Employee/Consumer Representation On Company Boards ?

If Theresa May does go ahead and impose employee/consumer representation on company boards, there are likely to be unintended knock-on consequences.  In particular, it is likely to inhibit open discussion at board level because it is difficult to see an employee representative being able to withhold all board information from the employee constituency that they represent.  That it turn may undermine the role and contribution of the other non-executives, which undermines the efforts made to bolster their role over the last decade or more.

Business people discussing strategy in boardroomThe most significant change is likely to come in the way that boards interact with the rest of the day to day governance structure of the company.  Many (most?) quoted companies already have a significant management/executive committee operating below the board (the members of which include the executive directors and other senior executives).  This is likely to become an important part of the new regime to ensure that effective governance continues.  At the moment, we suspect that in practice the remit of the executive/management committee may be a little vague or imprecise.  However, under the new regime this remit would become a cornerstone of the governance structure of the company and would need to be crystal clear in order to maintain the authority of the board.  This could effectively overturn the current unitary board system in favour of a two-tier system closer to that used elsewhere in Europe (moving us closer to Europe despite Brexit?).

UK Share Plans Deadline

Colleagues have published a new post on our Compensation and Benefits Global Insights Blog entitled “Filing deadline for UK share plans is fast approaching!”

iStock_000046212782_SmallThis serves as a quick reminder that the deadline for making annual returns for UK share schemes relating to the 2015/2016 tax year is 6 July 2016. It also discusses some differences in treatment of tax-advantaged share schemes and non-tax-advantaged plans.

Capital Markets Union: a Step Closer

The EU Council has agreed a negotiating stance on proposed new rules on prospectuses for the issuing and offering of securities in the EU.

The proposed Regulation is an important step towards the creation of the capital markets union which is due to be fully functioning by the end of 2019. The draft regulation seeks to provide all types of issuers with disclosure rules that are tailored to their specific needs, whilst making the prospectus a more relevant tool for informing potential investors. It will also reduce divergences that have emerged in implementation by member states.

iStock_000055735570_SmallThe proposal establishes specific rules for companies already listed on a regulated market that wish to raise additional capital by means of a secondary issuance, as well as for SMEs.  With reduced paperwork and associated costs, it is likely SMEs may be encouraged to raise capital in the market.

The draft Regulation also sets out to achieve greater convergence between the prospectus rules and other disclosure rules.

Resolution for Disapplying Pre-Emption Rights

The Pre-Emption Group has published a monitoring report on the implementation of its 2015 Statement of Principles for disapplying pre-emption rights and a template resolution for disapplying pre-emption rights.

Ballot_Box-l-s[1]The monitoring report reveals that the 2015 Statement of Principles was generally adhered to but, having considered the views of investor representatives on best practice, the Pre-Emption Group decided to publish a template resolution for disapplying pre-emption rights to assist companies.

The template recommends issuers propose two separate resolutions:

  • The first resolution is to seek a five per cent disapplication to be used on an unrestricted basis.
  • The second resolution, which should only be put forward when appropriate, is to request authority to disapply pre-emption rights when the board considers the use to be for an acquisition or specified capital investment in accordance with the 2015 Statement of Principles.

Where the second resolution is proposed, companies should disclose the circumstances that led to its proposal and the consultation process undertaken.

The Pre-Emption Group encourages companies to use the template resolutions at their next general meeting but will be expected to use them for meetings held after 1 August 2016.

Revised CG Code and Guidance on Audit Committees

The Financial Reporting Council has published its final draft of the UK Corporate Governance Code which is expected to apply (subject to Parliamentary approval) to accounting periods beginning on or after 17 June 2016 and to all companies with a premium listing of equity shares regardless of whether they are incorporated in the UK or elsewhere. The draft follows on from the consultation “Enhancing Confidence in Audit: Proposed Revisions to the Ethical Standard, Auditing Standards, UK Corporate Governance Code and Guidance on Audit Committees” and resulting feedback.

Minor amendments are envisaged to the Code, such as:

  • a new requirement that the audit committee as a whole shall have competence relevant to the sector in which the company operates (C.3.1).
  • the existing requirement that FTSE 350 companies should put the external audit contract out to tender at least every ten years has been deleted (C.3.7).

  • a new requirement that the annual report sets out advance notice of any external auditor retendering plans (C.3.8).

iStock_000046212782_SmallThe FRC has committed not to amend the Code further until at least 2019.

The FRC has also published a final draft of its Guidance on Audit Committees. While boards are not required to follow this guidance, it is intended to assist them when implementing the relevant provisions of the Code.

The FRC has stated that it will, from 2017, publish the names of those companies or company audits which have been the subject of the FRC’s Corporate Reporting Review (CRR) and Audit Quality Review (AQR). It notes that, as a result of the identification of those companies subject to CRR and AQR reviews, audit committees are encouraged to report even if there were no significant issues, in order to avoid speculation. Disclosure of AQR and CRR reviews should be factually accurate, fair and balanced in order for the market to understand and avoid the need for further public clarification. A focus of the FRC’s ongoing monitoring will be how audit committees report the outcomes of AQR and CRR reviews in their annual reports.


Executive Remuneration: IA’s Interim Report

The Squire Patton Boggs’s Compensation and Benefits Global Insights blog is hosting a new post entitled “Shareholder Spring 2: Rabbit Emerges From The Hat”.

iStock_000005855098_SmallThe post looks at the Investment Association’s Interim Report which will be used to inform a revision of the IA’s “Principles of Remuneration”. Essentially, they are looking to fix an executive remuneration system that they feel is no longer “fit for purpose” and outline some innovative proposals.

FCA Paper on Reform of the IPO Process

The Financial Conduct Authority has published a discussion paper on the availability of information during the UK equity IPO process.  The FCA focuses on 2 key issues:

  1. the fact that in the vast majority of London IPOs (in the absence of a retail or other public offer) an approved prospectus is not published until immediately prior to admission to trading, rendering the document ineffective as a basis for an investment decision by investors;
  2. the use of analyst research in the IPO process, in particular the potential bias of connected research, the lack of availability of unconnected/independent research, the timing of the publication of research (and the perception that there is a lack of other information available for investors upon which to base their investment decision) and the related market practice and rationale of blackout periods.

The FCA is seeking views on the need for reform in the UK IPO process to address these issues and has developed 3 different models for possible reform (although it is at pains to point out that these are not definitive proposals for reform at this stage).  All 3 models propose the use of a tri-partite prospectus with the publication of a FCA approved registration document at the same time as an Intention to Float announcement and prior to the publication of research.  Both connected and unconnected research could then be published after an appropriate blackout period.  Following the marketing and pricing of the transaction, the securities note and summary parts of the prospectus would be approved and published immediately prior to admission in the usual way.

iStock_000064569703_SmallThe FCA’s suggested “re-sequencing” of the IPO process is designed to give unconnected analysts and potential investors formal disclosure from the issuer at an early stage thus affording them more time to conduct due diligence and to consider the investment case.  The FCA believes it would give independent research analysts a more level playing field from which to author unconnected research and to publish that ahead of any marketing process.  One of the FCA’s additional ideas is to allow unconnected analysts equal access to the issuer’s management to assist them further in producing research.

This paper is likely to generate significant market interest and feedback.  The FCA’s starting position seems to be that the UK IPO process is inefficient; and yet London’s success as an IPO venue over the last few years suggests otherwise.  There are some obvious points that seem to have been overlooked in the analysis, for example, certain issuers may be concerned to preserve confidentiality (or at least to limit the amount of disclosure that is put into the public domain) for as long as possible during an IPO process (particularly if a twin track exit strategy is being pursued); the assumption that a registration document would be more effective disclosure than a pathfinder prospectus (which would contain the same information); the assumption that independent research would be commercially viable and readily produced; concerns around the control of information to a wider analyst community and the potential commercial and legal risks for an issuer if a wide range of potentially inconsistent disclosures and valuations are available to potential investors.

Brokers should also note the FCA’s words of warning to those who deploy research analysts formally or informally in the pitch process for IPO mandates.

Stakeholder responses are due by 13 July 2016.

Proposed Changes to AIM Rules

The London Stock Exchange has issued AIM Notice 44 in which it is consulting on proposed changes to the AIM Rules for Companies in advance of the Market Abuse Regulation coming into effect on 3 July 2016.

MAR establishes a new EU-wide regulatory framework on market abuse which expands on the previous regime and includes insider dealing, unlawful disclosure of inside information and market manipulation.  MAR will introduce new and more detailed regulations relating to market soundings (eg the confidential marketing of a placing of securities), the public disclosure of inside information, the contents and procedures relating to the maintenance of insider lists, transactions by an issuer’s managers and those closely associated with them (including during closed periods), and the sanctions for any related breaches.

The proposed changes to the AIM Rules for Companies include:

  • Amending the guidance note to AIM Rule 11 (General disclosure of price sensitive information) to reiterate the purpose of the rule and to signpost an AIM company’s new and separate disclosure obligation under Article 17 of MAR. Compliance with one rule will not automatically mean compliance with the other. In this regard, AIM companies will be accountable to two regulators: the Exchange regarding AIM Rule 11 and the Financial Conduct Authority  regarding Article 17.
  • iStock_000046478238_SmallDeleting from AIM Rule 17 (Disclosure of miscellaneous information) the obligation on AIM companies to notify information relating to directors’ dealings. The Exchange is satisfied that Article 19 of MAR provides an appropriate level of transparency. New guidance to Rule 17 is also proposed, signposting an AIM company’s obligations under Article 19.
  • Deleting existing AIM Rule 21 (Restrictions on Deals) and replacing it with a new Rule requiring AIM companies to have a reasonable and effective dealing policy. Existing AIM companies are expected to update their policies to ensure compliance with the new rule by 3 July 2016. Under the AIM Rules for Nominated Advisers, Nomads have a responsibility to ensure that their AIM clients continue to understand their obligations, including being satisfied that each client’s dealing policy is effective.  Many AIM companies will have a share dealing code in place already but the code will need to be reviewed and updated in order to comply with MAR and to ensure full compliance with the new requirements of AIM Rule 21.

The Exchange anticipates making consequential amendments to the AIM Rules for Companies, the AIM Rules for Nominated Advisers and the AIM Note for Investing Companies.

The Exchange will also consider further amending the AIM Rules once ESMA clarifies whether an issuer can end its close period by publishing a preliminary statement of annual accounts under MAR.

Responses on the consultation should be emailed to AIM on or before 12 May 2016.