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Essential Corporate News – Week ending November 24, 2017

Publication November 24, 2017


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

ESMA: Updated Q&As on MAR

On November 21, 2017 ESMA published its latest version of Q&As on the Market Abuse Regulation (MAR).

ESMA has added two new questions in relation to transactions by PDMRs covering:

  • Trading during closed periods and prohibition on insider dealing: This provides that the prohibition on insider dealing under Art 14 of MAR applies during closed periods in the same way as at any other time, and therefore where clearance to trade during a closed period is given under Art 19(12) of MAR the PDMR must always consider whether or not the relevant transaction would constitute insider dealing; and
  • Meaning of “transaction”: This considers the meaning of “transaction” in respect of the closed period prohibition under Art 19(11) of MAR and the notification requirement under Art 19(1) of MAR.

(ESMA, Updated Q&As on MAR, 21.11.17)

ISS: Updated UK Proxy Voting Guidelines

On November 16, 2017 Institutional Shareholder Services (ISS) announced updates to its 2018 benchmark Proxy Voting Guidelines (Guidelines) for various regions, including the UK, Ireland and Europe. The updates for the UK and Ireland include a new voting recommendation on virtual meetings following a consultation launched on the topic by ISS in October 2017.

Changes to the UK and Ireland Guidelines include the following:

  • Virtual meetings: ISS will generally recommend voting for proposals allowing for the convening of hybrid shareholder meetings if it is clear that it is not the intention to hold virtual-only AGMs. ISS will generally vote against proposals allowing for the convening of virtual-only shareholder meetings.
  • Overboarding of directors: The definition of an excessive number of board roles at listed companies (which may result in ISS recommending a vote against a director) has been amended to state that any person who holds more than five mandates at listed companies will be classified as overboarded. Furthermore, any person who holds the position of executive director (or a comparable role) at one company and non-executive chairman at a different company will be classified as overboarded.
  • Overboarding in relation to chairs and CEOs: For chairs, negative vote recommendations will be applied first to non-executive positions held but the chair position will be targeted where where in aggregate the individual has three or more chair positions (as well as where they are being elected as chair for the first time or if the chair holds an outside executive position).
  • Audit and remuneration committees: These should be made up of independent directors only in order to align the Guidelines with the UK Corporate Governance Code and PLSA 2017 voting guidelines on the composition of the remuneration and audit committees.
  • Threshold vesting levels for Long-Term Incentive Plans (LTIPs): The Guidelines have been amended to make it clear that while threshold vesting should generally be no higher than 25 per cent, a 25 per cent vesting threshold may be considered inappropriate if LTIP grants represent large multiples of salary.
  • Share issuances without pre-emption rights: ISS has amended the Guidelines to clarify that a cash-box structure will be treated as a share issuance for cash and so using a cash box structure to issue more than the authority approved at the previous AGM will be considered an example of an abuse of that authority.

The updated Guidelines will be applied to shareholder meetings taking place on or after February 1, 2018.

(ISS, 2018 Proxy Voting Guidelines updates, 16.11.17)

Financial Reporting Lab: Risk and viability reporting

On November 23, 2017 the Financial Reporting Lab (the Lab) published a report on ‘Risk and viability reporting’. The project on risk and viability began in May 2017 and the Lab report examines the views of those companies and investors that participated in the project on the key attributes of principal risk and viability reporting, their value and use. It also provides illustrative examples of reporting favoured by investors.

Principal risk reporting

The Lab found that, since the financial crisis, companies have made enhancements to their risk reporting and investors have seen better engagement with them on how they are managing their risks. A number of developments have been made:

  • Principal risk disclosures have increased in length.
  • More information on the risk management process is being disclosed.
  • A greater contextualisation of risk (including risk movement; the categorisation of risk; the identification of the risk owner; more links to other parts of the annual report; and diagrams and visual aids).

In terms of risk reporting generally, the report notes that:

  • The best risk disclosures are specific to the company as they allow investors to identify risks in enough detail to make an informed assessment of how the risks may impact the company’s business model.
  • The quality of disclosure is more important than the number of risks disclosed.
  • Investors want to understand the reasons why assessments of principal risks that have previously been disclosed have changed during the financial year.
  • Further improvements could be made and the report provides guidance and practical examples of how companies can find a balance between reporting that is specific, whilst not revealing commercially sensitive information.

Viability statements

On the viability statement, companies have found the process of developing their statement to be helpful in better analysing their risk appetite, particularly by incorporating stress and sensitivity analyses into their risk management processes.

In terms of viability statement reporting, the report notes:

  • Investors want companies to focus on long-term prospects more clearly and state how the company will remain relevant and be able to adapt to emerging risks.
  • Viability statements should not be prepared as longer term going concern statements that focus on liquidity.
  • Investors find descriptions of the work performed by the directors around the viability statement as being helpful in providing context for the disclosure.
  • Investors highlight the sustainability of the business model as a key consideration when discussing long-term prospects of a company and they expect directors to be able to discuss its resilience to risk and adaptability to market challenges.

The Lab report encourages companies to refer to the Investment Association’s Guidelines for Viability Statements and the Financial Reporting Council’s (FRC) Developments in Corporate Governance and Stewardship where the FRC notes that there is room for improvement in explaining what qualifications and assumptions have been made and the quality of reporting of the principal risk linkages.

The Lab urges companies to be bolder in their viability report disclosures to ensure that they provide investors with better information on the company’s longevity and relevance in the market. The report encourages companies to develop their viability statements in two stages: first companies must assess prospects; and second make their statement of viability.

Next steps

The Lab is keen to hear from readers of the report and asks for comments on its content and presentation. Comments will be taken into consideration when producing future Lab reports.

(FRC, Risk and viability reporting, 23.11.17)

FRC: Independent review of the FRC’s enforcement procedures sanctions

On November 21, 2017 the report of an independent review into the Financial Reporting Council’s (FRC) enforcement sanctions, chaired by former Court of Appeal Judge Sir Christopher Clarke, was published.

The report makes a number of recommendations, including:

  • applying a greater focus on the use of non-financial penalties to ensure the quality and reliability of future audit and accountancy work;
  • removing any requirements for tribunals to consider themselves bound by previous cases when determining the appropriate sanction to impose; and
  • adjusting the settlement discount provisions to encourage timely settlements.

Although the report concludes that it is not appropriate to set a tariff or range for financial sanctions, it does suggest that in certain circumstances a fine of £10 million or more could be appropriate for cases involving seriously poor audit work, carried out by a Big Four firm.

Next steps

The FRC will take the report’s recommendations into account and decide which recommendations it ought to adopt and incorporate into its revised sanctions guidance.

(Review of FRC’s Enforcement Procedures Sanctions, 21.11.17)

European Commission: Notice to stakeholders on the withdrawal of the UK and EU rules on company law

On November 21, 2017 the European Commission wrote to stakeholders reminding them that preparation for the withdrawal from the EU is not just a matter for EU and national administrations, but one also for private parties.

The European Commission states that as of the withdrawal date, the EU rules in the field of company law will no longer apply to the UK and this has the following consequences in the different areas of EU company law:

  • UK incorporated companies: These will be third country companies and therefore will not automatically be recognised under Article 54 of the Treaty on the Functioning of the European Union by member states. Member states will not be obliged to recognise the legal personality and limited liability of companies which are incorporated in the UK but have their central administration or principal place of business in the EU. UK incorporated companies may be recognised in accordance with each member state's national law or international law treaties. As a consequence, depending on the applicable national or international law rules, such companies might not have a legal standing in the EU and shareholders might be personally liable for the debts of the company.
  • Branches in EU-27 Member States of UK incorporated companies: Thesewill be branches of third country companies and rules relevant to branches of third country companies will apply.
  • EU law on disclosure, incorporation, capital maintenance and alteration, and cross-border mergers: Thiswill no longer apply to the UK. Consequently, stakeholders, including employees, creditors and investors dealing with UK companies will have to rely solely on the national rules of the UK for adequate safeguards. EU rules on compulsory disclosure of certain company information in the business registers (such as documents and particulars related to instruments of constitution, appointment, termination of office and particulars of persons representing a company, the winding-up of a company or a change of the registered office) will no longer apply.
  • UK business register: Thiswill no longer be connected to the business registers interconnection system and information about UK companies will no longer be available through the e-justice portal. EU law on access, including cross-border, to company information available in the EU business registers, will no longer apply to the UK. Also, EU business registers will no longer be notified about certain changes in relation to UK companies (changes to UK companies with a branch in EU-27; cross-border mergers involving at least one EU company and one UK company).
  • The company law form of a European Company will no longer be available in the UK.

(European Commission, Notice to stakeholders, 21.11.17)

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