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Listed company update December 2016
This update summarises the major developments in UK corporate law and regulation for listed and quoted companies since our last update in August 2016.
Corporate Reporting 2016
In the lead-up to year end for many of our clients, the purpose of this section is to highlight a number of areas of particular focus for corporate reporting for 2016 annual reports. Starting with the remuneration report and policy, this was the third year that listed companies were reporting under the remuneration regime introduced in 2013 and this year's implementation reports, reported against the remuneration policies approved back in 2014. What this means is that for many companies, the remuneration policy is due to be put back to a binding shareholder vote at the 2017 AGM. Listed companies should already have begun to review their remuneration policies to take account of investor feedback since 2014 and to consider whether the remuneration policy puts in place in 2014 is still fit for purpose, given the changing business landscape.
The GC100 and Investor Group has published the 2016 version of its directors remuneration reporting guidance, which includes greater clarity on the exercise of discretion by the Remuneration Committee, expanding the guidance on the use of commercial sensitivity as a basis for not disclosing performance targets, recommending that the statement by the Chairman of the Remuneration Committee sets out the link between remuneration and the company's strategy, and noting that a clear reason must be given if a new remuneration policy is introduced mid cycle. The Investment Association (IA) has also updated its principles of remuneration to reflect the recommendations of the Executive Remuneration Working Group, as referred to in our August update. The IA has also sent an open letter to FTS350 companies on executive pay, which highlights a number of issues for the forthcoming 2017 AGM season. The principles of remuneration published by the IA can be found here.
Turning to the viability statement, listed companies were faced with a new requirement this year in relation to disclosures around the longer-term viability of the company. Boards now need to provide two forward looking statements in their annual reports (i) the first being the traditional going concern statement, where directors state whether they consider it appropriate to adopt the going concern basis of accounting in preparing the accounts, essentially confirming that they believe that the company will still be a going concern in 12 months' time; and (ii) the new longer term viability statement, where directors should state whether, taking account of the company's current position and principal risks, they think they have a reasonable expectation that the company will be able to continue to operate and meet its liabilities over a chosen period, based on a robust assessment of the risks ahead. One of the biggest discussion points amongst our clients seems to be around the length of time that they should pin their viability statements to. FRC guidance states that the period covered by the viability statement should be significantly longer than 12 months from the approval of the financial statements. It appears that the majority of companies are making three year statements, with some stretching to five years, but best practice continues to evolve in this area. The IA has recently published guidelines setting out institutional investors' expectations around the viability statement. The IA also notes that three or five years has become standard practice but also encourages companies to consider longer time horizons "given the long-term nature of equity capital and directors' fiduciary duties". The IA also highlights that it is important that directors are clear in why they have selected a particular timeframe. See the IA guidance.
Turning to committee reporting, it is now common practice for listed companies to have separate sections of their annual report, describing the work of the various board committees in discharging their responsibilities. It should be noted that the audit committee report should be expanded this year to reflect changes in the reporting landscape, including disclosures relating to auditor rotation and tendering, non-audit services provided by the external auditor and dividend policy. The UK Corporate Governance Code, the latest version of which was published in April 2016, usefully sets out what it would expect to see in each committee report.
A new item for all companies this year, listed and unlisted, is the disclosure of related undertakings. Up until 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, 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 the annual report and cannot be appended to annual returns (or confirmation statements as they are now). Companies House will reject accounts that don't include a full list of related undertakings. This should also include registered office addresses for subsidiaries, even when these are in the UK.
In terms of best practice and useful checklists, the FRC published a statement in July 2016 about the need for boards to consider whether disclosures relating to Brexit are necessary in their annual and interim reports (see our August update – for further details). In October 2016, the FRC published advice to audit committee chairs and finance directors of listed companies, highlighting key issues and improvements it considered can be made to annual reports in the 2016/17 reporting season. In November 2016, the FRC issued some guidance on nine characteristics of a good annual report within its annual review of corporate reporting.
Another recent report from the FRC looks at business model reporting and reiterates the importance of business model disclosure to investors.
Preparers of accounts should also bear in mind disclosures around the use of Alternative Performance Measures (APMs). An APM is a financial measure of historical or future financial performance, financial position, or cash flows other than a financial measure defined or specified in the applicable financial reporting framework. Examples of APMs most commonly used include EBIT (Earnings Before Interest & Tax), EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), free cash flow, and underlying profit or net-debt.
On 30 June, ESMA released guidance for the disclosure of APMs, which can be found here:
In addition to submitting the remuneration policy to the 2017 AGM, as referred to above, listed companies are reminded that the Pre-Emption Group recommends that companies propose two separate resolutions to cover the disapplications covered by the Pre-Emption Group Statement of Principles, namely
(i)disapplying pre-emption rights on up to five per cent of the issued share capital and;
(ii) disapplying pre-emption rights for an additional five per cent for transactions which the Board determines to be an acquisition or other capital investment as defined by the Statement of Principles. 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.
Template resolutions can be found on the Pre-Emption Group website.
In addition to the disclosures that must be included within a company's annual report as noted above, there are also several website disclosures that companies need to build into their reporting timetables. Starting with the Modern Slavery Act 2015, which was passed into law in March 2016 and referred to in our August update, a commercial organisation is required to produce a "slavery and human trafficking statement" (the Statement) under section 54 of the Modern Slavery Act if it:
- is a body corporate or a partnership;
- carries on business, or part of a business, in the UK;
- supplies goods and services; and has a global annual turnover of £36m or more.
All four of the above criteria must be met. The Government has stated that it expects a common-sense approach in determining whether an organisation is carrying on a business within the UK and indicates that having a "demonstrable business presence" within the UK will be required. Companies have already begun to publish their Statements as companies with financial year ends on 31 March 2016 were the first to publish their Statement for their 2015 to 2016 financial year - these had to be made within six months of their year end. Companies with December year ends are required to publish their statements by 30 June 2017.
In terms of publication, the Statement must be approved by the board of directors and signed by a director on behalf of the board. Once approved and signed, the statement must be published on the organisation's website, on a prominent page with a link on the homepage. The link should be clearly described such as "Modern Slavery Act Transparency Statement". If a company does not have a website, a copy of the statement must be provided to anyone who requests one in writing within 30 days. There is no need to include the statement in the company's annual report and accounts as this is a web-based disclosure. There is some useful guidance on how to structure statements and in particular CORE has issued a publication, the intention of which was to supplement the official guidance on the Act. The publication provides valuable insight on what is expected from companies in terms of managing modern slavery risks and a helpful list for companies on expected content of their statements.
In terms of monitoring compliance with the Act, organisations such as the Business and Human Rights Resource Centre are busily analysing statements and publicly stating where companies are lacking in their disclosure. So companies risk adverse stakeholder and media feedback and potential reputational damage. Whilst the Secretary of State may seek an injunction requiring an organisation to comply, this seems unlikely and so it is more likely that pressure groups will target organisations in high risk sectors, analyse their statements (or lack of) and subject them to reputational campaigns instead.
Another web disclosure introduced recently is the publication of a company's tax strategy, if in a previous tax year, the company had either a turnover above £200m or a balance sheet total of over £2bn. The disclosure should include details about a company's tax strategy, how the company manages tax risks and its attitude to tax planning, but does not need to include amounts of tax paid or commercially sensitive information. This should be made available on a company's website as either a separate document or self-contained part of a wider document and should be published each year, and within 15 months of the last one being published. Penalties are payable to HMRC if companies have not published their tax strategy correctly or in time.
Market Abuse Regulation (MAR)
MAR came into force on 3 July 2016 and replaced in its entirety the Market Abuse Directive. MAR has changed the rules around the disclosure of inside information, insider lists and disclosure of dealings by persons discharging managerial responsibilities and persons closely associated with them – see our August update for further details. Companies are starting to embed their processes around MAR and practical issues include the application of the €5,000 threshold (most companies prefer to disregard this and announce all transactions), the granting of options and awards when inside information is in existence, the use of ICSA model dealing codes, permanent vs project insider lists, training and self-certification of insiders and FCA interaction.
On the horizon
This section of our update provides readers with a heads up on issues likely to affect listed and large companies over coming months.
BEIS inquiry into Corporate Governance
BEIS has published its Green Paper on corporate governance, which considers three aspects of corporate governance: executive pay, strengthening the voice of employees, customers and suppliers and corporate governance in larger private companies following the collapse of BHS. The Government has diluted its approach to imposing mandatory worker participation on Boards. The proposals within the Green Paper are open for consultation until 1 February 2017, following which a White Paper is expected to set out formal legislative proposals.
Ethnic Diversity of UK Boards
The Parker Review Committee has published a report into the ethnic diversity of UK boards, which finds that ethnic minority representation on the boards of FST100 companies is disproportionately low. The report includes several recommendations, one of which is that each FTS100 boards should have at least one director of colour by 2021, and each FTS250 boards should have at least one director of colour by 2024. Comments on the consultation version of the report are requested by 28 February 2017.
Gender Pay Gap Reporting
The Government published the draft Equality Act 2010 (Gender Pay Gap Information) Regulations 2016 in February this year and subject to Parliamentary approval, this is likely to come into force in early 2017. The Act will have an impact on companies with 250 or more employees who will be required to publish certain information in relation to the gender pay gap, and gender bonus gap on an annual basis. The first gender pay reports will have to be published no later than 4 April 2018, based on pay rates as at 5 April 2017 and, in the case of the bonus pay gap, bonuses paid between 6 April 2016 and 5 April 2017. This information will need to be posted in a publicly accessible manner, such as the company's website and on a yet undetermined Government website. Companies should start thinking about how this information is going to be collated, by whom and looking at what the results look like now and the message that they might convey. Whilst there is not a requirement in the regulations to provide a narrative for the results, companies are advised to consider putting something together to make some sense of the results for both employees, potential employees and the public at large.
Fourth Money Laundering Directive
In September 2016, the Treasury published a consultation paper on the transposition of the Fourth Money Laundering Directive (4MLD) into UK law. This will have an impact on the UK's current PSC (Persons with Significant Control) regime as the 4MLD requires information on the beneficial ownership register to be "current". This differs from the position under the UK's PSC regime which allows companies to file details of their PSC's only once a year via the confirmation statements. BEIS has published a discussion paper on possible approaches to implementing the requirements and areas on which BEIS is seeking views include removing the exemption for AIM and ISDX companies (these are currently exempt from maintaining a PSC register but the exemption in 4MLD is more limited).
The UK must implement 4MLD by 26 June 2017.
EU Non-Financial Reporting Directive (NFR Directive)
In November 2016, BEIS issued its response to the consultation document on the implementation of the EU Non-Financial Reporting Directive. This directive requires certain large companies to disclose information in their narrative report on policies, risks and outcomes regarding environmental matters, social and employee aspects, respect for human rights, anti-corruption and bribery issues and board diversity. The new rules will only apply to large companies and groups with more than 500 employees, including listed companies as well as other public interest entities (PIEs), such as banks and insurance companies. Draft regulations have been laid before Parliament to amend the strategic reporting requirements in the Companies Act 2016 and the FCA has published changes to the Transparency Rules to implement the NFR Directive. The changes take effect for financial years beginning on or after 1 January 2017.
Women in Leadership Roles – Hampton-Alexander Review
The Hampton-Alexander Review builds on the work of Lord Davis and seeks to apply a similar framework to improving the number of women in leadership roles below the board. It has determined a set of five recommendations including a requirement that FTS350 companies disclose the gender balance of their executive committees and its direct reports.
Late Payment of Suppliers
Draft regulations are due to come into force from 6 April 2017 for businesses to report on payment practices. This requirement is likely to be satisfied by an organisation putting a report, accessible to all, on its website on a half-yearly basis, although Government guidance is awaited on this. The report will need to include such matters as the organisation's standard payment terms, the average time taken to pay, the proportion of invoices paid beyond agreed terms and the amount of late payment interest owed and paid by the organisation.