Law Society and CLLS: Persons of significant control register – Q&A
On November 8, 2019, the Law Society and the City of London Law Society published a jointly produced Q&A series regarding the requirements of the Persons of Significant Control (PSC) regime. The main purpose of the Q&A is to highlight certain areas of complexity within the regime which are not specifically covered by the PSC primary and secondary legislation or the related guidance issued by the Department for Business, Energy and Industrial Strategy.
The main areas covered in the Q&A are the following:
- Holding shares/votes/board appointment rights
- Indirect interests/majority stakes
- Reasonable steps, restrictions and warning notices
- Position on incorporation
Some specific issues addressed in the Q&A include:
- Whether the direct (or indirect) holder of over 50 per cent of the voting rights in a company automatically qualifies as registrable under the third specified condition on the basis that they could use their votes at general meeting to pass an ordinary resolution to remove any director under section 168 of the Companies Act 2006 (CA 2006).
- The question of who holds or controls a right where a person has control over a right granted to them by another but may lose it in certain circumstances.
- Illustrations of what is meant by holding a share jointly and having a joint arrangement between individuals in respect of shares (paragraph 11 and 12 of Schedule 1A).
- What is meant by an arrangement that rights that will be exercised ‘jointly in a way that is pre-determined by the arrangement’ (i.e. whether it is the voting process or the outcome which must be pre-determined).
- Whether an individual would be considered a PSC of a charity set up as a company limited by guarantee by virtue of making a substantial donation.
- Where an unlisted overseas legal entity has the right to exercise significant influence or control over a UK company, whether a shareholder of that entity that is subject to its own disclosure requirements (within the meaning of section 790C(7) of the CA 2006) would need to be put on the UK company's PSC register.
- Whether it is necessary to aggregate interests held at two different levels in a corporate structure where the majority stake test in paragraph 18 of Schedule 1A is not met at the second level.
- Which entities are registrable where management rights in relation to an investment in a UK company which are held by a general partner of a fund are delegated to an investment manager.
- For the purpose of the fifth specified condition (paragraph 6, Schedule 1A), whether an individual who has the right to appoint a trustee in certain circumstances only would have significant influence over the trust.
- Whether it could ever be appropriate to issue a restrictions notice in circumstances where a third-party lender has security over the shares which are the subject of the relevant interest.
The Q&As also reiterate the requirement on a company to identify its registrable persons (if any) on incorporation.
(Law Society and CLLS: Persons of Significant Control register – Q&A, 08.11.19)
Hampton Alexander Review: Improving gender balance in FTSE leadership, November 2019
On November 13, 2019 the Hampton Alexander Review published its fourth and penultimate report (Report), assessing progress against its five key recommendations set in 2016, which aimed at increasing the number of women in leadership positions of FTSE 350 companies and highlighting emerging best practices and current challenges. The Report notes that the drive by companies to address the shortfall of women in leadership has continued strongly in 2019 and recognises that although 2019 has been the strongest year of progress for women on boards, a step-change is needed for women in leadership roles.
The Report notes the following:
Executive Committee and Direct Reports – The FTSE 100 has seen the number of women on the combined Executive Committee and Direct Reports increase to 28.6 per cent, up from 27 per cent in 2018. FTSE 250 companies have demonstrated a stronger increase, with women’s representation increasing to 27.9 per cent from 24.9 per cent in 2018. The appointment rate for FTSE companies has remained low for a second year running, at 36 per cent for FTSE 100 companies and 35 per cent for FTSE 250, and the Report notes that, as a result, too many companies remain well adrift from the 33 per cent target. The Report states that, unless the appointment rate of women is nearer to 50 per cent, neither the FTSE 100 nor the FTSE 250 will achieve the 33 per cent target by the end of 2020.
Women on boards – The Report notes that the FTSE 100 has progressed in line with expectations and is close to the 2020 target, with the number of women on FTSE 100 boards at 32.4 per cent this year, up from 30.2 per cent in 2018. This means that the FTSE 100 is very close to meeting the 33 per cent target for women on boards and will do so ahead of the 2020 deadline. The FTSE 250 has had its best year yet, increasing the number of women on boards to 29.6 per cent up from 24.9 per cent in 2018, and if the same rate of progress continues in 2020, the FTSE 350 will be on track to meet the 33 per cent target by the end of 2020 deadline. ‘One and done’ boards have reduced in 2019 from 74 to 39 and only two all-male boards remain.
Outlook – The Report notes that the FTSE 100 is likely to achieve the 33 per cent target for women on boards in the coming months, ahead of the December 2020 deadline. If progress with the FTSE 250 continues, and nearly half of all available appointments go to women next year, the FTSE 350 will also meet the target by the end of 2020. Although the FTSE 350 shows promising progress in relation to women on boards, the Report notes that the pace of change in leadership roles is too slow. If the FTSE 350 is to meet the 33 per cent target for combined Executive Committee and Direct Reports by the end of 2020, a significant increase in the number of women appointed would be required; if current progress continues, the FTSE 350 will miss this target.
(Hampton Alexander Review: Improving gender balance in FTSE leadership November 2019, 13.11.19)
ISS: UK proxy voting guidelines 2020
On November 11, 2019 Institutional Shareholder Services (ISS) published updates to its UK proxy voting guidelines for 2020 (Guidelines). The amendments follow the ISS benchmark policy consultation which was launched on October 7, 2019.
ISS is making several UK and Ireland voting policy changes, including:
- Director Elections – The inclusion of a new policy on board gender diversity, with the text remaining unchanged from that in the consultation paper and an amendment to the policy on chair tenure to clarify that ISS will not consider tenure in isolation, but as one of several key factors relevant to the re-election of chairs.
- Board and committee composition – ISS has removed the exception for companies below FTSE 350 from the expectation that at least 50 per cent of their boards, excluding the chair, should comprise independent directors. In addition, ISS has removed the exception for such companies that allowed chairs to sit on the audit committee, in line with changes to the UK Corporate Governance Code. These amendments have been mirrored in the policy for smaller companies.
- Pension Contribution Rates – Amendments have been made to the pension contribution policy to provide that rates for new directors should be aligned with those of the wider workforce, and to encourage companies to actively disclose whether or not this is the case. The policy states that for incumbent directors, companies should seek to align the contribution rates with the workforce over time, recognising that many investors in the UK will expect this to be achieved in the near-term.
- Remuneration report – The bonus policy has been amended to clarify that ISS will now normally, (rather than may), recommend a vote against where bonus targets are not disclosed. The Guidelines state that targets for both financial and non-financial objectives should be presented in an appropriate level of detail, immediately following the reporting year. In addition, the Guidelines state that any company choosing to disclose one or more years in arrears may attract a negative vote recommendation. The exit payments policy has been amended to specify that formal notice should be served no later than the day on which the executive's leaving date is announced, and if a company chooses not to serve notice at that point, it should explain its reasoning in the report. The policy on the use of discretion by remuneration committees has been amended to provide that the remuneration committee should disclose how it has taken into account any relevant environmental, social and governance matters when determining remuneration outcomes.
ISS aims to publish the amended policies by mid-November 2019. The amended policies will then be effective for meetings on or after February 1, 2019.
(ISS: UK Proxy Voting Guidelines 2020, 11.10.19)
Council of the EU: Adoption of SME growth market reform regulation
On November 8, 2019, the Council of the European Union (Council of the EU) adopted the proposal for a regulation to amend the Markets in Financial Instruments Directive II, the Market Abuse Regulation and the Prospectus Regulation (Regulation) as regards the promotion of the use of SME growth markets. The adopted Regulation is in the same form as that proposed by the European Parliament on April 18, 2019, subject to the amendments made by a corrigendum approved on October 21, 2019.
The adopted text will be signed in the week commencing November 25, following which it will be published in the Official Journal. The majority of the Regulation will then enter into force 20 days following its publication in the Official Journal, save for the amendments to the Market Abuse Regulation, which shall apply 12 months thereafter.
(Council of the EU: Adoption of SME growth market reform regulation, 08.11.19)
Takeover Panel: Replacement of the AFME Corporate Finance Committee
On November 7, 2019, the Takeover Panel published Instrument 2019/4 (Instrument). The Instrument amends paragraph (iv) of section 4(a) of the Introduction to the Takeover Code which sets out the process for the selection of members of the Takeover Panel. Paragraph (iv) of that section lists 10 bodies which appoint 12 members of the Takeover Panel.
The Instrument states that the Association for Financial Markets in Europe (AFME) Corporate Finance Committee ceased to exist as of October 31, 2019, and states that members of the former AFME Committee have formed a new Corporate Finance Committee - UK Finance.
The Instrument makes the following changes to paragraph (iv):
- Removes all reference to the separate appointee for the AFME Corporate Finance Committee.
- Reduces the number of members appointed by AFME to the Takeover Panel to two.
- Introduces a reference to an additional, separate appointee for the UK Finance Corporate Finance Committee, increasing the number of members appointed to two.
Changes brought in by the Instrument came into force on November 6, 2019.
(Takeover Panel: Instrument 2019/4, 07.11.19)
(Takeover Panel: Replacement of the AFME Corporate Finance Committee - statement, 07.11.19)