Companies on the Official List of the London Stock Exchange need to consider the latest regulatory changes and best practice guidance when planning their 2009 AGM.
Companies whose current financial year commenced before 6 April 2008 will need to hold their AGM within seven months of the end of their accounting reference period. All other public companies are now required to hold their AGM within six months after their accounting reference date (s. 336(1) Companies Act 2006).
Companies should ensure their AGM is held within the applicable deadline.
The Department of Business, Enterprise and Regulatory Reform (BERR) has issued guidance to listed companies who wish to preserve the ability to call general meetings on 14 days notice from 3 August 2009. It recommends that such companies should pass an appropriate resolution at their next AGM.
The UK will need to give effect to the Shareholder Rights Directive (the Directive) by 3 August 2009. Draft regulations have been drawn up to implement it. The Directive requires listed companies to call general meetings on at least 21 days notice. Following the implementation, listed companies will only be able to call general meetings (other than AGMs) on 14 days notice if they meet certain conditions, which are:
- A resolution must be passed to reduce the notice period.
Under the Directive and the proposed regulations, the resolution must be passed unanimously on a show of hands or by a two-thirds majority on a poll. BERR is currently consulting on whether this majority should be three-quarters so as to align better with the current regime for special resolutions. However, BERR recommends that a special resolution is passed at the next AGM. Such a resolution would need to be renewed annually.
- The company must offer "the facility for shareholders to vote by electronic means accessible to all members who hold shares that carry rights to vote at general meetings".
BERR has not yet issued guidance as to what is required to satisfy this requirement. However, it has confirmed that this second requirement does not need to have been addressed in order to pass an enabling resolution to satisfy the first requirement in anticipation of the new regulations.
Companies whose articles of association so permit, and which want to preserve the right to hold a general meeting on 14 days notice, should pass an appropriate special resolution to preserve this right at this year's AGM. For an example of such a resolution, see the pro forma AGM circular issued by the Company Law Committee of the City of London Law Society.
Limiting Auditors Liability
Public companies looking to enter into an auditors' liability limitation agreement (LLA) must obtain shareholder approval at a general meeting.
In June 2008 the Institutional Shareholders Committee (ISC) issued a statement (which is supported by the Association of British Insurers) setting out what institutional investors are likely to expect when asked to consider a LLA. The main points of this statement are:
- investors are generally willing to support agreements providing for "proportional liability or those providing for liability to be at the level that is fair and reasonable". Agreements with a fixed cap element are unlikely to be approved;
- directors are reminded that neither they, nor the shareholders, are compelled to enter into a LLA;
- investors will be unlikely to support agreements after the audit work for that year has been completed and discussions should be entered into as early as possible; and
- investors will be looking to see that audit quality will be preserved and enhanced following the implementation of a LLA.
Such a resolution would need to be renewed annually.
In January the GC100 published an issues note on the implications of LLAs and, in addition to the above, made the following key points:
- it is important that a company sees an LLA in the context of the existing contractual relationship which it has with the auditor;
- directors must understand the nature of the LLA and the fact that there is an increased risk that the company may not be able to recover all or any loss suffered as a consequence of entering into the agreement;
- in the case of complex groups consisting of large numbers of companies spread over many jurisdictions, it would be reasonable to expect that the audit firm should bear the costs of the necessary research to establish how liability limitation provisions might work.
Note that if a company has entered into a LLA it must disclose the principal terms of the LLA in a note to its accounts (along with the date of the resolution approving the LLA or its principal terms).
To date we have yet to see much evidence of LLAs being implemented.
Proxies and corporate representatives
S323 Companies Act 2006 permits a corporate shareholder to appoint one or more representatives but currently provides that if the representatives vote in different ways they will be treated as abstaining from the vote.
The Government is proposing to amend this provision to enable multiple corporate representatives appointed by a member to vote in different ways in respect of different blocks of shares. It is anticipated that regulations dealing with this issue will be issued on or before 3 August 2009, in line with the implementation of the Shareholder Rights Directive (of which this proposed amendment forms part).
In the meantime guidance issued by the Institute of Chartered Secretaries and Administrators (ISCA) suggests that corporate shareholders either appoint proxies or a single corporate representative until the anomaly has been resolved. If this cannot be done ISCA suggest an alternative procedure which is outlined in their guidance note ((no. 080122) at http://www.icsa.org.uk/knowledge).
Keep an eye out for the regulations on corporate representatives - these are likely to be implemented on or by 3 August 2009.
Association Of British Insurers (ABI) guidance: allotment of shares and pre-emption rights
On 31 December 2008 the ABI announced that it will now regard as routine requests to authorise the allotment of up to two-thirds of the company's existing share capital (previously the limit was one third), subject to certain conditions.
The conditions are:
- the additional authority can only be used for fully pre-emptive rights issues;
- the authorisation (for both the general and the additional authority) must only be valid for one year;
- where the additional authority is taken and:
- the number of shares actually issued is more that one third of the nominal share capital; and
- where the shares are issued at least in part by way of a fully pre-emptive rights issue, the proceeds exceed one third (or the relevant proportion in light of the prevailing market value of the company) of the pre-issue market capitalisation of the company.
ABI members will expect all board members who wish remain in office to stand for re-election at the next AGM following the decision to make the issue.
The ABI have published example shareholder authorisations for use by companies who wish to take advantage of this increased headroom and we can provide further guidance as required.
Companies should consider whether to widen the scope of allotment authorisation in line with the revised ABI guidelines.
Other ABI and NAPF Guidance
On 23 December 2008 the ABI published guidance on articles of association and related areas. On 6 February 2009, the National Association of Pensions Funds (NAPF) published revisions to its Corporate Governance Policy and Voting Guidelines.
Issues covered by these guidelines include:
- Borrowing powers
Companies should include borrowing limits in their articles. The ABI's guidance suggests a broad figure of twice capital and reserves, dependent on the company and its sector. The NAPF states that it is unacceptable to remove such borrowing limits and provides that any material increase (e.g. 30%) in such limits should be accompanied by a detailed explanation setting out the rationale for it and the company's policy on managing its debt.
- Directors' conflicts of interest
The ABI's guidance provides that companies should undertake to follow emerging best practice in line with the GC100's guidance paper and the board should report annually on the procedures put in place to deal with conflicts of interest and their operation.
- Corporate representatives
The ABI recommends that companies should follow the ISCA guidance on multiple proxies and corporate representatives at general meetings, which is discussed above.
- Political donations
The ABI recommends that companies seeking authority to make political donations as a precautionary measure (due to the broad interpretation of donation in the Companies Act 2006) should affirm to shareholders that it is not company policy to make political donations and they have no intention of using the authority for that purpose. In addition, note that on 1 October 2008, the Companies Act 2006 extended the scope of persons to whom political donations could be made to include independent election candidates; companies may wish to revisit the wording of any proposed resolution on political donations in consequence.
- Combined chairman/ceo
The NAPF's policy revisions provide that while investors may be willing to accept non-compliance with the separation of the role of ceo and chairman for a short time, where there is a specific statement of the reasons for combining such roles and a clear timetable for their separation, investors nevertheless regard the separation of such roles as important and may vote against the chairman where the role is combined for more than one year.
- Corporate Governance
The NAPF revised guidance provides that in the event of continued material non-compliance with the Principles of the Combined Code on Corporate Governance, the chairman should be held accountable by investors who may vote against such chairman's re-election.
The guidance issued by the ABI is available at: http://www.ivis.co.uk/PDF/3.5_Articles_of_Association.pdf. The NAPF's policy revisions can be accessed via http://www.napf.co.uk/Policy/Governance.cfm. Review compliance with these updated guidelines.
Future developments imposed by the Shareholder Rights Directive
The UK will need to give effect to the Shareholder Rights Directive (the Directive) by 3 August 2009. Draft regulations have been drawn up to implement it. The aim of the Directive is to improve corporate governance in traded companies.
Two of the issues which the Directive deals with are mentioned above (timing of general meetings and corporate representatives). Some other key points are:
- The removal from listed companies of the continued validity of the right of the chairman to have a casting vote if there is a hung shareholder vote at a general meeting. This right has only continued to exist for those listed companies who, prior to 1 October 2007, had such a provision in their articles (and if such a company had subsequently removed such a provision, then it has been entitled to reinstate it);
- clarification of the rules allowing proxies to vote in different ways;
- traded companies must allow members to ask questions at general meetings and answer them, subject to certain conditions;
- members must be able to participate in general meetings using electronic means, subject to certain conditions.
Companies should take the following action:
- Companies whose articles of association still contain a casting vote provision should consider a resolution to remove it at this year's AGM to align with the forthcoming change in the law.
- Once the Directive has been implemented companies should be ready to allow members to ask questions at general meetings, and to participate via electronic means, in each case subject to conditions.
Future Companies Act 2006 changes
Changes to be brought in by provisions of the Companies Act 2006 being implemented on 1 October 2009 include removal of the requirement to have an authorised share capital and changes to the memorandum of association.
Companies planning to hold their AGM after 1 October 2009 should consider incorporating these changes into their articles of association along with any changes required by the implementation of the Shareholder Rights Directive which will also have been brought into force by 3 August 2009. Companies planning their AGM before this time may prefer to defer making such changes until the 2010 AGM. Wragge & Co can, of course, provide appropriate guidance as required.
Pro forma circular published by city law firm working group
The Company Law Committee of the City of London Law Society has developed a pro forma circular to listed companies shareholders, including a notice of AGM, explaining matters relevant to 2009 AGMs.
The circular explains and seeks approval for:
- amendments to the articles of association of a listed company to reflect the provisions of the Companies Act 2006 coming into force in October 2009;
- a resolution to allow the company to call general meetings on not less than 14 clear days notice;
- an auditors' liability limitation agreement.
A copy of the circular can be found on the Company Law Committee section of The City of London Law Society website.