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Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.
The Department for Business, Energy & Industrial Strategy (BEIS) published the Government’s response to its Green Paper on corporate governance reform (Green Paper) on August 20, 2017. The response document identifies nine proposals for reform which the Government intends to take forward. It also includes a summary of the responses to the Green Paper.
The Green Paper was published on November 29, 2016 and its purpose was to consider changes that might be appropriate to the UK’s corporate governance regime to help improve business performance and ensure that the economy works for all. The Government consulted on three specific aspects of corporate governance, namely executive pay, strengthening the employee, customer and supplier voice and corporate governance in large privately-held businesses. The nine proposals for reform relate to these aspects of corporate governance.
The Government is to invite the Financial Reporting Council (FRC) to revise the UK’s Corporate Governance Code:
The Government is to introduce secondary legislation to require quoted companies:
The Government intends to invite the Investment Association to maintain a public register of listed companies encountering shareholder opposition to pay awards of 20 per cent or more, along with a record of what these companies say they are doing to address shareholder concerns.
Other issues in relation to executive pay
The Government notes in the response paper that it will commission an examination of the use of share buybacks to ensure that they cannot be used artificially to hit performance targets and inflate executive pay. The review will also consider concerns that share buybacks may be crowding out the allocation of surplus capital to productive investment and the Government will announce more details shortly.
In terms of other options included in the Green Paper in relation to executive pay, the Government will not be taking these forward at the moment. These are as follows:
The Government intends to introduce secondary legislation to require all companies of significant size (private as well as public) to explain how their directors comply with the requirements of section 172 Companies Act 2006 to have regard to employee and other interests. The Government notes that the operation of this new reporting requirement will be subject to further consideration. It envisages that it would include a requirement to explain how the company has identified and sought the views of key stakeholders, why the mechanisms adopted were appropriate and how this information has influenced decision-making in the boardroom. Such disclosures might have to be included on the company’s website as well as in its annual strategic report.
In terms of determining which companies should be subject to the new reporting requirement, the Government’s initial view is that a threshold based on employee numbers would be reasonable and its initial view is that a threshold of 1000 employees should be used. However, this will be subject to further consideration.
The Government will invite the FRC to consult on the development of a new UK Corporate Governance Code principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level as an important component of running a sustainable business. As part of this, the Government will ask the FRC to consider and consult on a specific provision requiring premium listed companies to adopt, on a “comply or explain” basis, one of three employee engagement mechanisms:
The Government notes that many companies already have mechanisms in place to ensure that employee and other stakeholder voices are heard and taken into account in boardroom decision-making but it wants to ensure that good practice is adopted more widely and more consistently, including potentially to larger private companies.
The Government intends to encourage industry-led solutions by asking the Institute of Chartered Secretaries and Administrators (ICSA) and the Investment Association to complete their joint guidance on practical ways in which companies can engage with their employees and other stakeholders. This is something that they are already developing. The Government will also invite the GC100 to complete and publish new advice and guidance on the practical interpretation of directors’ duties in section 172 Companies Act 2006. The Government notes that it has no plans to amend section 172 but it does consider that it would be useful to have more guidance for companies of all sizes on how the “enlightened shareholder value” model enshrined in section 172 should work in practice. It notes the recommendations in relation to employee voice made by Matthew Taylor in his Review of Modern Working Practices published in July 2017 and the Government will consider these and respond to the whole report later in 2017.
The Government is to invite the FRC to work with the Institute of Directors, the CBI, the Institute for Family Businesses, the British Venture Capital Association and others to develop a voluntary set of corporate governance principles for large private companies under the chairmanship of a business figure with relevant experience. In making application of these principles voluntary, the Government notes that private companies would be able to continue to use other industry-developed codes and guidance if they are considered more appropriate. Companies will also be able to adopt, or to continue to use their own preferred approaches.
Secondary legislation will be introduced to require companies of a significant size to disclose their corporate governance arrangements in their directors’ report and on their website, including whether they follow any formal code. This requirement will apply to all companies of a significant size unless they are subject to an existing corporate governance reporting requirement. The Government will also consider extending a similar requirement to limited liability partnerships of equivalent scale. Further consideration is to be given to the size of company that would be covered by the new reporting requirement, but the Government’s initial view is that it should apply to companies with over 2000 employees. It will apply to privately-owned and public companies but there will be an exemption for premium listed companies required to report against the UK Corporate Governance Code or companies required by the Disclosure Guidance and Transparency Rules to issue a corporate governance statement. The disclosure will include details of any UK Corporate Governance Code or other formal set of corporate governance principles that the company has adopted. Where a company departs from any of the provisions in the adopted code or principles, it should explain which parts these are and the reasons for the departure. If a company has decided not to adopt a formal code or set of principles, it will be required to explain the reasons.
The Government notes that consultation on the Green Paper revealed questions over whether the FRC has the powers, resources and status to undertake its functions effectively. To address this, the Government is to ask the FRC, the Financial Conduct Authority and the Insolvency Service to conclude new, or in some cases revised letters of understanding with each other before the end of 2017 to ensure the most effective use of their existing powers to sanction directors and ensure the integrity of corporate governance reporting. In light of this work, the Government will then consider whether further action is required.
The Government notes that the FRC intends to consult on amendments to the UK Corporate Governance Code in the late Autumn. The Government intends to lay before Parliament draft secondary legislation, where required, before March 2018. The work on developing voluntary corporate governance principles for large private companies will commence in the Autumn.
The current intention is to bring the reforms into effect by June 2018 to apply to company reporting years commencing on or after that date.
The Government notes that many of the recommendations set out in the House of Commons Business, Energy and Industrial Strategy Committee’s report on Corporate Governance published April 2017 are concerned with potential amendments and enhancements to the UK Corporate Governance Code and guidance. While the Government supports many of these recommendations, it notes that they are ultimately matters for the FRC to consider and states that many will be addressed in the consultation on the UK Corporate Governance Code that the FRC intends to undertake in the Autumn.
The Government also notes that the reforms set out in the response document will complement wider work that the Government and others such as Mathew Taylor, Sir Philip Hampton, Sir John Parker and Baroness McGregor-Smith have done and are leading in relation to matters such as increasing gender and ethnic diversity in the boardroom and the workforce.
On August 31, 2017 the Financial Conduct Authority (FCA) published its 18th edition of the Primary Market Bulletin (PMB). The edition focuses on the FCA’s proposed new guidance for sponsors on their obligations to ensure directors understand their responsibilities and obligations under the Listing Rules and the Disclosure Guidance and Transparency Rules.
The FCA plans to publish three new technical notes which will outline the FCA’s expectations of sponsors and in particular, their obligations under LR 8.3.4R, LR 8.4.2R(3) and LR 8.4.12R(2). The FCA also intends to amend technical note UKLA/TN/708.2 in order to align the language more closely with that of the three new technical notes.
The FCA wants to ensure sponsors take a consistent approach and can demonstrate due and careful enquiry has been undertaken for each declaration. This will include sponsors not relying on generic documents and the work done by other advisers. Sponsors should also not adopt a ‘one size fits all’ approach’; instead sponsors must recognise the background and experience of the directors, circumstances of the company or the complexity of the transaction.
The FCA reminds issuers to cooperate with sponsors by providing them with all information reasonably requested by their sponsor to enable the sponsor to carry out its services in accordance with LR 8. The FCA notes that attendance at board meetings of the issuer can be integral to a sponsor being able to satisfy LR 8.3.4R.
The proposed technical notes provide guidance to sponsors on the type of work they ought to complete. The sponsor is advised to assess the nature of the company and the circumstances of the sponsor service it will provide to determine the steps to be taken. Guidance is also provided on circumstances that a sponsor may encounter on transactions. Sponsors are required to create and retain accessible records on every declaration they submit to the FCA under LR 8.6.16AR(1). The proposed technical notes also provide guidance on when the FCA expects sponsors to record their work and the PMB prompts sponsors to review UKLA/TN/717.1 on record-keeping requirements.
Following its consultations in PMB No. 13 and PMB No. 16, the FCA is postponing its proposed amendments to:
Profit forecasts and estimates
Public offers, admission to trading and the marketing of securities
The FCA asks for any feedback to be submitted by October 11, 2017.
On November 17, 2019, the DIFC Court handed down a landmark decision in YYY Limited v ZZZ Limited [DIFC] 2017 ARB 005 (DIFC Court Judgment).
The recent decision of the Western Australian Court of Appeal in Hancock Prospecting Pty Ltd v DFD Rhodes Pty Ltd highlights the complex issues that arise where court proceedings commenced by “strangers” to an arbitration agreement involve disputes covered by the arbitration agreement.