Investment Association Updates its 2018 Principles of Remuneration

Colleagues have published a new post on their blog, “Compensation and Benefits Global Insights”. The post considers the Investment Association’s annual letter to Remuneration Committee Chairs and their updated Principles of Remuneration. The post also notes that many companies will need to take action before their 2018 AGM.

ISS Consults on Hybrid and Virtual-Only Shareholder Meetings

The Institutional Shareholder Services (“ISS”) has published a consultation document seeking views on certain of its proposed benchmark voting policies for 2018. Of relevance in the UK and Europe is the “UK/Ireland Policy and European Policy – Virtual/Hybrid Shareholder Meeting Proposals”.

As the title suggests, ISS is considering (i) “hybrid” meetings, that is where shareholders can attend a physical meeting of the company in person or elect to participate online; and (ii) “virtual-only” meetings, that is where shaeholder meetings are held entirely through online participation with no corresponding physical meeting taking place.

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The Stakeholder Voice in Board Decision Making

The Institute of Chartered Secretaries and Administrators (ICSA) and the Investment Association (IA) have published guidance entitled “The Stakeholder Voice in Board Decision Making; Strengthening the business, promoting long-term success”. This guidance is aimed at the boards of all companies, whether listed or privately owned and regardless of sector or size.

The guidance acknowledges that whilst companies may have certain stakeholders in common (such as employees, customers, suppliers, shareholders and lenders) their stakeholders will vary according to, amongst other things, the size, industry and location of the specific business. For that reason, the guidance does not seek to set out a comprehensive range of approaches but rather concentrates on 10 core principles that should guide boards’ strategic decision making.

The core principles are set out below verbatim:

  • “Boards should identify, and keep under regular review, who they consider their key stakeholders to be and why.
  • Boards should determine which stakeholders they need to engage with directly, as opposed to relying solely on information from management.
  • When evaluating their composition and effectiveness, boards should identify what stakeholder expertise is needed in the boardroom and decide whether they have, or would benefit from, directors with directly relevant experience or understanding.
  • When recruiting any director, the nomination committee should take the stakeholder perspective into account when deciding on the recruitment process and the selection criteria.
  • The chairman – supported by the company secretary – should keep under review the adequacy of the training received by all directors on stakeholder-related matters, and the induction received by new directors, particularly those without previous board experience.
  • The chairman – supported by the board, management and the company secretary – should determine how best to ensure that the board’s decision-making processes give sufficient consideration to key stakeholders.
  • Boards should ensure that appropriate engagement with key stakeholders is taking place and that this is kept under regular review.
  • In designing engagement mechanisms, companies should consider what would be most effective and convenient for the stakeholders, not just the company.
  • The board should report to its shareholders on how it has taken the impact on key stakeholders into account when making decisions.
  • The board should provide feedback to those stakeholders with whom it has engaged, which should be tailored to the different stakeholder groups.”

The Government has recently announced a raft of corporate governance reforms and the Financial Reporting Council will be consulting on the development of a new UK Corporate Governance Code with an intended implementation date for company reporting years commencing after June 2018. In light of these developments, ICSA and the IA will update this guidance, if necessary, but in any event will review the guidance in the second half of 2019 to measure it against companies’ experience of applying the guidance.

Strategic Report Changes Ahead

The FRC has published a consultation paper setting out draft amendments to its Guidance on the Strategic Report.

The Guidance was first published in June 2014, since when there has been an upward trend for large companies to report more broadly on their impact on society, with specific reference to the directors’ duty under section 172 of the Companies Act 2006 i.e the duty to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

(a) the likely consequences of any decision in the long term;

(b) the interests of the company’s employees;

(c) the need to foster the company’s business relationships with suppliers, customers and others;

(d) the impact of the company’s operations on the community and the environment;

(e) the desirability of the company maintaining a reputation for high standards of business conduct; and

(f) the need to act fairly as between members of the company.

The consultation paper reflects the UK’s recent implementation of Directive 2014/95/EU (Non-Financial Reporting Directive) by way of the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016.  The amendments proposed in the consultation paper do not constitute a fundamental review of the Guidance, but reflect these recent legislative changes to the strategic report requirements and apply in relation to financial years beginning on or after 1 January 2017.

In summary, the proposed changes include:

  • Amendments to sections 4 (purpose) and 7 (content elements) to reinforce the link between strategic reporting and the directors’ section 172 duty. Section 7 changes seek to encourage companies to evaluate issues that may impact the value of the company over the longer term and to underscore how value is generated.
  • Amendments to section 5 (materiality) seek to clarify the use of the concept “material” in the guidance, to focus on non-financial information and long term value, and to scrutinise the exceptions from the over-arching requirement to disclose material information.
  • Amendments to section 6 (communication principles) seek to facilitate companies to better integrate related information in their annual reports and to ensure shareholders have access to information that will enable them to assess the factors that may impact the long-term success of the business.

The consultation paper is set against the backdrop of the government’s Corporate Governance Reform Green Paper. This consultation ended in February and the government’s response is expected shortly. One of the specific issues on which the government consulted was the option of introducing clearer requirements for companies to report on how they are giving consideration to the different stakeholder interests specified in section 172 of the Companies Act 2006. Depending on the outcome of that consultation and any other legislative changes affecting the strategic report requirements, amendments may need to be made to the Guidance on the Strategic Report.

The deadline for responses to the FRC consultation is 24 October 2017.

AIM Consultation

The London Stock Exchange (“Exchange”) has published AIM Notice 46 in which it announced the launch of a discussion paper on proposed changes to the AIM Rules for Companies and the AIM Rules for Nominated Advisers.

Many of the proposals concern the pre-admission process, principally to avoid delays. However, there are a number of proposals which would affect companies already admitted to trading on AIM.

Pre-Admission Proposals

  • Early notification: whether nominated advisers should enter into discussions with the Exchange at an earlier stage setting out key information regarding the company and its proposed admission to AIM.
  • AIM Rule 9 powers: whether the Exchange should publish a list of non-exhaustive examples of factors that a  nominated adviser should take into account when assessing a company’s appropriateness for AIM.
  • Free float: whether the Exchange should introduce a minimum “shares in public hands” requirement and if so, what the minimum free float should be.
  • Minimum fundraising: whether the Exchange should introduce a minimum fundraising threshold for all new applicants (subject to limited exceptions) and if so, whether it should apply to both revenue and non-revenue generating companies. What should the minimum threshold be?

Post-Admission Proposals

Corporate Governance

The Exchange takes a principle-based approach to corporate governance and is of the view that each company, together with their nominated adviser, should focus on what is meaningful and appropriate for that company in its particular circumstances. AIM Rule 26 sets out the current corporate governance arrangements and the discussion paper is canvessing views on whether those requirements are effective.

The question is also raised as to whether it should be mandatory for AIM companies to comply and explain against one of the industry codes of their choosing, such as the UK Corporate Governance Code or the Quoted Companies Alliance Corporate Governance for Small and Mid-Size Quoted Companies.

Standards of Conduct and Approach to Non-Compliance

The Exchange’s remit to enforce standards of conduct in AIM companies is strictly limited to its rulebooks. It cannot get involved with other examples of inappropriate or fraudulent conduct such as market abuse, fraud, breach of directors’ duties and so on. The Exchange is concerned that market participants, particularly individuals, do not fully appreciate its limited remit. To that end, it raises the question as to what more it could do to educate market participants, beyond the information already available on its website.

Breaches of the AIM Rulebooks

The discussion paper sets out what factors the Exchange considers when investigating alleged breaches of its rulebooks and the sanctions available to it. The Exchange intends to undertake a further review of the AIM Disciplinary Procedures and Appeals Handbook with a view to considering proposals to increase understanding about the outcome of the Exchange’s work.

The Exchange also intends to review its supervisory powers and sanctions policy and to issue a consultation paper on proposed changes to the AIM Disciplinary Handbook. In the meanwhile, the discussion paper raises the question as to whether to introduce automatic fines for explicit breaches of the AIM Rules, which breaches and the level of the fine.

The Exchange invites responses to the discussion paper on or before 8 September 2017.

Takeover Code Consultation

The Code Committee of the Takeover Panel has published PCP2017/1 consulting on a number of proposed amendments to the Takeover Code in relation to asset sales in competition with an offer and other matters.

The background to one of the consultation issues is that in late 2016, there were two cases in which the board of an offeree company subject to a unilateral offer decided that shareholders would receive better value by the company selling all of its assets to a third party, returning the proceeds to shareholders and winding up the company, rather than accepting the offer. These cases raised a number of issues under the Takeover Code and in part led to this PCP.

In the Code Committee’s view it is undesirable that certain provisions of the Takeover Code might be capable of being circumvented through an offeror or potential offeror purchasing the assets of an offeree company. Accordingly, the Code Committee proposes to introduce an additional restriction into Rules 2.8, 12.2(b)(i) and 35.1 prohibiting persons subject to these Rules from purchasing, agreeing to purchase, or making any statement which raises or confirms the possibility that it is interested in purchasing, the assets of an offeree company. Furthermore, in order to cast the net wider, the Code Committee proposes that the prohibition should apply not only in relation to the purchase of all or substantially all of the assets of the offeree company but rather in relation to the purchase of assets which are significant in relation to the offeree company. In determining whether assets are “significant”, the Panel will look at the consideration, assets and profits tests similar to those set out in Note 2 on Rule 21.1 and relative values of more than 50% will generally be regarded as significant.

Responses to the consultation are requested by 22 September 2017.

Changes to the PSC Regime: AIM Companies Take Note

In our Down the Wire post of 22 May, we warned that the Fourth Money Laundering Directive (which the UK had to implement by 26 June 2017) could bring AIM companies within the scope of the “PSC regime”, so as to require the identification and registration of people with significant control. At the time we said that clarification on this question was required.

Guidance issued by the Department for Business, Energy & Industrial Strategy (BEIS) on Friday, 23 June, confirmed that AIM companies are, from today, now required to create and maintain a PSC register, and must file PSC information with the central public register at Companies House, as a result of the coming into force of  The Information about People with Significant Control (Amendment) Regulations 2017.

Until now AIM companies have been exempt from the need to create and maintain a PSC register.   This new compliance requirement for AIM companies applies in addition to the existing disclosure obligations in Rule 17 of the Aim Rules and DTR 5.

iStock_000020654006_SmallCompanies whose voting shares are admitted to trading on the London Stock Exchange’s main market, or any other regulated market in the UK or EEA (and certain other specified markets) are not affected by the changes and continue to be exempt from the PSC regime (but subject to other transparency rules).

For AIM companies and other companies affected by the PSC regime BEIS has issued updated Summary Guidance and Detailed Guidance.

If you require any further assistance please contact your usual Squire Patton Boggs representative.

Changes to the Persons with Significant Control Regime

The Fourth Money Laundering Directive ((EU) 2015/849) (“MLD4″) must be transposed into national law by 26 June 2017. MLD4 requires (amongst other things)  corporate and other legal entities to disclose their beneficial owners. In many respects this is currently being done under the PSC regime. However, MLD4 goes further than the PSC regime in two important regards and, as a consequence, changes will need to be made to the PSC regime.

Money Laundering SeriesMLD4 requires the beneficial ownership information to be “current”. However, at present, any changes to the PSC register are notified on the annual confirmation statement, meaning the information open to public scrutiny could potentially be close on a year out of date. For that reason, Companies House has announced that as from 26 June the PSC register will no longer be updated on the confirmation statement (form CS01). Instead, companies will need to update their register within 14 days of the change and file a form PSC01 to PSC09 within another 14 days. This is a significant change and is strictly event-driven.

The second difference is that MLD4 has a wider scope of application, meaning that the PSC regime will need to be extended to include more entities. Affected entities are Scottish Limited Partnerships and General Scottish Partnerships, in both cases from 24 July 2017 (although strangely it appears from Companies House announcement that they can continue to update their PSC information yearly on a confirmation statement).

Other possible affected entities are so called DTR5 companies i.e those listed on AIM and NEX (formerly ISDX). Such companies are currently not caught by the PSC regime, but that could change. Clarification is required but, as a result of the snap general election being called, government has gone into purdah. No regulations have yet been published and parliamentary time will be in short supply after the result is called, meaning that the timetable could be delayed. However, Companies House has said that until it hears otherwise, it is currently working to the original timetable.

New Long-Term Reporting Guidance

The Investment Association (“IA”) has published new guidance on long-term reporting which it is encouraging companies to adopt as soon as possible. This follows on from the IA’s call some 6 months ago to cease quarterly reporting in favour of more meaningful long-term reporting. The guidance applies to  companies whose shares are admitted to the Premium Segment of the Official List. All other listed companies (including AIM companies) are encouraged to follow the guidance as a matter of best practice.

Business people discussing strategy in boardroomThe guidance comprises recommendations in the following areas:

  • Business models and long-term reporting. This section reiterates the importance of longer-term performance reporting. The IA endorses the FRC Reporting Lab’s Business Model Reporting recommendations and suggests reporting should aim to clarify a company’s significant strategic issues and risks, at least over the next 3 to 5 years, although longer time frames would be preferable where possible.
  • Productivity. This section sets out how companies should assess and report on the drivers of productivity within their business. The IA would like to see companies develop a set of Key Performance Indicators by which improvements in productivity can be reliably measured over time.
  • Capital management. This section outlines investors’ expectations on capital management disclosures and how companies can improve reporting on the connection between capital management and its long-term strategy, promoting sustainable, long-term value creation.
  • Disclosure of material environmental and social risks. This section covers disclosures relating to the board’s responsibilities and policies, procedures and verification systems to manage environmental, social and governance risks. The IA encourages companies to demonstrate how they create, sustain and protect value through the management of material environmental and social risks.
  • Human capital and culture. This section sets out expectations as to how companies should report on human capital and culture. The guidance sets out minimum metrics which a company should disclose.  As regards culture, the guidance notes that a healthy corporate culture is a valuable asset, a source of competitive advantage and a vital component in the creation and protection of long term value.

Andrew Ninian, Director of Stewardship and Corporate Governance at the IA, said:

“The best way to boost productivity and long-term returns in the UK is to shift the way many big companies operate away from a short-term focus, to more long-term decision-making. This will ultimately benefit the economy as a whole by creating more jobs, higher levels of growth and stronger returns for savers.

All businesses need access to long-term funding to grow, but many who take a long-term view are not currently maximising their appeal to investors. This guidance will help responsible companies get noticed by investors, by providing them with the information they need to make informed, long-term investment decisions.”

The IA’s corporate research service, the Institutional Voting Information Service, will be monitoring the implementation of the guidance analysing annual reports for year-ends on or after 30 September 2017.