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Essential Corporate News – Week ending March 11, 2016

Publication March 11, 2016


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

BIS: Enhancing transparency of beneficial ownership information of foreign companies undertaking certain economic activities in the UK

On March 4, 2016 the Department for Business, Innovation and Skills (BIS) published a discussion paper setting out proposals to improve the transparency of ownership of foreign companies that purchase land or property in England or Wales or enter into public procurement contracts in England. Following on from the introduction, from April 6, 2016, of the “persons with significant control” or PSC regime for UK companies and limited liability partnerships, the discussion paper looks at options for identifying, reporting and using information on the beneficial ownership of foreign companies as part of the Government’s aim for the UK to be “one of the most open countries in the world for good, clean investment”.

Holding of foreign company beneficial ownership information

The discussion paper raises questions as to how an approach of requiring foreign companies to provide information on their beneficial ownership before they buy land/property or bid on a contract with the UK Government could be implemented. The Government would like the obligations on foreign companies to be broadly similar to those on UK companies. Companies House could manage a new register with the requisite information or it could be operated by a private sector organisation or another independent public body. The foreign company on the register would have a unique identifier number which would enable it to buy land or property in England or Wales or help it facilitate its participation in public contracting in England.

Enforcement mechanisms

The discussion paper recognises that it is more difficult to enforce criminal penalties for failure to file information or for filing false beneficial information with UK authorities against foreign companies than UK companies. As a result, the discussion paper looks at possible additional civil and criminal sanctions, including a daily fine, sanctions linked to the specific activity that the company needs to register for or sanctions linked to other specific economic activities the company is undertaking in the UK.

Purchase of land or real property

The discussion paper notes that the Land Registry is publishing a data set containing the legal owner and addresses of all properties owned in the UK by foreign companies. The Government is considering exempting foreign companies incorporated in jurisdictions which already have an accessible central register of beneficial ownership information from providing similar information to a UK foreign company beneficial ownership register. As a result, all non-UK EU companies may be exempt given the requirements of the 4th Money Laundering Directive which EU member states must implement by June 2017.

One proposal is that foreign companies would only be able to register their ownership of land or property by providing the Land Registry with the unique identification number obtained from the foreign companies beneficial ownership register. Existing registered proprietors of land and property currently registered to foreign companies would also need to obtain this unique identifier. Possible civil and criminal sanctions against foreign companies that already own property in England and Wales and which do not apply for a unique identification number could include imposing criminal sanctions on the company, its officers and/or its persons of significant control and/or preventing the company from selling or charging its property until the unique identification number is restored.

Public procurement

The Government is proposing that the new policy would apply to “major projects” in Government procurement which have a value threshold of £10 million or more. While the new policy on the provision of beneficial ownership information would not be applied to existing contracts, it would be applied from a future date for contracts that have not yet been awarded. The Government has identified four possible options to ensure the contracting authority obtains beneficial ownership information from bidder companies before awarding a public contract. These are as follows:

  • The failure to provide beneficial ownership information could be linked to existing grounds for exclusion under the Public Contract Regulations 2015.
  • The link referred to above could be made but all non-UK companies could have the option to provide beneficial ownership information directly to the contracting authority.
  • Failure to provide beneficial ownership could be treated as making the bid incomplete or non-compliant.
  • It could be made a condition of the procurement process that to be awarded a contact a bidder must provide beneficial ownership information.

Next steps

The closing date for responses to the discussion paper is April 1, 2016.

(BIS, Enhancing transparency of beneficial ownership information of foreign companies undertaking certain economic activities in the UK, 04.03.16)

FRC: Letter to audit committee chairs providing guidance on reporting on volatility and uncertainty in annual reports

On March 8, 2016 the Financial Reporting Council (FRC) published a letter from its Chief Executive to chairs of Audit Committees providing guidance on how aspects of corporate reporting that have seen increased uncertainty and/or volatility should be dealt with in annual reports and accounts in the reporting season.

The letter highlights that:

  • the strategic report provides an opportunity to provide the most current view of prospects and it should be reviewed by the board before it is issued to ensure it remains pertinent;
  • the key to understanding the company’s prospects will be disclosure of the directors’ judgements as to the principal risks and their potential impact;
  • accounts should be drawn up on the basis of the conditions existing at the balance sheet date, but events or information arising later which affect valuations need careful consideration and may need to be disclosed;
  • Financial Reporting Standards require companies to disclosure material post balance sheet events including the nature of each event and its estimated financial impact if that can be made; and
  • it should be determined whether recent events have had a material effect on the preparation of the accounts on a going concern basis of accounting and/or whether there are material uncertainties relating to that assessment requiring disclosure.

(FRC, Letter to Audit Committee Chair - Request for guidance on volatility and uncertainty for corporate reporting season, 08.03.16)

ICAEW: Exposure draft of updated guidance on determination of realised and distributable profits under the Companies Act 2006 – TECH [XX/16]

On March 9, 2016 the Institute of Chartered Accountants in England and Wales (ICAEW) published TECH XX/16 (the draft guidance), an exposure draft based on TECH 02/10 setting out updated guidance on determining realised and distributable profits in the context of distributions under the Companies Act 2006 (CA 2006). The draft guidance is based on TECH 02/10 and marked up to show proposed amendments.

In addition to updating references to standards and removing obsolete material, the draft guidance proposes the following main changes:

  • Additional guidance has been added at 2.6A to 2.6D concerning the definition of a distribution. This has been applied to certain intragroup off-market loans at 9.55.
  • Additional guidance has been added at 9.45 to 9.56 to address the consequences of accounting for intragroup off-market loans. In accordance with FRS 102 (and IFRSs) these are recognised initially at fair value rather than face value. The guidance addresses the nature of the difference in value and subsequent interest income and expense under the law and for distributable profits.
  • The guidance on retirement benefit schemes in section 8 has been completely rewritten on a simplified basis because the previous material was mainly concerned with transition from SSAP 24 to FRS 17.
  • New paragraphs 2.47C-2.47E have been added to draw attention to the very considerable doubt concerning the operation of the section 843 CA 2006 special rule for long term insurance business, in relation to accounts for years ending on or after January 1, 2016 as a result of Solvency II. The ICAEW understands that the Government is actively considering changing the law to address this issue.
  • The guidance on deferred tax has been reorganised. It has been clarified that, unless it is the reversal of a realised loss, a deferred tax credit which results in the recognition of a deferred tax asset will generally be an unrealised profit because a deferred tax asset does not usually meet the definition of qualifying consideration (see 3.17D).

Where the draft guidance deals with issues about the interpretation of the law, the ICAEW notes that it should be regarded as having immediate effect. Specifically, this applies to the guidance concerning the definition of a distribution and its application to intragroup off-market loans.

Comments on the remaining aspects of the draft guidance are requested by June 9, 2016.

(ICAEW, TECH XX/16 - Exposure draft of updated guidance on realised and distributable profits under the Companies Act 2006 issued by the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland (the Institutes) in March 2016, 09.03.16)

PIRC: Shareholder Guidelines 2016

On March 9, 2016 Pensions & Investment Research Consultants Ltd (PIRC) issued their 2016 edition of their UK Shareholder Voting Guidelines (the 2016 Guidelines), replacing those issued in March 2015.

Key changes in the 2016 Guidelines are as follows:

Authority to purchase own shares

PIRC will not support general authorities to buy back shares unless the board has made out a clear, cogent and compelling case demonstrating both how the authority would be used to benefit long-term shareholders, and also that the directors are not conflicted in recommending the authority.

Significant votes not in favour of management proposals

PIRC will expect a considered response on issues arising from significant adverse votes to be provided to shareholders before the next annual general meeting.

Non-disclosure of auditors date of appointment

If the date of an auditor’s appointment is not disclosed, PIRC will draw a negative inference as to the length of the auditor’s tenure and will assume that there is an impact on the auditor’s independence.

Board diversity

PIRC advocates that FTSE 350 boards aim for women to account for 33% of board positions in FTSE 350 companies by 2020. If PIRC deems there to be evidence of gender disparity in the workforce generally and the gender balance on the board then PIRC expects targets and attempts to address this inequality to be reported. PIRC regards disclosure of targets for gender balance rebalancing as a minimum.

Authorities to allot shares for cash

PIRC will continue to be guided by the Pre-Emption Group’s guidelines on disapplication of pre-emption rights and will not support new 10% disapplication authorities unless the board has made a clear, cogent and compelling case why the 10% level is appropriate for the company.

Policy changes applicable to UK investment companies

  • Continuation vote - Following discussions with the Association of Investment Trust Companies, it was considered that that the wording of PIRC's previous position implied an inflexible approach that did not take account of management actions. Accordingly the position is being made clear that the current position will apply “unless the board has provided a clear, cogent and compelling rationale, within the context of its overall investment strategy, in respect of the discount and the actions it is taking to address the situation.”
  • Payment of quarterly monthly dividend – the 2016 Guidelines state that PIRC considers that, in cases where it has been demonstrated that an annual approval of dividend could interfere to shareholders’ detriment with monthly or quarterly dividends, the investment company should in any event put forward its dividend policy for annual shareholder approval. PIRC would not make adverse voting recommendations in such circumstances.

Mergers and acquisitions

The 2016 Guidelines expressly indicate the factors that PIRC will review and the effect these may have on voting outcomes in relation to votes on corporate transactions. PIRC sets out the factors it will note in evaluating M&A and in determining voting recommendations. PIRC will not support transactions where:

  • there is insufficient independent oversight of the deal;
  • directors are compromised by remuneration arrangements or other conflicts of interest;
  • shareholder rights are materially compromised; or
  • shareholders are treated inequitably.

The PIRC UK Shareowner Voting Guidelines 2016 can be purchased here.

European Commission: Commission delegated regulation on regulatory technical standards under the Market Abuse Regulation

On March 8, 2016 the European Commission published a delegated regulation on regulatory technical standards under the Market Abuse Regulation (MAR), specifically relating to the conditions applicable to buyback programmes and stabilisation measures.

The standards in the delegated regulation are in largely the same form as those proposed by ESMA in its final report on draft technical standards on MAR delivered to the European Commission in September 2015.

If accepted by the Council and the European Parliament, the delegated regulation will apply from July 3, 2016.

(European Commission, Commission Delegated Regulation supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the conditions applicable to buy-back programmes and stabilisation measures, 08.03.16)

Draft Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016

On March 8, 2016 the draft Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016 (the draft regulations) were published and laid before Parliament, together with an explanatory memorandum, transposition note, and impact assessment. The draft regulations reflect the Government’s response to its November 2015 consultation on the financial reporting requirements for limited liability partnerships (LLPs) and the creation of a new micro-entity regime for LLPs and for those general partnerships and limited partnerships that are Qualifying Partnerships as defined in the Partnerships (Accounts) Regulations 2008.

The main changes to the accounting and audit framework for LLPs include:

  • increasing the thresholds to determine size for LLPs in order to save costs for some LLPs, which will be categorised in a lower size category;
  • lessening the administrative burden on small LLPs by reducing the number of mandatory notes required;
  • permitting small LLPs to prepare an abridged balance sheet and an abridged profit and loss account if this is agreed by all members of the LLP;
  • allowing greater flexibility within layouts of profit and loss accounts and balance sheets, permitting the use of sector-specific layouts; and
  • allowing participating interests to use the equity method in individual LLP statements.

The draft regulations will apply to financial years commencing on or after January 1, 2016, however,  early adoption of the revised framework is permitted for entities if a copy of its accounts for that financial year has not already been delivered to the Registrar of Companies before the regulations come into force.

(Draft Statutory Instrument - The Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016, 08.03.16)

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