HM Treasury: UK Listings Review – Consultation
On November 19, 2020 the UK Listings Review, chaired by Lord Hill, was launched by the Chancellor as part of a plan to strengthen the UK’s position as a leading global financial centre. The Review will gather evidence from market participants and make recommendations to the Government and UK regulators on how to encourage more high-quality UK equity listings and public offers.
The Review has been asked to consider, in particular:
- Whether current rules around free floats, dual class share structures, and track record requirements strike the correct balance between corporate governance and market integrity on the one hand, and the requirements of companies seeking to list on the other.
- Whether the requirements for when a prospectus has to be produced (which are currently harmonised at EU-level), are appropriate for the UK market – including whether companies that are already listed should be able to more easily raise new capital, and whether other triggers and documentation required for offers to the public and admission to trading venues are optimal for the UK market.
- Whether there are specific non-regulatory, non-legislative actions which the Government could take to boost the UK as a destination for IPOs and optimise the capital raising process for large and small companies on UK markets.
- Other issues, including whether there is a case to introduce differentiated entry requirements for the UK’s premium listing segment in respect of companies which already have a primary equity listing on markets in other countries that are assessed to have high standards of corporate governance.
The deadline for responses to the consultation is January 5, 2021.
The terms of reference for the Review are here and the Call for Evidence is here.
(HM Treasury, New Review launched to attract high-quality innovative companies to list in UK, 19.11.2020)
Pre-Emption Group: Additional flexibility on non-pre-emptive issuances to end on 30 November 2020
On November 20, 2020 the Pre-Emption Group (PEG) announced that its previous recommendations, first made in April and then extended in September 2020, for investors to apply additional flexibility in considering share issues on a non-pre-emptive basis will end on November 30, 2020. From December 1, 2020 full pre-emption will be required except in the specific circumstances outlined in PEG’s Statement of Principles and non-pre-emptive issuances should be undertaken only when effective consultation has taken place.
(Pre-Emption Group, Additional flexibility on non-pre-emptive issuances to end on 30 November 2020, 20.11.2020)
FCA: Warning Notice Statement 20/2 – Carillion plc
Carillion plc (in liquidation) and certain of its previous executive directors in September 2020. These concern action the FCA proposes to take in respect of conduct involving breaches of the Market Abuse Regulation (MAR), the Listing Rules and the Listing Principles. Final decisions have not yet been made by the FCA as the parties can make representations to the Regulatory Decisions Committee, with a further reference to the Upper Tribunal being possible. The statement notes that public censure rather than a financial penalty is proposed for Carillion.
From July 1, 2016 to July 10, 2017, the FCA believes that Carillion breached the following, and that the relevant executive directors (who were executive directors at material times in that period) were knowingly concerned in these breaches by Carillion:
- Article 15 of MAR (prohibition of market manipulation) by disseminating information that gave false or misleading signals as to the value of its shares in circumstances where it ought to have known that the information was false or misleading.
- Listing Rule 1.3.3R (misleading information must not be published) by failing to take reasonable care to ensure that its announcements were not misleading, false or deceptive and did not omit anything likely to affect the import of the information.
- Listing Principle 1 (procedures, systems and controls) by failing to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations under the Listing Rules.
- Premium Listing Principle 2 (acting with integrity) by failing to act with integrity towards its holders and potential holders of its premium listed shares.
The FCA also considers that Carillion and the executive directors acted recklessly in relation to these matters.
(FCA, Warning Notice Statement 20/2 – Carillion plc, 13.11.2020)
Investment Association: Principles of Remuneration 2021
On November 16, 2020 the Investment Association published their latest Principles of Remuneration, together with a letter to the chairs of listed companies’ remuneration committees setting out key changes and areas of focus for the 2021 AGM season. The Investment Association has also published updated guidance on the expectations of its members during the COVID-19 pandemic.
Key changes to the 2021 Principles
These include the following:
- Use of non-financial performance measures – The Principles have been updated to be clearer on shareholder expectations on the range of non-financial performance metrics (strategic, personal and environmental, social and governance) in variable remuneration.
- Post-employment shareholding policies – Shareholders are keen to understand the enforcement mechanisms which the remuneration committee has in place to ensure that post-employment shareholding policies are enforced once a director has left the company.
- Deferral of bonuses – the Principles have been updated to reflect member expectations that a proportion of the entire bonus should be deferred when the bonus opportunity is greater than 100 per cent of salary.
Approach to pensions in 2021
Investment Association members continue to consider that pension contributions for executive directors should be aligned with those available to the majority of the company’s workforce. Where the pension contributions for incumbent directors are above the majority of the workforce rate, members expect remuneration committees to set out a credible action plan to align the pension contributions of incumbent directors to the majority of the workforce rate by the end of 2022.
The approach that will be taken to implement this guidance in 2021 is as follows:
- Pension contributions for new directors –The Investment Association comments that it is now standard market practice for any new executive director or any director changing position to be appointed on a pension contribution which is aligned to the majority of the workforce rate. In 2021, if any new remuneration policy does not explicitly state that any new executive director appointed will have their pension contribution set in line with the majority of the workforce, IVIS, the Investment Association’s Institutional Voting Information Service, will Red Top (indicating strong concerns) that remuneration policy. If there is any new executive director or director changing role whose pension contribution is not aligned with the level of the majority of the workforce, IVIS will Red Top the remuneration report.
- Pension contributions for incumbent directors – Investment Association members want to see all pension contributions aligned to the majority of the workforce rate, as soon as possible. As such, when analysing companies with year-ends starting on or after December 31, 2020, members expect remuneration committees to set out a credible action plan to align the pension contributions of incumbent directors to the majority of the workforce level by the end of 2022. Where the remuneration committee has not done this, IVIS will Red Top the remuneration report if the pension contribution received by an executive director is 15 per cent or more. In most circumstances, it is noted that members do not consider fixing the monetary value of pension contributions over time to be a credible action plan to bring the pension contributions in line with the majority of the workforce.
(Investment Association, Principles of Remuneration 2021, 16.11.2020)
(Investment Association, Introductory letter to remuneration committee chairs, 16.11.2020)
Investment Association: Executive remuneration in listed companies and shareholder expectations during the COVID-19 pandemic
The Investment Association published guidance on shareholder expectations during the COVID-19 pandemic in April 2020, and updated that guidance on November 16, 2020.
Key changes/additions to the guidance are as follows:
- The impact on executive pay if a company has taken government support (through the Job Retention Scheme, loans or other schemes) or additional capital from shareholders – In those circumstances, shareholders would not expect annual bonuses to be paid to executive directors for FY2020 or FY2020/21 unless there are “truly exceptional circumstances”. It will be very important that the wider employee context is taken into account in ensuring that executive remuneration reflects the pay and conditions of the workforce.
- The impact of other indirect government support such as business rate relief – Remuneration committees in sectors where indirect support measures have had a significant positive impact on financial performance will be expected to disclose how they have taken into account the impact of these government measures on remuneration outcomes.
- Shareholder expectations if a company has suspended or cancelled its dividend in relation to FY2019 or FY2019/20 – Where dividend payments for FY2019 or FY2019/20 were suspended or cancelled, members expect this to have a corresponding impact on remuneration outcomes. Shareholders expect remuneration committees to clearly disclose how the cancellation of an intended dividend has been reflected in 2019 or 2020 remuneration outcomes either through the use of discretion or malus provisions to correspondingly reduce any deferred shares related to the 2019 annual bonus. Alternatively, shareholders would expect this to be fully reflected in the FY2020 bonus outcomes.
- Adjustment of performance conditions due to COVID-19 – Remuneration committees will not be expected to adjust performance conditions for in-flight annual bonuses or long-term incentive awards to account for the impact of COVID-19. Remuneration committee chair’s should confirm in their statement that they have not adjusted performance targets during the year. Shareholders would also not expect LTIP grants to be cancelled and replaced with another long-term incentive grant and shareholders do not expect remuneration committees to compensate executives with higher variable remuneration opportunity in 2021 for lower remuneration received in 2020 due to the pandemic.
- Salaries – Shareholders will expect any increases, if necessary, to be in line with changes to the wider workforce and shareholders will scrutinise justification of basic salary or variable pay opportunity.
- Bonuses – Shareholders will expect a higher level of disclosure around rationale and outcomes where discretion in relation to variable pay is exercised, including on how financial targets have been determined where lower than in the previous year. Companies should consider whether a higher proportion of any bonus should be deferred into shares, and enhanced disclosure should be provided where adjustments to variable pay performance measures due to exceptional circumstances such as rent concessions or waivers are made.
- Performance measures for long-term incentives – Targets must remain sufficiently stretching and not be adjusted to compensate executives for reduced remuneration outcomes due to COVID-19. The process used by remuneration committees to set targets, including the use of internal budgets and consensus estimates, should be disclosed.
- Alternative remuneration schemes – Remuneration committees considering moving to restricted share schemes must still consider the strategic rationale for such schemes and not move to them simply because meaningful performance targets cannot be set. Thought should be given as to whether grant sizes under restricted share schemes are appropriate where share prices have fallen and would otherwise risk windfall gains on vesting. Share price factors should also be considered, as well as the expected discount rate, to avoid awarding the same number of shares as would usually have been granted.
- New remuneration policies – When considering changes in remuneration policies, structures or performance metrics, shareholders must have sufficient information to make informed voting decisions. Remuneration committees will have to continue to evaluate if it is the appropriate time to make substantial changes if the company is significantly impacted by COVID-19. For these companies, it may be more appropriate to wait until there is greater clarity on the future market environment before proposing significant changes to their policies. Minor changes should still be addressed, with policies updated to reflect best practice and UK Corporate Governance Code requirements, including changes to post-cessation shareholding requirements, bonus deferrals and malus and clawback provisions.
(Investment Association: Executive remuneration in listed companies and shareholder expectations during the COVID-19 pandemic, 16.11.2020)
FRC: Thematic review – Cash flow and liquidity disclosures
On November 17, 2020 the Financial Reporting Council (FRC) published the results of a thematic review launched in December 2019 into liquidity risk disclosures. The review was launched as the FRC continues to identify errors in cash flow statements and it examines many of the issues faced in their preparation, as well as providing insights into how the quality of cash flow statements can be improved.
The FRC states that it will continue to challenge those companies where there is an apparent material inconsistency between the cash flow statement and the notes, or where cash flows were incorrectly classified. In addition, the FRC notes most companies could improve their disclosures of accounting policies and judgements in relation to the cash flow statement.
The review also addresses the disclosure of liquidity risk and supplements the review on the financial reporting effects of COVID-19 (July 2020) and the FRC Lab’s two COVID-19 reports (June 2020) by providing more recent examples of good reporting that companies should find helpful.
Several companies in the sample published their accounts before the UK lockdown in March 2020 and many of these accounts contained only boilerplate disclosures in respect of liquidity risk and related issues. However, the FRC has noted a marked improvement in liquidity risk reporting, including linkage to viability statement and going concern disclosures, in reports and accounts published from April 2020 onwards, most notably in smaller listed companies.
The majority of companies in the sample that published their accounts from April 2020 onwards disclosed key liquidity information such as availability of cash, undrawn borrowing facilities, use of supply chain finance and compliance with covenants. The FRC did, however, identify that some companies could improve their disclosures of covenant testing, and assumptions and judgements around going concern and viability.
The FRC is encouraging all companies to review this report in detail and consider the findings carefully when preparing their future reports and accounts.
(FRC: Thematic review – Cash flow and liquidity disclosures, 17.11.2020)
(FRC, Preparation of cash flow statements needs to improve, 17.11.2020)
ISS: Benchmark Voting Policy Changes for 2021
Following a consultation in October 2020, on November 12, 2020 Institutional Shareholder Services Inc (ISS) announced the results of its consultation on its proposed changes to its annual benchmark voting policies, including some proposed changes to its voting policies for the UK and Ireland.
The key changes to the ISS voting policy for the UK and Ireland are as follows:
- Board diversity and gender – ISS will generally recommend a vote against the nomination committee chair (and possibly other directors) if a FTSE 350 company does not have at least 33 per cent female representation on the board (although in 2021 only, FTSE 350 companies that publicly commit to reach this target by the next AGM will not receive this voting recommendation). Companies (other than investment trusts) in the FTSE Small Cap index, ISEQ 20 or on AIM (and with a market capitalisation of over £500 million) will receive such a voting recommendation if there is no female board member.
- Director accountability – ISS will make it clear that if it considers there has been significant risk oversight failures by board members in relation to environmental and social concerns, ISS may recommend votes against board members re-election.
- Capital issuances for investment companies – ISS proposes to support share issue requests when investment trusts provide an explicit commitment that the shares will only be issued above net asset value, in line with the Pre-Emption Group’s requirements.
The policy changes will be applied to company meetings taking place on or after February 1, 2021.
(ISS, Benchmark Voting Policy Changes for 2021,12.11.2020)
FCA: Changes to way investor notifications are submitted under DTR 5
On November 12, 2020 the Financial Conduct Authority (FCA) updated its webpage on the means for shareholders and holders of financial instruments to notify major shareholdings as required under Chapter 5 of the FCA’s Disclosure Guidance and Transparency Rules (DTR 5). The standard notification form, TR-1 Form, will need to be submitted to the FCA in a different manner in Q1 2021.
The FCA is developing a new online portal. With the new process, those needing to make notifications will need to complete an electronic TR-1 Form which will be available on the DTR 5 reporting element of the FCA’s Electronic Submission System (ESS). After launching the new DTR 5 portal in Q1 2021, investors will no longer be allowed to send TR-1 Forms by email. Only notifications sent via the new portal will be considered for the purpose of monitoring compliance with the reporting requirements under DTR 5.
However, Majorshareholdings@fca.org.uk can still be emailed if TR-2 Form notifications for market making exemption, and other exemptions available to certain investors under DTR 5 are being submitted.
(FCA, Submit an investor notification, 12.11.2020)