This briefing sets out issues which listed companies should consider when preparing for their 2010 AGM and suggests changes to articles of association to reflect full implementation of the Companies Act 2006 (CA 2006) (as amended with effect from 3 August 2009 by way of implementation of the Shareholder Rights Directive).
As a result of amendments made to the CA 2006 in August 2009 by way of implementation in the UK of the Shareholder Rights Directive, companies will not simply be able to make a few minor changes to their 2009 AGM documentation when preparing the notice of meeting and other documents for the 2010 AGM. There are now additional information requirements to be included in the documentation and made available on a company’s website. The amendments to the CA 2006 will also have an impact on the conduct of the AGM itself as there have been changes to the voting rights of proxies and the process of appointment of corporate representatives since August 2009, and shareholders now have a new right to have answered questions they raise at the AGM. Resolutions proposed at the 2010 AGM will need to reflect the relevant CA 2006 references and take account of the latest guidelines issued by the various institutional investor bodies during 2009, and the preparation of the annual report and accounts in advance of the AGM will also need to take account of legal, regulatory and other developments during 2009.
These issues are considered in brief below. However, we will be pleased to provide detailed advice on any of the areas mentioned.
Preparing for the AGM
New requirements for the content of the AGM notice
The CA 2006 now requires a company’s notice of meeting to include the following information:
- The address of the website on which certain information required to be published in advance of the meeting is published (see further below);
- A statement of the right to vote at the AGM which is determined by reference to the register of members at a particular record date (which must be no earlier than 48 hours, excluding non-working days, before the AGM);
- The procedures for attending and voting at the AGM;
- Details of the forms to be used for the appointment of proxies at the AGM;
- Procedures for voting in advance or by electronic means (if offered by the company);
- A statement of the right of members to ask questions at the AGM; and
- If the notice is sent out more than six weeks before the AGM, a statement of the rights of members to include a resolution or other matter in the business of the AGM.
Shareholders’ rights in relation to the AGM
In addition to the rights that shareholders have to raise audit concerns at the AGM (this right came into effect in respect of accounts for financial years beginning on or after 6 April 2008) and the right that shareholders have, subject to certain constraints, to request that resolutions and statements be added to the AGM agenda, shareholders (including indirect investors) meeting the required threshold can now request that a matter (other than a proposed resolution) be included in the business to be dealt with at the AGM. The required threshold is, as with the right to raise audit concerns and to requisition resolutions and require the circulation of statements, shareholders with 5 per cent or more of the total voting rights of all shareholders or 100 or more shareholders holding an average £100 of paid up share capital. A shareholder request to include a matter in the business of the AGM must be received by the company no later than six weeks before the AGM or, if later, by the time at which the notice of the AGM is given and the company will have to include the relevant matter in the business of the AGM unless it is defamatory, frivolous or vexatious.
In light of this new shareholder right, the Institute of Chartered Secretaries and Administrators (ICSA) is recommending that companies wait until six weeks before the date of the AGM before sending out their AGM notice to avoid the expense of having to circulate several documents to shareholders on a number of occasions before the AGM.
Website publication requirements prior to the AGM
Companies will have to publish certain information on their website in advance of the AGM because of changes to the CA 2006 made in August 2009. The information must be freely accessible and shareholders wanting a hard copy of it must be able to obtain it free of any charge or other restriction. This information must be kept on the company’s website for two years beginning with the date of the notice of AGM and so companies will need to put in place procedures to ensure that the information remains on their website and is not inadvertently removed within the two-year period.
The information that has to be available on a company’s website for two years is:
- The matters set out in the notice of AGM (this requirement can be met by putting a copy of the actual AGM notice on the website);
- The total number of shares of the company and shares of each class; and
- The total number of voting rights that can be exercised at the AGM in respect of each class of shares.
In addition, any shareholders’ statements, resolutions or matters of business received by the company after the notice of AGM has been sent out will have to be published on the company’s website as soon as reasonably practicable and remain there for a period of two years.
Proxy form requirements
Companies will now have to provide an electronic address for the receipt of any document or information relating to proxies for the AGM. The company can provide an electronic address either when it sends out its proxy forms or that electronic address can be made available on the company’s website throughout the period beginning with the first date on which notice of the AGM is given and ending with the conclusion of the AGM. Companies should bear in mind that, by including an electronic address on the company’s website or in proxy forms, the CA 2006 deems the company to have agreed that shareholders can send any documents or information relating to the AGM or proxies for the AGM by electronic means to that address unless the company specifies any conditions or limitations in relation to that address when it makes it available. However, where a company’s shares are held through CREST and the CREST electronic proxy appointment service is available, ICSA have issued guidance to the effect that the statutory requirement to include an electronic address for the receipt of proxies can be satisfied simply by referring to the CREST manual on the Euroclear website.
As noted above, one of the new content requirements for 2010 AGM notices is a requirement to include details of the proxy forms in the notice of AGM. However, ICSA have advised that companies should not make unpersonalised proxy forms available on their website and as part of disclosing the procedure to attend and vote at the AGM, a company’s website should make clear how shareholders can obtain a personalised proxy form.
Business of the AGM
Authority to allot shares
Section 551 CA 2006 replaced section 80 Companies Act 1985 (CA 1985) with effect from 1 October 2009 and so the wording of the resolution to authorise the directors to allot shares will need to reflect the new CA 2006 references and the different terminology used in the CA 2006. In addition, in drafting the resolution, companies will need to decide whether they want to take advantage of the guidance first issued by the Association of British Issuers (ABI) at the end of 2008, and updated in November 2009. This permits the directors to seek a general authority to allot shares equal to one-third of a company’s issued share capital together with an additional authority to allot a further one-third (i.e. so that the directors’ allotment authority can equal two-thirds of the company’s issued share capital in total). This is to enable companies to conduct a rights issue of up to two-thirds of their issued share capital without the need to go back to shareholders for their approval at the time, which would otherwise delay the process.
Just over 60 per cent of FTSE 100 companies took the opportunity to increase the ceiling on their allotment authorities to two-thirds of issued share capital at their 2009 AGM. Any additional one-third authority that a company took at its 2009 AGM is only valid for one year and so companies that took such authority last year will need to consider whether to renew that authority at the 2010 AGM.
In addition, the ABI guidance makes it clear that where additional authority of this kind is taken and where both the aggregate actual usage of the authority exceeds one-third as regards nominal amount; and, where the issue is in whole or part by way of a fully pre-emptive rights issue, the monetary proceeds exceed one-third (or such lesser relevant proportion) of the company’s pre-issue market capitalisation, then ABI members will expect all of the board wanting to remain in office to stand for re-election at the next AGM of the company following the decision to make the issue in question. The National Association of Pension Funds (NAPF), in the 2009/10 Policy Updates to its Corporate Governance Policy published in January 2010, supports the ABI position in terms of recommending that the whole board should stand for re-election at the next AGM where a company undertakes a rights issue of more than one-third of its issued share capital under a general authority, rather than following specific shareholder approval. The NAPF points out that, as a voting sanction, shareholders may choose to vote against the re-election of the chairman, or the senior independent director when the board is not subject to re-election at the next AGM after a general authority rights issue that exceeds 33 per cent. of issued share capital.
Authority to disapply pre-emption rights
References to section 89 and section 95 CA 1985 will need to be replaced with the new CA 2006 references and drafting of the disapplication resolution will need to reflect the changes in terminology between the disapplication provisions in the CA 1985 and those in the CA 2006.
Share buy-back authority
The usual authority sought at the AGM to enable companies to make purchases of their own shares will need to reflect both the new CA 2006 provisions and the recently updated guidance on buy-back authorities issued by the ABI. While the ABI have made no substantive amendments to their previous guidance on buy-back authorities, their guidelines do differ from the CA 2006 provisions in several respects. For example, the ABI guidelines require buy-back authorities to be granted by way of a special resolution rather than an ordinary resolution as permitted by the CA 2006, and the ABI require buy-back authorities to be renewed annually, although, under the CA 2006, shareholder authority for market purchases can last for up to five years. The ABI guidelines, unlike the CA 2006, also contain limits on the amount of shares that can be included in buy-back authorities. Institutional shareholders will accept authority to purchase up to five per cent of ordinary share capital and most will accept the authority extending up to ten per cent, but there may be resistance from institutional shareholders if authority is sought to buy-back shares in excess of ten per cent. of ordinary share capital. The ABI guidelines also require the directors to undertake that they will only exercise the buy-back authority if it would result in an increase in earnings per share and is in the best interests of shareholders generally.
Authority to hold general meetings (other than AGMs) on fourteen days notice
With effect from August 2009, a change was made to the CA 2006, as part of the implementation of the Shareholder Rights Directive, with regard to the minimum period of notice of a general meeting other than an AGM. Although a company’s articles may enable the company to call general meetings on 14 days’ notice, in future the company will have to call all meetings on a minimum of 21 days’ notice unless three conditions are met. If these conditions are met, the company can hold a general meeting on a minimum of 14 days’ notice. The three conditions are:
- That the meeting is not an AGM;
- That the company offers a facility for shareholders to vote by electronic means accessible to all shareholders who can vote at general meetings; and
- That shareholders have passed a special resolution reducing the notice period to not less than 14 days at the immediately preceding AGM or at a general meeting held since the last AGM.
The second condition will be met if the company offers a facility, accessible to all shareholders, to appoint a proxy by means of a website. However, the condition will not be satisfied simply by permitting electronic proxy appointments via CREST as that service is only available to shareholders who hold their shares in uncertificated form via CREST.
To enable a company to have the flexibility to call general meetings other than AGMs on 14 days’ notice, a resolution approving the reduction of the notice period will need to be on the agenda at the 2010 AGM to satisfy the third condition. Approximately 89 per cent of FTSE 100 companies included such a resolution in their 2009 AGM notice.
Companies with a large number of US shareholders need to be aware of the position of RiskMetrics Group, a US based proxy service, in relation to resolutions at AGMs enabling the notice period for general meetings to be reduced to not less than 14 days notice. RiskMetrics Group, in its updated European Governance Policy for 2010 which is expressed to take effect for meetings held on or after 1 February 2010, is recommending that investors who follow its recommendations vote in favour of enabling resolutions if the relevant company states that a shorter notice period of between 20 and 14 days will not be used as a matter of routine for general meetings, but only when the flexibility is merited by the business of the meeting. Even if shareholders have passed an enabling resolution at the AGM, if the business of a general meeting is not time-sensitive (such as the approval of incentive plans), RiskMetrics Group would not expect that general meeting to be called on less than 21 days’ notice.
When evaluating any enabling resolution proposal, RiskMetrics Group will look at the company’s use (if any) of shorter notice periods during the preceding year to check that these were only used for meetings dealing with genuinely time-sensitive matters. If the company has not limited its use of shorter notice periods to time-sensitive matters and fails to provide a clear explanation for this, RiskMetrics Group will consider a vote against the enabling resolution for the next year.
However, this issue is now of relevance to all listed companies since, in its recent 2009/10 Policy Updates to its Corporate Governance Policy, the NAPF includes a policy update in relation to general meetings called on short notice. The NAPF supports the views of RiskMetrics. The NAPF expects companies to give as much notice as is practicable when calling a general meeting. As a result, the NAPF believes that meetings should only be called on 14 days’ notice in limited circumstances where it would clearly be to the advantage of shareholders as a whole. If the proposals at a meeting are not time-sensitive, then a company should not normally use the shorter notice period. The NAPF also encourages companies to outline the circumstances in which a short-notice meeting can be called when tabling the enabling resolution.
Authority to make political donations and incur political expenditure
If the company wants to ask shareholders to authorise political donations and expenditure at the 2010 AGM, it will need to ensure that the wording of the resolution extends to donations to and expenditure on independent election candidates. The restrictions on donations to and expenditure on independent election candidates came into force in October 2008. Just under 50 per cent of FTSE 100 companies sought authority to make political donations and incur political expenditure at their 2009 AGM.
Approval of auditor liability limitation agreement
Although auditors have been able to limit their liability by agreement with shareholders since April 2008, no FTSE company sought approval of an auditor liability limitation agreement (LLA) at its 2009 AGM. Institutional investor bodies such as the ABI have expressed concerns about LLAs.
Companies registered in the US with the Securities and Exchange Commission (SEC), will not be able to enter into an LLA anyway as the independence rules of the SEC do not yet allow LLAs.
Conduct of the AGM
The changes to the CA 2006 made by way of implementation of the Shareholder Rights Directive in August 2009 will mean some changes for the conduct of and voting procedures at 2010 AGMs. The chairman and other directors will need to be fully briefed on these procedures in advance of the AGM so as to ensure the smooth running of the meeting.
Voting by proxies
The amended CA 2006 has clarified the position concerning the rights of proxies when voting on a show of hands. On a vote on a show of hands, each proxy, including multiple proxies appointed by one shareholder, has one vote. However, in certain circumstances, a proxy can have two votes. Subject as otherwise provided in a company’s articles, a proxy appointed by more than one shareholder will have one vote on a show of hands for all the appointing shareholders who instructed the proxy to vote in the same way (i.e. for or against a particular resolution). However, if the proxy has been instructed by his appointing shareholders to vote in different ways, (i.e. some shareholders have instructed the proxy to vote in favour of a particular resolution but other shareholders have instructed him to vote against it), the proxy will have two votes on a show of hands - one vote for and one vote against the resolution.
Voting by corporate representatives
The position of voting by corporate representatives at the 2010 AGM has been clarified as a result of amendments made to the CA 2006 by the regulations which implemented the Shareholder Rights Directive in the UK. Prior to the amendments being made, there was some uncertainty about the position of voting by multiple corporate representatives of the same corporate shareholder as a result of the original drafting of the CA 2006. That uncertainty has now been resolved as the CA 2006 has been amended to clarify that where a corporate shareholder appoints more than one corporate representative in respect of its shareholding, then provided those corporate representatives have been appointed in respect of different shares, the corporate representatives for that corporate shareholder can act independently of each other and validly vote in different ways. This means that the “Designated Corporate Representative” procedure set out in guidance issued by ICSA in January 2008 will no longer be needed for the 2010 AGM.
Shareholder questions to be answered at AGM
As has been mentioned above, shareholders will have a new right at the 2010 AGM to have answers provided to questions they raise at the AGM. This right was introduced into the CA 2006 in August 2009 and companies will have to “cause to be answered” any question relating to the business of the meeting raised by a shareholder unless one of three exceptions applies. No answer need be given:
- If to do so would unduly interfere with the preparation for the meeting or it would involve the disclosure of confidential information;
- If the answer has already been given on a website in the form of an answer to a question; or
- If it is undesirable, in the interests of the company or the good order of the meeting, that the question be answered.
The chairman of the AGM in particular will need to be fully aware of this new statutory right and the exceptions that he may be able to apply, depending on the nature and number of questions asked at the meeting by shareholders. Since one of the exceptions is that the answer to a question has already been given on a website in the form of an answer to a question, as part of the preparation for the 2010 AGM companies should consider the sorts of questions shareholders might want to raise at the AGM. Answers to those questions could then be put on the Q&A section of the company’s website relating to the AGM, and shareholders could be referred at the meeting to those answers if they raise one of the questions dealt with there. In addition, it should be noted that there is no requirement for a question to be answered at the meeting so, where this is not possible, the chairman could nominate someone to provide an answer after the meeting that can be added to the Q&A section of the company’s website.
It remains to be seen how this will affect market practice on the conduct of AGMs but it may make it more difficult for the chairman to end any question and answers sessions if shareholders continue to raise questions that do need to be answered i.e. do not fall within one of the exceptions listed above.
Chairman’s casting vote
Although a company’s articles may include a provision giving the chairman of the AGM a casting vote on a poll or on a show of hands at the meeting, the chairman will not be able to exercise this right at the 2010 AGM since, as part of the implementation of the Shareholder Rights Directive in August 2009, this right was abolished.
Results of poll to be made available on website
If a company takes a poll on any resolution at the 2010 AGM, then, as a result of changes made to the CA 2006 in August 2009, the following information must be made available on the company’s website:
- The date of the AGM;
- The text of the resolution or, as the case may be, a description of the subject matter of the poll;
- The proportion of the company’s issued share capital (determined at the voting record date) represented by those votes;
- The number of votes cast in favour;
- The number of votes cast against; and
- The number of abstentions (if counted).
This information must be published on the company’s website as soon as practicable and in any event no later than the end of the 16th day beginning with the date of the AGM (or, if later, the end of the first working day following the day on which the result of the poll is declared).
Impact of institutional shareholder guidelines on 2010 AGMs
A number of bodies representing different groups of institutional shareholders have published and continue to publish on a regular basis, guidance and views on different issues relating to the AGM. In this briefing it is not possible to consider all of the guidance and views issued. However, in order to avoid adverse publicity in advance of the 2010 AGM, companies are likely to want to ensure that the resolutions being proposed at the meeting comply with the various guidelines issued by bodies such as the ABI and NAPF or, if any of the resolutions do not so comply, that there are good reasons for the non-compliance that can be explained clearly to shareholders.
The ABI’s recently updated guidelines on directors’ powers to allot shares and disapply pre-emption rights and on own share purchases, as well as the policies of RiskMetrics Group and the NAPF with regard to resolutions enabling general meetings to be held on 14 days’ notice, have been discussed above. Other developments during 2009 which will need to be considered prior to the 2010 AGM are discussed below.
ABI’s revised guidance on articles and other matters
In October 2009, the ABI published its views on current best practice in relation to articles and associated areas. This guidance covers auditor liability limitation agreements, reincorporation outside the UK, resolutions seeking approval for political donations and/or political expenditure, electronic communications, annual reporting on a company’s procedures for dealing with directors’ conflicts of interest and the position of corporate representatives at meetings. In relation to guidance on articles, the ABI comments on borrowing powers, directors’ fees, dispute resolution and exclusive jurisdiction clauses and clauses dealing with the non-disclosure by shareholders of information about interests in shares.
ABI’s updated guidelines on executive remuneration
In December 2009, the ABI published an updated version of its guidelines on executive remuneration. These guidelines were last updated in December 2007 and are intended primarily for listed companies. The 2009 guidelines are broadly similar to those produced in 2007 but they do include a new acknowledgement of risk management as one of the considerations relevant to executive remuneration and incentives. Boards will need to ensure that their company’s remuneration policies and practices are demonstrably aligned with the company’s corporate objectives and business strategy, taking risks fully into account. The remuneration committee will need to ensure that remuneration targets take account of risk and there is a new recommendation for remuneration committees in relation to the remuneration of senior executives who are not on the board but who have a significant influence over the company’s ability to meet its strategic objectives. In this context, the new recommendation is that the remuneration committee should “have oversight of all associated risks arising throughout the firm as a result of remuneration”. Boards are also recommended to consider disclosure of these risks and how they are managed in accordance with the board’s obligations under the business review included in the annual directors’ report.
The ABI also published a position paper on executive remuneration in December 2009. This is aimed at helping remuneration committees understand how shareholders expect the ABI’s remuneration guidelines to be implemented in the current economic conditions, and to encourage constructive dialogue between remuneration committees and shareholders on the delivery of core principles.
NAPF’s Corporate Governance Policy and Voting Guidelines 2009/10
The NAPF published a new version of its Corporate Governance Policy and Voting Guidelines in November 2007. Since then it has updated these guidelines three times, firstly in 2008, then in February 2009, and now in January 2010. The voting guidelines are designed to assist institutional shareholders in interpreting the Combined Code when considering voting decisions at company meetings.
In the 2009 update there were new voting guidelines in relation to, inter alia, directors, remuneration, accountability and the audit, borrowing limits in articles, resolutions to disapply pre-emption rights and the time limits for the validity of certain resolutions. The 2010 update contains voting guidelines relating to short notice general meetings (as discussed above), director independence, director suitability, director re-election following a large rights issue (as discussed above), termination payments and investors’ responsibilities (including endorsement of the ISC Code on the responsibilities of institutional investors referred to below).
In addition, in November 2009, the NAPF wrote to all chairmen of the FTSE 350 companies urging them to exercise restraint in setting executive pay and reviewing the company’s remuneration policy. The NAPF also made it clear that company remuneration should be aligned with the long-term interests of shareholders.
PIRC Shareholder Voting Guidelines 2009
The latest edition of PIRC’s Shareholder Voting Guidelines was issued in March 2009, and in these Voting Guidelines PIRC sets out where its view of best practice goes beyond existing legal or regulatory requirements. The Voting Guidelines cover numerous issues under the headings of the board, directors’ remuneration, audit and reporting, shareholders’ rights and corporate actions and sustainability and non-financial reporting. PIRC update their Voting Guidelines annually and so the 2010 version is likely to be published in early 2010.
The current version of the Combined Code is the June 2008 edition which applies to accounting periods beginning on or after 28 June 2008. During the course of 2009, the FRC undertook a review of the Combined Code. This review was originally scheduled for 2010 but was brought forward in light of the significant changes in economic conditions since the previous review in 2007 and the Government’s decision to ask Sir David Walker to review the governance of banks and other financial institutions.
In July 2009, the FRC published a progress report on its review and it issued its final report in December 2009. As a result of its review, in December 2009 the FRC also issued a consultation paper seeking views on a number of proposed changes to the Combined Code. The intention is that a revised Combined Code will be published in April or May 2010, with it applying to accounting periods beginning on or after 29 June 2010.
The consultation paper sets out proposed changes to both the structure of the Combined Code and to its content. It is proposed that its name will be changed to “The UK Corporate Governance Code” so as to avoid confusion among overseas investors as, from April 2010, overseas companies with a Premium listing in the UK will need to report against it. The following are some of the changes proposed:
- To enhance accountability to shareholders, the FRC proposes to amend the provisions relating to the re-election of directors and is inviting views on two options - either the annual re-election of the chairman or of the whole board. Five FTSE 100 companies reappointed their entire board at their 2009 AGM but most FTSE companies do not currently follow this practice ;
- To ensure the board is well balanced and challenging, new principles are put forward on the leadership of the chairman, the rules, skills and independence of the non-executive directors and their level of time commitment;
- To enhance the board’s performance and awareness of its strengths and weaknesses, board evaluation reviews should be externally facilitated at least every three years and the chairman should hold regular development reviews with each director;
- To improve risk management, new principles are proposed on the board’s responsibility for and handling of risks; and
- Proposals have been made to emphasise that performance-related pay should be aligned to the long-term interests of the company and its policy on risk.
While the revised Combined Code will not apply at the time of the 2010 AGM season since, as mentioned above, it is proposed that it will only apply to accounting periods beginning on or after 29 June 2010, companies may wish to start complying with the updated version as soon as they are able to and, in any event, companies should be aware of the proposed changes so they are in a position to implement them when necessary.
Issues in relation to the report and accounts for 2010
The CA 2006 has already had an effect on the matters to be included in the annual report and accounts. For example, additional disclosures about share capital structures, the transferability of shares and control structures are amongst the disclosures that have been required to be included in directors’ reports for financial years beginning on or after 20 May 2006 and the expanded business review for listed companies for financial years ending on or after 1 October 2007 has required additional disclosures and the inclusion of more forward-looking information than was previously the case. Furthermore, the periodic financial reporting requirements in the FSA’s Disclosure and Transparency Rules (DTRs) largely came into effect in January 2007 to implement parts of the Transparency Directive. In preparing the annual report and accounts to be sent out with the 2010 notice of AGM, companies will need to comply with these existing requirements but also be aware of a number of new developments in relation to financial reporting that have emerged in 2009. These are considered briefly below.
New FSA rules on audit committee disclosures and corporate governance statement
DTR 7 was introduced into the DTRs by the FSA to implement in part the Statutory Audit Directive and the Company Reporting Directive. DTR 7 applies to companies whose financial year begins on or after 29 June 2008 so, for companies with 31 December year-ends, unless they voluntarily complied in their 2008 accounts, their 2009 accounts are likely to be the first set of accounts dealing with DTR 7. These disclosure requirements concern audit committees and corporate governance statements. As a result, companies will need to make certain disclosures about their audit committee and how it is composed (this statement can be included in the corporate governance statement referred to below) and include a corporate governance statement in the directors’ report or publish a separate corporate governance report with and in the same manner as the annual report, which, in either case, complies with the requirements of DTR 7.2.
The corporate governance statement must refer to the corporate governance code to which the company is subject or to which it has voluntarily decided to apply and/or refer to all relevant information about the corporate governance practices applied beyond the requirements under national law. Companies must also explain in the corporate governance statement the extent to which they depart from that corporate governance code and their reasons for doing so and the corporate governance statement must include a description of the main features of the company’s internal control and risk management systems in relation to the financial reporting process.
Although the FSA has included guidance in DTR 7 to the effect that compliance with particular provisions in the Combined Code will largely satisfy the requirements of DTR 7, DTR 7 does include certain additional disclosure requirements which must be met.
Dissemination of information in the annual report
In March 2009 the FSA published clarification on how it interprets certain of the requirements in the DTRs regarding the production and announcement of the annual report.
The DTRs require listed companies to publish regulated information in unedited full text. Although announcing the annual report is exempted from this companies must still announce information in the annual report in unedited full text if it is information of a type that would be required to be disseminated in a half-yearly financial report. The FSA has now clarified that it considers such information to include:
- Those financial statement line items required under the half-yearly report;
- A management report; and
- Responsibility statements.
Companies should announce this information at the same time as they make their annual report public and indicate the website on which the annual report is available.
The FSA also believes it is for companies and their advisers to decide whether the information to be released in unedited full text comprises statutory accounts under the CA 2006. If it does not, the FSA will not expect companies to breach the CA 2006 by publishing an audit report with non-statutory accounts through the inclusion of the audit report in the unedited full text. Companies must also judge how to incorporate a responsibility statement into the key information presented in unedited full text.
In addition, where a company opts to make a preliminary statement and includes in that preliminary statement in unedited full text information of a type that would require to be disseminated in a half-yearly report, the FSA accepts that that information does not need to be repeated when the company announces its annual report. However, the FSA does want companies to refer to the preliminary statement when they later release their annual report.
New reporting requirement for the directors’ remuneration report
There is a new content requirement for any directors’ remuneration report prepared in respect of a financial year beginning on or after 6 April 2009. The report must include a statement of how pay and employment conditions of employees of the company and of any group undertakings were taken into account when determining the directors’ remuneration for the relevant financial year.
Latest FRC guidance on going concern and liquidity risk
The Listing Rules require listed companies to include in their annual report a statement that the business is a going concern with supporting assumptions or qualifications as necessary. This statement must be prepared in accordance with the guidance on going concern published by the Financial Reporting Council (FRC).
The FRC first published guidance on going concern and liquidity risk in 1994. They then published an update on going concern and liquidity risk in November 2008 and consulted on revised guidance during 2009. This has resulted in final revised guidance which was published in October 2009. The revised guidance applies to accounting periods ending on or after 31 December 2009 so companies with year-ends of 31 December 2009 or later will need to prepare their going concern statement in accordance with the 2009 FRC guidance.
It is worth noting two differences between the 2009 FRC guidance and the earlier versions. Firstly,the 2009 FRC guidance covers all UK companies in one set of principles with specific provisions in the guidance differentiating between smaller companies and medium and larger companies. The earlier guidance is aimed at listed companies with separate guidance being directed at directors of smaller companies that qualify for the small companies regime in the CA 2006 and apply the Financial Reporting Standard for Smaller Entities. Secondly, it is made clear that the principles in the 2009 FRC guidance should now be applied when companies prepare their annual and half-yearly statement.
The 2009 FRC guidance sets out three principles relating to:
- The process directors should follow when assessing whether the company is a going concern when preparing annual and half-yearly financial statements;
- The review period covered by the assessment (the review should usually cover a period of at least 12 months from the date of approval of annual and half-yearly financial statements); and
- The disclosures to be made about liquidity risks, other uncertainties and key assumptions concerning going concern which are necessary for the annual and half-yearly financial statements to give a true and fair view.
In preparing the annual report and accounts prior to the 2010 AGM, companies may wish to refer to the examples in an appendix to the 2009 FRC guidance which illustrate how directors might explain their going concern conclusions taking account of current economic conditions in a way that readers of the annual report will understand. Boards should also consider the questions it is suggested boards may wish to discuss with management when determining the appropriateness of adopting the going concern basis of accounting which are set out in a further appendix.
With effect from 31 December 2009, the FSA has amended LR 9.8.6R(3) so that it now refers to the 2009 FRC guidance.
Review of narrative reporting by UK listed companies conducted by the ASB
In preparing the annual report for the 2010 AGM, companies should consider the practical steps recommended by the Account Standards Board (ASB) to improve narrative reporting published in a report in October 2009. The ASB reviewed the annual reports in 2008 and 2009 of 50 UK listed companies, focussing on how well the companies were reporting on the content areas set by the enhanced business review requirements and on how well the companies were communicating that content (particularly in light of a discussion paper, “Louder than Words”, published by the FRC in 2009), as well as identifying sources of immaterial clutter in narrative reporting.
The aim of the ASB report is to assist companies in their narrative reporting, since the ASB recognises that it takes a lot of time and effort to prepare a good quality annual report that communicates effectively all the important information.
The ASB found that most companies provided a good standard of information in their financial reviews, the description of objectives and strategies, and the provision of financial key performance indicators (KPIs). However, the reporting of principal risks, trends and factors, contractual and other arrangements and non-financial KPIs could all be improved.
In addition to the practical steps companies can take to improve their narrative reporting, the ASB also includes a list of “do’s and don’ts” for companies when drafting their annual report, and recommends that companies should:
- Provide context for principal risks and uncertainties so that it is clear whether they are increasing or decreasing, rather than including generic descriptions of risks;
- Use tables to link principal risks to related actions to manage the risks;
- When articulating strategy, ensure that the company describes what its goals are and how it plans to achieve them, rather than making bland statements such as “our plan is to grow” with no further explanation;
- Use KPIs to demonstrate progress against stated objectives and strategies rather than box-ticking by providing a KPI table that does not link to the rest of the narrative;
- Explain why corporate social responsibility is important to the business but not include information on employees, environment and social and community that is not important;
- Include non-financial KPIs to explain how the key drivers of the business are monitored;
- Provide an explanation of the business model (i.e. how the company makes its money) but without this being limited simply to a discussion of products and services; and
- Support the discussion of relevant industry trends with external evidence.
Possible changes to articles of association at the 2010 AGM
This section of the briefing lists changes which listed companies may wish to make to their articles of association at their 2010 AGM to address (1) changes to the CA 2006 from August 2009 pursuant to the Companies (Shareholders’ Rights) Regulations 2009 and (2) the final implementation of the CA 2006 in October 2009 (as well as other changes made by the CA 2006 since it was first enacted in 2006). It is recommended that these changes are made by way of adoption of new articles. For ease of reference, the changes recommended are divided into different subsections namely, Constitution, Share Capital, Shareholder Meetings, Directors and Miscellaneous. Some companies may already have made certain of these changes to their articles at previous AGMs.
As well as adopting new articles themselves, companies may, now that CA 2006 has been implemented in full, also wish to consider updating their subsidiary group company articles. We issued a briefing on this in September 2009 (Companies Act 2006 - private company articles of association: time to act?) which you can access via the Knowledge/Publications page of our website www.nortonrose.com
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