ATMs: Increasing financial flexibility of public companies
The current economic environment creates significant vulnerability for many public companies.
On May 25, 2019 the Investment Association (IA) published a report which presents findings on the prevalence of listed UK companies paying ordinary dividends without seeking shareholder approval. The research conducted by the IA is in response to a request from the Secretary of State for the Department of Business, Energy and Industrial Strategy (BEIS) to investigate the concern (expressed in response to the BEIS May 2018 consultation on corporate governance and insolvency) that increasing numbers of companies are not seeking shareholder approval for dividend distributions at their AGMs, denying shareholders a critical opportunity to engage on the sustainability of the dividend payment.
The IA’s research shows that 22 per cent of FTSE All-Share companies that pay ordinary dividends are not holding annual shareholder votes on the payment of the final dividend or are paying only interim dividends. This practice is particularly common in the 20 largest companies in the FTSE All-Share and is widespread among investment companies. The approach is dominant in companies that issue quarterly or monthly dividends to meet investor demands for a regular income stream, and in those with large, complex, international structures where there are legal, regulatory or tax obstacles to putting forward a shareholder vote. In addition, the research revealed that there are often legitimate reasons for that decision and that making an annual vote on the payment of dividends mandatory may have an undesirable impact on certain companies and shareholders.
As a result, the report recommends that all listed companies, including those that put a dividend resolution to shareholders, should, as a minimum, publish a ‘distribution policy’ setting out their long-term approach to making decisions on the amount and timing of returns to shareholders, including dividends, share buybacks and other capital distributions within the context of any relevant legal or financial constraints. This will enable shareholders to engage with companies on their approach to shareholder distributions, regardless of the timing and structure of these distributions. It will also enable companies to be transparent about how they structure these distributions in the context of their overall approach to capital management and give shareholders more detailed information about their approach in order to better hold them to account.
The IA will establish a working group to develop best practice guidance on distribution policies and will make recommendations to the Government on whether a shareholder vote on such policy and/or on yearly distributions should be mandatory. The distribution policy guidance will be published in Autumn 2019.
On May 29, 2019 the Institute of Chartered Secretaries and Administrators (ICSA) published a review which assesses the quality of independent board evaluation in the UK listed sector and identifies ways in which it might be improved. This review has been conducted at the request of the Department for Business, Energy and Industrial Strategy (BEIS). In its feedback statement, published in August 2018 on its “Insolvency and Corporate Governance” May 2018 consultation paper, BEIS noted that several respondents had suggested that the market for independent board evaluations should be reviewed with a view to introducing minimum standards, As a result, BEIS announced in that response that it would be asking ICSA to convene a group, including representatives from the investment community and companies, to identify further ways of improving the quality and effectiveness of board evaluations, including the development of a code of practice for external board evaluations.
The first part of the consultation document seeks views on the purpose of board evaluations. This is followed by a summary of the evidence on current practice in the conduct of, and reporting on, independent board evaluations in the listed sector. The consultation document then invites suggestions for actions that should be considered and in particular seeks views on whether there is a need for:
Appendices C to E of the consultation document contain draft versions of a code of practice for independent reviewers and voluntary principles and guidance on disclosure for listed companies.
Purpose of board evaluation
It is proposed that the purpose of independent board evaluation should be defined as:
Views on that definition are sought.
Code for service providers
The draft code starts with the definition of “independent board evaluation” to establish who is and who is not eligible to become a signatory. It then identifies the commitments that service providers would take on if they wish to become signatories. The main body of the draft code contains three sections covering “competence and capacity”, “independence and integrity” and “ client engagement”. Each section consists of principles and good practice guidance.
The “competence and capacity” section is essentially a disclosure framework while the “independence and integrity” and “client engagement” sections set out certain minimum standards. These include the following:
Voluntary principles for listed companies
The review considers that there may be merit in setting out some short principles to which companies would be invited to commit when engaging external reviewers, and that they should certify whether or not they followed the principles when reporting on the results of the board evaluation. ICSA has decided that the principles should not include a requirement on companies that adopt them only to engage external reviewers that are themselves signatories to the code of practice but welcomes views on that point.
Guidance for listed companies on disclosure
The main objective for producing guidance with be to assist listed companies seeking to comply with the UK Corporate Governance Code and provide their shareholders with information that they would find useful in assessing how diligently the board is seeking to improve its effectiveness. However, it is recognised that the existence of principles and guidance for listed companies would provide additional leverage for investors (and other stakeholders) to incentivise companies and board reviewers to sign up to the proposed principles and code of practice respectively.
The BEIS guidance covers both internal and external board evaluations. It sets out suggested good practice disclosures for all evaluations and then recommends additional disclosures for externally facilitated ones.
Responses to the consultation are requested by 5 July 2019. Once the responses have been considered, ICSA will publish a report containing its recommendations and revised versions of the draft codes and guidance if it is concluded that they are needed. The report will then formally be submitted to BEIS and it will be for BEIS to consider whether, and how, to act on the recommendations.
On May 29, 2019, the Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 were published together with an explanatory memorandum. The 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), and are in the form published in draft on April 9, 2019. They come into force on 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:
Directors’ remuneration report
Directors’ remuneration provisions
On May 30, 2019 the London Stock Exchange (LSE) published AIM Disciplinary Notice 21 in which it announced that it had agreed settlement terms with Real Good Food plc (the Company) for a public censure and fine of £450,000 for breaches of AIM Rules 10, 13, 17, 19, 21 and 31. The fine has been discounted to £300,000 for early settlement. The LSE states that it is publishing details of the public censure in order to educate the market on the expected standards of conduct for AIM companies under the AIM Rules for Companies.
The various breaches of the AIM Rules were as follows:
Breach of AIM Rule 10
On June 29, 2017 the Company notified an “Update on Trading” in which it indicated that it intended to announce, in July 2017, its final results for the year ended 31 March 2017 and that it expected to report EBITDA to 31 March 2017 of between £5 million and £5.4 million. The material part of this expected figure was predicated on the Company having settled a number of legal claims in favour of the Company. The former chairman knew that the claims were ongoing but confirmed to the nominated adviser that the largest claim had been settled. Other board members had concerns about the reliability of the 2017 EBITDA figure but did not raise these concerns with the nominated adviser or check the position, prior to approving the notification. Further misleading or incomplete information was also given in that notification about the Company’s expansion plans and their impact on the Company’s 2018 budget which would impact the 2018 EBITDA.
As a result, the Company breached its AIM Rule 10 disclosure obligations in that it did not take reasonable care with respect to the information in its notification of 29 June, 2017.
Breaches of AIM Rule 13 and AIM Rule 19 in relation to transactions with directors
For financial years ending 31 March 2015 and 2016, consultancy payments were made to the former chairman, over and above normal remuneration. These involved a related party transaction which should have been disclosed without delay pursuant to AIM Rule 13. Notification was not made in breach of AIM Rule 13 and the Company’s directors who were independent of the transaction did not, in consultation with the nominated adviser, consider whether the consultancy payments were fair and reasonable insofar as the Company’s shareholders were concerned.
There were also breaches of the Company’s AIM Rule 19 obligations in that during three consecutive years, consultancy fees paid to a non-executive director and to the former chairman involved transactions with related parties which exceeded 0.25 per cent pursuant to the AIM Rules class tests. As a result, details of these consultancy fees should have been disclosed in the audited annual accounts pursuant to AIM Rule 19. A loan to the former chairman to finance a personal family transaction should also have been disclosed in the annual accounts as it was a related party transaction which exceeded the 0.25 per cent threshold pursuant to the class tests and fees paid as remuneration of one non-executive director for performance of his role during a particular period should also have been disclosed, pursuant to AIM Rule 19, in the audited annual accounts for the relevant period.
Breaches of AIM Rules 10, 17 and 21
The former chairman dealt in the Company’s securities while the Company was in a close period. This resulted in a breach of the Company’s AIM Rule 21 obligations to ensure that its directors did not deal during a close period. The Company also breached its AIM Rule 17 obligation to notify, without delay, the former chairman’s dealing when it had all relevant information to make that notification. The notification which was made breached AIM Rule 10 because it contained an incorrect transaction date which gave a misleading impression that the dealing did not take place during a close period.
Conduct resulting in multiple breaches of AIM Rule 31
The Company’s conduct reflected serious underlying failures during the relevant period in the Company’s compliance with its AIM Rule 31 obligations and responsibilities. This included failing to ensure that each of its directors accepted responsibility, collectively and individually, for AIM Rules compliance, failure to ensure its procedures and controls were sufficient so that progress could be monitored and timely and accurate updates provided on expected trading performance, and failure to liaise with the nominated adviser by failing to provide timely or accurate information and/or seek AIM Rules advice and guidance whenever appropriate.
Expected standards for AIM companies
The LSE notes that the events outlined in this public censure reflect inadequate corporate governance within the Company. The inadequate corporate governance facilitated a culture of poor decision making, and an overly dominant former chairman and directors who were allowed to go unchallenged. The board failed to assert sufficient control or prevent the former chairman and certain directors from exerting disproportionate influence and this contributed to a number of serious failures by the Company to comply with its AIM Rules obligations.
The LSE notes that robust procedures and controls, overseen by independent non-executive directors who can hold management to account, are essential to ensure corporate integrity, considered judgment and accountability. As a result, AIM companies must ensure that appropriate corporate governance and financial controls are properly embedded in culture and effective in practice so as to avoid the inherent risk of breaching a company’s AIM Rules obligations.
On May 28, 2019 the AIM Regulation team at the London Stock Exchange (LSE) published an edition of Inside AIM. The newsletter sets out answers to some of the frequently asked questions in respect of staffing of nominated advisers, particularly taking into account wider market conditions and trends.
The newsletter addresses uncertainties in several areas, including:
On May 28, 2019 the AIM Regulation team at the London Stock Exchange (LSE) published an edition of Inside AIM announcing that it has issued an updated AIM Designated Market Route publication. Companies whose shares have for the last 18 months been traded on certain markets may be eligible to use an AIM Designated Market route to admission. This route to market streamlines the AIM admission process by dispensing with the requirement of producing an AIM admission document.
The new publication updates the list of AIM Designated Markets by introducing a new category extending to applicants admitted to an EU Regulated Market or SME Growth Market. The addition of the new category reflects harmonisation of investor protections and regulations in relation to securities admitted to trading on UK and European trading venues.
The current economic environment creates significant vulnerability for many public companies.
Due to the extraordinary nature of the impact of COVID-19 on senior living providers, investors in public debt are looking for insight into how these individuals are coping.
The coronavirus pandemic has required directors to navigate extreme market volatility, weakened financial markets and an uncertain business outlook. An increasing number of ASX-listed entities have had to re-evaluate their liquidity positions, with many raising capital to firm-up their balance sheets to weather the COVID-19 storm.