Consultation on Changes to the UK Corporate Governance Code

Colleagues in Squire Patton Boggs have added an interesting post on the Compensation and Benefits Global Insights blog. It looks at the FRC’s consultation on proposed changes to the UK Corporate Governance Code, with emphasis on remuneration and benefits.

Responses to the consultation need to be in by 28 February 2018 with the final revised Code being published in early summer 2018 and coming into force for accounting periods beginning on or after 1 January 2019.

AIMing for SME Growth Market Status

The London Stock Exchange has applied to the Financial Conduct Authority for AIM to be registered as a SME Growth Market on 3 January 2018.

This new designation is being brought about by the Markets in Financial Instrument Directive (“MiFID II”) as part of the European Commissions’ capital markets plan.

As a consequence, minor amendments will need to be made to AIM Rule 26 regarding company information disclosures that are required to be freely available on its website. Essentially, the following information will need to remain on a company’s website for the longer period of 5 years:

  • annual accounts and all half-yearly, quarterly or similar reports,
  • regulatory notifications containing inside information
  • any prospectus published on or after 3 January 2018.

The 5 year requirement will not be retrospective for disclosures made prior to 3 January 2018.

The AIM Rules will also see a new definition of “SME growth market”.

ISS 2018 Proxy Voting Guidelines Updates

At the end of October we reported on the Institutional Shareholder Services’ (“ISS”) consultation on hybrid and virtual-only shareholders’ meetings. The ISS has now published its updated 2018 Proxy Voting Guidelines, effective for meetings on or after 1 February 2018.

As expected, the guidelines support hybrid shareholder meetings and reject vitual-only meetings. By way of a reminder, hybrid meetings refer to in-person, physical meetings in which shareholders are permitted to participate online. Virtual-only meetings refer to meetings where there is no physical meeting and participation is exclusively through online technology.

Other updates include the following:

Overboarding: For chairmen, a negative recommendation would first be applied towards non-executive positions held but the chair position would be targeted where the chairman is being elected as chairman for the first time or holds three or more chair positions or where the chairman holds an outside executive position.

Audit and Remuneration Committee Composition: The guidelines reiterate the UK Corporate Governance Code which requires that the audit and remuneration committees should comprise only independent directors.

Threshold Vesting Levels for Long-Term Incentive Plans: The guidance states that threshold vesting should generally be no higher than 25 percent. However, as much as 25 percent may be considered inappropriate if LTIP grants represent large multiples of salary. When analysing LTIP award vesting levels, other issues will be taken into account, such as how challenging the threshold targets are, the positioning of salaries and remuneration levels in general.

Share Issuances without Pre-emption Rights: The guidelines have been amended to specifically refer to a cash-box structure as being an abuse of the authority to disapply pre-emption rights approved at the previous 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.