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Listed company update V
This update summarises the major developments in UK corporate law and regulation for listed and quoted companies since our last update in May 2015.
Small Business, Enterprise and Employment Act 2015 ("SBEEA")
SBEEA, which received Royal Assent on 26 March 2015, is introducing a number of fundamental changes to UK company law and goes far wider than reducing administration and red tape for small businesses. Listed and quoted companies should be alert to the implications for their groups, which include, amongst others, the abolition of bearer shares and corporate directors, new procedures for director disputes and appointments, changes to the annual return process and changes to the statement of capital requirements for companies. One area which has received its fair share of scrutiny and controversy is the establishment of register of Persons with Significant Control ("PSC register").
Main market listed and AIM quoted companies are exempt from the requirement to hold a PSC register, as they are already subject to equivalent requirements under DTR5, however, their UK subsidiaries are not exempt and each subsidiary must maintain a PSC register from January 2016 and provide this information to Companies House from April 2016. A PSC is defined as an individual that holds, directly or indirectly, more than 25 per cent of the shares or voting rights of a company, an individual that holds the right, directly or indirectly, to appoint a majority of the Board of directors or has the right to exercise or actually exercises significant influence or control over a company. BIS is currently consulting on draft regulations on the detailed aspects of the PSC register and on the proposed protection regime, which would enable PSCs who are at risk of violence to have their information hidden from public disclosure.
Companies should be preparing for this new regime now, especially those with complex ownership structures, in order to identify exactly who should be listed on the PSC register. Contact us if you need any advice in this area.
Modern Slavery Act
We reported in our May and February updates that companies of a certain size will be required to prepare an annual slavery and human trafficking statement under the Modern Slavery Act 2015. Section 54 of the new Act imposes new reporting obligations on companies to prepare a ‘slavery and human trafficking statement' for each financial year, which should include the steps the company has taken to ensure that slavery and human trafficking is not taking place in any of its supply chain. This statement must be approved by the Board and signed by a director and be published on a company's website. The Secretary of State has now confirmed the financial thresholds applicable, namely that commercial organisations carrying on business in the UK, wherever incorporated, with a turnover of £36 million or more, will be subject to the reporting requirement. The concept of "total turnover" includes an organisation's worldwide turnover, meaning that organisations even with limited operations in the UK will be subject to the reporting requirement if they trade in the UK. Final regulations around the effective date for the new corporate reporting requirement are awaited, but it is expected to be implemented in October 2015. Our November edition will include an update on this matter and will provide further guidance on the content of the statement.
We urge clients to start looking at their supply chains now in preparation for the disclosure requirements. Companies are reminded that they need to consider suppliers throughout their supply chain, not just their immediate suppliers, and ensure that policies, procedures, training and the management of supplier contracts are reviewed now in preparation for the statement.
Related Party Transactions – a reminder
A recent fine imposed by the FCA on Asia Resource Minerals plc (ARM) serves as a reminder to listed companies of the importance of having adequate systems, controls, policies and procedures in place in relation to the disclosure of related party transactions.
ARM breached Listing Principle 2 by failing to take reasonable steps to establish and maintain adequate procedures, systems and controls for related party transactions, when a subsidiary entered into various related-party transactions without following the established policy, which resulted in the listed holding company breaching the Listing Rules.
Regular training is crucial – this should ensure that all relevant individuals within an organisation are aware of how the Listing Rules apply to a company, particularly where listed companies have subsidiary operations in overseas jurisdictions where local management may be unfamiliar with the Listing Rules. Companies are advised to seek guidance from their corporate advisers, sponsors, and corporate brokers when a transaction is proposed. Contact us if you need our help in reviewing your policies and procedures in this area.
Disclosure of related undertakings – changes introduced
Up until 1 July 2015, companies were able to show a full list of subsidiaries in their accounts or take advantage of section 410 of the Companies Act 2006, which allowed them to show only the principal subsidiaries in their accounts and annex a full list of subsidiaries to their next annual return. However, section 410 exemption has been repealed, which in practical terms means that all related undertaking information must now be disclosed in annual accounts and cannot be appended to annual returns. This applies to annual accounts approved on or after 1 July 2015. Companies should note that Companies House may reject accounts that do not include a full list of related undertakings after this date.
Changes to Listing Rules and DTRs to reflect UK Corporate Governance Code
The FCA has proposed some minor changes to the Listing Rules to reflect the updated UK Corporate Governance Code introduced in September 2014. The changes reflect the fact that under the new Code, companies now need to make both a going concern statement as to the appropriateness of adopting the going concern basis of accounting, as well as a viability statement around the longer-term viability of the company. Other changes are also proposed around the provision that securities of a premium listed company must be capable of electronic settlement (which has been superseded by the EU Central Securities Depositaries Regulations). The consultation closed on 5 August 2015 and no date has yet been set for the changes to take effect.
Financial Reporting Council – business model reporting
The Financial Reporting Lab has announced that it plans to undertake a project during the second half of 2015 to consider the reporting of business models in listed and quoted company annual reports. The requirements to make disclosures relating to a company's business model are set out in the Companies Act 2006 and in the UK Corporate Governance Code. The aim of the project is to help companies to understand how investors are using the business model disclosures in their decision making processes and how the information should be presented. The Lab is inviting investors, companies and analysts to participate in this project. Find out more.
Reporting by smaller listed and AIM companies
We stated in our summer 2014 edition that the FRC was embarking on a project aimed at improving corporate reporting in the AIM and small cap sector, in response to concerns about the quality of reporting. The aims of the project were to achieve, over a three year period and in three phases, a step change in the quality of reporting in this sector.
The FRC published a discussion paper in June 2015 on its findings. The FRC found that the annual reports of smaller listed and AIM quoted companies are not always of the highest standard. Research around this suggests that companies believe that investors pay little attention to the content of annual reports and there is often a lack of sufficient resources to dedicate to corporate reporting. However in contrast, investors are saying that these reports are important to them because fewer analysts are following those companies and preparing reports. The FRC plans to address the issues raised by producing guidance on key areas of focus, guidance for audit committees and boards and by developing its training resources.
Financial Reporting Lab – audit committee practice aid
In May 2015 the FRC Financial Reporting Lab published practical guidance with the intention of helping audit committees evaluate external audit quality in light of section C.3 of the UK Corporate Governance Code. The aid was developed by the FRC at the request of audit committee members, who asked for guidance to support their assessment of external audit. Although the aid is designed for premium listed companies, the FRC notes that it may assist other companies, including those adopting the Code voluntarily. The aid can be found here.
Narrative reporting – gender pay gaps
A consultation paper has been issued by the Government Equalities Office outlining proposals to require companies to publish pay information to show whether there are any differences between the pay of their male and female employees. The consultation paper requests feedback on where and how frequently information should be published, the type of companies the disclosures should apply to and whether there are any associated risks or unintended consequences of publication of gender pay gap information. Responses are requested by 6 September 2015 and the consultation paper is available here.