The Quoted Companies Alliance (QCA) published its revised corporate governance code last week (QCA Code). The QCA Code is used by nearly 900 companies across AIM, the Aquis Stock Exchange and the Main Market, making it a significant voice in the corporate governance space.
The QCA Code sets out ten broad principles, accompanied by an explanation of what the principles involve and includes a set of prescribed disclosures. It asks companies to apply each principle on a “comply or explain” basis. Where a company chooses to depart from the application for a principle it must provide a clear and well-reasoned explanation for doing so.
The overarching theme of the QCA Code is to deliver growth in long-term shareholder value whilst taking into consideration wider stakeholder interests both within and outside of the company. To achieve this, the QCA Code requires companies to have an efficient, effective and dynamic governance framework and to build trust through effective communication.
The ten principles are broadly in line with those in the earlier 2018 code but with:
a greater emphasis on ESG issues
a new principle to establish a remuneration policy, which supports long-term value creation and the company’s purpose, strategy and culture, having regard to its stage of development
extended disclosures in the chair’s corporate governance statement, including an explanation of key governance-related developments during the year and any positive or negative outcomes
additional guidance to support companies in the application of the principles.
The QCA recommends that a company’s corporate governance statement is published both in its annual report and on its website.
The QCA Code will apply for financial years beginning on or after 1 April 2024, with initial disclosures against the revised QCA Code expected to be published during 2025. The QCA has confirmed that there will be a 12-month grace period to allow companies time to apply the updated principles.
The QCA has also introduced a new QCA Code Badge which will be used to indicate an Official User of the QCA Code. Anyone that has bought a verified copy of the revised QCA Code can display the QCA Code Badge in their annual report and/or on their website. The QCA intends the QCA Code Badge to become a recognisable mark for investors and wider stakeholders and to improve the integrity of the QCA Code.
The QCA Code can be downloaded from https://www.theqca.com/ free of charge for QCA members or can be purchased by non-QCA members for £450.
Companies will long be familiar with the Financial Conduct Authority’s rules on climate disclosure (LR 9.8.6 R (8) and LR 14.3.27 R). The FCA now intends to consult on updating these TCFD-aligned disclosure rules in light of 2 new IFRS Sustainability Disclosure Standards (ISSB standards) published by the International Sustainability Standards Board (ISSB).
The new standards are IFRS S1 on sustainability-related disclosures and IFRS S2 on climate-related matters disclosing material information about all sustainability-related and climate-related risks and opportunities that could reasonably be expected to affect an issuer’s prospects.
These two new standards are a significant and exciting step towards (near) global consistent and comparable climate-related and other sustainability-related disclosures. The government expects the ISSB’s standards will form a core component of the Sustainability Disclosure Requirements (SDR) framework. This will mean far greater transparency than is currently the case, assisting investors with their decisions and subjecting issuers to closer scrutiny.
The next steps are for the government to undertake a formal assessment and endorsement process which it aims to complete within 12 months of the final standards being published. Assuming this timeframe is adhered to, the FCA aims to finalise their policy position by the end of 2024, with a view to bringing the new requirements into force for accounting periods beginning on or after 1 January 2025. The first reporting would begin from 2026.
Meanwhile, and as part of the on-boarding of the new IFRS S1 and S2, the FCA will consult on the scope and design of its proposed equity listing rule reforms. These reforms include the potential replacement of premium and standard listing categories with a single category of equity shares and a move from the current comply or explain compliance basis to mandatory disclosures for listed issuers.
During this transitional period, the FCA recommends that issuers:
Continue to improve reporting in line with existing climate-related disclosure rules.
Engage early with IFRS S1 and S2, the associated guidance, and the Transition Plan Taskforce’s Disclosure Framework and Guidance (once published) and consider reporting on a voluntary basis.
Engage with the UK endorsement and implementation process for the ISSB standards.
The German Federal Court (Bundesgerichtshof – II ZB 12/21 – link) has rendered a landmark decision in an appraisal dispute (Spruchverfahren) allowing the evaluation of enterprises based on their stock price for German corporate reorganisation measures. This decision can make appraisals of undertakings involved in a post-merger scenario much easier. It may solve many appraisal disputes with minority shareholders in squeeze-out or similar scenarios and should make the overall financial planning for takeovers in Germany more predictable.
A public offer for the acquisition of shares in a German target company must not be less than the three-months average stock price of the target prior to its announcement. But while the stock price as such is the key parameter for the adequacy of the offer price for the purposes of the takeover, German courts have long been reluctant to use the stock price as the key basis for the evaluation, when deciding whether the shares in the buyer or a cash price offered are an adequate compensation for minority shareholders in subsequent corporate reorganisations – such as a squeeze-out of minority shareholders or the integration of the target company by means of control- and profit-transfer agreement.
The German discussion on how to determine an adequate compensation for minority shareholders and the German jurisprudence on appraisal disputes dealing with this topic are endless. For a very long time, the German courts found the stock price to be irrelevant, when the task would be to determine a fair value in appraisal procedures. Following decisions of the German Constitutional Court in 1999 and 2001, this changed. But only with the effect that courts would have to look at the stock price as the floor for the evaluation. Until now, the courts’ practice remained to try and find a fair price, which would provide a so called “full” compensation of the value of the minority shares. Therefore, it was common practice that the buyer and the target obtained expert opinions calculating the relevant enterprise values prior to their reorganisation under income or cash-flow based models approved by the German Institute of Accountants (Institut der Wirtschaftsprüfer – IDW). These evaluations would then be challenged and reviewed by the German courts in appraisal disputes. And German appraisal disputes have always been extremely slow by their nature, which in many cases involve re-evaluations by auditors appointed by the courts and courts looking into all details of the evaluations submitted.
With a view to capital markets having become much more transparent and acknowledging that no perfect evaluation method exists to find the one and only true value of a share, the courts in Frankfurt, which had to decide the matter in previous instances (Landgericht and Oberlandesgericht), allowed a calculation of the compensation of minority shareholders due under control agreement (Beherrschungsvertrag) on the basis of the stock price of the companies involved. And they sanctioned this evaluation with respect to both elements: the exchange-ratio to be applied to a conversion of target and buyer shares, as well as the annual compensation due to outstanding shareholders remaining in the target (now contractually controlled by the buyer).
The New Decision
Now, the German Federal Court has confirmed that, the stock price may not only be applied as a floor, but that it can be used by the enterprises involved and the appraisal courts to determine the fair compensation of minority shareholders in restructuring scenarios. The Federal Court held, that to determine the minority compensation with reference to the stock prices of the undertakings involved, is a reasonable approach and does not in any way rank behind expert opinions on the business values based on their income or discounted cash flows. Further, the Federal Court has rejected all arguments by the plaintiffs, that the fair value must be determined by experts and that the district courts or court of appeal must look at and evaluate expert opinions. Also, the courts must not refrain from applying the stock price just because the takeover offer of the buyer announces the post-merger reorganisation.
Impact on Corporate Reorganisations, in particular Post-Merger
It is obvious that evaluations and evaluation procedures become much easier if the fair value of the shares of outstanding shareholders can be determined with reference to their stock price. Unless for special scenarios, where the public trading of the relevant shares would need to be deemed inefficient (disguised/withheld information situations, no liquid market, price manipulations), the relevant stock prices can be used and therefore the compensation to minority shareholders.
In summary, the decision of the Federal Court creates a solid foundation for the calculation of the fair compensation of minority shareholders in post-merger reorganisations and will make many appraisal disputes more efficient and their outcome predictable. In the ordinary course, parties to a merger will be able to use the stock price for post-merger reorganisations and spare the cost for experts’ evaluations and long-lasting legal procedures. As almost simultaneously the new German law on corporate transformations makes it possible to use a holding’s stock rather than cash where a merger-exchange ratio has been found inadequate (Sections 72a and 72b Umwandlungsgesetz), Germany has removed two significant technical obstacles for post-merger integrations and reorganisations. But open questions remain not least with respect to special capital market scenarios, e.g., how German courts will apply the new doctrine where incidents like the COVID-19 epidemic or the Russian war in the Ukraine have had a significant influence on stock prices.
Glass Lewis has published it 2023 proxy voting guidelines for the UK (the “2023 Guidelines“). The full guidelines can be read here. Updates made in the 2023 Guidelines reflect the trending topics at the forefront of investors and issuers’ minds, including oversight of climate and other environmental and social risks and board diversity and composition. Key changes to last year’s guidelines are summarised below.
External commitments of directors
The 2023 Guidelines stress that an uncommitted director can post a material risk to a company’s shareholders, particularly during periods of crisis.
Germany will implement the EU company law directive (EU) 2017/1132 (latest government proposal: https://dserver.bundestag.de/btd/20/038/2003822.pdf). The new law will serve as a basis for EU-wide corporate mergers, divisions and transformations of German companies. In addition, it will provide for essential improvements to mergers and other company reorganizations. Below are some key topics and changes.
Abandoning the Covid-19 concept, Germany has set a new standard for virtual shareholder meetings. The German 2023 general assembly season will be a new legal venture – companies and investors need to prepare.
The UK Secondary Capital Raising Review has made a number of recommendations which, when implemented, will make secondary fundraisings by companies admitted to the Official List significantly quicker, cheaper and easier.
The Review seeks to be “bold and brave” and indeed, it is.
The U.S. Securities and Exchange Commission (“SEC”) announced in March 2021 the formation of a Climate and ESG Task Force in the Division of Enforcement with a mandate to identify material gaps or misstatements in issuers’ ESG disclosures.
The Financial Conduct Authority (FCA) has published amendments to the Listing Rules and the Disclosure Guidance and Transparency Rules which implement mandatory board and executive management-level diversity and inclusion reporting.