FRC: Pre-Emption Group’s Annual Monitoring Report

On 22 November 2024, the Financial Reporting Council (FRC), on behalf of the Pre-Emption Group (PEG), published the PEG’s annual report monitoring the use of its 2022 Statement of Principles in disapplying shareholder pre-emption rights.

The report examines the implementation of the 2022 Statement of Principles by FTSE 350 companies for meetings held between 1 August 2023 and 31 July 2024. The data reported on concerns only resolutions seeking disapplication authorities and their voting results. The PEG notes that company disclosures on the disapplication of pre-emption rights in share issuances can be found in the post-transaction reporting database on the PEG webpage.

Key findings from the report are as follows:

• 67.1% of FTSE 350 companies sought enhanced disapplication authority. Enhanced authority refers to a disapplication request where either the request for general corporate purposes, or the request for a specified capital investment, exceeds the authority previously allowed under the 2015 Statement of Principles.  The 2022 Statement of Principles increased the permitted level of general disapplication of pre-emption rights authority from 10% of issued ordinary share capital to 20%. Companies are able to use the first 10% for any purpose and the further 10% in connection with an acquisition or specified capital investment (as opposed to the previous 5% + 5% model in the 2015 Statement of Principles).
• 64.1% requested authority for a specified capital investment.
• Of the FTSE 350 companies which put forward a resolution concerning the disapplication of pre-emption rights in the case of a specified capital investment, 26.6% included a six-month time limit on how many months prior the investment may have been made. This was the time limit in the 2015 Statement of Principles, but the 2022 Statement of Principles increases the limit to 12 months and the PEG does not consider a six-month time limit to be best practice any longer. As a result, it expects to see the percentage including a six-month time limit in resolutions to continue to fall in subsequent years.
• The 2015 Statement of Principles advised that companies should not issue non-pre-emptively for cash equity securities representing more than 7.5% of its issued ordinary share capital in any rolling three-year period. This limit is not in the 2022 Statement of Principles and the PEG no longer consider it best practice. 13.2% of companies which tabled a disapplication included the 7.5% limit and again, PEG expects to see this percentage continue to fall in subsequent years.
• 99.4% had all disapplication resolutions passed, with an average of only 4.7% votes against.

The appendix to the report includes a detailed breakdown of votes against resolutions by the percentage of disapplication request and the PEG will continue to monitor this over longer market cycles.

The PEG notes that a small minority of investors continue not to support the 2022 Statement of Principles, partly due to the elevated limits of disapplication authority they allow. The PEG will continue to monitor this over longer market cycles and may engage with the market in the future if the levels of dissent remain elevated. The PEG also encourages investors who become aware of companies misusing disapplication authorities (including using cash box structures to raise funds in excess of the disapplication authority that has been granted by shareholders at the company’s most recent AGM), to contact the PEG.

(FRC, Pre-Emption Group’s Annual Monitoring Report, 22.11.2024)

FRC: Review of Corporate Governance Reporting

On 26 November 2024, the Financial Reporting Council (FRC) published its latest annual review of corporate governance reporting. This includes examples of good reporting and explores areas that could be improved to help those preparing to implement the 2024 UK Corporate Governance Code (2024 Code).

Key findings, which are based on reporting against the 2018 UK Corporate Governance Code (2018 Code), include the following:

• Compliance with the 2018 Code: The FRC found that fewer companies reported departures from Provisions in the 2018 Code, and this can be primarily attributed to increased compliance with Code Provision 38 which requires executive pensions to be aligned with those of the workforce. When departing from the 2018 Code, the FRC reminds companies that the explanation should be clear and provide sufficient detail. It also points out that a separate compliance statement can make it easier for the users of the annual report to understand the company’s approach to following the 2018 Code and its use of the flexibilities offered.
• Corporate culture reporting: Disclosure in governance reports around how boards are promoting the desired culture is generally very low. The FRC urges more thorough reporting in this area and better signposting in the strategic report, where most of culture reporting is usually placed.
• Culture assessment and monitoring reporting: While this keeps increasing, in the reports reviewed more companies opted for disclosure of policies and practices, rather than board’s actions during the year. The FRC wants to see more transparency and rigour in reporting in this area.
• Shareholder, stakeholder and workforce engagement: The FRC focused on whether companies report effectively on the outcomes of their engagement with these groups, as this is also a key area of focus in the 2024 Code. The FRC notes that explaining the outcome of engagement activities with shareholders adds meaning and purpose to reporting (although it is understood that outcomes can take time to materialise) and in demonstrating the effectiveness of engagement generally, it is important to explain the engagement undertaken during the year and any outcomes. However, the FRC found some examples of good practice in this area and encourages companies to read the section of the review where these are set out.
• Over-boarding of directors: Companies are encouraged to be transparent in their annual report and disclose information about the time commitments of their directors. The FRC states that good reporting will include factors that the board took into consideration when reviewing the time commitments of a director.
• Reporting by audit committees on the Audit Committees and the External Audit: Minimum Standard: This is referenced in the 2024 Code and the FRC found some evidence of early adoption of it. The FRC considers early adoption to be optimum because it facilitates timely design and testing of new processes and an evolutionary approach to enhancing audit committee practices, for example around audit tenders. It suggests that companies can support their audit committees by making their responsibility for following the Standard explicit in terms of reference as this will encourage their audit committees to focus on the content of the Standard. The FRC also considered how companies report on Audit Quality Reviews and found there has been an increase in the level of disclosure by audit committees of these inspection results.
• Risk management and internal controls reporting: Many companies have updated their reporting over time, particularly in relation to the mitigations put in place to manage their principal risks. However, the FRC notes that, despite existing requirements under the 2018 Code, reporting on the effectiveness of internal controls remains at an early stage and many companies have work to do ahead of the commencement of the new Provision 29 in the 2024 Code (with reporting against that Provision commencing from 2027), particularly in relation to reporting on non-financial controls. The FRRC suggests that when reporting on the review of effectiveness, good disclosures provided a summary of how the board had monitored and reviewed the effectiveness of the framework. This could include the type of information the board has received and reviewed; who it has consulted with; any internal or external assurance received; and if relevant, the name of the framework, standard or guideline the board has used to review the effectiveness.
• Viability assessment: The FRC notes that there is significant scope for improvement in this area. By clearly outlining the rationale for the assessment period and providing longer-term information where possible, companies would offer valuable insights to investors. Including sufficient qualitative and quantitative information is also crucial for enabling readers to fully understand the assessment.
• Remuneration reporting: The FRC states that it is essential that the rationale behind key decisions on remuneration is clear and understandable.
• Overall conclusion: While reporting quality remains strong, there is still a need for more concise, outcomes-focused disclosure and enhanced reporting on risk management and internal controls.

(FRC, Review of Corporate Governance Reporting, 26.11.2024)

FCA: PDMR fined for trading during closed periods and for trade disclosure failures

On 27 November 2024 the Financial Conduct Authority (FCA) announced that it had fined a person discharging managerial responsibility (PDMR) who had both traded his listed company’s shares in the restricted 30-day period leading up to the company’s financial results announcements and also failed to notify the FCA and the company of his personal trades in the company’s shares within the required three business days. This resulted in breaches of the Market Abuse Regulation (MAR).

This is the first time the FCA has fined a PDMR for trading company shares during closed periods under Article 19(11) of MAR), and the second time the FCA has fined a PDMR for failing to disclose personal trades under Article 19(1) MAR. The first fine for £45,000 for failure to notify personal trades under MAR was issued in December 2019. 

Andras Sebok was Chief Supply Chain Officer at an airline company listed on the main market of the London Stock Exchange) at the time he committed breaches of MAR. Although not a board member, as a senior executive on the leadership team, with regular access to confidential information containing inside information and the power to make managerial decisions affecting the company’s future development and business prospects, the FCA found him to be a PDMR as defined under Article 3(1)(25)(b) of MAR.

Article 19(1) of MAR requires a PDMR of an issuer to notify the issuer and the FCA of transactions in the issuer’s shares within three business days of any such transactions. Between 4 April 2019 and 6 November 2020 (Relevant Period), Mr Sebők, as a PDMR, breached Article 19(1) of MAR by failing to notify the company and the FCA of 115 transactions in the company’s shares (PDMR Trades) within three business days, or at all and the PDMR Trades resulted in him selling the entirety of his holding in the company’s shares.

Article 19(11) of MAR sets out restrictions on a PDMR’s ability to transact in shares of their company as a PDMR during a closed period of 30 calendar days before the announcement of the company’s interim or year-end financial reports. Article 19(12) of MAR permits transactions during such periods only if specifically authorised by the company in particular circumstances. Mr Sebők breached Article 19(11) of MAR, whilst transacting in the PDMR Trades during the Relevant Period, by trading during the closed period of the company’s interim and year-end financial reports on 18 occasions in respect of four half-year and/or full year financial reports. As a result of his failure to notify the company of the PDMR Trades, the company was not able to announce the transactions to the market in a timely fashion in accordance with Article 19(3) of MAR. He also failed to seek prior authorisation from the company to trade, as required by the company’s internal policies, which resulted in the company not being given the opportunity to approve or reject his personal account dealing.

On account of Mr Sebők’s agreement to settle the matter, he qualified for a 30% discount on his penalty, resulting in a £123,500 fine.

(FCA, FCA fines former airline executive for trading during closed periods and for trade disclosure failures, 27.09.2024)

(FCA, Final Notice, Mr András Sebők, 26.11.2024)