The UK Department of Business, Innovations and Skills (BIS) recently has launched the draft Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 (Proposed Regulations) for consultation. The Proposed Regulations make various amendments to the Companies Act 2006 (CA 2006) and the related secondary legislation in order to increase corporate transparency in narrative reporting, and make it easier for shareholders to hold companies to account. In addition, the Proposed Regulations will remove outdated and duplicated requirements to reduce the clutter from directors’ reports of companies.
The Proposed Regulations amend existing companies law concerning annual reporting, primarily the CA 2006, but also the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) (Large and Medium Company Regulations) and the Small Companies and Groups (Accounts and Directors' Report) Regulations 2008 (SI 2008/409) (Small Company Regulations).
One of the key amendments suggested by the Proposed Regulations is the revocation of section 417 of CA 2006, which requires a company’s directors’ report to include a business review. Instead of the business review, companies will have to produce a standalone strategic report for each financial year, which will be separated from the directors’ report.
The directors’ duties to prepare the strategic report, as set out in the Proposed Regulations, are identical to those currently applicable to the business review. The small companies exemption, which exempts certain companies from the need to produce a business review, will also be applicable to a strategic report.
In relation to the content of a strategic report, the format and substance broadly match those required for a business review. However, in relation to quoted companies, the Proposed Regulations require the following in addition to the existing requirements of a business review:
a description of the company’s strategy and its business model (new sections 414C(4)(a) and (b) of CA 2006);
three separate disclosures of the number of persons of each gender who are, respectively, directors, managers (excluding those who are also directors) and employees of the company. The Proposed Regulations define a “manager” as a person who has responsibility for planning, directing or controlling the activities of the company and is an employee of the company (new section 414C(6) of CA 2006); and
consideration of human rights, social and community issues, when disclosing information necessary for an understanding of the development, performance or position of the company’s business (new section 414C(4)(d)(iii) of CA 2006).
As the strategic report is to be a document separate from the directors’ report, new section 414D of CA 2006 requires the strategic report to include the same statement, that each director has taken all steps to ensure that both he/she and the company’s auditor are aware of all relevant audit information, as must appear in a directors’ report under section 418 of CA 2006. In addition, new section 414E of CA 2006 imposes, in relation to the strategic report, the same approval and signing requirements applicable to a directors’ report under section 419 of CA 2006.
Summary financial statements
Under section 426 of CA 2006, a company may, subject to conditions set out in The Companies (Summary Financial Statements) Regulations 2008 (SI 2008/374) (SFS Regulations), ask its shareholders, debenture holders, persons nominated to receive the accounts and reports under section 146 of CA 2006, and other persons entitled to receive notice of general meetings, whether or not they would like to receive a summary financial statement instead of its full annual accounts and reports.
The Proposed Regulations remove the concept of summary financial statements from section 426, and they provide that a company may instead send a copy of its strategic report in place of the annual accounts and reports, to shareholders, etc., who so agree.
In addition, the Proposed Regulations amend the required content of disclosures in a company’s directors’ report that are currently prescribed by secondary legislation (respectively the Large and Medium Company Regulations and the Small Company Regulations).
In relation to all companies, the Proposed Regulations remove the following required disclosure items:
charitable donations in excess of £2,000 (paragraph 5, Schedule 7, Large and Medium Company Regulations; paragraph 4, Schedule 5, Small Company Regulations); and
for private companies only, particulars of acquisitions of own shares (paragraph 8, Schedule 7, Large and Medium Company Regulations; paragraph 6, Schedule 5, Small Company Regulations). For public companies, the disclosure requirement remains as currently drafted.
For large and medium-sized companies, the following disclosure items are to be removed:
substantial differences between market and balance sheet values of land (paragraph 2, Schedule 7, Large and Medium Company Regulations); and
policy and practice on payment of creditors (Part 5, Schedule 7, Large and Medium Company Regulations).
It is recognised widely that the UK is a leader in setting standards of corporate reporting, but there is still room for improvement. The Proposed Regulations will likely encourage companies to produce innovative and engaging reports, in line with current business best practice.
BIS invites comments on the draft Regulations by 15 November 2012. The Proposed Regulations are scheduled to come into force in October 2013, and they will apply to companies preparing annual reports for financial years ending after the implementation date.
The consultation also notes that the BIS is working with the UK Financial Reporting Council (FRC) on guidance for the new strategic report, and that the FRC aims to consult on the format and substance of the draft guidance early next year.
For more information on the consultation and the Proposed Regulations, please visit: