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Essential Corporate News – Week ending November 25, 2016

Publication November 25, 2016


Introduction

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

HM Treasury: Autumn Statement 2016

For corporates, the Autumn Statement published on November 23, 2016 provided relatively few surprises. We will need to wait until the Finance Bill is published on December 5, 2016 for the detail on the key reforms to interest deductibility, loss relief and the substantial shareholding exemption but there were some indications of what to expect. Other points to be aware of include the abolition of tax relief benefits in respect of employee shareholder status shares for arrangements entered into on or after December 1, 2016 and the changes to the Budget timetable, with a move to a Budget in the Autumn and abolition of the Autumn Statement.

Corporate interest deductibility and corporation loss relief

There was confirmation that the reforms to corporate interest deductibility and corporation loss relief would be effective from April 1, 2017. Draft guidance and a response to the consultation launched in May 2016 had been hoped for in the Autumn Statement but we will have to wait until publication of the Finance Bill on December 5, 2016.

  • Interest deductions – The proposals work to limit the deductions available to groups with net interest expense in excess of £2 million where net interest expense exceeds 30 per cent of UK taxable earnings and the group’s net interest to earnings ratio in the UK exceeds that of the worldwide group. The basic message from the Autumn Statement is that these rules will be introduced broadly as set out in the May 2016 consultation document. The Government intends to widen the public benefit project exclusion (PBPE) to protect public benefit infrastructure projects, but no further detail has been provided. It has also been announced that the rules will apply to banks and insurance groups in the same way as other industry sectors. Once affected parties are able to respond to specific legislation there may be some fine-tuning.
  • Loss relief – The proposed reforms to corporation loss relief allow losses to be carried forward and set against taxable profits of different activities (rather than requiring, as at present, that these are streamed). They therefore provide welcome flexibility. However, they also include a restriction which has the effect of limiting the amount of annual profit that can be relieved by carried forward losses to 50 per cent. Two key criticisms had been raised in response: (i) that the proposals would hit businesses, such as infrastructure, with high capital outlay hard, raising a possibility of tax being payable before any real-world profits were obtained; and (ii) that the proposals were excessively complicated. The Autumn Statement is clear that the Government is simplifying administration of the new regime and also indicates that changes are being made to remove ‘unintended consequences’. We will have to wait for the Finance Bill to see whether this extends to assistance for capital intensive projects.

Substantial Shareholding Exemption (SSE)

The Government consulted on reforms to SSE over the summer. The tenor of the consultation was how to make the UK more attractive as a holding company jurisdiction and a number of possible reforms were mooted. It was confirmed in the Autumn Statement that the changes will apply from April 1, 2017 and draft legislation is therefore expected on December 5, 2016. It was indicated in the Autumn Statement that the requirement relating to the investing company (i.e. that it is a trading company or member of a trading group) would be removed and that a more comprehensive exemption for companies owned by qualifying institutional investors would be introduced. There is no detail at present and reform may not be limited to these two areas.

Employee Shareholder Status (ESS)

Tax benefits for employees in respect of ESS shares will be abolished for arrangements entered into on or after December 1, 2016. ESS shares attract income tax and capital gains tax reliefs. Corporation tax reliefs for the employer company are not affected.

Budget timetable

The Budget timetable will change from 2017 to focus on a single fiscal event, the Budget, with the aim of providing greater stability for business. The Budget will take place in the Autumn following which the Finance Bill will be introduced into Parliament with Royal Assent in the Spring ahead of the new tax year. In 2017 there will be both a Spring Budget and an Autumn Budget as we transition to this new regime. The new Spring Statement introduced from 2018 is intended to have the limited function of responding to the updated Office for Budget Responsibility forecast, albeit that the Government reserves the right to make changes to fiscal policy in the Spring Statement if economic circumstances require it.

(HM Treasury, Autumn Statement 2016, 23.11.16)

FRC: Thematic review of alternative performance measures

On November 25, 2016 the Financial Reporting Council (FRC) published a thematic review of the reporting of alternative performance measures (APMs) following concerns about such measures expressed by a number of commentators and stakeholders. In October 2015 the European Securities and Markets Authority (ESMA) published its “Guidelines on alternative performance measures” (Guidelines). Listed companies are required to make every effort to comply with the Guidelines which apply to all regulated information, including interim statements and annual reports, published by listed companies on or after July 3, 2016. The Guidelines do not, however, apply to financial statements prepared in accordance with IFRS. The FRC’s report concludes that, although the use of APMs in narrative reporting has progressed, further improvements are required.

The thematic review was conducted by the FRC’s Corporate Reporting Review (CRR) team and looked at 20 sets of June 30, 2016 interim statements published after the Guidelines came into force. The main findings of the review are:

  • APMs are very widely used and definitions and reconciliations are usually given;
  • 35 per cent of companies sampled had made improvements in the last year;
  • some good explanations for why APMs were used were given, but in other cases explanations were either not given or were cursory/boilerplate;
  • narratives usually dealt with IFRS measures as well as APMs;
  • there was no common definition of adjusted profit but some commonality in items were added back;
  • adjusted profit was higher than the equivalent IFRS measure in 78 per cent of cases; and
  • there was concern over some of the items added back, for example, restructuring costs.

To achieve continuous improvement in reporting, the FRC expects many companies to make changes in response to the coming into force of the Guidelines. In its reviews of reports and accounts ending December 31, 2016 onwards, the FRC will consider whether APMs disclosed in strategic reports are consistent with the Guidelines and, where there are material inconsistencies, it will write to the companies concerned. The FRC will also take into account any such inconsistencies when deciding whether strategic reports are fair, balanced and comprehensive as required by the Companies Act 2006.

(FRC, Corporate Reporting Thematic Review - Alternative Performance Measures, 25.11.16)

ISS: Proxy Voting Guidelines updates for 2017

On November 21, 2016 Institutional Shareholder Services (ISS) published the updates to its 2017 benchmark policy recommendations which are to be included in its UK and Ireland Proxy Voting Guidelines. These updates will, for the most part, take effect for shareholder meetings held on or after February 1, 2017. ISS set out its proposed updates for consultation in October 2016.

The 2017 updates include the following:

Overboarding definition

Where directors have multiple board appointments, ISS may recommend a vote against the election/re-election of directors who appear to hold an excessive number of board roles at publicly-listed companies. ISS has amended the definition of overboarding to provide clarification on the precise number of board seats ISS believes can be held. A vote could be recommended against directors who hold more than five non-chair non-executive director positions, as well as against a non-executive chairman who also holds more than three other non-chair non-executive director positions, more than one other non-executive chair position and one non-chair non-executive director position or any executive position. In addition, a vote may be recommended against any executive director who holds more than two non-chair non-executive director positions, any other executive position or any non-executive chair position. The voting policy has also been amended to provide that an adverse vote recommendation in relation to a chairman will not generally be applied at the company where the individual is chairman unless that chairman exclusively holds other chair and/or executive positions or is being elected as chairman for the first time.

Remuneration policy

  • The wording of the remuneration sections has been amended to reflect developments in market practice and investor expectations. As a result, the introduction to the remuneration sections includes a direct reference to companies which seek to implement pay structures (for example, non-performance related restricted shares) which sit outside the typical UK model, making it clear that structures which involve a greater level of certainty of reward should be matched by lower levels of award.
  • In relation to the voting recommendation on the remuneration policy, one of the factors ISS will now consider is whether the remuneration policy or specific scheme structure has an appropriate long-term focus and has been sufficiently justified in light of the company’s specific circumstances and strategic objectives. Again, in relation to variable pay, it is made clear that any increase in the level of certainty of reward must be accompanied by a material reduction in the size of award.
  • The policy now states that where a serious breach of good practice is identified in relation to the company’s remuneration policy, and typically where issues have been raised over a number of years, ISS might make a negative voting recommendation against the chair of the remuneration committee (or, where relevant, another member of the remuneration committee).

Remuneration report

  • In terms of the general recommendation on the remuneration report, ISS will now, where relevant, take into account its European Pay for Performance methodology (EP4P) and a definition of EP4P has been included.
  • One of the factors ISS will consider in relation to the remuneration report will be whether exit payments to good leavers were reasonable, with appropriate pro-rating (if any) applied to the outstanding long-term share awards, and special arrangements for new joiners should be in line with good market practice.
  • Again, if a serious breach of good practice is identified in relation to the company’s remuneration report, and typically where issues have been raised over a number of years, ISS might make a negative voting recommendation against the chair of the remuneration committee or, where relevant, another member of that committee.

Approval of new or amended LTIP

Factors ISS will consider when considering a resolution to approve a new or amended long-term incentive plan (LTIP) will include whether it is over-complex, and ISS will want to ensure that any increase in the level of certainty of reward is matched by a material reduction in the size of award.

Committee composition of smaller companies

ISS has now made it clear that for companies listed on AIM, and for other companies which are not a member of the FTSE All Share or FTSE Fledgling Indices, the membership of their audit and remuneration committees should reflect the standard set out in the QCA Corporate Governance Code for Small and Mid-Size Quoted Companies. This requires that audit and remuneration committees should include independent non-executive directors only, with half the membership of the nomination committee being independent directors.

Timing of changes to Guidelines

As mentioned above, these updates will apply to shareholder meetings taking place on or after February 1, 2017. However, the policy with respect to committee composition of smaller companies will not apply until February 2018 since ISS recognises that this is a significant change and smaller companies will need time to comply with the new requirements if they wish to do so.

(ISS, EMEA Proxy Voting Guidelines Updates: 2017 Benchmark Policy Recommendations, 21.11.16)

European Commission: Communication on EU regulatory framework for financial services

On November 23, 2016 the European Commission (Commission) published a communication setting out the results of its September 2015 call for evidence on the EU regulatory framework for financial services.

The Commission has taken the following follow-up actions as a result of the responses it received to the call for evidence:

  • Reducing unnecessary regulatory constraints on financing the economy – In accordance with the Commission’s priority of stimulating investment, growth and job creation, it notes that the EU needs to pay attention to areas where EU rules may be impeding the flow of finance to the economy. The Commission sets out its recommendations for reducing constraints regarding bank finance, small and medium enterprise (SME) financing, long-term investment, market liquidity and access to clearing. This includes monitoring market developments to make sure that the regime for SME growth market issuers under the Market Abuse Regulation (MAR) strikes the right balance between supporting SMEs to list and protecting investors.
  • Enhancing the proportionality of rules without compromising prudential objectives – The Commission notes that regulation must be applied in a proportionate manner to regulated entities, reflecting their business model, size and systemic significance, as well as their complexity and cross-border activity, and the Commission sets out its recommendations for enhancing the proportionality of rules for the banking, derivatives, insurance, asset management and credit rating sector.
  • Reducing undue regulatory burdens – The Commission sets out its recommendations for rules related to reporting, public disclosure requirements, compliance costs and reducing barriers to entry and market integration in order to keep the regulatory burden to the minimum required for the rules to achieve their objectives, while making full use of modern technological solutions. These include assessing the national transposition measures for the Transparency Directive and the Accounting Directive, reviewing the national options in the Audit Regulation, with a specific focus on the cross-border impact of mandatory rotation of audit firms and the blacklist of prohibited non-audit services, undertaking a mapping exercise of national transposition measures to identify gold-plating provisions which create undue additional compliance costs, and reviewing national provisions that create an unjustified or disproportionate burden to the cross-border movement of capital.
  • Making the regulatory framework more consistent and forward-looking – The call for evidence underlined the need to: ensure consistency in the overall regulatory framework; further enhance investor and consumer protection; address the remaining risks in the financial system and keep the regulatory framework up-to-speed with technological developments. The Commission sets out its recommendations in order to achieve this.

The Commission will monitor progress in the implementation of the respective areas and will publish its findings and possible next steps before the end of 2017.

(European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Call for Evidence - EU regulatory framework for financial services, 23.11.16)

OTS: Call for views on reform of stamp duty on paper transactions

On November 24, 2016 the Office of Tax Simplification (OTS) published a press release announcing that it has agreed to carry out a review of stamp duty on paper transactions. The review will develop recommendations to simplify this area of the stamp duty system from both a technical and administrative stand point. This will include considering the possibility of transforming or replacing it so as to entirely remove the need for physical stamping, but will not cover Stamp Duty Reserve Tax or Stamp Duty Land Tax more widely.

The OTS is interested in hearing from businesses, advisers and others who deal with stamp duty about the technical and administrative issues that are most complex and time consuming in relation to documents requiring physical stamping. The OTS is also interested in any ideas to simplify this area of the stamp duty system.

(OTS, Stamp Duty: Review of remaining paper duty on shares etc, 24.11.16)


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