This briefing sets out issues which AIM 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).
Amendments made to the CA 2006 in August 2009 by way of implementation in the UK of the Shareholder Rights Directive will have an impact on the conduct of 2010 AGMs as there have been changes to the voting rights of proxies and the process of appointment of corporate representatives since August 2009. Resolutions proposed at the 2010 AGM will also need to reflect the relevant CA 2006 references, some of which became effective on 1 October 2009, and companies may want to take account of the latest guidelines issued by the various institutional investor bodies during 2009. 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.
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, those companies that are in the habit of adhering to the guidance issued from time to time by the institutional investor bodies 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.
A number of AIM 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.
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 the new CA 2006 provisions and some companies may wish to take account of 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 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.
Approval of auditor liability limitation agreement
Although auditors have been able to limit their liability by agreement with shareholders since April 2008, it would appear that no AIM 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 to 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.
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 AGMs. Many AIM companies are likely to continue to follow the corporate governance guidelines for AIM companies published by the Quoted Companies Alliance (QCA) in February 2007 (QCA Guidelines). These are considered briefly below together with the QCA’s more recent guidelines on the role of the audit committee in small quoted companies.
While in this briefing it is not possible to consider all of the other guidance and views issued, some AIM companies are also likely to want to ensure that the resolutions being proposed at their 2010 AGM 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, have been discussed above. Other developments during 2009 that should be considered prior to the 2010 AGM are discussed below.
The QCA Guidelines are a simple set of guidelines for corporate governance for AIM companies which the QCA believes all AIM companies should be able to follow.
The QCA Guidelines are broadly as follows:
- There should be a formal schedule of matters reserved for board approval. A specimen list is included in the appendices to the QCA Guidelines and includes matters relating to management structure and appointments, strategic/policy considerations, transactions and finance;
- Information appropriate to enable the board to discharge its duties should be provided to the board in a timely manner;
- Internal controls should be reviewed at least annually by the board. The review should cover all material controls including financial, operational and compliance controls and risk management systems;
- The roles of chairman and chief executive should not be exercised by the same individual. If they are, there should be a clear explanation of the board procedures which provide protection against the risk of concentration of power within the company;
- A company should have at least two independent non-executive directors (one of whom may be the chairman) and the board should not be dominated by one person or group of people. A list of factors which might impair a director’s independence is included in the appendices to the QCA Guidelines;
- All directors should be submitted to re-election at regular intervals. Re-election should be subject to continued satisfactory performance;
- Audit, remuneration and nomination committees should be established and the audit and remuneration committee should each have at least two members, who should all be independent non-executive directors. The main roles and responsibilities of the audit committee are set out in the appendices to the QCA Guidelines; and
- There should be dialogue with shareholders to establish mutual understanding of the company's objectives.
Although the QCA Guidelines do not contain any provisions as to the duties of shareholders as the QCA believes that shareholders' duties and obligations stated in the Combined Code should apply to all AIM companies, there is a section on reporting on corporate governance matters which includes recommendations such as:
- An AIM company should publish an annual corporate governance statement which describes how it achieves good governance. The QCA recommends that this report is published on the company's website or, alternatively, in its annual report and accounts;
- An AIM company should either describe in its corporate governance statement how each of the QCA Guidelines are put into practice or, if the QCA Guidelines are not complied with, explain how the features of good governance are being achieved. In addition, the company should describe any additional corporate governance procedures and standards which it applies beyond the basic level of the QCA Guidelines;
- An AIM company's annual report should also include certain basic disclosures such as a statement of how the board operates and information about the directors and board committees; and
- The terms and conditions of appointment of non-executive directors and the terms of reference of the audit, remuneration and nomination committees should be available for inspection on the company's website or by shareholders on request.
QCA’s audit committee guide
In February 2009, the QCA published a guide for the audit committees of smaller quoted companies. The QCA points out that the audit committee is one of the key checks and balances within corporate governance structures and is seen as the ‘conscience’ of the company. The guide provides an overview of the responsibilities that fall to audit committees and their chairmen, and also provides guidance on the content of audit committee reports.
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 for AIM companies in March 2007 and a version for Official List Companies in November 2007. The AIM Voting Guidelines are designed to provide guidance to AIM companies and shareholders on the issues which the NAPF believes are of key importance and where practice may reasonably differ from the Combined Code.
The guidelines for Official List companies have been updated three times, firstly in 2008, then in February 2009, and now in January 2010. 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, inter alia, 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.
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. 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 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.
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 Accounting 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.
Although the ASB report was concerned with Official List rather than AIM companies and the narrative reporting requirements are less onerous for AIM companies, much of the ASB report will be of relevance to AIM companies.
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 AIM 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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