- 0117 918 1383
Listed company update June 2017
This update summarises the major developments in UK corporate law and regulation for listed and quoted companies since our last update in March 2017.
Changes to the PSC regime
As reported in our December 2016 and other updates, companies have been required to keep a register of people with significant control (PSC) since April 2016. Whilst main market listed and AIM quoted companies are currently exempt from the requirement to hold a PSC register, their UK subsidiaries are not exempt and companies are reminded to ensure that processes are in place to maintain this register for affected companies. Since June 2016, companies have been required to submit PSC information to Companies House with their annual confirmation statements.
Further changes are being introduced from 26 June 2017 that include updating PSC registers within 14 days of a change to their PSC information on an event driven basis (as is the case with, for example, changes in directors). Currently PSC information is required to be updated only in the annual confirmation statement. Companies House has created a variety of forms to enable companies to update their PSC information and these will be available on the Companies House website with effect from 26 June 2017.
Important news for AIM and ISDX quoted companies is that the Fourth Money Laundering Directive will see the PSC requirements extended to entities that have not previously been required to comply with the PSC register. We understand that this is likely to apply to companies with shares admitted to trading on prescribed markets like AIM and ISDX, but this is yet to be confirmed. Companies House will be communicating with such companies to ensure that they are aware of their new obligations and are in a position to comply when the rules change. Also with effect from 24 July 2017, the PSC regime will be extended to active Scottish limited partnerships and general Scottish partnerships where all the partners are corporate bodies.
There will also be changes to the protection regime, where companies can apply to have their PSC information withheld from the public register where disclosure would put a person at risk of violence or intimidation. Companies House has also stated that it intends to improve the accuracy and completeness of PSC data, recognising that a number of organisations have analysed such data and found inaccuracies. Companies House aims to contact those with clearly incorrect PSC data and will introduce a new “report it now” button on their website. This will enable those accessing information on the register to report problems with the information and for people who spot potential inaccuracies in a company’s PSC information, so that this can be reported instantly to Companies House. Companies House will also review its guidance so as to better assist companies and PSCs to make the appropriate disclosures.
We referred in our March 2017 update to the requirement under section 838 of the Companies Act 2006 for PLCs (listed and unlisted) to file interim accounts at Companies House before paying an interim dividend. This still appears to be a hot topic and an area where companies are continuing to fall foul of the requirement. In recent weeks, we have seen Domino’s Pizza, Dunelm Group and Hargreaves Lansdown Plc arrange general meetings to put a corrective resolution before shareholders. This has put these issues into the public domain and attracted comment in the press. We therefore recommend that all company secretaries check this process and alert the board and relevant colleagues as appropriate.
Legal Entity Identifiers
We reported in our March 2017 update that the FCA was consulting on new rules for listed companies to include additional information in London Stock Exchange announcements. The London Stock Exchange recently announced that these changes will be effective from 1 October 2017, from which issuers will be required by the FCA to have a valid Legal Entity Identifier (LEI) to file regulatory announcements and to classify the information in the required manner (see below). Issuers are advised to obtain their LEIs promptly and to make any other preparations in order to be ready for compliance from October. The process for registering and requesting an LEI can be found here.
Announcement text must also classify the information according to the legal obligations under which it is disclosed e.g. Article 17 of MAR, listing rule 9.6.2R etc.
Revised LSE Admission and Disclosure Standards
The London Stock Exchange (LSE) has published draft revised admission and disclosure standards, which came into effect on 8 May 2017. The standards have made some minor amendments and a link to the document can be accessed here.
The LSE has also issued guidance on good practice in environmental, social and governance (ESG) reporting, the aim of which is to help companies understand what ESG information investors would like to see, encouraging a more consistent approach to ESG reporting.
BEIS Corporate Governance Review
In April 2017 the Business, Energy and Industrial Strategy (BEIS) Committee published its report on corporate governance in UK business, which was commissioned following a number of recent high profile corporate governance failures.
The Committee has made a number of recommendations, and it is expected that these, along with the Government’s Green Paper on corporate governance reform, will be considered by the Financial Reporting Council (FRC) when it consults on changes to the UK Corporate Governance Code and supporting guidance, which is expected to take place in Autumn 2017 once the Government has published the results of its analysis of the response to its Green Paper.
Recommendations of the BEIS report include:
- An amendment to the Code to include informative narrative reporting on the Board’s fulfilment of Section 172 duties.
- Expanding the powers of the FRC to enable it to call out companies engaged in poor practice and to engage with them to improve performance.
- Simplification of remuneration including a return to a salary-only method of remuneration for Chief Executives, with the phaseout of LTIPs (no new LTIPs to be agreed from 2018), to be replaced by deferred stock.
- Encouraging diversity on Boards, including cognitive diversity.
- Encouraging the appointment of workers to Boards and also recommending that the FRC embeds the promotion of the ethnic diversity of boards within its revised Code.
- Chairs of remuneration committees to be expected to resign if their proposals do not receive the backing of 75% of voting shareholders.
- Encouraging the Government to set a target of at least 50% of all new appointments to senior and executive management level positions in the FTSE 350 and all listed companies being women by May 2020.
- The establishment of a new corporate governance code for the largest privately owned companies, developed and overseen by the FRC, along with the establishment of a new body to oversee and report on compliance (which would be funded by contributions from the companies themselves).
Whilst the BEIS report is broader in scope than the Green Paper, several of the recommendations of the report overlap with the Green Paper in a number of area, notably executive pay, workers on boards and the governance of private companies. Should the Conservative Party remain in power following the General Election, it is considered that a number of these recommendations will go on to become law.
Gender Pay GapGender pay reporting legislation under the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 came into force on 6 April 2017. The new legislation requires employers with 250 or more employees in both the private and the voluntary sectors to publish specific calculations on an annual basis that are designed to show the extent of any pay gap between male and female employees. Further details of the requirements can be found in the listed company update published in March 2017.
On 6th April 2017, The Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 came into force.
The regulations introduce a duty on large companies (whether private, public or quoted) and LLPs incorporated in the UK to publish certain information regarding their payment practices on a publicly accessible government website.
We discussed in our March 2017 update the necessary thresholds a company would need to meet in order to fall under these regulations, the potential information that each company would need to publish and the reporting timelines.
Considered as a criminal offence by both the company and each director or designated member of an LLP, failure to publish the report within the specified filing period (30 days) will be punishable on a summary conviction by an unlimited fine. Therefore, Companies and LLPS incorporated within the UK will now need to carefully consider whether they fall within the scope of these regulations not just for the financial years beginning on or after the 6 April 2017, but for every financial year thereafter. It has been suggested that every company and LLP should introduce specific procedures which require board level approval to ensure that the company/LLP remains compliant under the new regulations.
ICSA revised terms of reference for Audit CommitteesThe ICSA has updated its guidance notes on terms of reference for audit committees of listed companies and has provided model terms of reference for audit committees. The model terms of reference have been amended to reflect the requirements on audit committees introduced by the EU Audit Directive and Audit Regulation and changes to the UK Corporate Governance Code, in particular to reflect the requirements in the EU audit regime relating to the audit tender process, the provision of non-audit services by the auditor and the remuneration of the auditor for audit and non-audit services.
Listed companies have not been required to publish a preliminary statement of annual results in the UK since 2007. However, apparently 93% of listed companies still issue one, as do about 70% of AIM quoted companies. The FRC has issued a discussion paper to stimulate debate about ways of enhancing the value of preliminary announcements and any assurance provided by auditors in connection with them.
Financial Reporting Counsel (FRC) letter to investors
The FRC has written to investors highlighting recent changes and developments in corporate reporting. The helpful letter covers developments in four areas, namely the strategic report, governance reporting, audit committee reporting and financial statement disclosures. The FRC’s letter to investors is available on the FRC website here.
Pre-emption Group monitoring report
In May 2017, the Pre-emption Group released a monitoring report on the implementation of its statement of principles for dissapplying pre-emption rights and the template resolutions. Their report concluded that the 2015 statement of principles and the template resolutions have generally been followed and encourage companies to ensure that dialogue between them and their investors addresses both the spirit and the letter of the statement of principles.
To assist companies going forward, the Pre-emption Group has published an appendix of best practice in engagement and disclosure.
Investment Association guidance
The Investment Association (IA) published guidance in May 2017 on long-term reporting. The guidance sets out the expectations of the IAs members on aspects of long-term reporting and whilst mainly applying to premium listed companies, other listed and AIM companies are encouraged to apply it. The guidance complements the requirements of the Companies Act 2006 and strategic report requirements and focuses on a number of areas including business model and long-term reporting, productivity (setting out the key drivers of productivity within a business), capital management, material and environmental social risks and human capital and culture. Companies are encouraged to adopt the guidance at the earliest possible opportunity and IVIS has been tasked with monitoring implementation of the guidance through their analysis of annual reports.
PIRC shareholder voting guidelines
PIRC has published its 2007 UK shareholder voting guidelines. PIRC, typically regarded as one of the stricter proxy voting advisory organisations has included in its updated guidelines amended guidance on nomination committees, board diversity, executive chairman, directors’ remuneration, audit and significant votes against. The guidelines are not available on the PIRC website but can be ordered for a fee via the PIRC website, which has attracted some negative coverage.
McGregor-Smith Review on race in the workplace
The McGregor-Smith Review on race in the workplace was published in late March. The report makes a number of detailed recommendations aimed to improve diversity within organisations. Aimed at companies and businesses with more than 50 employees, this includes publishing five aspirational targets, publishing a breakdown of employees by race on their website and in their annual report and identifying a board-level sponsor for all diversity issues. The Minister for Small Business Consumers and Corporate Responsibility has written to chief executives of all FTSE 350 companies encouraging them to take up key recommendations from the review.
Tesco Plc Market Abuse Regulations (‘MAR’) Censure
In March the Financial Conduct Authority (FCA) announced that Tesco plc and Tesco Stores Limited (Tesco) had agreed that they committed market abuse in relation to a trading update published on 29 August 2014, which gave a false or misleading impression about the value of publicly traded Tesco shares and bonds.
The FCA noted that this was the first time it had used its powers under section 384 of the Financial Services and Markets Act to require a listed company to pay compensation for market abuse. Whilst Tesco is not subject to regulation by the FCA as a financial services firm (although certain members of its group are regulated). it is however subject to the requirements of the UK Listing Authority, and the UK’s securities regulator which is part of the FCA. The case demonstrates how the market abuse regime extends beyond the regulated financial services sector, impacting all listed entities and those that deal with information regarding entities caught under MAR.
It was also announced that Tesco Stores Limited had entered into a deferred prosecution agreement with the Serious Fraud Office relating to false accounting, pursuant to which it will pay a fine of £128,992,500. In light of the acceptance of responsibility and co-operation by Tesco in respect of both market abuse and false accounting, the FCA decided not to impose a financial penalty but instead imposed a requirement on Tesco to pay appropriate compensation. The FCA has stated that it considers the outcome to be in the public interest because Tesco has accepted responsibility for market abuse and has agreed to remediate the consequences in an appropriate way that tackles directly the loss caused by the market abuse, avoiding the costs and burden on investors of litigation.
Tesco agreed to pay compensation to investors who purchased Tesco shares and bonds on or after the 29 August 2014 and who still held those securities when the statement was corrected on 22 September 2014. Under the compensation scheme Tesco will pay an amount to each purchaser of Tesco shares and bonds who makes a claim under the proposed scheme that is equal to the inflated amount for each share or bond. The inflated amount has been established with the assistance of an independent expert engaged by the FCA. The FCA estimates the total amount of compensation that may be payable under the scheme will be approximately £85 million, plus interest.
FCA reviews and consultations
The FCA has published two consultation papers as part of a review of the structure of the UK’s primary market. Consultation paper 17/4 deals with premium listing eligibility for commercial companies, using the “class test” to assess the size of transactions and the requirement for shareholder approval and the FCA’s approach to suspending the listing of an issuer that has announced a reverse takeover. Discussion paper 17/2 considers the broader market landscape and addresses the split between standard and premium listings.
The FCA has also published a consultation paper including measures to improve the range and quality of information made available to investors during an IPO. This follows a discussion paper published last year. The key proposals being consulted on by the FCA focus on two areas: the timing of the publication of the prospectus and the interaction between the issuer and analysts.
Register of overseas companies
The UK government have now published their proposals to deliver the world’s first register of overseas companies and other legal entities that own property within the UK. The new register will be held by Companies House and modelled on the recently introduced persons with significant control register (“PSC Register”).
The new register aims to further increase the corporate transparency of the UK, protect the integrity and reputation of the UK property market and help to combat corruption and money laundering. It is hoped that the introduction of the register will make the UK a less attractive place to launder money and will assist investigators tracking down and recovering the proceeds of crime.
Overseas entities that wish to acquire UK property (currently defined as freehold land or a lease whose original term is over 21 years) will be required to register the entities beneficial ownership information with Companies House. Once the necessary information has been submitted, the entity will be assigned a unique registration number, which will need to be provided to the Land Registry when registering titles to land or property. Those who have failed to obtain a registration number and comply with the registration requirements, will ultimately be prevented from buying or selling property within the UK. Those who have already obtained property within the UK, will be granted a grace period of a year during which they can choose to either submit the entities beneficial ownership information or dispose of the property accordingly.
Similarly, to the PSC register, beneficial owners will therefore mean persons who, directly or indirectly, hold more than 25% of the shares in the company or more than 25% of the voting rights in the company, or hold the power to appoint or remove the majority of the board of directors or persons who otherwise have the right to exercise (or actually do exercise) significant control over the company or any other relevant entity. Closely based on the requirements for the PSC register, information such as the individuals name, date of birth, address, nationality and the nature of the person’s control over the company will need to be disclosed.
To ensure that the information is accurate, the overseas will entity will have to check the information with the beneficial owners before submitting it to Companies House. As with the PSC register, the overseas entity will be required to show that they have taken “reasonable steps” to find out who the beneficial owners are. If, despite having taken reasonable steps, an overseas entity is unable to supply full details of its beneficial owners, or it has been unable to establish if it has any beneficial owners, it will be able to comply with the requirements by making a statement to this effect. As a means of increasing compliance, the government have proposed that supplying misleading information to the register should be considered as a criminal offence.
On 5 April 2017, the government launched a call for evidence asking overseas investors, property and transparency experts for their opinions on how this register could be delivered. Having closed on 15 May 2017, the feedback from those involved is currently being analysed, and the outcome of the public feedback should be published shortly. However, due to being modelled so closely on the already established PSC register, the proposal has already received heavy criticism. With many believing that the legislation will be just as complex as that of the PSC register, leading to individuals being mistakenly listed on the register or companies opting to enter the “reasonable steps statement” as a means of avoiding entering the correct individuals into the register.
Companies House “Follow” service
Companies House have introduced a free “follow service”, which gives any individual the ability to follow a company’s filing history once registered to do so. Once a company has been “followed” instant email notifications will be sent to the individual as soon as any changes are made to the company’s filing history. The email will contain information regarding the filing alongside a link which will lead to a copy of the relevant documentation that can be downloaded free of charge.
Companies House suggest that the Follow service could be of particular use to persons wishing to monitor their own company to ensure no fraudulent filings are made or simply as means of keeping track of the filings submitted by the subsidiaries of larger parent companies.
If you would like our assistance in navigating through any of those issues, we would love to hear from you.
Contact the listed company team below if you need our help in navigating any of the issues covered in this update.
With contributions from the Jordans Corporate Law Listed Corporate Governance Team:
Assistant Manager, Listed Corporate Governance
Corporate Governance Consultant