Essential Corporate News: Week ending May 15, 2020

BEIS: Announcement about temporary suspension of wrongful trading liability and temporary measures around AGMs

On May 14, 2020, the Department for Business, Energy and Industrial Strategy (BEIS) updated its earlier press release (first published on March 28, 2020)  concerning, among other things, regulations to protect companies hit by COVID-19.

The press release now states that the temporary measures to permit companies to hold AGMs online or postpone meetings will be applied retrospectively from March 26, 2020, subject to successful passage of the upcoming Corporate Insolvency and Governance Bill. 

In addition, the suspension of the wrongful trading provisions, previously announced to be for three months from  March 1, 2020, will now continue until June 30, 2020, subject also to successful passage of the upcoming Corporate Insolvency and Governance Bill. 

(BEIS, Regulations temporarily suspended to fast-track supplies of PPE to NHS staff and protect companies hit by COVID-19, 14.05.2020)

BEIS and FRC: Measures in respect of Company filings, AGMs and general meetings during COVID-19

On May 14, 2020, the Financial Reporting Council (FRC) issued a further joint Q&A with the Department for Business, Energy and Industrial Strategy (BEIS) to provide companies with additional information to enable them to plan company activities over the coming months. An earlier joint Q&A was published on April 17, 2020.

The Q&A covers the following:

• The legislation has not come in so what guarantee is there of the retrospective measures announced? – The legislation will be introduced when the Parliamentary timetable allows (but is subject to Parliamentary approval) and measures relating to AGMs and other meetings will apply retrospectively from March 26, 2020 the first day of the emergency period when a company would have been statutorily required to issue a meeting notice.
  
  
• AGM needs to be held by x date so if legislation is not passed by that time, should members still be notified of meeting even if AGM is likely to be delayed? – Yes, as legislation needs Parliamentary approval and shareholders should be informed of plans, including if intention is to postpone the AGM once the legislation is passed.
  
  
• If AGM is held in accordance with new legislation before it is passed (e.g. virtually), will votes taken at meeting be valid? – This is a matter for companies to take their own advice on as it cannot be guaranteed that the legislation will be passed and apply retrospectively.
  
  
• The company’s articles require a physical AGM so how can measures change that? – The legislation will give companies temporarily the ability to override certain requirements in articles concerning meetings. Where a physical meeting is required by articles, companies should make reasonable efforts to provide the opportunity for challenge and engagement by all shareholders before the AGM and give shareholders time to take account of feedback received and exercise their voting rights.
  
  
• If flexibilities are available until the end of September, will lockdown continue until then? – Social distancing is likely to be required for some time so these flexibilities are covering the period in which most companies hold their AGM.
  
  
• How long can the AGM be postponed? – Those who have postponed their AGM since March 26, 2020 will have until the end of September 2020 to hold the AGM but further extensions could be made by regulations if appropriate.
  
  
• Where the company’s constitution requires an AGM, can it still be postponed? – Yes, as with companies required by legislation to hold an AGM.
  
  
• What if coronavirus restrictions are reintroduced or extended beyond September 30? – The situation will be kept under review and flexibilities could be extended if necessary.
  
  
• What is the position with general meetings? – The same flexibilities around the mode these can be convened as apply to AGMs will apply until the end of September 2020.
  
  
• As a shareholder these measures deny my rights to engage with and challenge the board – These measures are short-term to protect the safety and well-being of shareholders, management and company employees. Voting rights can still be exercised and companies should be making reasonable efforts to provide the usual level of engagement and challenge.
  
  
• As a director, how should I safeguard shareholders’ interests? – Think about what is best for their well-being and safety and then think of how best to engage with shareholders in the current circumstances. Processes and timelines should be designed so as wide a range of shareholders as is reasonably practicable can engage, exercise voting rights and have their feedback taken into account. Guidance as to best practice on this is to be published.
  
  
• How can retail shareholders be engaged if they cannot attend the AGM in person? – Conference calls, video calls and email questions are suggested, with shareholders asked to submit questions before the AGM that can be dealt with prior to, at or shortly after the AGM. Shareholder meetings should be agreed once social distancing measures are lifted.
  
  
• What is the position with shareholder authorisations at the last AGM if the AGM is postponed for more than 12 months? – This will depend on the company’s articles and the resolutions passed at the last AGM.

(BEIS and FRC, Measures in respect of Company filings, AGMs and general meetings during COVID-19, 14.05.2020)

FRC: Guidance for companies on corporate governance and reporting (including interim reports) – COVID-19

On May 12, 2020, the Financial Reporting Council (FRC) published a paper which highlights some key areas of focus for boards in maintaining strong corporate governance and guidance on some of the most pervasive issues when preparing their annual report and other corporate reporting.

The FRC’s key messages to boards on corporate governance are to:

• Develop and implement mitigating actions and processes to ensure that boards continue to operate an effective control environment, addressing key reporting and other controls on which the board has placed reliance historically but which may not prove effective in the current circumstances.
• Consider how the board will secure reliable and relevant information, on a continuing basis, in order to manage the future operations, including the flow of financial information from significant subsidiary, joint venture and associate entities.
• Pay attention to capital maintenance, ensuring that sufficient reserves are available when the dividend is paid, not just proposed; and sufficient resources remain to continue to meet the company’s needs.

The FRC notes that making forward-looking assessments and estimates when preparing financial statements and providing other corporate reports is particularly difficult currently. As a result, it sets out guidance which is intended to help boards focus on areas of reporting of most interest to investors, and to encourage them to provide clarity on the use of key forward-looking judgements. The guidance covers:

• The need for narrative reporting to provide forward-looking information that is specific to the entity and which provides insights into the board’s assessment of business viability and the methods and assumptions underlying that assessment.
• Going concern and any associated material uncertainties, the basis of any significant judgements and the matters to consider when confirming the preparation of the financial statements on a going concern basis.
• The increased importance of providing information on significant judgements applied in the preparation of the financial statements, sources of estimation uncertainty and other assumptions made.
• Judgement required in determining the appropriate reporting response to events after the reporting date and the extent to which qualitative or quantitative disclosures may be appropriate.

So far as interim reports are concerned, the FRC notes that directors will need to exercise judgement about the nature and extent of the procedures that they apply to assess the going concern assumption at the half-yearly date and consider some of the issues which might trigger a need to examine the going concern assumption and going concern and liquidity risk disclosures.

(FRC,  Guidance for companies on corporate governance and reporting (including interim reports) (COVID-19), 12.05.2020)

FRC: Audit Quality Indicators – AQR Thematic Review

On May 6, 2020, the Financial Reporting Council (FRC) published the results of a review it has conducted into the use of Audit Quality Indicators (AQIs) as a tool for flagging poor and good audit quality within the UK. 

AQIs are quantitative and qualitative measures of external audit quality and while most of the report is relevant to auditors, there are aspects that are relevant to audit committees. These include the following: 

• Audit committees are advised to use AQIs when appointing their auditor and to assess quality on an ongoing basis, by benchmarking against other firms.
• There should be better communication of AQIs on audits to audit committees to help them assess audit quality.
• Audit committees are advised to read the Transparency Reports prepared by their audit firm and provide constructive feedback.
• Audit committees should consider the types of AQIs and contextual information that would help them gauge audit quality, request these from audit firms and respond to the FRC’s consultation on Transparency Reports which is to be launched on a proposed set of AQIs that audit firms should include in their Transparency Reports.

(FRC,  Audit Quality Indicators – AQR Thematic Review, 06.05.2020)

FRC: Editorial updates to 2018 Guidance on Strategic Report

On May 11, 2020, the Financial Reporting Council issued two editorial updates to its Guidance on the Strategic Report which it published in July 2018. These relate to Appendix II and Appendix III of that Guidance.

The amendments:

• Clarify that companies that meet the medium-sized criteria in section 465 Companies Act 2006 (CA 2006) but are excluded from being treated as medium-sized because they are ineligible under section 467, for example as they are a public company, are required to produce a section 172(1) statement under section 414CZA CA 2006.
• Clarify that when determining whether a company has to disclose matters regarding employee engagement under Schedule 7.11(1) of the Large-and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, consideration must be given to the number of UK-based employees in both the current and preceding year, unless a company is in the first year of operation. 
• Correct an error in Appendix II relating to disclosure of trends and factors, to reflect the fact that the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016, removed the requirement for Public Interest Entities to disclose trends and factors.

(FRC, Editorial updates to the 2018 Guidance on the Strategic Report, 11.05.2020)

(FRC, Strategic Report – Section 172 reporting requirements, 11.05.2020)

(FRC, Editorial amendments to Guidance on the Strategic Report, 11.05.2020)

PLSA: PLSA launches industry group on ESG duties next steps

On May 13, 2020, the Pensions and Lifetime Savings Association (PLSA) announced that it has set up an industry group to help produce guidance to support trustees of pension schemes in meeting the deadlines and duties imposed on them in relation to environmental, social and governance (ESG) and stewardship reporting.

Two documents are to be prepared in time for summer trustee meetings as follows:

• A voting behaviour template and “pack” for asset managers to fill out will be produced so that trustees can better compare and contrast engagement and voting behaviour and this should make it easier for trustees to produce their own disclosures.
• Practical, step-by-step guidance for schemes to achieving good practice on their implementation statements and responsible investment communications will also be produced.

(PLSA, PLSA launches industry group on ESG duties next steps, 13.05.2020)