Essential Corporate News – Week ending May 27, 2016
Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.
FCA: Closed periods and preliminary results under MAR
On May 26, 2016 the Financial Conduct Authority (FCA) published a note on its website on its approach to closed periods and preliminary results under the Market Abuse Regulation (MAR). Article 19(11) of MAR prohibits dealings by persons discharging managerial responsibilities in “closed periods” except in certain circumstances.
In the UK issuers often announce their preliminary results ahead of the final year-end results and the current UK regime ends the close period when the preliminary results are publicly announced, so the dealing prohibition then ends. There has been uncertainty as to whether under MAR, in force from July 3, 2016, issuers that announce preliminary results need to impose closed periods either before the preliminary results, the year-end report, or both. The FCA notes that this is still being discussed at a European level and the FCA will provide further clarification in due course. In the meantime, pending clarification from the European Commission and the European Securities and Markets Authority, the FCA will continue to view the 30 day closed period under MAR as being immediately before the preliminary results are announced provided the preliminary announcement contains all inside information expected to be included in the year-end report.
On May 25, 2016, the Financial Conduct Authority (FCA) published Primary Market Bulletin No. 15, a short special edition focussing mainly on how issuers are expected to file persons discharging managerial responsibilities (PDMR) notifications and notifications for delayed disclosure of inside information with the FCA under the Market Abuse Regulation (MAR).
The Primary Market Bulletin provides as follows:
Delayed disclosure of inside information — from July 3, 2016, where an issuer has delayed disclosing inside information in accordance with Article 17 of MAR, the issuer will have to notify the FCA of the delay immediately following public disclosure of the information. The notification will need to be made through an online form, a draft version of which is available on the FCA’s website. The FCA reminds issuers that they will need to provide a written explanation of why the disclosure of inside information was delayed only if the FCA requests it.
Transactions by PDMRs — Article 19 of MAR requires PDMRs and persons closely associated with them to notify the issuer and the FCA of certain transactions in or related to the issuer’s financial instruments conducted on their own account and worth over €5000. This notification must be made promptly and no later than three business days after the date of the transaction. Again, notification will be through an online form and a draft version of that form is available on the FCA’s website.
In the Primary Market Bulletin the FCA also point out that it plans to work closely with market operators to monitor the application of MAR and compliance with it. For issuers with financial instruments admitted to trading on multilateral trading facilities, the FCA intends to collaborate with market operators on compliance issues and real time market monitoring.
FRC: ESMA Guidelines on Alternative Performance Measures – FAQs
On May 25, 2016 the Financial Reporting Council (FRC) published a set of responses to frequently asked questions to assist directors in their consideration of the Guidelines on Alternative Performance Measures (Guidelines) published by the European Securities and Markets Authority (ESMA) in June 2015. ESMA aims to promote the usefulness and transparency of alternative performance measures (APMs) presented to investors through the Guidelines which will apply to APMs presented on or after July 3, 2016 in prospectuses and regulated information. That includes APMs presented in periodic reports such as the narrative sections of the annual report, including the strategic report, interim management reports and half-yearly financial reports and preliminary announcements, as well as RNS announcements and other ad hoc disclosure such as press releases.
The frequently asked questions in the document comprise the following:
What is an APM?
Are APMs prohibited or required?
Do the Guidelines apply to all APMs?
What APMs should be provided?
How should APMs be presented?
What disclosures should be given about APMs?
How will the FRC monitor compliance with the Guidelines?
FRC: UK Board Succession Planning Discussion Paper – Feedback Statement
On May 23, 2016 the Financial Reporting Council (FRC) issued a feedback statement on the discussion paper it published in October 2015 on UK board succession planning. That discussion paper had sought views on issues surrounding board succession for both executive and non-executive directors.
The discussion paper was divided into six sections which the FRC had identified as important in relation to succession planning, and responses in relation to each of those sections include the following:
Business strategy and culture — the discussion paper asked about practical methods that can be used to link the development of business strategy and company culture to succession planning. Responses described how the use of skills matrices and completion of a gap analysis of board requirements can better link strategy and company culture, and ensuring the involvement of the chairman and senior independent director in shaping a strong board and underlining the importance of succession is regarded as essential. Responses also indicated that there is an appetite for better disclosure of the link between strategic planning and effective succession planning, with investors wanting to understand the nature of the skills and experience a board will need in the future and how the company intends to make this transition.
Nomination committee — it was suggested that greater clarity over the nomination committee’s role and responsibilities would be helpful to promote its purpose and standing. There was no support for the view that “natural challengers” are sifted out of the recruitment process and responses were mixed as to whether details of the objective criteria used in the search for board candidates should be set out in the nomination committee’s report. Public advertising for non-executive roles did not receive much support but it was suggested that additional guidance for nomination committees could be helpful.
Board evaluation — the overall view was that board evaluations should inform and influence succession planning and that while succession planning should be included in the evaluation, it should not be considered only once a year as part of the annual evaluation, but rather be regarded as a continual process. Suggestions were made as to how to make the succession planning process more meaningful, with investors considering that current disclosures about board evaluations are insufficient. Investors would value more disclosure around the outcomes of the board evaluation, rather than a focus on its process.
Pipeline — respondents felt that the nomination committee should consider taking a more active interest in talent management. Information was provided about the methods used to identify, develop, track and prepare internal candidates for senior management and board positions. In the context of establishing an external pipeline of candidates, the role of executive search advisers was highlighted, with it being suggested that there needs to be better two-way communication between them and nomination committees.
Diversity— most respondents felt it was critical that any incorporation of diversity in the succession plan is part of a holistic approach to diversity and inclusion in the organisation. For example, all employees should have diversity and inclusion objectives and search firms should be appropriately briefed. Diversity should also be considered at the senior level. A number of suggestions were made about what more can be done and by whom to encourage greater diversity in the boardroom, with respondents stating that diversity should be considered as a broad concept in order to encourage diverse thinking and to avoid the dangers of group think.
Institutional investors— companies and investors have had mixed experience in terms of engagement about the introduction of new talent to a board. There is some hesitation by investors to become directly involved in suggesting candidates for recruitment but a number commented that the quality of reporting in this area could be greatly improved. Annual reporting could explain clearly the system the board uses to maintain good succession planning practices and their oversight of succession.
As part of the FRC’s on-going Culture Coalition Project, the FRC will consider providing nomination committee guidance as part of its revision of its Guidance on Board Effectiveness last published in 2011. For the current reporting season, the FRC will review and analyse nomination committee disclosures (including board evaluation reporting for the FTSE 350) and comment on its findings in its 2016 “Developments in Corporate Governance and Stewardship” report.
Investment Association: Letter to chairmen of FTSE companies on changes to profit expectations and dividend policy following management changes
On May 20, 2016 the Investment Association wrote to the chairmen of FTSE companies to highlight its members’ concerns about the number of instances where companies have made significant changes to their profits expectations and/or have reduced the dividend policy following the appointment of new management.
The letter notes that in the last year there have been many examples of companies where new management has been appointed and within months the value of the assets being written down and future profit expectations are scaled back significantly. In many cases these impairments have impacted on the capital strength of the balance sheet and have led to a dividend cut. Investors believe these actions highlight insufficient oversight on the part of independent directors and the audit committee and it points out that directors should be assessing the likely future profitability of the business and the valuation of its assets on an on-going basis. If, on the appointment of new management, the prospects of the business are then presented as being fundamentally different, it raises questions about the board’s oversight of the previous management and why these issues were not addressed earlier.
The letter notes that Investment Association members have asked IVIS to highlight on an “Amber Top” the re-election of the non-executive directors of any companies where this situation arises following the appointment of new management and this policy will come into effect for AGMs after August 1, 2016.
ICSA: The practice of minuting meetings – Consultation
ICSA’s Governance Institute has been looking at the practice of taking board and committee minutes and is aware that there is a variety of practice both across sectors and the industry as a whole. It notes that, unlike company general meetings, board meetings are almost entirely unregulated by the Companies Act 2006 and it is aware that as well as constituting a long-term internal record of board and committee meetings, minutes are increasingly being seen to fulfil additional functions. ICSA wants to update its guidance on good practice to reflect the reality of modern market practice on a cross-sectorial basis and so has issued this consultation paper.
The consultation paper considers the following issues:
Respondents are asked what they believe the principal function of meeting minutes to be.
In terms of responsibility for the production of minutes, ICSA’s view is that the company secretary is responsible to the chairman for the preparation and retention of minutes, with the chairman and board members being responsible for confirming their accuracy. It asks whether respondents agree with that position.
The consultation paper suggests preliminary information to be included at the beginning of minutes and seeks views on that. It also asks whether it is necessary to include legal boilerplate wording regarding the directors having considered conflicts of interest, the meeting being quorate etc.
ICSA asks for views on the style of writing in minutes i.e. should they be written in “reported speech” (past tense) and whether the naming of individuals should be avoided wherever possible. ICSA notes that the chairman has a responsibility under common law to ensure all those entitled to speak at the meeting have the opportunity to have their say and this should be reflected in the minutes.
In terms of the level of detail in minutes, ICSA asks whether the minutes should be a verbatim record of the meeting or whether they should document the reasons for a decision and include sufficient background information for future reference or for an absent board member to understand why the board has taken the decision that it has. The consultation paper asks whether minutes should include allocated actions with deadlines and whether, where papers are received for noting, the minutes should simply indicate that the relevant report was received and noted unless there is additional discussion that needs to be recorded. It also asks whether respondents include copies of presentations or other papers presented to the board with the board minutes, whether minutes should be drafted in such a way as to facilitate regulatory oversight, whether excessive detail in minutes can leave an organisation vulnerable to legal challenge in the future, how dissenting views should be recorded and views on the publication of board minutes.
This consultation paper also addresses issues in relation to conflicts of interest and how they should be addressed in board minutes. It asks whether minutes should be redacted when circulated to a conflicted director or whether, as a director, they should receive the full minutes.
The consultation paper discusses the editing of minutes and notes that once minutes have been approved by the whole board, they should not be amended, save in respect of errors agreed and minuted at a subsequent meeting.
ICSA also raises questions about access to minutes, noting that they form part of the company’s internal records and points out that before minutes of board meetings and associated papers are published on a website, the organisation needs to carefully consider this and think about the potential impact.
The consultation paper also asks about practice in relation to the retention of the company secretary’s notes of meetings, pointing out that if written notes are kept indefinitely they could be “discoverable” or disclosable in the context of future litigation.
ICSA has asked for comments by June 24, 2016. It will review those comments and then publish revised guidance in due course.
European Commission: Final draft Delegated Regulation on Regulatory Technical Standards relating to market soundings
On May 17, 2016, the European Commission adopted a Delegated Regulation which supplements the Market Abuse Regulation (MAR) with regard to regulatory technical standards (RTS) for the appropriate arrangements, systems and procedures for disclosing market participants conducting market soundings. Article 11(4) of MAR states that when a disclosing market participant discloses inside information to a person receiving the market sounding in the course of a market sounding in accordance with the conditions in Articles 11(3) and (5), this should be deemed to have been made in the normal course of the exercise of a person’s employment, profession or duty and so not constitute market abuse. Article 11(9) of MAR requires the European Securities and Markets Authority (ESMA) to develop draft RTS to determine appropriate arrangements, procedures and record keeping requirements so that the framework for market soundings can be effectively managed and controlled.
The draft RTS were submitted to the European Commission in September 2015 and the delegated Regulation was adopted by the European Commission on May 17, 2016. It provides for the following:
Article 1 requires disclosing market participants to regularly review and update, where necessary, the arrangements and procedures they have established to comply with certain of the requirements of Article 11 of MAR.
Article 2 lays down the procedures for the purposes of conducting market soundings.
Article 3 sets out the standard set of information for communications to persons receiving market soundings.
Article 4 concerns the data regarding persons receiving the market sounding and it requires disclosing market participants to draw up lists containing particular information about persons to whom information has been disclosed. Disclosing market participants also have to draw up a list of potential investors that have informed them that they do not wish to receive market soundings in relation to either all potential transactions or particular types of potential transactions.
Article 5 sets out the procedures for notifying recipients of the market sounding where the information has ceased to be inside information.
Article 6 sets out the record keeping requirements that disclosing market participants must meet.
The Delegated Regulation is to apply from July 3, 2016 and it will enter into force on the 20th day following its publication in the Official Journal.
European Commission: Delegated Regulation with regard to Regulatory Technical Standards on admission to trading
On May 24, 2016 the European Commission published a Delegated Regulation under MiFID II with regard to Regulatory Technical Standards (RTS) for the admission of financial instruments to trading on regulated markets. The draft RTS were submitted to the European Commission by the European Securities and Markets Authority (ESMA) in September 2015 and the corporate aspects of the text of the Delegated Regulation remain in substantially the same form as the text proposed by ESMA in September 2015.
The Delegated Regulation should enter into force on the 20th day after its publication in the Official Journal and will apply from January 3, 2017.
Financial Stability Board: Phase I Report of the Task Force on Climate-Related Financial Disclosures
On May 13, 2016, the Financial Stability Board (FSB) published a Phase I Report prepared for it by the Task Force on Climate-Related Financial Disclosures that was set up in December 2015 by the FSB to develop recommendations for climate-related disclosures by companies.
The G20 asked the FSB in April 2015 to consider risks related to climate change, noting that while in most G20 jurisdictions there is a legal obligation to disclose any material risks in financial reports (which includes climate-related risks), the lack of a standardised framework for disclosing climate-related risks makes it difficult for companies to determine what information should be included in their annual reports and other financial filings and how it should be presented.
The Phase I Report sets out the scope and high-level objectives for the proposed work as well as a set of fundamental principles for disclosures on climate-related financial risk and risk management. These are as follows:
To present relevant information.
To be specific and complete.
To be clear, balanced and understandable.
To be consistent over time.
To be comparable among companies within a sector, industry or portfolio.
To be reliable, verifiable and objective.
To be provided on a timely basis.
These principles are to underpin the Task Force’s Phase II recommendations for enhancing climate-related disclosures and the recommendations that are to be developed will be for issuers of public securities, listed companies and key financial-sector participants, although it is expected that the recommendations will be capable of broader application. The aim is for a final report which sets out specific recommendations for voluntary disclosure principles and good practice to be delivered by the end of 2016.
House of Lords: Modern Slavery (Transparency and Supply Chains) Bill
On May 23, 2016 the Modern Slavery (Transparency and Supply Chains) Bill had its First Reading in the House of Lords. The Bill proposes amendments to section 54 Modern Slavery Act 2015, which requires commercial organisations to prepare a slavery and human trafficking statement for each financial year.
The Bill extends this requirement to “public bodies” as defined in a new section 54(2A) to be inserted in section 54. The Bill also includes a new section 54(6A) which provides that commercial organisations and public bodies must include the slavery and human trafficking statement in their annual report and accounts, together with a requirement in new section 54(10A) and (10B) that the Secretary of State must publish a list of all commercial organisations required to publish a slavery and human trafficking statement, with that list being published in a place and format that is easily accessible and with the commercial organisations in the list being categorised according to sector. In addition, the Bill proposes amending Regulation 57 of the Public Contracts Regulations 2015 to provide that a contracting authority must exclude an economic operator from participating in a procurement procedure where they have established that the economic operator has failed to produce a slavery and human trafficking statement under section 54 Modern Slavery Act when required to do so under that Act.
The Second Reading of the Bill has not yet been scheduled.