Corporate Governance

FRC consultation on Code, Guidance on Board Effectiveness and Stewardship Code

The Financial Reporting Council (FRC) has published for consultation proposed revisions to the UK Corporate Governance Code (Code) and Guidance on Board Effectiveness. The paper also includes an initial high-level consultation on the UK Stewardship Code. For a full summary of the proposed changes, please read our Governance & Compliance update.

Responses should be sent to the FRC by 28 February 2018. The FRC aims to publish a final version of the Code by early summer 2018, to apply to accounting periods beginning on or after 1 January 2019. The FRC also intends to publish a detailed consultation on specific changes to the Stewardship Code once the review of the Governance Code has been completed.

Investment Association launches public register of shareholder dissent

The Investment Association has launched its public register of listed companies which have encountered significant shareholder rebellions. The register includes FTSE All-Share companies which have received votes of 20% or more against any resolution or withdrew a resolution prior to their AGM in 2017. By publishing this information for the first time in one central location, the register aims to increase transparency, accountability and scrutiny of listed companies by shareholders, media and the wider public.

A key purpose of the public register is to focus attention on how companies respond to the concerns of their investors. Almost one third of companies named on the register have provided a public response explaining how they are addressing their shareholders’ concerns.

The data reveals that:

  • 22% of companies listed on the FTSE All Share feature on the public register.
  • 38% of resolutions listed on the register are due to significant votes against pay-related resolutions.
  • The second most frequent resolutions featured are the re-election of company directors with 32% of resolutions listed on the register.

The register, which can be accessed here, can be searched by resolution type and links to any statement made by a company in response to a significant vote against. As part of the proposals published by the FRC in relation to the reform of the UK Corporate Governance Code (see above), a company will, if the FRC's proposals are adopted, not only be required to explain when announcing voting results what actions it intends to take to understand the reasons behind any vote of more than 20 per cent. against a resolution but also publish, no later than six months after the vote, an update on actions taken before a final summary is provided in its next Annual Report or in the explanatory notes to the resolutions at its next AGM. 

Challenges to Effective Board Reporting

ICSA: The Governance Institute and Board Intelligence have published a report on effective board reporting based on a survey of 80 governance professionals drawn from a range of sectors and representing companies of all sizes. The aim of the survey was to understand the main challenges to effective board reporting in order to identify actions that might be taken to address those challenges. Perhaps unsurprisingly the survey found that board packs are too long, very time-consuming to prepare and that the process for doing so could be improved. Getting the focus and balance of the board pack right is also a challenge.

As next steps, ICSA and Board Intelligence intend to produce:

  • A cost calculator which will enable organisations to work out how much time and money they currently spend on board and committee reports.
  • A self-assessment tool enabling assessment of the length and balance of board packs to be undertaken and to identify ways in which they may be made more user friendly and better focused.
  • Guidance to assist those charged with the production of board packs to address the challenges.

AGMs

Investment Association position statement on virtual-only AGMs

The Investment Association has stated that its members will not support amendments to articles of association that would allow "virtual-only" AGMs.  Rather, it would expect any proposed amendment to confirm the holding of a physical meeting alongside any electronic meeting element. This position broadly aligns with the position published by the ISS in its 2018 Proxy Voting Guidelines.

The term "virtual-only" refers to meetings that are held without a physical place of the meeting. They are distinct from hybrid meetings, where there is both a physical place of the meeting and electronic access.

IVIS will red-top any company that will have the ability to hold virtual-only AGMs after amending its articles.

Equity Capital Markets

Consultation on the AIM Rules for Companies

The London Stock Exchange (LSE) has published feedback on its discussion paper on the AIM Rules for Companies and Nominated Advisers (Nomads) together with a consultation on the Rules themselves taking forward some, but not all, of its original proposals.

One of the most significant proposals being consulted on is the requirement for an AIM company to state which recognised corporate governance code the board has decided to apply within its AIM Rule 26 website disclosures. This would end the ability of an AIM company not to follow any code of governance. If taken forward, the change would come into effect on 30 June 2018 in order to allow companies time to prepare.

The LSE does not propose to take forward proposals to impose:

  • prescriptive criteria regarding a minimum level of shares held in public hands (or "free float");
  • a minimum fundraising requirement on admission to trading; and
  • a regime of automatic fines for breaches of the AIM rulebooks, although the LSE does intend to review its Disciplinary Handbook in due course.

Responses to the consultation must be submitted no later than 28 January 2018.

AIM Disciplinary Notice: disciplinary action summary for breach of AIM Rules

The LSE has published a summary of enforcement matters brought by the LSE that were concluded as private censures and fines during 2017 by way of guidance to AIM companies and Nomads. The summary highlights that:

  • when considering disclosure, AIM companies need to ensure that information included in any notification provides a complete picture of the matters being disclosed. Thus, while a company may conclude that information is not material in and of itself, it should also give consideration as to whether the information was necessary to ensure that a reader of the company's notifications would gain a full understanding of any transaction. In particular, AIM companies should also take care to ensure that related party information in transactions is properly disclosed; and
  • Nomads owe certain obligations solely to the LSE, and the proper performance of these obligations is important to maintain the integrity and reputation of AIM.

FCA imposes first fine on an AIM company for failure to disclose inside information under MAR

The FCA has published a final notice in which it imposed a £70,000 fine on Tejoori Limited (Tejoori), an AIM company, for failing to inform the public as soon as possible of inside information, in breach of Article 17(1) of the Market Abuse Regulation (MAR). This is the first time the FCA has imposed a fine on an AIM company for late disclosure following the introduction of MAR on 3 July 2016.

In early 2016, Tejoori had two material investments, one of which was a shareholding in BEKON Holding AG (BEKON) which Tejoori valued in its financial statements at USD 3.35 million. On 12 July 2016, Tejoori was notified by BEKON about a compulsory acquisition of its shares by Eggersmann Gruppe GmbH & Co. KG (Eggersmann). The acquisition required Tejoori to sign a share purchase agreement and to sell its BEKON shares to Eggersmann for no initial consideration and with only a possibility of receiving deferred consideration that was materially lower than the value of Tejoori’s investment in BEKON. This information constituted inside information and, under MAR, needed to be disclosed as soon as possible.

Tejoori’s BEKON shares were ultimately transferred to Eggersmann on 10 August 2016 with both BEKON and Eggersmann issuing press releases announcing the acquisition the following day. The press releases made no reference to Tejoori so the market was unaware of the terms, including the consideration paid to Tejoori by Eggersmann.

Following a two-day, 38% price rise in Tejoori's shares based on bulletin board speculation about the proceeds Tejoori would receive from the BEKON sale, the LSE contacted Tejoori's Nomad. Tejoori denied having inside information and said that it had not sold its BEKON shares, based on the board's mistaken understanding of the mechanics of the agreement it had signed. The Nomad only learned the correct position when Tejoori's German legal adviser confirmed the sale. On 24 August 2016, Tejoori announced the sale of its BEKON shares for the first time and that it was unable, at that time, to assess whether it would receive any future consideration. Tejoori's share price closed 13% down after that announcement.

The FCA found that Tejoori had failed to inform the public as soon as possible after 12 July 2016 of inside information which directly concerned it. At that time it was in possession of information of a precise nature for the purposes of MAR which, had it been made public, would have been likely to have had a significant impact on the price of Tejoori's shares.

Takeovers

Takeover Code: Statements of intention, asset sales and other matters

The Code Committee of the Takeover Panel has published its response statement (RS 2017/2), following its consultation on intention statements and has also published its response statement (RS 2017/1) following its consultation dealing with asset sales and other matters. The resultant changes to the Code came into force on 8 January 2018. More detail can be found in Corporate Finance News.  

Narrative Financial Reporting

FRC to publish guidance on non-financial reporting legislation

The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016, SI 2016/1245, implementing the EU legislation as regards disclosure of non-financial and diversity information by certain large undertakings and groups, became effective for financial years starting on or after 1 January 2017. The FRC is currently consulting on revisions to its guidance on strategic reporting but has stated that this will not be finalised for some time. In the meantime, it has published a factsheet and, most recently, frequently asked questions to assist companies with implementation. For further information, please see our Governance and Compliance update.

FRC report on the determination of materiality in audit

The FRC has also published a report dealing with auditors' application of materiality thresholds in the financial statements of public interest entities (which includes companies with securities traded on the main market of the LSE).

The report also sets out the results of discussions with various audit committees and their chairs and, in part, is designed to assist them in understanding the impact of materiality assessments on the audit process and in their challenge of auditors. Key recommendations for audit committees are set out in Appendix 1 to the report.

Money Laundering

HMRC guidance - Anti-money laundering supervision: Enforcement measures

HMRC has produced detailed guidance to enable businesses to have written risk assessments, policies, controls and procedures in place to prevent others using them to launder money or finance terrorism.  The guidance sets out how HMRC will use its enforcement powers under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and states that it will use those powers in the same way under POCA and Schedule 7 of the Counter Terrorism Act 2008.

M&A Trends

Office for National Statistics M&A Report for Q3

The Office for National Statistics has published its statistical bulletin for M&A involving UK companies for Q3 (July – September 2017). Highlights include:

  • A sizeable increase in the value of successful cross-border and domestic M&A involving UK companies.
  • Outward M&A (UK companies acquiring foreign companies abroad) was the main driver for the overall total increased value of M&A activity during Q3.
  • There were 52 completed inward M&A transactions (foreign companies acquiring UK companies) in Q3 worth £16.8 billion (Q2: £3.9 billion).
  • There were 58 successful domestic acquisitions (UK companies acquiring other UK companies) during Q3 worth £5.6 billion, the highest quarterly value since Q2 2016 (when there were 130 acquisitions valued at £6.8 billion).

Articles to read

ECJ ruling on holiday pay

The ECJ has ruled that workers who are denied the right to take paid annual leave are entitled to bring claims in respect of accrued but untaken leave. There is no requirement on them to take the leave on an unpaid basis in order to bring a claim.