Essential corporate news - Week ending February 22, 2019

Publication February 2019


DWP: Government response to consultation on protecting defined benefit pension schemes

On February 11, 2019 the Department for Work & Pensions published the Government’s response to its summer 2018 consultation document, “Protecting Defined Benefit Pension Schemes – A Stronger Pensions Regulator. That consultation document set out a number of proposals to improve the powers of the Pensions Regulator (TPR).

The key proposals to be taken forward are as follows:

Notifiable events framework

The government proposes to take forward the introduction of the following new employer-related notifiable events:

  • Sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20 per cent of the scheme’s liability
  • Granting of security on a debt to give it priority over debt to the scheme

The government accepts that the definition of the terms relating to each of these new events will be crucial and it will, with TPR, engage with stakeholders to develop its thinking further.

The government will remove the existing notifiable event of “wrongful trading of the sponsoring employer” but, in light of comments received, it does not intend to take forward its original proposals for the following to be additional new notifiable events:

  • The significant restructuring of the employer’s board of directors and certain senior management appointments;
  • The sponsoring employer taking independent pre-appointment insolvency/restructuring advice (such as an independent business review)
  • The extension of the current “breach of banking covenant” notifiable event to include covenant deferral, amendment or waiver

The government is also not proposing to extend the framework to cover the payment of dividends but TPR will consider, when reviewing a scheme’s funding valuations, whether the level of dividend payment made by a sponsoring employer or its parent company is appropriate in relation to the scheme’s funding position or where a recovery plan has been agreed.  In addition, the DWP is to continue to work with the Department for Business, Energy and Industrial Strategy in relation to strengthening the UK’s framework relating to dividend payments.

Proposal to bring forward or specify more clearly timing of reporting notification of certain events

The government had proposed bringing forward the reporting notification of certain events to, for example, the point at which heads of terms are agreed for some transactions.  In light of comments received, the government states that it recognises that there is more work to be done in this area and it will work with TPR and industry to identify where earlier notification could be beneficial in relation to each of the employer-related notification events and how best to make this clear, whether in legislation or a revised Notifiable Events Code of Practice.

Declaration of intent

The consultation document proposed the introduction of a Declaration of Intent made by the corporate transaction planner which would include an explanation of the transaction, confirmation that the trustee board has been consulted and how any detriment to the scheme is to be mitigated.

The government notes that opinion was divided on the introduction of a Declaration of Intent but it does believe that a statement from the transaction’s corporate planners (including but not restricted to the sponsoring employer or parent company) will help trustees to understand the detailed nature and implications of a proposed transaction for the scheme.  As a result, it intends to legislate for the introduction of a Declaration of Intent that will be shared with the trustee board of the pension scheme and TPR.  It will also consider in more detail, together with the industry, the content of the Declaration of Intent and the supporting guidance in the Notifiable Events Code of Practice.

In terms of timing of engagement with trustees and the issuing of a Declaration of Intent by sponsoring employers, the government will work with TPR to identify a flexible approach that takes into account the particular circumstances of individual transactions.  It is not currently intending to legislate to specify when the Declaration of Intent should be shared with the pension scheme trustees and TPR but expectations on timing will be set out in the guidance in the Notifiable Events Code of Practice.

Improved powers of a TPR

The consultation paper sought views on proposals to introduce a new civil penalty of up to a maximum of £1m for serious breaches and three new criminal offences to punish wilful or reckless behaviour in relation to a defined benefit pension scheme, non-compliance with a Contribution Notice and failure to comply with the notifiable events framework.

The government intends to move forward with these measures. It sets out the range of new and existing offences which the new civil penalty of up to a maximum of £1m will apply in a table in the response document. The government is to move forward with the proposals for new criminal offences for wilful or reckless behaviour in relation to a pension scheme and for failure to comply with a Contribution Notice, but the penalty for failure to comply with the notifiable events framework will be the new civil penalty of up to £1m.

The government’s proposal is for a maximum penalty of up to seven years imprisonment and/or unlimited fines for wilful or reckless behaviour in relation to a pension scheme and failure to comply with the Contribution Notice criminal offence will attract a maximum penalty of unlimited fines.

Contribution notices and financial support directions

The government is proposing to proceed with the proposals it set out in the consultation document to strengthen, clarify and improve TPR’s powers in relation to Contribution Notices although it will amend the reasonableness test to reflect that the actual or potential impact of the act, or failure to act, on the value of the scheme’s assets or liabilities, would be a relevant consideration when determining the amount to be paid under a Contribution Notice.  It will also add two additional limbs to the material detriment test to clarify the legislation and intends to proceed with its proposals for a more streamlined Financial Support Direction regime.

(DWP: Government response to consultation on protecting defined benefit pension schemes, 11.02.19)

(Norton Rose Fulbright: Pensions Stop Press - A stronger Pensions Regulator – Government announces possible prison sentences for directors who recklessly mismanage pension schemes, February 2019)

BEIS: Independent review of audit - Terms of reference

On February 14, 2019 the Department for Business, Energy & Industrial Strategy (BEIS) published the terms of reference for the independent review into the quality and effectiveness of audit being led by Sir Donald Brydon. The review will engage with a wide range of stakeholder groups in order to fully understand the range of issues facing audit, and ensure constructive challenge.

The review has been commissioned in response to the perceived widening of the “audit expectations gap” - the difference between what users expect from an audit and the reality of what an audit is and what auditors’ responsibilities entail. The review is intended to reconsider the scope of the audit, how far it can and should evolve to meet the needs of users of accounts, what other forms of assurance might need to be developed, and to define and manage any residual expectations gap. The review will also consider how the audit product should be developed to serve the public interest in future, taking account of changing business models, new technology and stronger public expectations.

The terms of reference establish the review’s scope including

  • Understanding the needs and expectations of stakeholders who make use of company audits - Specifically considering the origins and perceptions of the expectations gap, and what can be done to ensure that investors and other stakeholders fully engage with audit and understand its scope and limitations.
  • The scope of audit – The terms of reference suggest that the review should consider what information future investors and the users of corporate information are likely to require a company to produce and, in that context, what assurance investors and other users of corporate information will need; and how any extension of that assurance can be achieved at a proportionate cost to corporates.
  • How assurance is provided and how that assurance can be made more effective for investors – The review should consider from whom and how the assurance should be provided, the extent to which auditors can and should assess whether underlying information is reliable, the extent to which auditors can and should assess the impact of uncertain future events, and how audit can respond to the opportunities and challenges of new technology and other forms of innovation to increase the assurance and effectiveness of audit.

(BEIS: Independent review of audit - terms of reference, 14.02.19)

Investment Association: Irredeemable preference shares - Guidelines on redemption or cancellation

On February 19, 2019 the Investment Association published guidelines on the redemption or cancellation of irredeemable preference shares. The guidelines are intended to act as a useful guide to shareholder expectations and good practice and to be of general application to listed companies.

The guidelines, amongst other things, provide that

  • Issuers must follow a fair process and have regard to the fair market price, when looking to redeem or cancel irredeemable preference shares
  • As part of ensuring a fair process, consultation by an issuer should be designed such that the irredeemable preference shareholders have sufficient time and information to enable them to reach a properly informed decision on the proposed redemptions or cancellations
  • The issuer should use this consultation to inform the its decision as to the fair market price to be offered to the irredeemable preference shareholders as compensation for any subsequent redemption or cancellation
  • An issuer will need to respect the position of its ordinary shareholders and consult them equally with regard to the fair process and fair market value to be offered to preference shareholders as compensation for any subsequent redemption or cancellation

(Investment Association: Irredeemable preference shares - guidelines on redemption or cancellation, 19.02.19)

Investment Association: Investors to target pension perks and poor diversity in 2019 AGM season

On February 21, 2019 the Investment Association announced that it will highlight companies who are lagging behind on diversity or pay contributions to executive directors at rates above the majority of the workforce at 2019 AGMs.

Its Institutional Voting Information Service (IVIS) will “red top” companies that have no or only one woman on the board and “amber top” companies not on course to meet the 33 per cent women on board target by 2020 recommended by the Hampton-Alexander Review. IVIS will also highlight any board with women representing 25 per cent or less.

In addition, IVIS will “red top” any companies paying newly appointed directors pension contributions which are not in line with the majority of their employees. This is an expectation set in the Investment Association’s Principles of Remuneration published in November 2018.

(Investment Association: Investors to target pension perks and poor diversity in 2019 AGM season, 21.02.19)

European Commission: Consultation on update of guidelines on non-financial reporting

On February 21, 2019 the European Commission published a consultation paper which supplements its June 2017 non-binding guidelines on non-financial reporting, specifically with regard to the reporting of climate-related information.

The supplement on climate-related reporting is also non-binding and companies can choose alternative approaches to the reporting of climate-related information. Companies are advised to consider using the proposed disclosures in the supplement if either climate-related information is necessary for an understanding of the company’s development, performance and position or if it is necessary for an understanding of the external impacts of the company.

The supplement proposes climate-related disclosures in relation to the business model, policies and due diligence, outcome of policies, risks and risk management and key performance indicators (being the five reporting areas in the Non-Financial Reporting Directive) and suggests that most companies under the scope of that Directive are likely to conclude that climate is a material issue. Those companies that conclude climate is not a material issue are advised to consider making a statement to that effect, explaining how that conclusion has been reached. A number of sector-specific disclosures for banks and insurance companies are proposed in Annex 1.

Comments are requested by March 20, 2019 and the European Commission intends to publish the new supplement in June 2019.

(European Commission: Consultation on update of guidelines on non-financial reporting, 21.02.19)

ESMA: Prospectus Regulation – National thresholds below which obligation to publish a prospectus does not apply

On February 8, 2019 the European Securities and Markets Authority (ESMA) published a document containing a table of the national thresholds below which an offer of securities to the public does not need a prospectus in the various member states of the EU. The aim of the list is to create transparency around the regimes adopted across the EU in light of the provisions in the Prospectus Regulation (2017/1129).

The table sets out, for each member state:

  • A short description of the national thresholds below which no prospectus is required
  • A summary of any national rules which apply to offers below that threshold
  • Hyperlinks to the relevant national legislation and rules

ESMA will update and republish the table on its website when it receives notifications from member states that information reflected in the document has changed. If any discrepancy is identified between the information in the table and legislation or rules published nationally, priority should be given to the latter.

(ESMA: New Prospectus Regulation - thresholds below which prospectus not required, 08.02.19)

Companies House: Guidance on changes to company registrations if UK leaves EU without a deal

On February 14, 2019 Companies House published guidance on changes to company registrations if the UK leaves the EU without a deal.

It includes guidance on the following:

  • European entities formed under EU law - After the UK leaves the EU on 29 March 2019, Societas Europaea and European Economic Interest Groupings (EEIGs) will no longer be able to be registered in the UK. SEs and EEIGs registered in the UK can make alternative arrangements before March 29, 2019. For example, an SE can convert to a UK public limited company if it has been registered for at least two years or has had two sets of annual accounts approved. This conversion must be completed before March 29, 2019.

    SEs and EEIGs can also move their seat of registration from the UK to another EU member state. This must also be completed before March 29, 2019.

    Any SE registered in the UK on March 29, 2019 will be automatically converted to a UK Societas. It can remain as a UK Societas, be wound up or converted to a PLC, but it will not be allowed to transfer out of the UK. No SEs can be formed in or transferred in or out of the UK after March 29, 2019.

    If an EEIG chooses to move their seat of registration to another EU member state, it must complete this action before March 29, 2019. Any EEIG registered in the UK after March 29, 2019 will be automatically converted to a United Kingdom Economic Interest Grouping (UKEIG).
  • UK companies with EEA corporate officers - After March 29, 2019, the filing requirements for a UK company or LLP with EEA corporate officers will change. They will have to provide the corporate officer’s name, registered (or principal) office address, legal form and its governing law, register and registration number (if applicable).
  • UK companies involved in cross-border mergers - Any cross-border mergers involving UK companies must be completed and registered before March 29, 2019.
  • EEA companies - Companies with a UK establishment and whose home country is inside the EEA will have to report the same information as overseas companies after March 29, 2019. Companies House states that it will provide further information closer to exit day.

Companies House proposes that if the UK leaves the EU with no deal, these changes will come into effect at 11pm on March 29, 2019. Companies House has also provided guidance on its proposed changes to related forms.

(Companies House: Guidance on changes to company registrations if UK leaves EU without a deal, 14.2.19)

(Companies House: Changes to Companies House forms in the event of a no deal Brexit, 14.2.19)


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