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Essential Corporate News – Week ending June 15, 2018

Publication June 15, 2018


Introduction

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

FCA: Primary Market Bulletin No. 19 - Proposed update to technical note on periodic financial information and inside information

On June 11, 2018 the Financial Conduct Authority (FCA) published its latest Primary Market Bulletin concerning a consultation on a proposed update to the UKLA Knowledge Base. The consultation relates to updates to the existing technical note on periodic financial information and inside information The proposed amendments are extensive and centre on the issue of identifying and handling inside information during the preparation of periodic financial reports.

The revised technical note, FCA/TN/506.2, suggests that issuers, when preparing periodic financial reports, should conduct an ongoing assessment on a case-by-case basis as to whether or not the information they hold constitutes ‘inside information’ as set out in Article 7 of the Market Abuse Regulation (MAR). In undertaking this assessment, issuers should assume that information relating to financial results could constitute inside information. Issuers should exercise judgement and conduct the assessment in good faith and should be able to provide evidence of the assessment process to the FCA upon request. The FCA warns issuers that it is not appropriate for them to take a blanket approach to the assessment. They should not consider that information to be included in periodic financial reports will always or never constitute inside information.

In suggesting when a legitimate interest of an issuer maybe prejudiced, so permitting the issuer to delay disclosure in accordance with Article 17 (4)(a) of MAR, the FCA gives the example of a situation where work on preparing a periodic financial report is in process and immediate public disclosure of certain information to be included in it would impact on the orderly production and release of the report and could result in the incorrect assessment of that information by the public. The FCA stresses, however, that issuers should not assume that this interest will always be present. This example is limited to the situation in which the inside information emerges as part of the process of preparing a periodic financial report and is to be included in the report.

The technical note also reminds issuers that they should assess on an ongoing and case-by-case basis the extent to which the delay of disclosure of inside information is likely to mislead the public and it refers to ESMA’s non-exhaustive list of situations where delay of disclosure of inside information is likely to mislead the public. It also reminds issuers about the record keeping and other requirements under MAR where the disclosure of inside information is delayed.

Comments on the revised technical note are requested by July 23, 2018.

(FCA, PMB No.19, 06.18)

(UKLA technical note: Periodic financial information and inside information, UKLA/TN/506.2, 06.18)

The Companies (Miscellaneous Reporting) Regulations 2018 - Draft

On June 11, 2018 the draft Companies (Miscellaneous Reporting) Regulations 2018 (Draft Regulations) were published. Subject to Parliamentary approval, the Draft Regulations will amend the reporting requirements contained in Part 15 Companies Act 2006 (CA 2006), in the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 and in the Community Interest Companies Regulations 2005.
The Draft Regulations include the following new requirements:

  • Section 172 Statement: Companies already required under the CA 2006 to produce a strategic report, other than medium-sized companies in the qualifying year, so “large companies” as defined below, will need to include a statement in their strategic report of how the directors have complied with their duty to have regard to the matters in section 172(1) (a) to (f) CA 2006 when performing their duties. This statement must be made available on a website maintained by or on behalf of the company.
  • Statement about engagement with employees: Companies with more than 250 UK employees will be required to include a statement as part of their directors’ report summarising how the directors have engaged with employees, how they have had regard to employee interests and the effect of that regard, including on the principal decisions taken by the company in the financial year.
  • Statement about engagement with suppliers, customers and others in a business relationship with the company: Large companies, being those which meet two of the three following criteria: turnover of more than £36 million; balance sheet total of more than £18 million; and more than 250 employees, will need to include a statement in their directors’ report summarising how the directors have had regard to the need to foster relationships with suppliers, customers and others, and the effect of that regard,  including in relation to principal decisions taken during the financial year.
  • Statement of corporate governance arrangements: Very large companies (being those with either 2000 or more global employees or a turnover of over £200 million globally and a balance sheet over £2 billion globally) will be required to include a statement in their directors’ report about which corporate governance code, if any, has been applied by the company and how. If the company has departed from any aspect of the code it must set out the way in which it did so, and the reasons. If the company has not applied any corporate governance code, the statement must explain why. These new rules will not apply to companies that already have to provide a corporate governance statement (such as listed companies), to charitable companies or to community interest companies.
  • Publication of CEO’s pay ratio: UK quoted companies with more than 250 UK employees will be required to publish the ratio of their CEO’s total remuneration to the median (50th), 25th and 75th quartile pay remuneration of their UK employees in their directors’ remuneration report. Such companies will also have to publish supporting information, including the reasons for changes to the ratios from year to year and, in the case of the median ratio, whether this ratio is consistent with the company’s wider policies on employee pay, reward and progression.
  • Share price impact reporting: UK quoted companies will need to include some additional provisions in their directors’ remuneration report, including an illustration of the possible impact of future share price increases on executive pay outcomes linked to performance periods or other executive incentive periods of more than one financial year.

Timing

Subject to Parliamentary approval, the new requirements will apply to company reporting on financial years starting on or after January 1, 2019 in line with the Financial Reporting Council’s plans for bringing a revised UK Corporate Governance Code into effect. On June 12, 2018, the draft Companies (Miscellaneous Reporting) Regulations 2018 Q&A were published to help companies and other interested stakeholders understand how they will be affected by the new reporting requirements.

(The draft Companies (Miscellaneous Reporting) Regulations 2018, 11.06.18)

(Draft Explanatory Memorandum)

BEIS: Questions and Answers: Corporate governance: The Companies (Miscellaneous Reporting) Regulations 2018 - Draft

Following the publication of the draft Companies (Miscellaneous Reporting) Regulations 2018, on June 12, 2018, the Department for Business, Energy and Industrial Strategy (BEIS) published  draft “Companies (Miscellaneous Reporting) Regulations 2018 Q&A”. The purpose of the Q&A is to help companies and interested stakeholders understand how they will be affected by the Regulations. While the Regulations will not become law until approved by Parliament, BEIS recognises the importance of providing companies and stakeholders with as much time as possible to understand the proposed changes to the law.Among other things, the Q&A:

  • Provide an overview of the new company reporting regulations and the time frame in which they apply. Subject to Parliamentary approval, the Regulations will apply in relation to financial years starting on or after January 1, 2019 so 2020 reports will be amongst the first to be affected. The introduction of the Regulations will align with the Financial Reporting Council’s plans for bringing a revised UK Corporate Governance Code into effect;
  • Clarifiy the scope of the Regulations, specifying the companies to which they apply;
  • Anticipate the information that a qualifying company may want to include in its section 172(1) statement and consider how much detail should be included. The statement should address issues, factors and stakeholders the directors consider relevant in complying with section 172 (1) (a) to (f) Companies Act 2006 and how they have formed that opinion, and the main methods the directors have used to engage with stakeholders and understand the issues to which they must have regard. Companies will need to judge what is appropriate, but the statement should be meaningful and informative for shareholders, and be consistent with the size and complexity of the business;
  • Comment on how much detail a qualifying company will have to include in a statement of corporate governance arrangements, namely sufficient information to ensure that its arrangements are explained. For companies that choose to adopt the corporate governance principles for large private companies currently being developed by Wates Committee, it is envisaged that companies should provide a short supporting statement for each principle explaining how it has been applied to achieve better outcomes;
  • Include detail on the pay ratio reporting requirements for UK quoted companies. The Q&A looks at the different methodologies for calculating pay ratios that can be used, at what and how employee pay and benefits should be used to calculate the ratios and, among other things, how these ratios should be presented;
  • Consider the requirements on UK listed companies to report in their directors’ remuneration report on the possible impact of share price growth on executive remuneration outcomes.  

(BEIS, Questions and Answers: Corporate governance: The Companies (Miscellaneous Reporting) Regulations 2018, 13.06.18)

FRC: Consultation on the Wates Corporate Governance Principles for Large Private Companies

On June 13 2018, the Financial Reporting Council (FRC) issued a draft of the Wates Corporate Governance Principles for Large Private Companies (the Principles), and supplementary guidance, for public consultation. In its August 2017 response to its Green Paper on corporate governance reform, the Government stated that it believed that the corporate governance framework for the UK’s largest private companies should be strengthened and, in January 2018, Sir James Wates was appointed to chair a coalition group tasked with developing appropriate corporate governance principles for large private companies.

The Principles have now been published for consultation and are designed to assist companies which, for financial years beginning on or after January 1, 2019, will be required by the Companies (Miscellaneous Reporting) Regulations 2018 to provide a corporate governance statement for the first time. Such companies may adopt the Principles as a framework for the purposes of making the statement of corporate governance arrangements that will be prescribed by the Regulations, assuming they are adopted in their current form. It is further hoped that the Principles will act as guidance to companies of all sizes, not just those subjected to the new legislative requirements, in understanding good practice in corporate governance and apply that good practice widely.

It is intended that the Principles be applied on an “apply and explain” basis. A company adopting them will be expected to apply them fully but can provide a supporting statement for each of the six Principles that gives an understanding of how the company’s corporate governance processes operate and achieve the desired outcomes. The Principles are supported by non-exhaustive guidance that helps companies apply them in practice but this is not to be seen as a checklist. Rather, companies adopting the Principles will be encouraged to demonstrate, through a written explanation in their directors’ report and on their website, how the application of the Principles has resulted in improved corporate governance outcomes.

The six Principles and accompanying guidance are as follows:

  • Principle One - Purpose: An effective board promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.A well-defined purpose will help companies of all sizes and structures to articulate their business model, and develop their strategy, operating practices and approach to risk. In large private companies, key shareholders and the board should work together to ensure the company works with a clear sense of purpose. An effective board will promote and develop its collective vision of the company’s purpose and can identify and explain how events or developments affecting the company’s long-term success have been addressed. The board is responsible for ensuring that its strategy is clearly articulated and implemented throughout the organisation and that it, with the company’s values, supports appropriate behaviours and practices within the organisation. Key shareholders, the board and management must own and maintain a commitment to embedding the company’s desired culture throughout the organisation.
  • Principle Two - Composition: Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of the board should be guided by the scale and complexity of the company.An effective board embraces diversity, promotes accountability and incorporates objective thought that promotes appropriate constructive challenge and effective decision-making. Directors should collectively demonstrate a high level of competence relevant to the company’s business needs and stakeholders, companies should commit to ongoing board professional development and directors should be individually evaluated. Board membership must be broad enough to provide for an appropriate degree of challenge and analysis but agile enough to enable efficient and effective decision making.
  • Principle Three - Responsibilities: A board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision-making and independent challenge.Constitutional documents should set out policies and procedures that govern the internal affairs of the company including matters relating to authority, role and conduct of directors. Strong accountable decision-making systems and the delineation of responsibilities ensure the company’s key shareholders, board and senior management have clearly defined roles and decision-making powers, with conflicts of interest appropriately managed. Advisory or board committees could be established with clear terms of reference and independent challenge in board decision-making should be part of effective corporate governance practices. A board should have confidence in the integrity of information used for decision-making and reported by a company. The company should establish internal processes to ensure effective operation of systems and controls and that the quality and integrity of information is reliable, enabling directors to monitor and challenge the performance of the company.
  • Principle Four - Opportunity and risk: A board should promote the long-term success of the company by identifying opportunities to create and preserve value, and establishing oversight for the identification and mitigation of risks.A board has responsibility for an organisation’s overall approach to strategic decision-making and risk management, requiring oversight of risk and how it is managed and appropriate accountability to stakeholders, particularly with regard to conflicts of interest.
  • Principle Five - Remuneration: A board should promote executive remuneration structures aligned to the sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.Director and senior management remuneration should be developed around principles that align with the company’s culture, values and long-term success including a considered assessment of the company’s response to matters such as its gender pay gap reporting. A clear policy on the transparency of remuneration structures should be established to enable effective accountability to key shareholders. Remuneration including benefits, for directors and senior management, should consider the broader operating context of the company, including the wider workforce’s pay and conditions.
  • Principle Six - Stakeholders: A board has a responsibility to oversee meaningful engagement with material stakeholders, including the workforce, and have regard to that discussion when taking decisions. The board has a responsibility to foster good stakeholder relationships based on the company’s purpose.The board should present a fair, balanced and understandable assessment of the company’s position and prospects and make this available to its material stakeholders on an annual basis. Companies should identify the stakeholder relationships that are integral to its ability to generate and preserve value. The board should demonstrate how the company has undertaken effective engagement with material stakeholders and how such relationships have been taken into account in its decision making. Since the largest material stakeholder may be the workforce, companies should develop methods to engage meaningfully with their workforce and use such forms of engagement when taking decisions.Responses to the consultation are to be received by September 7, 2018 to allow for the final Principles and guidance to be published in December 2018.

(FRC, Consulation paper: The Wates Corporate Governance Principles for Large Private Companies, 13.06.18)

FRC: Corporate Reporting Review Briefing

On June 12, 2018 the Financial Reporting Council (FRC) issued a Briefing from its Corporate Reporting Review team setting out current ‘hot topics’ of its Corporate Reporting Review function which will be particularly relevant to companies about to prepare their interim accounts and auditors engaged to review them.

The Briefing notes that most listed companies will adopt IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’, meaning 2018 interim reports will be the first prepared under these new standards. The FRC will be monitoring companies’ disclosure of their effects. It points out that companies should assess and explain the effects of the new standards and should provide responses which are clear, concise and company-specific, and focus on the areas of change. Directors are expected to disclose significant judgements made in applying the new standards and to quantify and explain sources of estimation uncertainty.

Other topical issues identified by the Briefing include:

  • Supplier financing arrangements: IFRS 7 ‘Financial Instruments: Disclosures’ requires companies’ accounts to disclose information that allows readers to understand the nature of and risks around financial instruments, including liquidity risk. Companies’ strategic reports are required to give a fair review of the company’s business, including a balanced and comprehensive analysis of its position at the end of the year. The transparency of supplier finance arrangements will be an area of specific FRC focus during 2018.
  • Asset impairment: IAS 36 requires companies to assess at the end of each reporting period whether there is an indication that an asset may be impaired. This is in addition to the requirement to test annually cash generating units containing goodwill and indefinite lived assets. The FRC will pay particular attention to the impairment disclosures of companies in the FRC’s priority sectors and market sectors where there have been a number of profit warnings and asset write-downs.The Briefing also highlights issues identified by CRR’s monitoring activities. These include determining materiality, classification issues, failure to comply with IAS 33 in relation to earnings per share and failure to file interim accounts in connection with a dividend payment.

(FRC, Corporate Reporting Review Briefing, 12.06.18)

HM Treasury: Government response to Advisory Group Report on ‘Growing a Culture of Social Impact Investing in the UK’

On June 12 2018, the Department for Digital, Culture, Media and Sport and HM Treasury published the Government's response to the industry-led report, ‘Growing a Culture of Social Impact Investing in the UK’ published in November 2017 and which made a number of recommendations to better enable people to invest in line with their values. "Social impact investing" is defined in the response as investing in the share or loan capital of companies and enterprises that not only measure and report their wider impact on society but also hold themselves accountable for delivering and increasing positive impact.

As part of the response, the Government has committed to work with the financial services industry to facilitate the launch of further social impact investment funds. It has also outlined plans to encourage more investments to flow into disadvantaged areas and to create investment opportunities that both address social challenges and create financial return. In addition, it highlights the need to champion and promote the social and environmental responsibility of businesses across the country.

In the response, the Government:

  • Considers financial services to be key, and refers to several 2018 impact funds launched in the UK. The Government commits to working with the investment and savings industry to support the launch of further such funds and its priority is now to identify and address barriers to the effective scaling of successful investments and identify new policy areas where Government can partner with social impact investors to drive innovation and improve social outcomes.
  • Recognises that social impact investing is a relatively new, yet rapidly developing concept and investment professionals need the relevant educational tools and guidance to develop the expertise that allows them to best serve their clients’ interests and needs. The Government agrees with the Advisory Group that efforts to improve these professional skills should be primarily led by industry which will ensure that the tools and content accurately reflect practitioners’ needs.
  • Plans to assess early impacts of recent changes to company reporting, including the transposition of the EU Directive on the Disclosure of Non-Financial and Diversity Information. The Department for Business, Energy and Industrial Strategy will lead an evaluation of company reporting on social and environmental issues and consider with the Financial Reporting Council what further action may be necessary.
  • Proposes other regulatory changes, including to ensure that environmental, social and governance factors are properly considered in pension investing.The Government backs the significant contribution that social impact investment can make to help address some of the UK’s social challenges and drive innovation in the financial services sector and will continue to work alongside the financial services industry and regulators, and provide a progress update in winter 2018.

(Government’s response to the Growing a Culture of Social Impact Investment in the UK report, 13.06.18)


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