Essential Corporate News – Week ending August 19, 2016

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

On August 15, 2016 the GC100 and Investor Group (the Group) published a second edition of its directors' remuneration reporting guidance (the Guidance), which was initially published in September 2013. The second edition reflects changes resulting from a review by the Group of experience over the 2014 to 2016 AGM seasons, and feedback from companies, investors, advisers, other market participants and government. It will be reviewed on a regular basis to ensure it remains relevant and useful.

The Guidance notes that there has generally been an improvement in the quality of remuneration reporting since the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) (the Regulations) were introduced, but the Group believes that companies should continue to focus on clarity and conciseness. It states that remuneration committees may find it helpful to consider: 

• any feedback from shareholders on the last remuneration report and policy, and whether this suggests matters that could be set out more clearly and concisely in the next;
• what might make it easier for investors and other stakeholders to assess and understand each part of a remuneration report (or policy); and
• whether the report clearly explains the thinking and purpose behind the remuneration committee’s decisions and choices.

The revised Guidance notes the following:

• A decision by a remuneration committee to apply upwards discretion will inevitably be the subject of considerable shareholder scrutiny and will require careful explanation and, in certain cases, prior dialogue with shareholders. An example of this is where qualitative performance measures are used and performance against those measures is assessed as being very good, but the company’s overall financial performance over the relevant assessment period is not commensurate with that assessment. In these types of situations, investors generally expect the remuneration committee to give careful consideration to a moderation of formulaic outcomes – through the exercise of discretion – so that the remuneration outcome balances management performance and the shareholder experience. 
• In the 2014 AGM season, a notable number of assurances were given by remuneration committees in order to narrow discretions that investors found too broad after publication of the annual report but prior to the AGM. The provision of such assurances is generally undesirable. Therefore, the Guidance emphasises that the section on discretion in the Guidance should be read as a whole. Companies may well face unexpected developments over the term of a policy, but a broad discretion to address those will be more likely to be approved if it is drafted and explained to make investors confident that it will be used only if and as genuinely required, and within an acceptable maximum (either the general, or a higher exceptional, maximum).
• Investors understand that prospective disclosure of the targets related to certain short-term incentive measures would commonly give rise to commercial sensitivity issues. For example, where the performance measure is a component of the company’s annual financial budget. In such circumstances, investors do not generally expect prospective disclosure of the targets in the statement of implementation of the remuneration policy in the current financial year. However, investors generally expect retrospective disclosure of those targets. The retrospective disclosure could be at the end of the reported year, in the short-term incentive information that appears after the single total figure table. However, where the directors conclude that commercial sensitivity remains an issue, the retrospective disclosure could be made at a later time; in this situation, investors generally expect the remuneration report to contain a commitment to disclose at a specified time in the future. As regards the information to be disclosed on targets – that is, what targets were set at the beginning of the period and what was the actual performance relative to them - investors generally expect the full range (for example, threshold, target and maximum) to be disclosed retrospectively.
• Investors generally expect prospective and retrospective disclosure of the targets related to long-term incentive measures. Where the nature of a long-term incentive’s performance measure is such that commercial sensitivity exists (for example, it relates to a key strategic initiative that would be valuable information to major competitors if disclosed), investors generally expect the remuneration report to contain a commitment to disclose at a specified time in the future. In addition, in relation to awards that are yet to reach the end of their performance period, if targets have not been disclosed prospectively on commercial sensitivity grounds, investors generally expect the remuneration committee to consider including in the annual remuneration report qualitative commentary relating to intra-cycle performance (i.e. updates on performance to date) in order to provide an indication of projected vesting.
• Linking remuneration to the company’s strategy remains an important area for investors. Investors believe that many companies should give this area particular focus. While this is required as part of the future policy, investors generally expect that this should be supplemented by relevant disclosures in the annual remuneration report. Companies should take the opportunity to give this the appropriate emphasis and explanation in the remuneration committee chairman’s statement. The annual strategic report requires a company to set out its strategy and objectives. The need to explain the link between remuneration and strategy in the remuneration report thus invites cross-referencing and alignment between these two reports.
  
• Some remuneration committees have published assurances about the way aspects of their proposed policies would be implemented (Assurances). The Assurances were often given in order to narrow discretions that investors found too broad. Such Assurances were provided after publication of the annual report but prior to the AGM on the basis that they would bind the company once the policy is approved. An Assurance should be disclosed on the accounts and reports section of the company’s website, alongside the items required to be published there. An Assurance should be set out in remuneration reports in the following years of the remuneration policy’s term, as a disclosure regarding policy implementation in those years. This practice is supported by the Investment Association.
• If a company chooses a comparator group of employees when reporting on the percentage change in the CEO's remuneration, it may wish to consider using a group of employees defined by geography, business unit or level. Investors (and other stakeholders) generally expect a meaningful comparator group; not, for example, a narrow group consisting of senior managers.
• Although the Regulations do not state expressly that the maximum that may be paid in respect of each component of remuneration should be disclosed at an individual level in the future policy table, they state that “the table must also include any particular arrangements which are specific to any director individually”. Accordingly, the maximum level of each component of remuneration should be disclosed for each executive director.

(GC100 and Investor Group, Directors' Remuneration Reporting Guidance 2016, 15.08.16)

On August 15, 2016 the City of London Law Society (CLLS) and Law Society Company Law Committees’ Joint Working Parties on Market Abuse, Share Plans and Takeovers Code issued a second Q&A on the Market Abuse Regulation (MAR). This Q&A follows an earlier Q&A on aspects of MAR issued in July 2016.

The Q&A sets out a suggested approach to implementing certain aspects of MAR, and provides answers to questions including the following:

Market soundings (Article 11)

• If the bidder and target negotiate the terms of an irrevocable undertaking to accept the offer/vote in favour of the scheme (as applicable) that is intended to be given by target directors, will those communications fall within the market soundings regime?
• Where the terms of an irrevocable undertaking to accept the offer/vote in favour of the scheme (as applicable) intended to be given by target directors have been agreed between the bidder and target as outlined above, will the provision of the agreed form irrevocable to the target directors fall within the market soundings regime?
• Will communications between the bidder and shareholders with a view to seeking irrevocable undertakings to accept the offer/vote in favour of the scheme (as applicable) from them fall within the market soundings regime?
• In Article 11(2) of MAR, is a communication within the market soundings regime only if it is made by the bidder – i.e. given the lack of equivalent to Article 11(1)(d)?
• Can market soundings be conducted other than in strict compliance with Article 11 of MAR and the Implementing Technical Standards?

Stake-building on a takeover

• Will due diligence information that amounts to inside information preclude a stake-building pre-announcement as a result of Article 9(4) of MAR?
• Will due diligence information that amounts to inside information cease to be inside information once a bid is announced if the bid price is in excess of the price effect the inside information had been expected to have (i.e. if the impact of any inside information would be absorbed by the bid premium)?

Person discharging managerial responsibilities (PDMR) dealings (Article 19)

• Where a PDMR has entered into an irrevocable undertaking outside a closed period, can they satisfy that irrevocable undertaking during a closed period?
• During a closed period under Article 19(11) of MAR can a PDMR vote in favour of/enter into an irrevocable undertaking to vote in favour of a takeover conducted by way of scheme of arrangement?
• During a closed period under Article 19(11) of MAR can a PDMR accept/enter into an irrevocable undertaking to accept a contractual takeover?
• Do any of the matters referred to in Q9 or Q10, whether they occur within (if permitted) or outside a closed period, need to be disclosed in accordance with Article 19(1)?

The Joint Working Parties note that the Q&A is an explanation of how, in their view, MAR should apply to certain practical situations, but is subject to review and amendment in the light of practice on the implementation of MAR and any relevant future UK or EU guidance published in relation to MAR.

(CLLS, Market Abuse Regulation (EU MAR) Q&A, 15.07.16)