Consolidated corporate update
This half-yearly update briefing summarises the major developments in UK corporate law and regulation which have occurred over the last six months and which will be of relevance to UK listed companies.
'On the horizon' the more material developments we expect to see in the next 6-12 months:
TCFD reporting for all companies for financial years starting on or after April 2022 see item E1 below
Diversity reporting for listed companies for financial years starting on or after April 2022, but the FCA is encouraging early adoption see item C3 below
Companies House reform that will impact all companies due to the extensive nature of the proposals see item A1 below
Wide ranging audit and corporate governance reform which will impact many large and listed companies see item F1 below
Hill Review package of reforms a restructuring of the UK listing regime is in progress, the Secondary Capital Raising Review is due to report back, and draft legislation to give powers back to the FCA around prospectuses is expected this year see items C1, C2 and D1 below
JANUARY JUNE 2022
Table of contents
A. Company law B. Mergers and acquisitions C. Listing regime D. Capital markets E. Corporate reporting F. Corporate governance
Herbert Smith Freehills Corporate Notes Blog 'On the horizon' podcast
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A. Company law
1. Reform of Companies House and ban on corporate directors
In February 2022, the Government published a White Paper on the reform of Companies House.
Enhanced role and greater powers for Companies House
The reforms will result in the biggest change in the role of the Registrar since it was created in 1884, turning it from a largely passive recipient of information to a much more active gatekeeper. Under the plans, Companies House will:
Power to query information be given the power to query any filings (including company names) that appear erroneous, anomalous or suspicious, and which may impact the integrity of the register
or the wider business environment. It will have power to request further evidence and/or reject the filing;
Power to remove information from the register have power to remove material from the register more swiftly and in wider circumstances than is currently the case; and
Digital filing of information be able to require all information to be filed digitally. Company accounts will have to be tagged and filed in iXBRL.
New identity verification requirements will be introduced for all new and existing company directors (and equivalents for other entities), people with significant control (PSCs) and those filing information with Companies House. UK company formation agents that register with Companies House can conduct the checks. Directors and PSCs who do not verify their ID will commit a criminal offence and/or incur a civil penalty. Companies that have an unverified director will also commit an offence.
Ban on corporate directors
The ban on corporate directors (contained in the Small Business, Enterprise and Employment Act 2015) will also be implemented. The only exception is where:
all the directors of the corporate director are natural persons; and
prior to their appointment as directors of the corporate director, all the directors have had their identities verified.
Only UK registered corporate directors will be permitted companies will not be able to have overseasregistered corporate directors.
An easy reference snapshot of the proposals can be found here.
2. Register of overseas entities that own UK property and latest on sanctions
Register of overseas entities owning UK property
Under the Economic Crime (Transparency and Enforcement) Act 2022, which received Royal Assent on 15 March 2022, overseas entities that own land in the UK will have to be listed on a public register at Companies House. They will be required to:
take steps to identify their beneficial owner(s);
register information about their beneficial owner(s) at Companies House; and
update that information periodically (or confirm that the information on the register is up-to-date).
The requirement will only come into force once the necessary secondary legislation has been passed but, once in force, any overseas entity that becomes, or has since 1 January 1999 become, the registered owner of any UK land will have to go on the register. The definition of beneficial owner and the information required in relation to beneficial owners in the Act are substantially the same as under the UK Companies Act 2006 people with significant control regime.
If an overseas entity fails to register with Companies House, or to comply with the duty to update the information, in most cases this will affect the ability of the entity to sell or lease the land, or create a charge over it, as the other party would be unable to register the transaction with the Land Registry. The Act also sets out various sanctions that could be imposed on the entity, including fines for directors if they fail to comply.
An overview of the impact of the Act, and the transitional provisions in relation to land already owned by overseas entities, is available here.
The Act also makes significant changes to the sanctions regime in the UK which will have wider and longerterm ramifications beyond the conflict in Ukraine.
Of particular interest to listed companies are the amendments made by the Act to the Policing and Crime Act 2017. From 15 June 2022, the amendments introduced a strict civil liability regime in the UK for companies that breach financial sanctions legislation there is no longer a requirement to know about, or have reasonable cause to suspect, relevant matters (for example that a transaction involves a Designated Person).
The Treasury has also been given powers to publish reports in cases where a monetary penalty has not been imposed but it is satisfied that a person has breached a prohibition or failed to comply with an obligation imposed under financial sanctions legislation (on the balance of probabilities).
The implications of these changes will need to be considered in relation to any ordinary course corporate actions, e.g. which involve payments to shareholders or shareholders exercising voting or other rights.
B. Mergers and acquisitions
1. Miscellaneous changes to the Takeover Code published and new/updated guidance
On 13 June 2022 miscellaneous changes to the Takeover Code came into force and the Takeover Panel published Panel Practice Statement No. 33 on issues for a bidder to consider when buying target shares during an offer period.
The miscellaneous changes follow the publication of two response statements (RS 2021/1 and RS 2022/1) in May 2022 following consultations on various amendments to the Code. The rule changes include:
Announcement of minimum offer consideration when a potential offeror is publicly identified, it now has to disclose any minimum price, or particular form of consideration, that it is required to offer under Rules 6 or 11 of the Code, i.e. as a result of purchases already made (and to announce if, during an offer period, it triggers a requirement to offer a prescribed level or form of consideration).
Mandatory offers on a mandatory offer, the bidder and its concert parties are not permitted to acquire additional interests in target shares in the 14 days before the unconditional date (or the expiry of an acceptance condition invocation notice).
Chain principle a mandatory offer is required under the so-called chain principle where a person (A) acquires control of a company (B) and in doing so also acquires or consolidates control of a second company (C). In that situation, A must make an offer for Company C if the interest in shares which Company B has in Company C is "significant" in relation to Company B. In determining the significance of Company C to Company B: o the Panel will no longer look at whether securing control of Company C "might reasonably be considered to be a significant purpose" of A acquiring control of Company B; and
o Company C will be viewed as significant to Company B if it represents more than 30% of the value of Company B. This is a reduction from the current threshold of 50%.
Restrictions following the lapsing of an offer or a no intention to bid statement there are minor changes to the restrictions following an offer lapsing or a bidder announcing it will not make a firm offer and the circumstances in which a bidder will be allowed to make a new offer following such a statement.
Purchases of target shares by a bidder during an offer period the prohibition on a bidder and its concert parties acquiring target shares through an anonymous order book system, unless it can be established that the seller is not an exempt principal trader connected with the bidder, is being deleted. The Panel Executive has published new Panel Practice Statement No. 33 on a bidder buying target shares in an offer period covers topics such as using derivatives to acquire an interest in shares, the protection of retail shareholders and disclosure of transactions to the Panel Executive.
In February 2022, the Takeover Panel also published an updated version of Panel Practice Statement No. 20 which gives guidance on Rule 2 of the Code and when an announcement about a possible offer will be required. A blackline showing the changes to the Statement is available on the Takeover Panel's website.
2. Takeover Panel consultation on the presumptions of acting in concert
The Takeover Panel published a consultation paper on acting in concert under the Takeover Code (PCP 2022/2) in May 2022.
Acting in concert is a core concept under the Code. The Takeover Panel wants to be able to identify when parties are co-operating to obtain or consolidate control of a company, or to frustrate the successful outcome of a bid. Concert party members are, in effect, treated under the Code as a single person and so their interests are aggregated for the purposes of determining whether, for example, a requirement to make a mandatory offer under Rule 9 of the Code has been triggered. The definition of "acting in concert" lists categories of people whom the Panel will presume are acting in concert (although it is open to parties to rebut the presumption).
The Panel considers that there are a number of issues with the current definition, including that the 20% threshold for when companies are associated is too low and the presumption only looks at the equity share capital held, rather than the voting rights, whereas in practice control of voting rights may be more significant.
The Panel is therefore proposing to:
raise the threshold from 20% to 30%; and
make explicit that the presumption of acting in concert applies to interests both in shares carrying voting rights and in equity share capital (albeit the threshold will apply differently to each of them).
It is also proposing to make changes to how the acting in concert definition applies in other situations, including for fund managers, investment funds (such as limited partnerships) and investment trusts.
The consultation closes on 23 September 2022. The Panel then intends to publish a response statement setting out the final amendments to the Code in late 2022, with the rule changes coming into effect two months later.
3. Directors found liable for misleading statements and misrepresentations in annual and quarterly reports
See item C5 below.
C. Listing regime
1. The UK Listing Review
In March 2021, the Government published the outcome of the Review of the UK listing regime undertaken by Lord Hill. The Review, which was launched in November 2020, was set up to look at possible reforms to the UK listing regime that would attract the most innovative and successful firms and help companies access the finance they need to grow. We have published a short summary of the key proposals, which is available here. A number of the developments summarised below and under D.Capital Markets stem from the recommendations of the Review.
2. FCA consultation on restructuring the UK listing regime
The Financial Conduct Authority (FCA) published a discussion paper (DP22/2) in May 2022 seeking further views on the structure of the UK listing regime.
In response to one of the Hill Review recommendations around the status of the different UK market segments, the FCA sought views in a discussion chapter of CP21/21, published in July 2021, on four potential models for the UK listing regime going forward, possibly merging, or at least rebranding, the premium and standard segments, and amending the eligibility and continuing obligations accordingly. Following the feedback received, the FCA published DP22/2, a more detailed consultation on its plans.
The FCA is proposing that there be a single listing segment for equity shares in commercial companies, with companies in that segment then opting to comply either with a set of minimum standards only or with the minimum standards and some additional, supplementary standards. The FCA is also looking at changes to the class 1 transaction regime, the sponsor regime and the eligibility requirements for listing.
The FCA suggests that the current premium and standard segments be collapsed into a single segment, to be referred to as a "UK Listing". All listed companies would have to comply with a minimum standard of continuing obligations (labelled "mandatory"). These are the continuing obligations that currently apply to the standard segment but adding compliance with:
the Premium Listing Principles;
the sponsor regime;
the Listing Rule 11 regime on related party transactions; and
reporting against the UK Corporate Governance Code (on a comply or explain basis).
The FCA considers that these are set at such a level so as to ensure an appropriate baseline of transparency and investor protection. Companies could then also choose to opt in to "supplementary" continuing obligations, including the Listing Rule 10 significant transaction regime. A company would have to decide during its IPO process whether it will opt in to the supplementary regime. If it wants to move in or out of the regime at a later date, it will require shareholder approval.
The FCA recognises that moving all existing premium listed companies to either the mandatory or mandatory and supplementary continuing obligations is unlikely to be appropriate. The FCA may therefore require a shareholder vote of each existing premium listed company to determine whether compliance with the supplementary continuing obligations is appropriate for the company.
The FCA also recognises that providers of indices will need to set their criteria for inclusion following the changes outlined in the paper. It says that, whilst setting the criteria for inclusion is not within the FCA's control, it has taken into account how index providers may react to these changes and is in dialogue with them about the proposals.
The consultation closes on 26 July 2022 and the FCA expects to consult on the relevant rule changes in due course.
3. FCA publishes final rules on diversity-related disclosures by listed companies
In April 2022, the FCA published a policy statement (PS22/3) setting out rule changes that require premium and standard listed companies to make disclosures in relation to gender and ethnic diversity at board and executive management level for financial years starting on or after 1 April 2022.
Under the new Listing Rule requirements, premium and standard listed companies will have to include in their annual report a statement confirming whether they have met specified board diversity targets as at a reference date, chosen by the company, in the financial year. The targets are that:
at least 40% of the board are women;
at least one of the Chair, CEO, CFO or Senior Independent Director is a woman; and
at least one member of the board is from a minority ethnic background (that is one of the ethnic background categories recommended by the UK Office for National Statistics, other than a white ethnic group).
Companies not meeting these targets will be required to explain why they have not done so.
In addition, premium and standard listed companies will be required to include tabulated data in their annual report on the gender identity or sex, and the ethnic diversity, of members of their board and executive management. The final rules also expand the disclosures required in relation to a company's diversity policy under DTR 7.2.8AR. Going forward, the description will need to cover factors such as ethnicity, sexual orientation, disability and socio-economic background (as well as existing factors such as age and gender). Companies will also need to disclose how their diversity policy is applied to their key board committees.
Whilst the new disclosure requirements apply for financial years starting on or after 1 April 2022, the FCA is encouraging companies to include these disclosures in their annual report on a voluntary basis ahead of this date.
Our snapshot available here covers the new rules on diversity-related disclosures for listed companies.
4. Former CFO and finance director of AIM-listed company convicted for misstated results
Following criminal proceedings brought by the FCA, the former chief financial officer and the former finance director of Redcentric PLC were convicted in February 2022 of:
making false or misleading statements, contrary to section 89(1) of the Financial Services Act 2012; and
false accounting, contrary to section 17(1)(a) of the Theft Act 1968.
The proceedings were brought after Redcentric, an AIM-listed company, issued unaudited interim results in November 2015 and audited final year results in June 2016 which materially misstated its net debt position and overstated its true asset position by the same margin. The misstatement was discovered when the company's audit committee undertook an internal review of its subsequent interim results in November 2016. The FCA censured Redcentric itself for market abuse in connection with the issue in June 2020 but did not fine the company. This was in part because the company had put in place a scheme to compensate affected purchasers of its shares.
Ms Croft, who pleaded guilty in August 2021, was sentenced to three years' imprisonment and ordered to pay over 120,000. Mr Coleman was later sentenced to five and a half years' imprisonment and disqualified from being a director for ten years. Charges were also brought against the former chief executive officer of Redcentric but the jury cleared him on all counts.
5. Directors found liable for misleading statements and misrepresentations in annual and quarterly reports
Two former directors of Autonomy plc have been found liable for misleading statements and misrepresentations in Autonomy's annual and quarterly reports. This case (ACL Netherlands BV and others v Michael Richard Lynch and another  EWHC 1178 (Ch)) is the first on the liability of issuers in connection with published information under Schedule 10A of the Financial Services and Markets Act (FSMA) to go to trial.
Hewlett Packard acquired Autonomy, a software company, in 2012 for $11.1 billion. It subsequently claimed that the defendants, Mike Lynch (the former CEO of Autonomy) and Susovan Tareque Hussain (the former chief financial officer of Autonomy), dishonestly and deliberately mispresented Autonomy's financial performance and that as a result it was deceived into paying more for the company than it was worth. The claimants alleged that information was published to the market which was known by the defendants to be false. They are claiming US$5 billion in damages.
The fraud claims in respect of the acquisition were brought (by different entities within the HP group) under the following legal heads:
FSMA By far the largest of the claims was a claim under Schedule 10A of FSMA. Schedule 10A imposes liability on an issuer of securities for misleading statements or omissions in published information, but only if a person discharging managerial responsibilities at the issuer (a PDMR) knew that, or was reckless as to whether, the statement was untrue or misleading, or knew the omission to be a dishonest concealment of a material fact. In this case, HP alleged Autonomy was liable in respect of statements or omissions in its published information on which the investor, here the bid vehicle incorporated by HP to acquire Autonomy (Bidco), relied when making an investment decision.
Deceit / fraudulent misrepresentation These claims were based on the personal liability of the defendants (rather than of Autonomy). The representations relied upon include confirmations of the accuracy of statements in Autonomy's published information which were made in the course of negotiations of the takeover.
The specific allegations related to six areas within Autonomy's business and accounting. On all but one of those six areas, the judge concluded that the claimants had made out (to the extent that they were alleged in respect of that area) the FSMA claim and the common law / Misrepresentation Act claims.
This judgment is limited to the issue of liability. A separate judgment on the quantum of damages will be delivered at a later date. However, the judge has indicated that he anticipates that, although substantial, it will be considerably less than the $5 billion claimed.
It has been reported that Mr Lynch intends to seek permission to appeal.
D. Capital markets
1. Treasury response on the UK Prospectus Review
The Treasury published a response on the UK Prospectus Review in March 2022, setting out its policy approach to reforming the UK's prospectus regime, in the biggest shake up since 2005.
One of Lord Hill's other recommendations was an overhaul of the prospectus regime, in particular for further issuances by companies that are already listed. The Treasury published an initial consultation in July 2021 on fundamental reforms to the rules governing when a prospectus must be published, and what should be in a prospectus when an issuer is required to publish one. It has now published its policy approach, stating its intention to proceed with the reforms broadly as proposed.
The key features of the policy approach are:
IPOs and secondary issues Prospectuses will remain a key feature of an IPO in the UK. The FCA will be given discretion to determine when a prospectus is required but, for a listed issuer, a public offer to its existing shareholders would not of itself require a prospectus.
Prospectus contents The overarching requirement for a prospectus to contain `necessary information' will be retained, but the FCA will be given power to make rules on the detailed disclosure requirements, opening the door to a more proportionate disclosure regime, particularly for secondary issues (if a prospectus is required at all). The FCA will also have discretion to decide which types of prospectuses to review.
Liability Liability for forward-looking information in a prospectus will be aligned with liability for other listed company published information, so that liability is only incurred when those involved are reckless. In addition, it will no longer be a criminal offence to apply for admission to trading on a UK regulated market without an FCA-approved prospectus.
The next step is for the Government to make the necessary legislative changes to the Financial Services and Markets Act 2000 to create the framework for the new regime when parliamentary time allows. The FCA will also need to consult on new rules, given its expanded responsibilities.
For more information, see our detailed briefing on the reform proposals, which has been updated to reflect the Treasury's response.
2. FCA adapts ESMA Guidelines as FCA Guidance
In May 2022 the FCA published Primary Market Bulletin No. 40, launching its new technical note, Primary Market/TN 619.1, which adapts the Guidelines on disclosure requirements under the Prospectus Regulation published by the European Securities and Markets Authority (ESMA Guidelines) for use in the UK post-Brexit. The new technical note, effective from May 2022, includes the guidance on specialist issuers set out in the older CESR Prospectus Directive Recommendations (CESR Recommendations). The FCA has also incorporated some of ESMA's Q&As on the form and content of the prospectuses into its other guidance notes.
Prior to Brexit, the FCA participated in drawing up the ESMA Guidelines, designed to replace the CESR Recommendations. However, as the ESMA Guidelines did not become effective before the end of the Brexit transition period on 31 December 2020, they did not automatically become part of UK law on that date. Instead, the FCA directed issuers to continue to follow the previous ESMA Update to the CESR Recommendations for an interim period until it was able to incorporate the ESMA Guidelines into its own guidance. After a consultation in 2021, the FCA has now published technical note Primary Market/TN 619.1 to replace the previous EU guidance.
Primary Market/TN 619.1 replicates the ESMA Guidelines with two minor modifications. The FCA has also published two other new technical notes and made consequential changes to 11 existing procedural and
technical notes in its Knowledge Base as a result of publishing its own guidance on prospectuses to replace the previous EU guidance. Further details of the changes are described in Primary Market Bulletin No. 40.
E. Corporate reporting
1. Regulations requiring climate-related disclosures by listed and large companies
Regulations that require publicly quoted companies, large private companies and limited liability partnerships to include climate-related disclosures in their strategic reports came into force on 6 April 2022 and apply to accounting periods starting on or after that date.
The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/31) and the Limited Liability Partnerships (Climate-related Financial Disclosures) Regulations 2022 (SI 2022/46) require in-scope companies and LLPs to disclose climate-related financial information broadly in line with the Task Force on Climate-related Financial Disclosure (TCFD) Recommendations (which cover governance, strategy, risk management, and metrics and targets) and the TCFD Recommended Disclosures.
The Regulations apply to UK incorporated:
companies that are currently required to produce a non-financial information statement (i.e. companies with more than 500 employees which are listed, or are banking or insurance companies);
AIM companies with more than 500 employees; listed or banking LLPs with more than 500 employees; and companies and LLPs which have more than 500 employees and a turnover of more than 500
million. Our briefing on these requirements is available here.
Overlap with Listing Rule requirements
The requirements in the Regulations are in addition to the Listing Rule requirements, for both premium and standard listed companies, to report against the TCFD Recommendations and Recommended Disclosures on a "comply or explain" basis. For companies with a premium listing, the Listing Rule requirements apply for accounting periods beginning on or after 1 January 2021 and for standard listed companies, the requirements apply for accounting periods beginning on or after 1 January 2022. Our briefing on these requirements is available here.
Guidance on climate-related financial disclosures
The Department of Business, Energy and Industrial and Strategy (BEIS) published non-binding Guidance in February 2022 to help entities comply with the Regulations. The Financial Reporting Council (FRC) published an updated version of its Guidance on the Strategic Report in June 2022, which has been updated to reflect the Regulations.
Also in February 2022, the FCA published Technical Note (TN/802.1) which provides further guidance on the climate-related financial disclosures listed companies are required to make in their annual report and accounts.
2. Ethnicity pay gap reporting
In March 2022, the Government announced that it does not intend to adopt any mandatory ethnic pay gap reporting measures. It will instead be publishing guidance for those employers wishing to publish this data voluntarily.
In 2018 the Government published a consultation paper on ethnicity pay reporting. It had proposed that there should be a mandatory duty to report ethnicity pay gap data as little voluntary progress had been made after the 2017 McGregor-Smith Review on race in the workplace.
F. Corporate governance
1. Government response on audit and corporate governance reform
In May 2022, BEIS published the response to its March 2021 consultation on audit and corporate governance reform, Restoring trust in audit and corporate governance. Most of the proposals contained in the consultation will be implemented, a number in modified form following feedback received.
The reforms will see the creation of the Audit, Reporting and Governance Authority (ARGA) as the successor regulator to the FRC. The ARGA will have a broader remit and significantly expanded powers as compared to the FRC.
The majority of the changes will impact public interest entities (PIEs), a concept derived from the EU Audit Directive (as implemented into UK law). The reforms expand the current UK definition of PIEs to include all UK incorporated companies (and groups) with both 750 or more employees and an annual turnover of 750 million or more (the 750:750 threshold). AIM companies and LLPs which meet the 750:750 threshold will also be PIEs under the reforms.
The wide-ranging reforms will introduce a number of fundamental changes to the corporate governance and reporting landscape. These include:
Directors' duties The ARGA will be given the power to enforce breaches by directors of their duties in relation to audit and corporate reporting. All directors of PIEs (and in exceptional cases, directors of their subsidiaries) will be within the scope of this new enforcement power.
Internal controls The FRC will amend the UK Corporate Governance Code to require an explicit board statement on the effectiveness of the company's internal control systems and the basis for that statement. This was one of the three options the Government consulted on to strengthen the requirements in relation to internal control systems another of the options that is not being taken forward was a statutory reporting and assurance regime similar to the US Sarbanes Oxley regime.
Dividends PIEs meeting the 750:750 threshold will be required to explain their long-term approach to the return of value to shareholders and how that policy has been applied in the reporting year. Directors of these PIEs will also need to confirm the legality of any dividend proposed or paid in year. They will not need to provide a two year solvency statement prior to payment of any dividend, as had been proposed.
Reporting A number of changes are being introduced in relation to corporate reporting. These new reporting requirements will apply to PIEs meeting the 750:750 threshold. They include:
o replacing the existing UK Corporate Governance Code viability and going concern statements with a new statutory resilience statement, which will form part of the strategic report;
o requiring the publication every three years of an audit and assurance policy (AAP), and an annual report on the implementation of the AAP; and
o requiring directors to report on the steps taken to detect and protect against material fraud.
The Government has also confirmed a number of measures to reform the audit market and to amend the regulation of auditors.
The reforms will be implemented through primary and secondary legislation and amendments to the UK Corporate Governance Code. As a result, and in order to give companies time to prepare for the new regime, the reforms will be implemented over a number of years.
We have produced a more detailed briefing on the reforms which can be found here, and a one-page snapshot of the reforms available here.
2. FTSE Women Leaders Review 2022 Report published
The FTSE Women Leaders Review published its first report in February 2022 on improving gender balance in FTSE leadership. It highlighted progress across the FTSE 350 for women leaders and set out four new recommendations.
The Review is a new five-year independent review to monitor the representation of women among leaders of FTSE 350 companies. It was set up in November 2021 following the publication of the final report under the Hampton-Alexander Review. The Hampton-Alexander Review had set a target of having 33% of all board and senior leadership positions held by women by the end of 2020.
The 2022 Report highlighted that companies across the FTSE 350 continue to make progress in the drive for gender-diverse boards and leadership. Amongst FTSE 100 companies, 85 of them had met the 33% women on boards target and 44 had met the 33% women in leadership target (i.e. combined executive committee and direct reports to the executive committee). For FTSE 250 companies, 193 companies had met the board target and 65 have met the leadership target.
As the 33% targets had not been met by all relevant companies and across the FTSE 350 the number of women CEOs remained low, the Review has adopted new recommendations, including that 40% of FTSE 350 board and leadership positions should be held by women by the end of 2025. The FCA has introduced rule changes that require premium and standard listed companies to make disclosures in relation to gender and ethnic diversity at board and executive management level for financial years starting on or after 1 April 2022 see item C3 above.
3. Ethnic diversity on boards Parker Review update
In March 2022, the Parker Review published its 2022 Update Report on the progress made against the targets for ethnic diversity on UK boards. The 2022 Update marked the deadline for FTSE 100 companies to meet the target set by the Parker Review of having at least one director from an ethnic minority group by the end of 2021.
The key findings of the 2022 Update are that:
89% of FTSE 100 companies had met the target by the end of 2021, with a further five appointments announced ahead of the publication of the 2022 Update and three more companies actively engaged in the recruitment of a director from a minority ethnic group;
with another three years to go for FTSE 250 companies to meet the target, 55% of the FTSE 250 companies which responded to the voluntary census already have at least one director from a minority ethnic group; and
16% of all FTSE 100 board positions and 10% of all FTSE 250 board positions are currently held by minority ethnic directors.
As noted above, the FCA has introduced rule changes that require premium and standard listed companies to make disclosures in relation to gender and ethnic diversity at board and executive management level for financial years starting on or after 1 April 2022 see item C3 above.
4. Proxy advisor and investor group policy and voting guidelines
PLSA Stewardship Guide and Voting Guidelines 2022
In February 2022, the Pensions and Lifetime Savings Association (PLSA) issued its Stewardship Guide and Voting Guidelines for 2022. The 2022 Guidelines set out the PLSA's views on current best practice and its voting recommendations for AGMs in 2022. Three key areas covered by the 2022 Guidelines are:
Climate change The PLSA wants to see all listed companies refer to the TCFD framework and include better disclosure on the company's impact on the environment.
Executive remuneration Restraint should be shown on executive pay proposals in light of the increasing cost of living, and especially where companies benefitted from Government support during the pandemic.
Diversity The PLSA says it is seeing significant progress on diversity on boards and welcomes the direction of travel. It calls for a continued focus on ensuring diversity, and says that investors should vote against re-election of the Chair and/or Chair of the Nominations Committee of FTSE 100 companies that are consistently failing to move closer to the Parker Review target of `no white boards' by 2021.
Investment Association's updated statement on shareholder priorities
The Investment Association (IA) published a document discussing its listed company shareholder priorities for 2022 in March 2022.
First published in January 2020, the IA Shareholder Priorities document outlines investors' expectations for the coming year and sets out how the Institutional Voting Information Service (IVIS), which is part of the IA,
will analyse these issues for companies with year-ends on or after 31 December 2021 (including its "colourtop" approach).
Three key areas covered by the 2022 Guidelines are:
Climate change The IA expects companies to be taking action now on climate change and encourages companies to publish net-zero transition plans before it becomes mandatory to do so. IVIS will amber-top all companies that do not make disclosures against all four pillars of the TCFD Recommendations.
Diversity The IA supports the proposals contained in the FCA's consultation on additional diversity targets (see item C3 above) and reporting and the recommendations recently announced by the FTSE Women Leaders Review (see item F2 above). IVIS will red-top FTSE 350 companies where women represent 33% or less of the board, or 28% or less of the executive committee and their direct reports. It will also red-top FTSE 100 companies that do not have at least one director from a minority ethnic group on the board, in line with the Parker Review recommendation.
Stakeholder engagement The IA expects disclosures on stakeholder engagement to include the impact of increases to the cost of living and inflationary pressures on consumers and suppliers, as well as the impact of the Covid-19 pandemic.
PIRC Voting Guidelines 2022 published
In April 2022, PIRC (the consultancy that provides corporate governance advisory services to certain institutional investors) published the 2022 edition of its Shareholder Voting Guidelines. The guidelines set out PIRC's views on good corporate governance for listed companies. They cover a wide range of issues, including board composition, director remuneration and corporate reporting.
The 2022 edition of the guidelines include new details on PIRC's expectations in relation to companies' management of the transition to net zero and the resilience of business plans to climate change. In particular, PIRC expects climate governance to be integrated into a company's risk management. On diversity, the guidelines set out that PIRC will recommend voting against the re-election of the nomination committee chair of any FTSE 100 company that fails to meet the recommendations of the Parker Review on ethnic diversity. For FTSE 250 companies which fail to disclose their progress on the Parker Review recommendations, PIRC will recommend abstaining on the vote to re-elect the nomination committee chair.
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Herbert Smith Freehills LLP 2022