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Essential Corporate News – Week ending June 30, 2017

Publication June 30, 2017


Introduction

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

The Information about People with Significant Control (Amendment) Regulations 2017

The Information about People with Significant Control (Amendment) Regulations 2017 (Regulations) were published on June 23, 2017 and came into effect on June 26, 2017. The Regulations implement aspects of Article 30 (requiring a central register of beneficial ownership information for corporate and other legal entities) of the Fourth Money Laundering Directive (Directive 2015/849/EU). They make minor changes to and extend the scope of Part 21A Companies Act 2006 (CA 2006) which relates to the persons with significant control (PSC) regime, as well as changes to other secondary legislation (including the Register of People with Significant Control Regulations 2016), to bring the UK’s PSC regime into compliance with the Directive’s requirements.

Key Amendments to Part 21A CA 2006 made by the Regulations include the following:

  • Section 790B(1)(a) has been amended so that there is no longer an exemption from the requirement to maintain a PSC register for “DTR5 issuers”. Now the exemption will apply only to “companies with voting shares admitted to trading on a regulated market which is situated in an EEA state” and any other companies as determined by the Secretary of State. Such determination will now require the Secretary of State to have regard to companies subject to disclosure and transparency rules “which are contained in international standards and are equivalent to those applicable to companies” within the revised section 790B(1)(a). As a result, AIM and NEX Exchange companies will no longer be exempt from the requirement to maintain a PSC register as their shares are traded on prescribed markets rather than regulated markets.
  • Section 790(7) CA 2006 has been amended to provide that a legal entity is “subject to its own disclosure requirements” if it has voting shares admitted to trading on a regulated market in an EEA state. The reference to DTR5 issuers here has been removed.
  • Sections 790E and 790M CA 2006, which set out the company’s duties for keeping information in its PSC register up to date and entering required particulars and additional matters in that register, have been amended to introduce a 14 day time limit for notices to be given, information to be entered and changes made to the PSC register.
  • New Section 790VA has been added to Part 21A CA 2006. This requires companies to notify the Registrar of Companies of any entries in, alterations to or the noting of additional matters in its PSC register within 14 days of the entry, change or note being added to the PSC register. Failure to comply with the 14 day notification deadlines will constitute a criminal offence on the part of the company and any officers in default.
  • Part 24 CA 2006, which relates to the annual confirmation statement, has been amended so that companies that keep their own PSC registers will need to confirm annually that they have notified the Registrar of Companies of all changes to their PSC register.
  • Part 4 of the Regulations extends the PSC regime to unregistered companies.
  • The Schedule to the Regulations sets out transitional arrangements. There is a four-week transitional period (until July 24, 2017) for newly in-scope companies to obtain and file information on their PSCs and, where appropriate, apply to the Registrar of Companies for protection. As a result, AIM and NEX Exchange companies will need to establish their PSC register by the end of the transitional period.

(The Information about People with Significant Control (Amendment) Regulations 2017, 22.06.17)

Updated BEIS Guidance on the PSC regime

In light of the coming into force of The Information about People with Significant Control (Amendment) Regulations 2017 from June 26, 2017, the Department for Business, Energy and Industrial Strategy (BEIS) has updated the following guidance:

In addition, BEIS has published new PSC Guidance for eligible Scottish partnerships on the meaning of “significant influence or control”.

(BEIS, Guidance on PSC regime, 26.06.17)

BEIS: Written Statement on the EU Fourth Money Laundering Directive – Amendments to UK PSC register

On June 26, 2017 a Written Ministerial Statement from Margot James, Parliamentary Under Secretary of State for Business, Energy and Industrial Strategy (BEIS), was published. In it she refers to the two sets of regulations implementing Article 30 of the Fourth Money Laundering Directive, namely the Information about People with Significant Control (Amendment) Regulations 2017 and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. These modify and extend the UK regime for a public register of information about people with significant influence or control over UK companies and limited liability partnerships (the PSC regime).

The Ministerial Statement outlines key provisions in the new regulations and also refers to the updated guidance on the PSC regime published by BEIS.

(BEIS, Statement on Amendments to PSC register, 26.06.17)

Scottish Partnerships (Register of People with Significant Control) Regulations 2017

On June 26, 2017 the Scottish Partnerships (Register of People with Significant Control) Regulations 2017 came into effect. The Regulations implement aspects of Article 30 (requiring a central register of beneficial ownership information for corporate and other legal entities) of the Fourth Money Laundering Directive (Directive 2015/849/EU) for Scottish limited partnerships and certain Scottish general partnerships.

The Regulations cover the following:

  • Part 1 – includes interpretation and key terms used in the Regulations.
  • Part 2 – amends section 8A of the Limited Partnerships Act 1907 to require a limited partnership registering in Scotland to provide a statement of its initial significant control.
  • Part 3 – requires Scottish qualifying partnerships (general partnerships which are qualifying partnerships under the Partnership (Accounts) Regulations 2008) to register by providing registration information and information about their people with significant control (PSCs).
  • Part 4 – sets out requirements on eligible Scottish partnerships (collectively, Scottish limited partnerships and Scottish qualifying partnerships) to obtain information on their PSCs, and on others to supply such information, including the nature of the PSC’s significant control over the eligible Scottish partnership.
  • Part 5 – sets out the requirements on eligible Scottish partnerships to deliver to the Registrar of Companies the required particulars of any registrable persons and registrable relevant legal entities, and to provide additional information if there are no registrable persons or circumstances related.
  • Part 6 – requires eligible Scottish partnerships to provide an annual confirmation statement in relation to the requirements of these Regulations, similar to that required in Part 24 of the Companies Act 2006.
  • Part 7 – makes provision for the protection of information about a registrable person’s usual residential address from use or disclosure by an eligible Scottish partnership or the Registrar of Companies. It also provides for the Registrar to disclose usual residential address information to specified public authorities listed in Schedule 4, subject to conditions set out in Part 1 of Schedule 5.
  • Part 8 – makes provision about the protection of a registrable person’s particulars.

There are also consequential amendments to section 790C(7) of the Companies Act 2006, and its application in the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009.

(The Scottish Partnerships (Register of PSC Control) Regulations 2017, 26.06.17)

Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017

On June 22, 2017 the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (Money Laundering Regulations 2017) were laid before Parliament and came into force on June 26, 2017. They introduce a number of new and updated requirements on relevant businesses and changes to some of the obligations found under the Third Money Laundering Directive. They follow on from draft regulations and a consultation paper published by HM Treasury in March 2017.

Part 5 of the Money Laundering Regulations is concerned with beneficial ownership information and meets some of the requirements in Article 30 of the Fourth Money Laundering Directive (Directive 2015/849/EU). The following changes have been made to the draft regulations in so far as they apply to UK bodies corporate:

  • The definition of a UK body corporate in regulation 3 has been amended so that it is a ‘body corporate which is incorporated under the law of the United Kingdom or any part of the United Kingdom’ rather than incorporated and formed; furthermore the definition now includes eligible Scottish partnerships; it also excludes ‘a corporation sole’ or ‘a partnership that, whether or not a legal person, is not regarded as a body corporate under the law by which it is governed’.
  • Further amendments have been made to regulation 43(1)(a) regarding a UK body corporate’s obligation to respond to requests from certain relevant persons: it refers only to ‘a UK body corporate which is not listed on a regulated market’; the requirement to respond within two working days has been removed; and the previous reference to senior management has been altered to ‘senior persons responsible for its operations’.
  • New regulations have been included in regulation 43 to provide greater clarity surrounding references to legal owners and beneficial owners, and obligations to provide information identifying beneficial owners. The terms include reference to the legal owners and beneficial owners of any body corporate or trust which is directly or indirectly a legal or beneficial owner of that body corporate or trust.
  • The amount of time within which the relevant person must be notified of any change in the information previously provided has been changed from two working days of the change to 14 days from the date on which the body corporate becomes aware of the change.
  • New regulations have been introduced requiring a UK body corporate, on request, to provide all or part of the information referred to in regulation 43(1) to a law enforcement authority; and that information must be provided before the end of such reasonable period as may be specified by the law enforcement authority.
  • New regulations 43(7) and 43(8) have been inserted which state that ‘the provision of information in accordance with this regulation is not to be taken to breach any restriction, however imposed, on the disclosure of information’; and ‘where a disclosure is made in good faith in accordance with this regulation no civil liability arises in respect of the disclosure on the part of the UK body corporate’.

(Fourth Money Laundering Directive, Money Laundering Regulations 2017, 22.06.17)

European Commission: Guidelines on non-financial reporting

On June 26, 2017 the European Commission published non-binding guidelines on the methodology for reporting non-financial information. The guidelines have been prepared in accordance with Article 2 of the EU Non-Financial Reporting Directive (Directive 2014/95/EU) which requires the disclosure of non-financial and diversity information by certain large undertakings and groups.

The guidelines are designed to help companies disclose non-financial information in a relevant, useful, consistent and more comparable manner. The guidelines are not mandatory and do not create new legal obligations, so companies may also rely on international, EU-based or national narrative reporting frameworks, according to their own characteristics or business environment.. The overall aim of the guidelines is to promote sustainable growth and provide greater transparency to shareholders. They include examples and key performance indicators (KPIs) throughout.

The key principles of the guidance are:

  • To disclose material information so that it can be assessed regularly. Material disclosures should cover both positive or adverse impacts of a company’s activities in a clear and balanced way and the guidelines set out certain factors that may be relevant when assessing the materiality of information.
  • To be fair, balanced and understandable and presented in an unbiased way. Views and interpretations should be distinguished, plain language should be used, material information should be provided with appropriate context and the scope and boundaries of information disclosed should be explained.
  • Include comprehensive but concise material information on environmental, social and employee matters, human rights and anti-corruption and bribery matters. Companies should focus on providing the breadth and depth of information that will help stakeholders understand its development, performance, position and the impact of its activities.
  • To provide a strategic and forward-looking statement. Disclosures should provide insight into the strategic approach to relevant non-financial issues – what a company does, how and why it does it.
  • Ensure that all of the information is relevant and stakeholder orientated ie the information needs of stakeholders collectively should be considered rather than the needs or preferences of individual or atypical stakeholders.
  • The non-financial statement should be consistent and coherent with other elements of the management report.

In relation to the content of non-financial reports, the European Commission recommends the following:

  • Business model – Companies should consider using KPIs to explain their business model and main trends and highlight and explain any material changes to the business model during the reporting year. When describing their business model, companies may want to include the following: their business environment, their organisation and structure, the markets in which they operate, their objectives and strategies and finally any factors that may affect future developments.
  • Policies and due diligence – Companies should consider disclosures on their approaches to key non-financial aspects, their main objectives, and how they plan to deliver those objectives and implement those plans. They may want to explain the management and board’s responsibilities and make clear any changes to policies and processes.
  • Outcome – Companies should provide a useful, fair and balanced view of the outcome of their policies. The non-financial information disclosed by companies should help investors and other stakeholders understand and monitor the company’s performance.
  • Principal risks and their management – Companies are encouraged to disclose information that relates to principal risks and how they are managed and mitigated. A company should make such information on risks available to shareholders regardless of whether they stem from its own decisions or actions, or from external factors, and explain the processes used to identify and assess such risks. Companies should make clear any material changes to possible risks, or the way in which it intends to manage them in the reporting year.
  • KPIs – Companies are expected to report KPIs that are useful, taking into account their specific circumstances. KPIs should also be used consistently from one reporting period to the next to provide reliable information on progress and trends.
  • Thematic aspects – Material disclosures should provide a balanced and comprehensive view of a company’s development, performance, position, and the impact of its activities. The guidelines set out a list of thematic aspects that companies are expected to consider when disclosing non-financial information in relation to: environmental matters, social and employee matters, respect for human rights, anti-corruption and bribery matters, information on supply chain matters that have significant implications for the company and, where relevant, responsible supply chains for minerals from conflict-affected and high risk areas.

The guidelines also address board diversity disclosure in a bid to help large listed companies prepare an appropriate description of their board diversity policy for inclusion in their corporate governance statement. The board diversity description does not, however, form a part of the non-financial statement, so this section of the guidelines is without prejudice to the need to disclose material diversity information. Companies should:

  • cover all aspects of diversity including age, gender, educational and/or professional backgrounds;
  • show how their diversity policy objectives are taken into consideration and the role of board committees in doing so;
  • disclose the status of the implementation and also the results from the last statement regarding diversity aspects of their policy;
  • if the diversity objectives are not met, the company should disclose how it intends to meet the objectives, including the expected timeframe within which these objectives are to be met.

(European Commission, Guidelines on non-financial reporting, 26.06.17)

(European Commission, FAQ: Guidelines on disclosure of non-financial information, 26.06.17)

FCA: Investment and corporate banking: Prohibition of restrictive contractual clauses (PS17/13)

The Financial Conduct Authority (FCA) published Policy Statement PS17/13 on June 27, 2017 which sets out its rules banning the use of contractual clauses that restrict a client’s choice of future providers of primary market services (debt capital market, equity capital market and merger and acquisitions services). As of January 3, 2018 firms will be banned from entering into agreements with a provision that gives them a right to provide future primary market services to their clients. The ban excludes future service restrictions in bridging loans.

The ban follows the market study of investment and corporate banking conducted by the FCA, resulting in their final report published in October 2016. The FCA found that smaller clients in particular sometimes felt pressure to reward their relationship/lending bank or corporate broker with n future primary market services even where an alternative supplier might be better.  The FCA aims to provide clients with a greater choice of providers for future services; in turn competition will increase and firms will be encouraged to compete on the merits of their services. The Policy Statement comes after the FCA asked whether respondents agreed with its proposal to introduce rules banning  restrictive clauses in consultation paper CP16/31 in October 2016.

Scope, design and drafting of the rule and guidance

In CP16/31 the FCA asked for comments on the scope, design and drafting of the rule and guidance. PS17/13 therefore, considers each of the following points:

  • Types of clauses to be banned – The ban will apply to clauses in firms’ agreements which oblige clients to do future business with them. The ban will apply to written restrictive agreements only but clients should not be pressurised to enter into oral agreements instead. The ban applies to unspecified and uncertain future services only, to ensure that there is no unintended consequence of preventing clients from agreeing terms with firms for a specific piece of future business that they know they will undertake. “Right of first refusal” clauses are to be banned but “right to match” clauses will be acceptable.
  • Should any clients be exempt from the new rule? - The FCA will not segment the market and limit the applicability of the ban to specific client classes. It believes it is important that all clients are protected, irrespective of their size.
  • Types of services to be banned – The FCA has created a new Handbook definition for primary market services, covering equity capital markets, debt capital markets and M&A activities. The ban will apply to clauses affecting future primary market services.
  • Defining bridging loans – Bridging loans are excluded from the ban. The FCA sets out non-exhaustive characteristics indicative of a bridging loan in the Policy Statement.
  • The geographic scope of the ban – The application of the ban will be in line with the jurisdictional scope of the Conduct of Business sourcebook 1.1 application provision. The ban will apply where designated investment business or activities connected with designated investment business are carried on from a firm’s UK establishment. These services could be part of the services covered by the agreement itself or the future services affected by the restrictive clause. The prohibition will apply irrespective of the location of client.
  • Time period for implementation of the ban – The FCA is allowing firms a six-month period to get procedures in place to ensure that they do not enter into restrictive written agreements with clients. The ban will apply to agreements entered into from January 3, 2018.

(FCA, Prohibition of restrictive contractual clauses, 27.06.17)

FCA: Asset Management Market Study – Final Report

On June 28, 2017 the Financial Conduct Authority (FCA) published its final report MS15/2.3 into the asset management sector. This follows on from its interim report, MS15/2.2, published in November 2016.

The interim report found evidence to suggest that there was weak price competition in a number of areas of the asset management industry and in that interim report the FCA set out its provisional views on the way in which competition works for asset management services, the resulting outcomes for investors and its proposed remedies to address concerns which it identified. The interim report prompted feedback and the FCA undertook further work to reach a final set of findings (Part A MS15/2.3).

Final findings

The final report maintains that price competition is weak in a number of areas of the industry. Despite a large number of firms operating in the market, the FCA found evidence of sustained, high profits over a number of years. It is apparent that investors are not always clear what the objectives of funds are, and fund performance is not always reported against an appropriate benchmark. The FCA also identified concerns about the way the investment consultant market operates.

Package of remedies

In Part B of the final report, the FCA has published a series of remedies to increase competition in the asset management market and to protect those least able to actively engage with their asset manager. The package of remedies is designed to bring together a consistent and coherent framework of interventions, enable investors to exert greater competitive pressure on asset managers and increase the transparency of costs. Finally, the package seeks to improve the effectiveness of intermediaries for both retail and institutional investors.

Next steps

The FCA has published a separate consultation paper, CP17/18, ‘Consultation implementing asset management market study remedies and changes to Handbook’. This sets out the FCA’s proposals in relation to fund governance, risk-free box profits and share class switching.

(FCA, Asset Management Market Study, 28.06.17)

Tomorrow’s Company: NEDs – Monitors to Partners

Tomorrow’s Company announced publication of a new report “NEDS – Monitors to Partners” on June 26, 2017. Tomorrow’s Company, an independent non-profit think tank, has consulted with chairmen, non-executive directors (NEDs) and executives from a number of UK companies. The report concludes that there are shortcomings in the current approach to the role of non-executive directors (NEDs) and to corporate governance generally and it analyses the changes that need to be made in corporate governance to allow companies to focus upon long-term, sustainable business growth. This includes innovation in governance structures and greater alignment between NEDs and executives.

Many boards have found themselves focused on risk mitigation in recent years following a series of scandals and consequent reforms. While NEDs have occupied themselves with minimising risk and monitoring processes, executives have fallen short with record high dividends and low investment. The report considers that the following reasons have negatively impacted on board effectiveness:

  • shortage of time for the topics that drive long-term value;
  • unrealistic expectations that have created a lack of clarity on the role of NEDs;
  • a focus on acting as monitor rather than partner or adviser;
  • a focus on backward-looking financial information; and
  • too little variation in the role of NEDs.

The report addresses the need for change, critiques the current ‘focus on form over substance’ and lists a number of actions and questions that should be considered. The report also includes a series of perspectives from business leaders, intellectuals and its own members.

(Tomorrow’s Company, NEDs report, 26.06.17)

ICSA: Companies split over value of AGMs

On June 28, 2017 the Institute of Chartered Secretaries and Administrators’ (ICSA) Governance Institute and The Core Partnership, a recruitment specialist, announced the results of a joint poll that found that only 36 per cent of companies surveyed considered the current system of annual general meetings (AGMs) to be still valuable for companies. Almost one-third (30 per cent) feel it is no longer valuable and a further 34 per cent of respondents were undecided.

When companies were asked to vote on whether the current AGM system was still valuable for shareholders however, 45 per cent of respondents said ‘yes’. A much lower percentage said ‘no’ (19 per cent) and 36 per cent remained undecided.

Companies then suggested ways in which to change the current AGM system:

  • ban proxy advisor input;
  • create a discussion forum to allow smaller shareholders a voice;
  • introduce virtual meetings;
  • hold meetings at a time when the majority of shareholders can attend;
  • apply a shareholding threshold for attendance;
  • remove the option of voting by a show of hands and encourage electronic voting; and
  • make meetings more interactive by using presentations about the business.

(ICSA, Value of AGMS, 28.06.17)

ICAEW: What’s next for corporate reporting: Time to decide

On June 14, 2017 the Financial Reporting Faculty of the Institute of Chartered Accountants of England and Wales (ICAEW) published  a report which looks at where corporate reporting stands at present and identifies key decisions that need to be taken before a step change in the quality and usefulness of financial reports can be achieved, with particular reference to non-financial reporting.

A number of roundtable discussions have been held with stakeholders and the report sets out the main themes arising from those discussions. It sets out points of view that enjoyed substantial support and highlights major issues that were singled out as barriers to change in corporate reporting. The Financial Reporting Faculty believes stakeholders need to agree collectively a way forward in relation to these areas, which include the following:

  • Objectives of corporate reporting – who is the user?: The report points out that the definition of “corporate reporting” is uncertain, as is the definition of the users of corporate reports.
  • One report or many  - the needs of investors v other stakeholder groups: The annual report is seen as the cornerstone of the corporate reporting process and most agree it needs to focus primarily on reporting to investors. However, this can result in short-termism and there are concerns that other stakeholders have different information needs. The report provides examples of disclosures required other than in the annual report (for example reports under the Modern Slavery Act 2015 and gender pay gap reporting) and there is a question as to whether the trend for separate reporting outside the annual report should be encouraged or whether a single comprehensive report is more effective for communicating with a wide range of stakeholders.
  • Consistency, credibility and the pace of change: The question is whether a concerted international effort to encourage adoption of a consistent approach to non-financial reporting is needed or whether it should be accepted that initiatives aimed at standardisation may inhibit experimentation and innovation.
  • The intangibles problem: Should standard-setters prioritise ways and means of bringing a wider range of intangibles onto the balance sheet or should attention be focused on a broader approach to reporting that looks beyond historical financial performance?
  • Data and technology: Should it be accepted that the pace of progress in the use of technology as a corporate reporting tool is likely to remain slow or should stakeholders make a concerted effort to accelerate and coordinate progress, requiring greater collaboration between technology specialists and those with an interest in better corporate reporting?

The Financial Reporting Faculty will consider comments on the report and expects to publish a follow up paper in 2018.

(ICAEW, Corporate Reporting Report, 14.06.17)

Takeover Panel – Petropavlovsk PLC: Panel Statement 2017/10

On June 15, 2017 the Takeover Panel issued Panel Statement 2017/10 in relation to the submission by Renova Asset Holding Limited (Renova), M&G Debt Opportunities Fund II Limited (M&G) and Sothic European Master Fund Limited (Sothic) of resolutions proposing changes to the board of directors of Petropavlovsk to be considered at Petropavlovsk’s AGM on June 22, 2017.

The Panel Executive was asked to determine whether these shareholders, and the proposed directors, should be considered to be acting in concert under Note 2 on Rule 9.1 of the Takeover Code (the Code), and if so, whether any such persons had acquired any interests in shares of Petropavlovsk following the date on which they were presumed to have come into concert with the result that they had thereby triggered an obligation for a mandatory offer to be made under Rule 9.1 of the Code.

The Panel Executive concluded that three of the four proposed new directors were independent of the shareholders proposing their appointment. As a result, the resolutions were not “board control-seeking” for the purposes of Note 2 on Rule 9.1, so the shareholders and proposed new directors were not acting in concert and no mandatory offer needed to be made under the Code.

(The Takeover Panel, Statement 2017/10, 15.06.17)


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