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Listed company update March 2017
This update summarises the major developments in UK corporate law and regulation for listed and quoted companies since our last update in December 2016.
2016 Annual Reports and 2017 AGM season
The Secretariats of listed companies with a December year end will currently be busy finalising their 2016 Annual Reports and 2017 AGM documents. We signposted a number of items for consideration in our December 2016 update but the main reporting issue for companies to deal with this year is in relation to the remuneration policy. Most companies will be putting a new remuneration policy to a binding shareholder vote in 2017, assuming the policy was first approved in 2014 when the regulations were first introduced. Listed companies should review their remuneration policies 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. In particular, various institutional bodies have indicated that they would like to see maximum remuneration caps and improved disclosures around bonus targets.
Other changes for 2017 Annual Reports include the disclosure of related undertakings. We referred to this development in our December 2016 update and in practical terms this means that all related undertaking information must now be disclosed in the annual report and cannot be appended to confirmation statements. 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 designed to assist listed companies in drafting their Annual Reports, we provided a number of sources in our December 2016 update.
Turning to institutional investor expectations, the last couple of months have seen a number of bodies publish their updated voting guidelines, including:
- Pensions and Lifetime Savings Association (PLSA) (formerly known as NAPF) updated Corporate Governance Policy and Voting Guidelines.
Listed companies should also refer to the Investment Association (IA) updated principles of remuneration when drafting the remuneration report and policy.
The IA has also issued guidelines setting out institutional investors' expectations around the viability statement, now in its second year of reporting:
Turning our attention to audit tendering, FTSE 350 companies are for the first year required to make statements under the Competition & Markets Authority (CMA) Order regarding tendering for external auditors and include within the Audit Committee section of the Annual Report a statement that the company has complied with the provisions of the Order. Audit Committees should also note that the Order requires specific functions to be carried out by the Audit Committee, which should not only be reflected in the Audit Committee section of the Annual Report, but also incorporated into the committee's terms of reference and rolling meeting agendas.
Preparers of accounts should also bear in mind disclosures around the use of Alternative Performance Measures (APMs) as referred to in our December 2016 update. As a reminder, 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. In January 2017, ESMA published Q&A to support its guidance on the disclosure of APMs.
2017 AGM resolutions
Companies should ensure that a separate resolution is included in the 2017 AGM Notice seeking approval of the remuneration policy, as referred to above. Companies are also reminded that they should ensure that they use the template resolutions provided by the Pre-Emption Group if seeking a disapplication of pre-emption rights for up to 5 per cent in connection with a specified capital investment (up to 10% in total). The template resolutions can be found here.
Don't forget that companies with controlling shareholders (controlling 30% or more of the voting rights of the company) need to comply with rules relating to the election and re-election of independent directors (see our February 2015 update for further information).
Company Secretaries are also reminded that where a significant proportion of votes (widely felt to be 20% or more, but this depends on an individual company's shareholder base) has been cast against a resolution at any general meeting, the company should explain, when announcing the results of voting, what actions it intends to take to understand the reasons behind the voting result. Indeed, one of the first FTSE100 companies to seek approval of its new remuneration policy was Thomas Cook – this received a 21.7% vote against (along with a 22.5% vote against the remuneration report and 32.7% vote against a new share incentive plan). The company ensured that the announcement of its AGM results included an explanation of what it considered to be investor concerns.
Companies may also wish to review their articles to afford them flexibility to adopt alternative dividend payment methods, such as mobile phone payments, as and when they become available. Companies wishing to hold fully electronic AGMs will also need to amend their articles to permit electronic AGMs. Jimmy Choo plc held the first electronic AGM in the UK in 2016.
If you require any assistance in drafting your 2016 Annual Report disclosures or 2017 AGM documentation, please contact Jayne Meacham or Carolyn Campbell-Wales
Web-based corporate reporting requirements
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, as noted below:
It is almost a year since the Modern Slavery Act was passed into law in the UK. We have covered the requirements in depth in previous updates (see our August 2016 and December 2016 issues). As a reminder, 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 these criteria must be met. 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. There is no need to include the statement in the company's annual report and accounts as this is a web based disclosure.
One year on, how much interest have the press and consumer groups shown in companies' Statements? In short, plenty. The press has been critical of how some businesses have approached the reporting requirement, with some Statements described as "lacklustre". The Business and Human Rights Resource Centre maintains a public registry of Statements published to date and they are busily analysing statements and publicly stating where companies are lacking in their disclosure. Some companies have failed to comply with basic elements of reporting, such as obtaining director approval and putting a link to the Statement on a company's homepage. Other feedback suggests that companies are failing to include details of key performance indicators used to assess effectiveness and there have also been gaps in Statements on contractor relationships. This risks adverse stakeholder and media feedback and potential damage to the organisations reputation and credibility. Companies are citing lack of resources in their defence, and clearly it is early days, but companies can learn from the above feedback and must ensure that the coordination of the Statement is sufficiently resourced, either internally or by using external resource.
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.
Gender pay gap reporting
Preparations by listed companies should be well underway in advance of the implementation of gender pay reporting legislation under the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017, which is due to commence on 6 April 2017. The legislation will require 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. The calculation must begin from the ‘snapshot date' of 5 April 2017 and be published on the employer's website and on a dedicated government website no later than 12 months after this date. The employer is also required to make and sign a written statement to confirm that the information published in accordance with the regulations is accurate.
Following publication of the results, pay gaps of all relevant companies will be ranked by sector in a league table that will allow the public to identify companies where a disparity in gender pay is an issue, and which is intended to help drive improvements in this area.
Payment practices reporting
Following the introduction of protective provisions under S3 of SBEEA, as a means of reducing the administrative and financial burdens caused by late payments on businesses. The Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017, are due to come into force on 6 April 2017.
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. 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. In January 2017, BEIS published guidance to help both companies and LLP's determine whether or not they fall within the scope of the regulations and how to comply with these.
No company or LLP will be required to report on their first financial year. However, reports will need to be published on a twice-yearly basis within 30 days of the end of each reporting period, if a company or LLP meets the specific criteria listed below. UK Companies and LLPs will fall within the scope of the reporting requirements for the financial year if, on their last two balance sheet dates, they have exceeded two or all of the thresholds for qualifying as a medium sized company under the Companies Act 2006 (section 465 (3)). Current thresholds require companies and LLP's to exceed a £36 million annual turnover, an £18 million balance sheet total and more than 250 employees to qualify as a large company. It is worth noting that these thresholds will be periodically updated. Whilst considering whether they fall within the scope for that financial year, the updated thresholds should be applied retrospectively to preceding years for the purpose of the reporting requirement size test.
A company or LLP that has one or more subsidiaries will need to evaluate whether they fall under the reporting requirements using a two-stage test. Firstly, the parent itself will need to consider whether it is classified as a large company or LLP (using the individual company/LLP thresholds listed above). Subsequently, if the parent is classified as a large company, consideration will need to be given as to whether the group it heads is large. The current group thresholds require a £36m net (or £43.2m gross) aggregate turnover, £18m net (or £21.6m gross) aggregate balance sheet total and over 250 aggregate employees to be exceeded on both of its last two balance sheet dates. Interestingly, the parent company will only fall under the reporting obligations if both the parent itself and the group pass the respective size tests.
Failure to publish the report, within the specified filing period (30 days) will be considered as a criminal offence by both the business and every director of the company or designated member of an LLP. With these offences being punishable on a summary conviction by a fine.
BEIS Corporate Governance Review
The consultation period for the BEIS Green Paper on corporate governance, covering executive pay, strengthening the voice of employees, customers and suppliers and corporate governance in larger private companies, has now closed. A number of representative bodies have published their responses to the consultation, including the Financial Reporting Council (FRC) and the banking industry.
One of the areas being explored in the BEIS review, is how to strengthen the employee, customer and supplier voice at boardroom level. Accordingly, the ICSA: The Governance Institute and the Investment Association are launching a joint project looking at how UK PLC boards can ensure that they understand the views of their employees and other stakeholders. The project will be looking at existing best practice in this area with intention of producing practical guidance in accordance with board duties under Section 172 of the Companies Act 2006. Read more.
In response to the consultation, and the greater focus around Corporate Governance, the ICSA: The Governance Institute has issued a discussion paper called "The Future of Governance: Untangling corporate governance". It is intended to be a series of papers to encourage discussion and new thinking around governance.
Audit tendering - guidance
Both the FRC and the Investment Association have published guidance on audit tendering. This replaces the previous version published in 2013. The FRC's note follows a number of roundtable discussions with Audit Committee Chairs and representatives from audit firms. The key recommendations of the FRC include being clear on the timetable for the tender (ideally some years in advance of the requirement to tender or rotate); balancing the use of audit firms for non-audit advice; ensuring all members of the Audit Committee understand the legal requirements and the mechanics of the tender process; and engaging with investors at an early stage. The Investment Association's guidelines on audit tenders sets out the expectations of the investor community.
FRC activity during the quarter
The FRC have recently announced that they will be undertaking a fundamental review of the UK Corporate Governance Code. The review will take into account the FRC's recent work on corporate culture and succession planning, the issues raised in the Government's Corporate Governance green paper and the BEIS Select Committee Corporate Governance inquiry. The FRC have indicated that they will consult on proposals later this year. Sir Win Bischoff, Chairman of the FRC has confirmed that "any changes to the regulatory frameworks and the Code will be done carefully and through full consideration with a wide range of stakeholders."
In January, the FRC issued a report, "Developments in Corporate Governance and Stewardship 2016", which looked at four main areas: providing an assessment of corporate governance and stewardship in the UK; reporting on the quality of compliance with, and reporting against, both the UK Corporate Governance Code and the UK Stewardship Code; providing findings on the quality of engagement between companies and shareholders; and indicating where the FRC would like to see changes in corporate governance behaviour or reporting.
Market Abuse Regulation (MAR)
As referred to in previous updates, MAR took effect across the EU on 3 July 2016 and replaced in its entirety the Market Abuse Directive. MAR implemented new requirements for the disclosure of inside information, insider lists and disclosure of dealings by persons discharging managerial responsibilities and persons closely associated with them.
As a reminder, MAR expanded the scope of the Market Abuse Directive to include new disclosure requirements on issuers of any debt securities that are admitted to trading on either a regulated market or an EU multi-lateral trading facility (MTF). MAR covers any financial instrument admitted to trading on an MTF, whereas previously debt instruments traded on markets other than regulated markets in the EEA were outside the scope of the Market Abuse Directive. Debt issuers therefore need to ensure that they are aware of, and compliant with, the new requirements.
Following the implementation of MAR, there was some confusion in the market as to whether issuers that announce preliminary results should impose closed periods either before the preliminary results, the year-end report, or both. The FCA clarified that in its view when an issuer announces preliminary results which contain all inside information expected to be included in the annual report, the closed period, where dealing is prohibited, is immediately before the preliminary results announcement. The FCA refers to Section 2 of the European Securities and Markets Authority (ESMA) Q&A on MAR for the definitive clarification.
Changes to the Listing Rules
The FCA has issued a consultation paper CP17/4 setting out proposed changes to the Listing Rules. The proposed changes include eligibility for premium listing, class transactions/calculation of class tests and reverse takeovers. This is part of the FCA's wider review into the structure of the UK's primary markets.
Legal Entity Identifiers and new rules for announcements
Changes expected to be introduced by the Financial Conduct Authority will require listed companies to include additional information in London Stock Exchange announcements. The new rules, to be added to DTR 6.2, have recently been consulted on by the FCA and are expected to come into force later in the year. Under the proposed rules, listed companies must include the following information when announcing regulated information:
- The announcement includes the Legal Entity Identifier (LEI) for the listed company. An LEI is a 20-character reference code issued by the Stock Exchange to identify legally distinct entities.
- The announcement text classifies the information according to the legal obligations under which it is disclosed e.g. article 17 of MAR, Listing Rule 9.6.2R. etc.
If a listed company does not already have an LEI, it should obtain one now via the London Stock Exchange website.
AIM company focus
Turning to key developments concerning the AIM sector, an AIM company (unnamed) has been privately censured and fined £75,000 by the London Stock Exchange for failing to seek advice from its Nomad on compliance with the AIM rules and failing to liaise with its Nomad, in breach of AIM Rule 31. The disciplinary notice states that AIM companies should not decide in isolation whether developments in its business are disclosable to the market without prior reference to its nomad.
The London Stock Exchange has also issued guidance for AIM companies on their use of social media and interaction with their disclosure obligations under the AIM rules. The Stock Exchange acknowledged that whilst social media and other forms of electronic communication are powerful tools used by AIM issuers, they need to ensure that they comply with the AIM rules regarding the disclosure of regulatory information and that social media is no substitute for an AIM notification to an RIS.
Listed and unlisted companies are reminded that under section 838 of the Companies Act 2006, public companies must file interim accounts at Companies House before paying an interim dividend. Next plc had to convene an EGM to rectify a procedural oversight which resulted in a technical infringement of this requirement. It is also worth checking that Companies House file these interim accounts in the correct way on the public file – we have seen examples where the public file has been incorrectly updated with a new Accounting Reference Date upon the filing of interim accounts for the purposes of declaring a dividend.
As regards dividend disclosures, the FRC's financial reporting lab has outlined ways in which companies can improve this.
On the horizon – non-financial reporting regulations
We reported in our December 2016 update on the implementation of the EU Non-Financial Reporting Directive, which 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 Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 have now come into force and amend part 15 of the Companies Act 2006. The Regulations set out the requirement for companies meeting a certain threshold to prepare a non-financial information statement as part of their strategic report. The Regulations came into force on 26 December 2016 and apply to reports covering financial years starting on or after 1 January 2017.
EU General Data Protection Regulation (GDPR)
2017 brings in the final year for companies to complete their preparations for the implementation of the GDPR, which is scheduled for enforcement in May 2018. The government has confirmed that the UK's decision to leave the EU will not affect the commencement of the GDPR.
The Information Commissioner's Office (ICO) has recently published its guidance for GDPR 2017 on its website and the Article 29 Data Protection Working Party (the body that currently brings together the data protection authorities across Europe) has produced a number of guidelines, including the role of the Data Protection Officer, which are also available via the ICO website. Full details of the new regulation can be found at www.eugdpr.org.
Contact the listed company team below if you need our help in navigating any of the issues covered in this update.
Jordans Corporate Law Listed Corporate Governance Team:
Assistant Manager, Listed Corporate Governance
Senior Corporate Governance Consultant
Corporate Governance Consultant