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Listed company update IX
This update summarises the major developments in UK corporate law and regulation for listed and quoted companies since our last update in May 2016.
New Government – proposals for boardrooms
Prime Minister Theresa May recently announced potentially radical and fundamental changes to boardroom governance, where employees and consumers are represented on UK company boards. Other countries such as Sweden, Denmark and Germany already have systems that require certain companies to have employee representation. Here in the UK, any mention of such a proposal has been out of favour and not discussed seriously since the 1970s.
This would represent a significant change of direction for the UK. Details are very vague at the moment in terms of the nomination, election and appointment process and any penalties for non-compliance, but this development certainly gives us an insight into the PM's thoughts and plans for this area.
There has already been some lively debate on the topic, with some critics fearing that employee representation will lead to a clunky decision-making process, unwieldy boards, the stifling of debate at meetings and potential loss of confidentiality. Some have argued that the German model hasn't worked out quite as planned, citing its failure in preventing the emissions scandal from rocking the VW boardroom and governance structure. Others, however, have welcomed the news. Employee representatives can, they say, provide a balancing voice on remuneration and bring other values to the board, such as providing news from the shop floor and providing practical feedback on how technology and other changes are bedding in.
Market Abuse Regulation (MAR)
MAR came into force on 3 July 2016 and brought a number of changes for main market listed and AIM quoted companies. Key changes include the expansion of the scope of MAR to cover a wider range of instruments traded on a wider range of exchanges (including AIM - see below), more detailed requirements and procedures regarding the control of inside information, delaying disclosure, insider lists, share dealing restrictions, notification requirements for directors and senior managers (replacing the Model Code) and market soundings.
As regards the format for insider lists, companies are required by MAR to compile and maintain insider lists. The "Insider List Implementing Regulation" specifies the content and current requirements and the mandatory template for the insider list is very specific and must be kept updated.
MAR will apply directly to AIM companies and the London Stock Exchange has confirmed the changes to be made to the AIM rules to reflect MAR. The updated AIM rules are now available on the London Stock Exchange website. The main changes for AIM companies relate to the disclosure of inside information and there is some overlap between the obligations to disclose under the AIM rules and MAR. However, the requirements are not identical and companies should be aware of the additional requirements that apply under MAR. AIM companies should also note new requirements around delaying disclosure, insider lists, dealings by persons discharging managerial responsibilities (PDMRs) and persons closely associated with them (PCAs) and new restrictions on PDMR dealings during closed periods. It is also a new requirement of AIM Rule 21 for AIM companies to have a share dealing code in place.
The ICSA has published a useful suite of documents for companies to use for MAR compliance obligations, including a specimen dealing policy, dealing code and dealing procedures manual.
Companies should be aware that under FSMA the officers of a company, including Company Secretaries, can be liable for market abuse if the FCA is satisfied that the individual knowingly participated in the decision to deal. This is an unusual concept for Company Secretaries given that the Secretary does not share liability with the directors for breaches of the listing rules, including those considered to be administrative breaches.
In terms of practical steps, companies should have already begun to implement the provisions of MAR and these will include: reviewing and updating inside information and share dealing policies and procedures; including a section on delaying disclosure (and setting up notifications to the FCA in the new prescribed format - see below); expanding Insider Lists to include all details prescribed and considering the impact on external suppliers; considering training on seeking market soundings and on the regime generally; considering any changes necessary to the administration of long term incentive schemes; updating RNS announcement templates to contain the relevant statements; and updating company websites to ensure that they contain RNS announcements.
Jordans can help companies to navigate the new regime and provide support in bringing policies and procedures up to date and ensuring the practical arrangements to comply. Please contact us if you need our help in this area or would like us to conduct a review of your existing arrangements.
The FCA has published updated drafts of the forms which must be used to make notifications to the FCA required by MAR in relation to a delay in disclosure of inside information and in relation to PDMR dealings.
The London Stock Exchange has published a revised version of its Admission and Disclosure standards to reflect MAR and to signpost to issuers their obligations under MAR and these can be downloaded here.
The Executive Remuneration Working Group (ERWG) has published its final report on simplifying and realigning executive pay in the UK. The ERWG was set up by the Investment Association in 2015 to conduct an independent review of executive remuneration to address the concern that this had become too complex and was not fulfilling its purpose. The report includes ten recommendations to rebuild trust in executive pay structures in the UK. These include giving remuneration committees more flexibility in choosing a remuneration structure most appropriate for the company's strategy and business model, requiring non-executive directors to serve on a remuneration committee for at least a year before taking over chairmanship of that committee, improving shareholder engagement whereby both investors and companies focus engagement on the material issues for consultation, increasing transparency around target-setting and using both external and internal benchmarks for the board's explanation as to why levels of executive pay have been chosen.
Remuneration Committees are advised to review the report and assess how the recommendations can be implemented in their organisation. A copy of the report can be found here.
Turning to trends in remuneration voting at 2016 AGMs, most of the FTSE 100 AGMs have now been held. Nine AGMs saw 20% or more of shareholders voting against the implementation report, signalling what could be seen as potential re-run of the "shareholder spring" of 2012. Most companies will need to put their remuneration policies back to shareholders for approval in 2017. Companies are therefore advised to review their remuneration policies now to take account of investor feedback since 2014 and consider whether the remuneration policy put in place in 2014 is still fit for purpose given the changing business landscape. It should also be noted that the new Prime Minister has pledged to make the vote on the implementation report policy binding, rather than, as is currently the case, advisory.
Updated UK Corporate Governance Code and Guidance on Audit Committees
We reported in our May 2016 update that the FRC intended to issue an update to the UK Corporate Governance Code and the Associated Guidance on Audit Committees. In July 2016 the FRC published final versions of these two documents. The updated Code applies to accounting periods beginning on or after 17 June 2016 and the Guidance is a valuable tool for audit committees. Companies with reporting periods beginning before 17 June 2016 should continue to report against the September 2014 edition of the Code, although they are encouraged to consider whether it would be beneficial to adopt some or all of the new provisions in the revised code earlier than formally expected.
Click here to access final versions of the UK Corporate Governance Code and the Associated Guidance on Audit Committees.
ICSA Consultation on the practice of minuting meetings
The role, purpose and standard of minutes was the subject of Parliamentary attention following the independent report into the failure of HBOS plc and the discovery that board and committee meeting minutes at HBOS were at times incomplete and in some cases missing altogether. As a result, the ICSA was asked to produce guidance on the accuracy, maintenance, format and content of Board and committee minutes. In May 2016 the ICSA published its consultation on the minuting of meetings, which sought comments on the preparation and retention of minutes and listed a number of differing practices adopted by company secretaries. Some secretaries keep written notes of meetings indefinitely, which can make them discoverable in future litigation. Some secretaries will audio record board meetings to ensure a complete recording. After a review of responses, ICSA intends to publish revised guidance in the autumn and Jordans have provided comments on the consultation.
Changes to Listing Prospectus Disclosure & Transparency Rules (LPDTs)
The FCA has published minor rule changes to the LPDTs relating to reverse takeovers, the prospectus directive and the format for reporting on payments to governments. In relation to the latter, new provisions in DTR 4.3A prescribe the format for companies in the extractive or logging industries to report on payments made to governments in the countries in which they operate. These reports have to be prepared in XTML format and filed with the FCA by uploading these to the National Storage Mechanism, in addition to releasing an RIS containing this information.
Modern Slavery Act (MSA)
As referred to in our November 2015 and February 2016 updates, the new MSA reporting requirements apply to companies with a year ended on or after 31 March 2016. Commercial organisations with operations in the UK and with an annual global turnover of £36M or more are required to produce a "Slavery and Human Trafficking Statement" under s.54 of the MSA. Whilst there is no prescribed time limit to make the statement, the statement should be published as soon as possible after the financial year end to ensure that it is relevant and current. This is broadly interpreted as meaning within six months of the year end. A publication has recently been issued by CORE, which is intended to supplement the official guidance on s.54 of the MSA and provides valuable insights on what is expected from companies in terms of managing modern slavery risks. The guidance gives a helpful list for companies on expected content in MSA statements. A copy of the publication can be downloaded here.
Main Market Auditor Appointments
Changes have been made to the Disclosure and Transparency rules (DTRs) to reflect changes for auditor appointments. These changes apply to main market but not AIM quoted companies. The DTRs require main market companies to retender their audit engagement at least every ten years (subject to a number of exceptions based on market capitalisation). The Companies Act 2006 has also been amended and for the first time sets out in statute the role of the Audit Committee in relation to auditor appointments and provides for mandatory auditor rotation and competitive tendering.
FRC Report on Corporate Culture
In July 2016, the FRC published the results of a study exploring the relationship between corporate culture and long-term business success in the UK. The key findings of the study include the need to recognise the value of culture, the role of leaders (in particular the Chief Executive) in embodying the desired culture and embedding this at all levels, integrating the values of an organisation through every aspect of its activities, aligning values and incentives and the role of other stakeholders such as investors in encouraging behaviours in companies in which they invest. A copy of the report can be found here.
Investment Association revised share capital management guidelines
The Investment Association (IA) has published revised share capital management guidelines which set out the expectations of IA members as institutional shareholders on various aspects of share capital management, such as the power to allot shares and disapply pre-emption rights, purchases of own shares and scrip dividends. The guidelines have been updated to reflect the template resolution issued by the Pre-Emption Group in May 2016 for companies that wish to seek disapplication of pre-emption rights.
Changes to the Companies Act under the Small Business Enterprise and Employment Act 2015
As reported in our February 2016 and May 2016 updates, listed companies are reminded that the Small Business Enterprise and Employment Act 2015 has brought a number of fundamental changes to UK company law, which all UK companies should be alert to.
These changes include the introduction of Form CS01 Confirmation Statement, which has replaced the Annual Return AR01 from 30 June 2016. The new Confirmation Statement consists of the confirmation section (which confirms the registered office, officer appointments etc.) and additional information, where the company must confirm additional information such as the trading status, shareholder information and the information it holds on its PSC register. The Confirmation Statement must confirm at least annually that the information that Companies House holds about the company is up to date as at the date of the Statement. Although the format of the Confirmation Statement is different from the Annual Return, for the most part both forms cover the same data, except that for the first time, companies are now required to confirm information about People with Significant Control (PSCs) to Companies House. The Confirmation Statement must be delivered to Companies House within 14 days of the end of the ‘review period', which is 12 months after the date of the last Annual Return. This is less than the 28 day grace period that was given to file an Annual Return. Companies House has published a guidance on the completion of the Confirmation Statement.
In July 2016, the FRC published a statement about the need for boards to consider whether disclosures relating to the UK's vote to leave the European Union are necessary in their annual and interim reports. The statement lists matters for directors to consider when preparing their forthcoming reports. The board should determine what disclosures, if any, are required to ensure that their financial statements and other reports provide the information needed by investors and comply with regulatory requirements. A copy of the statement can be found here