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Essential Corporate News – Week ending January 20, 2016

Publication January 13, 2016


Introduction

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

PLSA: Corporate Governance Policy and Voting Guidelines 2017

On January 18, 2017 the Pensions and Lifetime Savings Association (PLSA) published an updated version of its Corporate Governance Policy and Voting Guidelines, previously published in December 2015.

The updated Guidelines make several amendments to the previous version, including the following:

Executive pay

  • Pay policies should ensure that maximum pay-outs remain in line with the expectations of shareholders and other stakeholders, including workers and wider society. The pay policy should not enable any pay award larger than that necessary to successfully execute the company’s wider strategy, and to incentivise and reward success. 
  • Pay policies likely to result in pay awards that could bring the company into public disrepute or foster internal resentment, owing to their excessive value and/or the overly-generous incentives and rewards that they offer, justify a vote against the policy.
  • If the process of engagement prior to the AGM vote fails to produce a remuneration policy that shareholders can support, this represents a serious failure on part of the chairman of the remuneration committee in the most fundamental aspect of their role. As such, a vote against the remuneration policy should in most circumstances be accompanied by a vote against the chairman of the remuneration committee if they have been in post for more than one year.
  • In the event of a vote against a revised remuneration policy, if the revised policy continues to fail to meet the principles outlined in the PLSA guidelines, it may also be appropriate to vote against the chairman of the board.
  • The evidence that pay incentives are necessary to motivate or reward executives and to achieve success for companies is questionable. Remuneration committee deliberations should take a critical and challenging approach to pay increases and be prepared to exert downward pressure on executive pay.
  • Given that the vote on the remuneration report is advisory and that many companies are too slow to heed the message on remuneration, it is more appropriate for shareholders to vote against any remuneration report that they feel unable to support, rather than abstain.

Diversity 

  • The progress in recent years towards meeting Lord Davies’ target of 33 per cent of women on FTSE 100 boards has been positive but there is still considerable room for improvement in some cases and shareholders expect this momentum to be maintained.
  • The Davies Report and 33 per cent target is a useful benchmark for gender diversity, and a failure to move closer to the target is one example of a criterion that could justify a vote against the re-election of the board chairman or chairman of the nomination committee.
  • The 2016 Parker report proposed an ethnic diversity target of no ‘all white’ boards by 2021 and progress towards this target is another useful measure of whether diversity is being sufficiently considered.

Accountability

  • Corporate reporting should detail the composition, stability, training and skills, and engagement levels of a company’s workforce, explaining how this relates to the underlying business strategy as well as the risks and opportunities that derive from the employment models and practices.
  • Disclosure of the business model and strategy which fails to convey how the company intends to generate and preserve value over the longer term may lead to a vote against the report and accounts, or the submission of a shareholder resolution.
  • Gathering the data necessary to clearly communicate the composition, stability, skills and engagement levels of a company’s workforce may be a medium to long-term process, but if shareholders do not see better disclosure in this area in coming years, a vote against the annual report would be appropriate.

(PLSA, Corporate Governance Policy and Voting Guidelines 2017, 18.01.17)

Investor Forum: Review for 2015-2016

On January 19, 2017 the Investor Forum (Forum) published its first review, the first time that its engagements have been disclosed publicly. Launched in October 2014, the Forum aims to facilitate a frank but constructive dialogue between investors and companies that focuses on long-term strategic issues and seeks to build trust and confidence through collective engagement.

The review notes that the underlying source of tension between companies and investors typically centres on one of more of four key issues:

  • strategy and capital allocation;
  • leadership and succession;
  • operational performance; and
  • reporting and communication.

In the first two years of operation, investors have asked the Forum to investigate 16 company situations for collective engagement. Most of the Forum’s work has been in situations where investors were seeking to recover value after a series of disappointing developments and six proposed engagements related to some form of corporate action by a company, where investors felt their interests could benefit from collective engagement. In eight cases there was comprehensive collective engagement. Three situations did not result in a full collective engagement, but investor feedback was provided to the company, three situations were narrowly defined or did not achieve critical mass for collective engagement, and two continental European situations did not lead to collective engagement as they are outside the Forum’s current remit. In both these cases there was interest in a collective exchange of views and the Forum identified and connected investors who then engaged directly.

Among other things, the review also considers the following matters:

  • developments in stewardship;
  • common themes in engagements;
  • what companies can expect from the Forum;
  • what the Forum expects from companies; and
  • the Forum’s other activities.

(Investor Forum, Review for 2015-2016, 19.01.17)

MoJ: Review of corporate liability for economic crime – Call for evidence

On January 13, 2017 the Ministry of Justice (MoJ) published a call for evidence on corporate liability for economic crime. The MoJ notes that, with the exception of the Bribery Act 2010, corporate criminal liability for economic crime is governed by common law rules, known collectively as the “identification” doctrine. The call for evidence examines the development and operation of this doctrine, its limitations as a means of addressing corporate criminal responsibility for economic crime and explores options for possible reform.

Section 7 of the Bribery Act 2010 introduced a new form of corporate criminal liability that focuses on the failure of a company to prevent bribery on its behalf. A company can be guilty not of a bribery offence itself but of the separate offence of failing to prevent the bribery. A company may be able to avoid prosecution if it can show that, despite the bribery having taken place, it has implemented procedures designed to prevent it. The MoJ states that, since its implementation in 2011, section 7 has incentivised companies in all sectors of the economy to assess the bribery risks they face and take steps to mitigate them. However, some have commented that the identification doctrine is a challenge to bringing successful criminal corporate prosecutions since it requires prosecutors to prove that those who are “the directing mind” of the company knew about, actively condoned or played a part in the offending.

This call for evidence seeks evidence on the extent to which the identification doctrine is deficient as a tool for effective enforcement of the criminal law against large modern companies. It surveys the options for reform of the law, including a strict (vicarious) liability offence or a strict (direct) liability offence, asks for views as to suitability and the scope that would be most effective, the advantages and disadvantages of adoption and the implications of change, particularly in terms of the costs to businesses associated with the implementation of prevention procedures.

The MoJ has requested responses to the call for evidence by March 24, 2017.

(MoJ, Corporate Liability for Economic Crime: Call for evidence, 13.01.17)

BEIS: Review of limited partnership law

On January 16, 2017 the Department for Business, Energy and Industrial Strategy (BEIS) published a call for evidence to better understand uses of limited partnership businesses, with the aim of better understanding the economic benefit of limited partnerships and what is behind their popularity.

The Government is gathering evidence on the use of limited partnerships across the country, with a particular focus on those registered in Scotland. Unlike those set up in England, Wales and Northern Ireland, Scottish limited partnerships have their own ‘legal personality’, meaning they can hold assets, borrow money from banks and enter into contracts. Over the last five years significantly more limited partnerships have been registered in Scotland than elsewhere and media reports have alleged that some are being used as vehicles for a number of different forms of criminality.

The call for evidence will help inform what further action, if any, is required to prevent limited partnerships being used as a front for unlawful activities such as money laundering and tax evasion, while also ensuring that the limited partnership business model continues to provide an efficient and flexible vehicle for legitimate business use.

BEIS will also look at other characteristics and requirements within limited partnerships law including transparency requirements, principal place of business for the purposes of registration and the serving of legal documents. The arrangements for the ending of a limited partnership and the role of formation agents are also included in the call for evidence.

BEIS is requesting responses to the call for evidence by March 17, 2017.

(BEIS, Review of limited partnership law: A call for evidence, 16.01.17)

Revised draft Legislative Reform (Limited Partnerships) Order 2015

On January 16, 2017 HM Treasury published a revised draft Legislative Reform (Limited Partnerships) Order 2015, originally published in July 2015 with HM Treasury’s consultation on using a Legislative Reform Order to change partnership legislation for private equity investments.

The purpose of the draft Order is to amend the Limited Partnerships Act 1907 to introduce a Private Fund Limited Partnership (PFLP) structure. This structure will be available to private investment funds which are structured as limited partnerships, e.g. private equity and venture capital funds. It is designed to reduce the administrative and financial burdens that impact these funds under the current limited partnership structure.

Amendments made to the Limited Partnerships Act 1907 include:

  • removing the requirement for limited partners to contribute capital to a PFLP;
  • enabling limited partners to appoint a person to wind up a PFLP if there is no general partner available to do so, and enabling the partners to make an agreement as to the winding up of a PFLP;
  • inserting a list of actions which limited partners in a PFLP may take without being regarded as taking part in the management of the limited partnership;
  • dealing with the application for and designation of a partnership as a PFLP;
  • removing certain administrative requirements in the case of changes to a PFLP;
  • making consequential amendments to provisions to do with the registry of limited partnerships;
  • amending the Financial Services and Markets Act 2000 such that a PFLP cannot also be a contractual scheme eligible for authorisation under Part 17 of that Act;
  • making consequential amendments to the forms to be used for applications and notifications to the Registrar at Companies House; and
  • making consequential amendments to the Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013 (S.I. 2013/1388) and the European Long-term Investment Funds Regulations 2015 (S.I. 2015/1882), both of which apply provisions of the 1907 Act with modifications.

(Legislative Reform (Private Fund Limited Partnerships) Order 2017, 16.01.17)


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