Welcome to the latest edition of Corporate Update, our fortnightly bulletin offering a five-minute read of the latest developments which we consider relevant to corporate counsel. Please get in touch with your usual contact if you want to explore any of the topics covered in more detail. If you would like to subscribe to this bulletin as a regular email, please click here.

In this issue


FRC launches consultation on changes to the UK Corporate Governance Code

On 24 May 2023, the Financial Reporting Council (FRC) published a Consultation Paper on proposed changes to the UK Corporate Governance Code in response to the government’s invitation to the FRC to strengthen the Corporate Governance Code following its Consultation on Restoring Trust in Audit and Corporate Governance. A draft revised Code is also included as Appendix A.

The consultation is split into five sections, with the most significant changes found in Section 4 (Audit, risk and internal control) on strengthening board accountability and internal controls. Some key proposed changes include:

  • Board leadership and purpose: Boards should assess and report how social and environmental matters have been accounted for (including climate ambitions and transition planning). A new Principle D has been added encouraging a focus on outcomes-based reporting (as opposed to processes) when reporting on governance practices.
  • Division of responsibilities: To address “overboarding” concerns, there is a new requirement to list all significant director appointments and a description of how each director has sufficient time to perform their duties in light of other appointments. Significant external commitments should be made an explicit part of board performance reviews.
  • Composition, succession and evaluation: The revisions to this section are designed to support new Listing Rule requirements on diversity and inclusion and focus on improving transparency regarding diversity and inclusion within succession planning and board performance reviews.
  • Audit, risk and internal control: A number of additions are made to the role of the audit committee, including developing, implementing and maintaining the Audit and Assurance Policy. Audit committees are expected to follow the new Audit Committee Minimum Standard (see below) and report on both the effectiveness of the company’s risk management and internal control systems, as well as sustainability matters.
  • Remuneration: Directors’ contracts should include malus and clawback provisions (which should be described in the annual report on remuneration) and there are provisions emphasizing greater alignment between remuneration outcomes and company performance, purpose and objectives (including ESG objectives).

Comments are requested by 13 September 2023, and the changes are expected to come into effect from 1 January 2025. The revised Code will be supported by updated FRC Guidance, including revisions of: (i) Guidance on Audit Committees; (ii) Guidance on Board Effectiveness; and (iii) Guidance on Risk Management.

FRC publishes its Minimum Standard for audit committees

The FRC has published its updated Minimum Standard: Audit Committees and the External Audit following its November 2022 consultation with stakeholders on the proposed draft. Responses from stakeholders were broadly supportive of the measures and the final standards are mainly the same as the draft standard.

The Standard applies to audit committees of FTSE 350 companies which are encouraged to apply the Standard on a voluntary basis as soon as possible. The Standard would become mandatory, assuming legislation to establish the Audit, Reporting and Governance Authority is passed, and subject to appropriate powers being included in that legislation.

FCA publishes engagement papers in relation to the new prospectus regime

To take forward the government’s proposed reform of the UK prospectus regime, part of which involves proposals to give the Financial Conduct Authority (FCA) powers to specify the circumstances when a prospectus is required if securities are to be admitted to trading on a UK regulated market, the FCA has published four engagement papers regarding the new regime for public offers and admissions to trading on UK public markets (with further to follow).

The engagement papers published so far cover the following four areas: (i) admission to trading on a regulated market; (ii) further issuances of equity on regulated markets; (iii) protected forward-looking statements; and (iv) non-equity securities. Stakeholders are invited to submit their responses before 29 September 2023. The FCA will then build on this engagement to develop specific rule proposals, which it plans on consulting on next year.

Government launches a review of non-financial reporting

On 24 May 2023, the Department for Business and Trade (DBT), working with the FRC, published a call for evidence as part of the first stage of its review on the regulation of non-financial reporting. The questions are available on the DBT’s website here.

This review builds on the Policy Paper: Smarter regulation to grow the economy, and aims to reduce the burden of non-financial reporting for UK companies following the UK’s departure from the EU. The call for evidence focuses primarily on certain requirements relating to non-financial reporting in annual reports and the preparation and filing of accounts with Companies House for companies, as well as the equivalent requirements for Limited Liability Partnerships. The call for evidence will close on 16 August 2023.

Call for evidence on the Digital Markets, Competition and Consumer Bill

The House of Lords Communications and Digital Committee has published a call for evidence as part of its review of the Digital Markets, Competition and Consumer Bill. The Bill provides for the regulation of competition in digital markets, and includes a range of reforms to UK competition and consumer law. Questions include whether the Bill strikes the right balance between regulating digital markets and encouraging innovation, its main strengths and weaknesses, and how does the UK’s approach compare to the EU and the US. Written contributions are invited by 12 June 2023.


ClientEarth v Shell plc and others [2023] EWHC 1137 (Ch)

High Court refuses permission to continue a derivative claim against the directors of Shell plc

In this case, the Court refused ClientEarth (a non-profit environmental law charity and a minority shareholder in Shell) permission to continue a derivative claim on behalf of Shell plc against its directors. ClientEarth had alleged that the directors were in breach of their duty under sections 172 and 174 of the Companies Act 2006 by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement and a “net zero” 2050 target. The Court held that ClientEarth had failed to establish a ‘prima facie’ case for a number of reasons including the following:

  • The Court could place very little weight on the evidence submitted by ClientEarth, which largely consisted of opinions of a senior lawyer employed by ClientEarth who could not give expert evidence on which the court could properly rely.
  • There is no universally accepted methodology as to the means by which Shell must achieve the net zero target, as the law respects the autonomy of Shell’s board to make decisions on commercial issues and how best to achieve results which are in the best interests of Shell’s members as a whole.
  • The evidence supplied by ClientEarth did not sufficiently engage with the board’s balancing and weighing of the many factors which should go into their consideration of how to deal with climate risk, amongst the other risks to which Shell’s business will inevitably be exposed.
  • It could be inferred from the fact that ClientEarth holds only 27 shares in Shell, but is proposing that it should be entitled to seek relief on behalf of Shell in a large, complex and important claim that its real interest is not in how best to promote the success of Shell for the benefit of its members as a whole.

In addition, the Court rejected ClientEarth’s imposition of additional, ‘incidental’ duties for directors, related to climate risk, on the basis that these incidental duties were too narrow and specific, and therefore not reconcilable with the true nature of the duty to exercise reasonable care and skill, which provides for the board to exercise discretion when making decisions for the best interests of Shell. ClientEarth has since been granted an oral hearing to ask the Court to reconsider the decision.