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Essential Corporate News – Week ending April 14, 2017

Publication April 14, 2017


Introduction

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

ICAEW: Technical Release – Guidance on realised and distributable profits under the Companies Act 2006 – TECH 02/17

On April 7, 2017 the Institute of Chartered Accountants in England and Wales (ICAEW) published a Technical Release, TECH 02/17,  which updates its guidance on realised and distributable profits. It is based on TECH 02/10 but has been updated as proposed in TECH 05/16, published in March 2016.  The ICAEW has also published a mark-up of changes to the guidance to show the changes made to both TECH 02/10 and TECH 05/16.

The guidance provides advice on realised and distributable profits under the Companies Act 2006 (CA 2006) and all relevant statutory instruments made under the CA 2006. Its purpose is to identify, interpret and apply the principles relating to the determination of realised profits and losses for the purposes of making distributions under the CA 2006.

Changes made to the March 2016 draft TECH 05/16 include the following:

  • The use of footnotes makes it clear that the definition of a distribution for Part 23 of the CA 2006 reflects case law.
  • The ICAEW confirms that this guidance reflects accounting standards in issue at December 31, 2016 in relation to the meaning of realised profits. However, the additional guidance about the definition of a distribution in paragraphs 2.6A to 2.6D is based on legal advice and is not a question of generally accepted practice. Therefore, it is possible that some transactions previously entered into were distributions at the time they were entered into and would have been unlawful distributions in the absence of adequate distributable reserves. For example this may apply to some intragroup loans on off-market terms.
  • Further guidance is included on the definition of distributions in kind under sections 845 and 846 CA 2006.
  • A new paragraph has been included on the determination of the amount of a distribution in kind (paragraph 2.9FA). This states that a transfer of assets may be lawful in accordance with the statutory provisions of section 845 CA 2006, but nevertheless be an unlawful distribution of capital contrary to common law. 
  • The paragraphs on intragroup loans have been redrafted to address comments received though not to change the overall conclusions. 
  • Amendments have been made to address the consequences of the change in the law concerning distributable profits in relation to long-term insurance business made by The Companies Act 2006 (Distributions of Insurance Companies) Regulations 2016 (SI 2016/1194) which were made on December 7, 2016.
  • There is confirmation that there is no requirement under law or accounting standards for financial statements to distinguish between realised profits and unrealised profits, or between distributable profits and non-distributable profits.#

(ICAEW, Technical Release TECH 02/17BL – Guidance on realised and distributable profits under the Companies Act 2006, 07.04.17)

FRC: Letter to investors ahead of annual reporting season

On April 12, 2017 the Financial Reporting Council (FRC) wrote to investors ahead of the 2017 shareholder meeting season to highlight some recent changes and developments in reporting which it hopes will be helpful. The letter encourages investors to engage with companies to provide a steer on what information they believe is relevant for inclusion in the annual report and to challenge where reporting falls short of expectations.

Business model reporting in the strategic report

The letter reminds investors about the Financial Reporting Lab report, published in October 2016, which identified room for improvement in the clarity with which many companies explain how they make money and what differentiates them from their peers.

Alternative performance measures in the strategic report

The FRC continues to monitor how alternative performance measures (‘APMs’ or ‘non-GAAP’ measures) are used to report performance. The letter comments that this year will be the first in which the European Securities and Markets Authority (ESMA) ‘Guidelines on Alternative Performance Measures’ apply to annual reports. Investors should expect to see disclosures that give a clear and complete understanding of the APMs presented, how they are calculated and why they are useful and, where relevant, reconciliation to amounts presented in the financial statements.

Risk reporting and viability statements in the strategic report

The letter notes that the FRC’s initial assessment of viability statements suggests that there is little variation in disclosures between business sectors. This year, the FRC has encouraged companies to provide clear disclosure of why the period of assessment selected is appropriate for the particular circumstances of the company, what qualifications and assumptions were made, and how the underlying analysis was performed.

Brexit and the strategic report

Companies will need to consider the consequential risks and uncertainties in the political and economic environment and the impacts of those risks and uncertainties on their business. As the economic and political effects are developed and become more certain in the medium and longer term, the FRC would expect boards to provide increasingly company specific disclosures with, ultimately, quantification of the effects.

Governance reporting

The letter reminds investors that the UK Corporate Governance Code operates on a comply or explain basis. Where companies elect not to comply with key provisions of the Corporate Governance Code, they should provide specific explanations. This means setting out the background, providing a clear rationale for the action being taken and describing any mitigating activities. The FRC encourages investors to challenge companies where they do not believe that explanations given are sufficiently persuasive.

Audit committee report

In 2015, the FRC issued its ‘Audit Quality Practice Aid for Audit Committees’ to assist audit committees in evaluating and reporting on audit quality in their assessment of the effectiveness of the external audit process. The FRC notes that investors should expect to see this reporting in the context of the company’s business model and strategy, the business risks it faces, and it’s perception of the reasonable expectations of the company’s investors and other stakeholders.

Tax

The FRC’s thematic study of tax reporting identified areas for improved disclosure. More companies are expected to disclose the amount of their tax provisions than in previous years.

Dividends

In light of the 2015 Financial Reporting Lab report on best practice in dividend disclosures, the FRC has already noted examples of improved disclosure, and expects to see more over the coming reporting period. The FRC suggests investors may wish to challenge companies that provide insufficient information in this area.

Low interest rates

The FRC has reminded companies that they should consider the impact of low interest rates on the amounts reported in their financial statements. In particular, careful consideration should be given to the valuation of long term assets and liabilities and companies may need to provide sensitivity analysis to highlight the potential impacts.

Accounting policies, significant accounting judgements and estimates

Companies should explain significant judgements and accounting policy choices, particularly where there is diversity of treatment, in pension reporting, for example. However, the FRC notes that there continues to be room for improvement in the disclosure of accounting policies, particularly in relation to revenue recognition. Investors should be able to see a clear link between the sources of income described in the business model and revenue recognition policies. Companies should also identify the precise nature of the judgements they make rather than merely repeat the accounting standards so investors can assess the quality of management’s policy decisions. Clear descriptions of sources of estimation uncertainty should explain the extent to which the values of assets and liabilities have the potential to change materially in the next year.

Developments in IFRS

The FRC notes that the International Accounting Standards Board has published three major standards that will become effective in the next few years: IFRS 15 Revenue from Contracts with Customers (effective for periods beginning 1 January 2018), IFRS 9 Financial Instruments (effective 1 January 2018), and IFRS 16 Leases (effective 1 January 2019). It expects that most companies that apply IFRS will have made substantial progress in their implementation of these standards. Investors should expect to see companies provide information on this progress and disclose the likely impacts of each of the new standards once they can be reasonably estimated.

(FRC, Letter to investors, 12.04.17)

Takeover Panel: Panel Statement 2017/7 – Amendments to the Takeover Code

On April 13, 2017 the Takeover Panel released a Panel Statement advising that the Panel and the Code Committee of the Panel have published Instrument 2017/1, and the Code Committee has published Instrument 2017/2, which make various amendments to the Takeover Code (the Code).

The amendments in Instrument 2017/1 and Instrument 2017/2 have either been made as a consequence of changes to legislation or do not materially alter the effect of the provisions in question. Accordingly, the amendments have been made without formal consultation.

The amendments made by the Instruments include:

Instrument 2017/1

  • Section 8 of the Introduction to the Code has been amended in order to remove any overlap with the Rules of the Takeover Appeal Board.
  • Section 4(a) of the Introduction to the Code has been amended to reflect the name change of the National Association of Pension Funds to the Pensions and Lifetime Savings Association.

Instrument 2017/2

  • Sections 3(a)(i) and (ii) of the Introduction to the Code have been amended to clarify that, where a company’s securities are admitted to trading on a multilateral trading facility, the Code will apply only if the company has approved trading, or requested admission to trading, of its securities on the relevant multilateral trading facility.
  • Rules 24.3(a) and 28.5 of the code have been amended to reflect the name change of ISDX Growth Market to NEX Exchange Growth Market.
  • Appendix 7 of the Code (Schemes of arrangement) has been amended to reflect the abolition by the Government of takeovers implemented by cancellation schemes of arrangement, following amendments to section 641 Companies Act 2006.

The amendments set out in Instrument 2017/1 and Instrument 2017/2 take effect on May 2, 2017.

The Takeover Appeal Board has also announced that is has published an amended version of its Rules which will take effect on May 2, 2017.

(Takeover Panel, Panel Statement 2017/7 – Amendments to the Takeover Code as of 2 May 2017, 13.04.17)

Takeover Panel: Panel Statement 2017/6 – Amendment of Practice Statement No 20

On April 13, 2017 the Takeover Panel released a Panel Statement advising that the Panel Executive has amended Practice Statement No 20 on Rule 2 – Secrecy, possible offer announcements and pre-announcement responsibilities.

Amendments include:

  • A sentence has been added to paragraph 8.2 to clarify that the requirement to consult the Panel Executive before more than a total of six parties is approached about an offer or possible offer continues to apply during an offer period in relation to a possible offer by any potential offeror which has not been identified.
  • A new paragraph 8.6 has been added to confirm that, if a shareholder (or other relevant person) is approached before an offer period begins and the meeting relates to the possible offer (or would not be taking place but for the possible offer), the meeting will need to be attended by a financial adviser or corporate broker and the financial adviser or corporate broker who attends the meeting must, by not later than 12 noon the following business day, provide a written confirmation to the Panel as specified by Rule 20.2(c) or Note 1 on Rule 20.2 of the Takeover Code (as applicable) unless certain conditions are met.

The amended Practice Statement No 20 has been published on the Practice Statements page of the Panel’s website and the electronic version of the Takeover Code has been amended.

(Takeover Panel, Panel Statement 2017/6 – Amendment of Practice Statement No 20, 13.04.17)

Takeover Panel: Panel Statement 2017/8 – Proceedings initiated against David King

On April 13, 2017 the Takeover Panel announced that it had initiated proceedings seeking an order requiring Mr David King to comply with rulings of the Takeover Appeal Board, Takeover Panel Executive and of the Hearings Committee of the Takeover Panel.

On March 13, 2017 the Takeover Appeal Board published its decision upholding rulings of the Takeover Panel Executive and of the Hearings Committee of the Takeover Panel that Mr David Cunningham King acted in concert with Messrs George Letham, George Taylor and Douglas Park to acquire more than 30% of the voting rights in Rangers and in consequence had incurred an obligation under the Takeover Code to make a mandatory offer at a price of 20 pence per Rangers share for all of the Rangers shares not already held by Mr King and members of his concert party.

The Takeover Appeal Board directed that Mr King should announce an offer pursuant to Rule 9 of the Takeover Code by April 12, 2017. No such offer having been announced, the Takeover Panel initiated proceedings on April 13, 2017 in the Court of Session, Edinburgh under section 955 Companies Act 2006 seeking an order requiring Mr King to comply with these rulings.

(Takeover Panel, Panel Statement 2017/8 – Rangers International Football Club PLC,13.04.17)

PIRC: UK Shareowner Voting Guidelines 2017

Pensions and Investment Research Consultants Ltd  (PIRC) has published the 24th edition of its UK Shareowner Voting Guidelines.

PIRC has made several key changes in the 2017 Guidelines, including:

The board

  • PIRC believes the combination of roles of chairman and chief executive at a listed company can only be justified on a temporary basis under exceptional circumstances and where a clear, cogent and compelling rationale has been provided for the combination. PIRC will also oppose the re-election of an executive chairman except in exceptional circumstances.
  • In the 2016 Guidelines, PIRC stated that it is important for both company boards and shareholders to take account of a director's track record, qualifications, sector-based experience, transactional experience and overall competency when contemplating his or her suitability for re-election. PIRC now states that this principle should also apply for a director’s election to the board.
  • Where there are serious concerns over the conduct of a director, PIRC will be unlikely to support a director's nomination unless fully justified by the board.
  • PIRC now believe it should be seen as normal practice for vacant executive director posts to be formally advertised.
  • PIRC supports the recommendations of the final Lord Davies review and the Hampton-Alexander review and will not support the re-election of a nomination committee chairman of a FTSE 350 company where current female representation on its board falls below the expectations of those reviews with no clear and credible proposals for reaching their objectives.
  • PIRC has removed guidance stating that it does not consider the appointment of alternate directors to be acceptable owing to the lack of accountability to shareowners and certain guidance on company secretaries.

Report and accounts, audit and financial controls

PIRC regards the provision of non-audit services as a significant material risk factor that can compromise auditors' ability to confront directors on difficult issues. Accordingly PIRC will normally recommend abstention in relation to the vote on the auditor’s re-appointment where non-audit fees are between 25 per cent and 50 per cent of audit fees, and oppose re-appointment if non-audit fees exceed 50 per cent of audit fees for either the year under review or over the previous three years. In its 2017 Guidelines PIRC clarifies that, in its view, tax compliance fees charged by auditors are to be regarded as non-audit fees for the purpose of calculating these percentages, since they cannot be fully separated from tax advisory services.

Shareowner rights, capital stewardship and corporate actions

PIRC maintains that where a company has received a significant proportion of votes cast against a management proposed resolution, it should provide a statement within its RNS announcement. The 2017 Guidelines also state that the company should disclose in its subsequent annual report steps taken to engage with shareowners on the substantive concerns represented by any ‘significant’ votes.

Directors' remuneration

PIRC now calls on companies to disclose the remuneration consultants they have used and their fees on an annual basis. PIRC also notes that it has become more common for audit firms to provide remuneration consultancy, which PIRC considers wholly unacceptable.

Sustainability and corporate responsibility reporting

PIRC states that the November 2016 BEIS Green Paper on Corporate Governance Reform is consistent with PIRC’s interpretation of the law regarding directors’ duties and the strategic report. It notes that the legislation enacting the strategic report requires directors to explain how they have fulfilled their duties under the Companies Act 2006 including the non-exhaustive list of items included in section 172. PIRC notes that some industry guidance, including the FRC Guidance on the Strategic Reports, has not done this, leading to evidence being presented to Parliament in 2016 which was indicative of wide spread non-compliance with the law.

The PIRC UK Shareowner Voting Guidelines 2017 can be purchased here.

FCA: Final notices issued to Niall O’Kelly and Lukhvir Thind in relation to market abuse

On April 7, 2017 the Financial Conduct Authority (FCA) announced that it had imposed financial penalties on two former Worldspreads Limited (WSL) employees, Niall O’Kelly and Lukhvir Thind and banned them permanently from performing any function in relation to regulated activities carried on by an authorised or exempt person or an exempt professional firm. Both were found guilty of engaging in market abuse.

In August 2007, the holding company of WSL, Worldspreads Group (WSG), floated on the Alternative Investment Market of the London Stock Exchange. Mr O’Kelly, as finance director, was closely involved in drafting and approving the admission documentation for the flotation, which contained materially misleading information and omitted key information that investors would have needed in order to make an informed decision about the company. The FCA also found that Mr O’Kelly helped manage an undisclosed ‘internal hedging’ strategy at WSL using fake client trading accounts and the unauthorised use of actual client trading accounts. By doing this, he artificially inflated assets on WSG’s balance sheet.

In the annual accounts for 2010 and 2011, Mr O’Kelly and Mr Thind, the financial controller, knowingly falsified critical financial information concerning WSL’s client liabilities and its cash position, which was passed to the company’s auditors. This meant that material shortfalls in WSL’s client money position were concealed from investors. By March 31, 2011, these misstatements amounted to £15.9 million. WSL was unable to meet this client money liability which ultimately led to WSL’s collapse in 2012.

(FCA, Final Notice – Niall O’Kelly, 07.04.17)

(FCA, Final Notice – Lukhvir Thind, 07.04.17)

European Commission: Consultation on conflict of laws rules for third party effects of transactions in securities and claims

On April 7, 2017 the European Commission published a consultation paper on conflict of laws rules for third party effects of transactions in securities and claims. In its September 2015 Capital Markets Union Action Plan, the European Commission noted that despite significant progress in recent decades to develop a single market for capital, there are still many long-standing and deep-rooted obstacles that stand in the way of cross-border investment. One of the obstacles identified is legal uncertainty surrounding securities ownership in cases when the securities issuer and the investor are located in different member states and/or securities are held by financial institutions in different member states.

The European Commission is seeking feedback on the practical problems and types of risks caused by the current state of harmonisation of the conflict of laws rules on third party effects of transactions in securities and claims and to gather views on possibilities for improving such rules.

In particular, the consultation considers the following assets:

  • book-entry securities;
  • certificated securities; and
  • claims.

The Commission is requesting responses by June 30, 2017.

(European Commission, Consultation document on conflict of laws rules for third party effects of transactions in securities and claims, 07.04.17)


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