to rotate every five years. However, where there are good reasons not to do so, for example to maintain audit quality, the rotation can be delayed so that the term is for no more than seven years.
The FCA has also issued a reminder of its voluntary moratorium on the publication of preliminary announcements and confirmed that it can end on 5 April 2020.
FRC guidance for companies preparing financial statements
The FRC's key messages to boards on corporate governance, which are developed with further guidance in the statement, are to:
- develop and implement mitigating actions and processes to ensure that they continue to operate an effective control environment: in particular, addressing any key reporting and other controls on which they have placed reliance historically, but which may not prove effective in the current environment;
- consider how they will secure reliable and relevant information, on a continuing basis, in order to manage their future operations and those of their workforce and suppliers, including the flow of financial information from significant subsidiary, joint venture and associate group entities; and
- pay attention to capital maintenance, ensuring that sufficient reserves are available when the dividend is made, not just proposed.
On the basis that making forward-looking assessments and estimates is particularly difficult in the current climate, the FRC's statement includes guidance for companies intended to help them make key forward-looking judgements, including as to business viability and going concern, as consistently as possible.
The FRC’s Financial Reporting Lab has been seeking feedback from investors on the disclosures that they would like to see and has produced a short infographic which highlights a desire for companies to disclose the financial resources available to them, including cash and access to additional finance (such as committed bank lines), other financing and non-standard debt arrangements (such as supply chain financing).
Investors have also pointed out the importance of forward looking information which explains how resilient the company’s business model is to current events, and to scenarios which are now reasonably plausible: for example, how long a company is likely to be able to sustain operations based upon these scenarios, and what mitigating actions it might be able to take to extend these timeframes. The FRC believes that information about such stress testing and reverse stress testing is particularly valuable in the current environment, and will help support both the going concern assessment of the company and its viability statement.
AIM: Period for publication of annual audited accounts extended
The London Stock Exchange (LSE) has published a further edition of Inside AIM setting out temporary changes to an AIM company’s obligation to publish annual audited accounts.
Under the AIM Rules for Companies (AIM Rules), an AIM company has six months after the end of its financial year to publish its annual audited accounts (AIM Rule 19). This is consistent with the legal filing deadline for UK incorporated public companies under the 2006 Act. If an AIM company has a financial year-end between 30 September 2019 and 30 June 2020, it may now apply to AIM Regulation, through its nominated adviser and prior to its reporting deadline, for a three month extension to this publication deadline. The deadline for the publication of half-yearly reports under AIM Rule 18 remains unchanged.
As noted elsewhere in this update, the extension dovetails with the Companies House announcement that UK companies may apply for a three month extension of the legal filing deadline for accounts.
Whilst ostensibly helpful, the complicating factor for those UK incorporated AIM companies which seek to take advantage of the extension is that, under the 2006 Act, they are still obliged to hold their AGM within six months of their year-end at which, in all probability, their directors will discharge their obligation to lay their accounts within the same timeframe.
New National Storage Mechanism launch delayed
The FCA has announced that the launch of the new National Storage Mechanism (NSM) will not take place on 30 March 2020 as previously communicated. Nevertheless, issuers should ensure that they have completed the necessary registration and authorisation activities outlined previously in anticipation of a revised launch date being announced.