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Essential corporate news
– week ending April 12, 2019

Publication April 2019

BEIS: Draft Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019

On April 9, 2019, the draft Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 were published together with a draft explanatory memorandum and transposition note. The draft regulations implement Article 9a (right to vote on a company’s remuneration policy) and Article 9b (information to be provided in and right to vote on the remuneration report) of the Shareholder Rights Directive (2007/36/EC), as amended by Directive (EU) 2017/828 (SRD II). These provisions need to be implemented by Member States by June 10, 2019.

Most of the requirements on directors’ remuneration reporting contained in SRD II are already implemented in UK law but, in order to implement Articles 9a and 9b of SRD II to the extent that they are not already implemented, the draft regulations amend the Companies Act 2006 and the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008. The amendments include extending the scope of the UK’s existing executive pay framework to cover unquoted traded companies as well as quoted companies.

Other changes being introduced to the existing executive pay framework include the following:

Directors’ remuneration policy

  • In respect of share-based remuneration to directors, the remuneration policy must provide details on vesting periods, and any deferral and holding periods.
  • The remuneration policy must give an indication of the duration of directors’ service contracts.
  • The remuneration policy must set out the decision-making process for its determination, review and implementation, and must explain all significant changes compared to the previous policy.
  • The date and results of the shareholder vote on the remuneration policy must be put on the company’s website as soon as reasonably practicable and remain there for the life of the policy.

Directors’ remuneration report

  • The remuneration report must be available free of charge on the company’s website for 10 years.
  • It must show the split of fixed and variable remuneration awarded to each director each year and specify any changes to the exercise price and date for the exercise of shares or share options by directors.
  • The remuneration report must compare the annual change in directors’ remuneration to the annual change in pay of the company’s employees and of the company’s performance (measured in terms of total shareholder return) over a five year rolling period.

Directors’ remuneration provisions

  • All payments to directors must be made in accordance with an approved remuneration policy. As a result, any payment to be made by way of an amendment to the approved remuneration policy must be approved by shareholders.
  • The remuneration of persons in the role of the chief executive officer and any deputy chief executive officer must be reported even if they are not a director on the board of the company.

If approved, the draft regulations will come into force on June 10, 2019.

(BEIS, The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019, draft 09.04.19)

(BEIS, Explanatory Memorandum to the Companies (Directors’ Remuneration Policy and Directors Remuneration Report) Regulations 2019, draft, 09.04.19)

(Transposition Note prepared by BEIS in relation to Articles 9a and 9b of Directive 2017/828, 09.04.19)

BEIS: Independent review into the quality and effectiveness of audit – Call for Views

On April 10, 2019, the Department for Business, Energy and Industrial Strategy published a consultation paper, a “Call for Views”, as part of the review by Sir Donald Brydon into the quality and effectiveness of audits in the UK.

The Call for Views notes that the Brydon review is primarily interested in questions around the purpose, scope and quality of audit, rather than the specific role of the audit regulator or the market through which audit services are provided, but it does invite input on some of the matters that the independent review of the Financial Reporting Council by Sir John Kingman and the Competition and Market Authority’s ongoing market study into the statutory audit market have highlighted, such as the recommendations in Sir John’s report concerning companies’ internal control systems.

The Call for Views covers the following areas

  • Definitions of audit and its users: it asks questions such as for whose benefit audit should be conducted and whether UK law should be amended to provide greater clarity regarding the purpose of an audit, and for whom it is conducted?
  • The expectation gap: this compares the requirements of audit in law and in international standards with what is currently expected of audit by shareholders, other stakeholders and wider society. It highlights perceived concerns that audit is not meeting existing requirements.
  • Audit and wider assurance: this chapter looks at the role of audit within the wider context of the assurance that companies are expected to provide to their shareholders regarding management of the business and its key risks. It seeks views on areas such as whether external auditors should make greater use of the work of internal auditors, and whether there should be a role for the external audit in assessing directors’ disclosures in areas beyond the financial statements.
  • The scope and purpose of audit: this chapter highlights and seeks views on various changes to the scope and purpose of audit and it asks whether auditors should have an expanded role in assessing the internal controls of an audited entity.
  • Audit product and quality: this questions the binary nature of audit opinions and looks at the possibility of graduated findings.
  • Legal responsibilities: this highlights and seeks views on the interplay between audit and the legal responsibilities of company directors. Questions include whether distributable and non-distributable reserves should be required to be disclosed in the audited financial statements, and how should auditors discharge their obligations relating to whether the entity has kept adequate accounting records?
  • The communication of audit findings: this chapter looks at how the auditor’s report is communicated and asks how this might be improved. It also asks whether, and if so how, greater transparency can be provided about the audit process and the auditor’s perspective.
  • Fraud: this chapter provides an overview of the extent to which auditors may reasonably be expected to detect fraud in their audit and its asks whether it is reasonable and feasible to expect auditors to play a greater role in detecting material fraud.
  • Auditor liability: this chapter looks at the auditor’s liability for any costs or damages incurred by an audited entity, or by its shareholders or other affected parties, as a result of a negligent audit. It asks whether having differential liability over different aspects of reporting might aid an expansion of assurance.
  • Other issues: this chapter looks at a number of other matters related to the quality and effectiveness of audit, including the role of technology and shareholder engagement.

Responses to the Call for Views are requested by June 7, 2019. It is noted that there are likely to be further Calls for Views and the need for deeper research as Sir Donald Brydon develops his conclusions.

(BEIS, Independent review into the quality and effectiveness of audit, Call for Views, 10.04.19)

Takeover Panel: Instrument 2019/3 – The UK’s withdrawal from the European Union

On April 4, 2019 the Takeover Panel and the Code Committee published Instrument 2019/3 which makes amendments to the Takeover Code following the consultation on PCP 2018/2.

When the Takeover Panel published RS 2018/2 on March 6, 2019, it stated that while it was setting out the amendments to the Takeover Code it intended to adopt in the Response Statement, it would not make the relevant rule-making Instrument until there was greater certainty as to the arrangements for the UK’s withdrawal from the EU. Instrument 2019/3 makes those amendments and will take effect on exit day, within the meaning of section 20 European Union (Withdrawal) Act 2018.

(Takeover Panel, Instrument 2019/3 – the UK’s withdrawal from the EU, 04.04.2019)

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