Essential Corporate News – Week ending 3 November 2023

Economic Crime and Corporate Transparency Act 2023 receives Royal Assent

The Economic Crime and Corporate Transparency Bill received Royal Assent on 26 October 2023. The Economic Crime and Corporate Transparency Act 2023 (ECCT Act) sets out wide-ranging reforms to tackle economic crime and improve transparency over corporate entities, including through reforms to the role of the UK companies registry, Companies House. A number of changes are also being made to processes and requirements for company formation and administration, including requiring identity verification of directors and persons with significant control of UK companies.

The ECCT Act also creates a new failure to prevent fraud offence to hold organisations to account if they profit from fraud committed by their employees. Further information on this is here. In addition, the ECCT Act reforms corporate criminal liability laws for economic crimes to hold corporations liable in their own right for economic crime. This is aimed at strengthening the ability to apply corporate liability to the makeup of modern corporations, particularly large complex structures, and deter instances where senior managers use their authority granted under the corporation to commit economic crimes. 

Implementation of the provisions in the ECCT Act will be in stages since many will need systems development and secondary legislation before they can be implemented. While the implementation timetable has not yet been published, Companies House is being readied to oversee and enforce a large number of the changes being introduced. In addition, a number of Factsheets giving details of a number of measures in the ECCT Act have been updated and are available here.

This briefing, The Economic Crime and Corporate Transparency Act 2023, considers some of the key reforms set out in the ECCT Act.

Takeover Panel: Response Statement and updated Practice Statement published

On 27 October 2023, the Takeover Panel published:

• Its response statement in relation to changes to the Takeover Code’s frustrating action rules  under the Code (RS 2023/1) – the revised rules will take effect on Monday 11 December 2023.
• A revised version of Practice Statement 5 (which relates to the invocation of offer conditions and pre-conditions) together with a note summarising the key amends that have been made.

Please find details of both of these developments in our briefings Frustrating action: UK Takeover Panel confirms significant changes to Rule 21 restrictions and UK Takeover Panel guidance on invoking offer conditions: A helpful update for the market.

FCA: Market Watch 75

In this edition of Market Watch, the Financial Conduct Authority (FCA) shares its observations about market soundings since it published Market Watch 51 and 58. It also reminds firms of the arrangements made by the UK Market Abuse Regulation’s market soundings regime, which provides formalised arrangements for issuers, and their advisors acting as Disclosing Market Participants, to legitimately disclose inside information where the disclosure is made in the normal exercise of a person’s employment, profession or duties.

Further information can be found in our Regulation Tomorrow blog post here.

FRC: “Materiality mindset” for better corporate reporting

On 30 October 2023, the Financial Reporting Council (FRC) published a report looking at how companies can improve their corporate reporting by taking a more focused, strategic approach to assessing materiality.

The report encourages companies to think holistically about what information is material to their stakeholders when preparing annual reports, and it provides practical suggestions and examples for identifying material issues, where reporting could be streamlined and prioritising key messages. The report is in four parts as follows:

Part 1 - Materiality in practice: applying a materiality mindset

The report is intended to help companies report clearly and in a compelling way on those issues that the board and management deem to be of greatest importance to stakeholders. Part 1 states that applying a materiality mindset can be powerful for corporate reporting. By thoroughly reviewing, ranking, and removing any information that is not relevant, management strengthen the value of their reporting. Identifying what matters can be a useful input not only for strategic planning, but also for identifying and refining controls and processes.

Drawing on the lessons learned from project participants, the FRC have compiled a toolkit to help companies apply a materiality mindset to reporting and provide tips, primarily focused on a reporting perspective, on the following:

• Think about investor needs and decision-making
• Take a holistic approach to materiality
• Embed a materiality mindset

Part 2 - Think about investor needs and decision-making

Materiality means considering not only what is important to the business, but also the information investors need for decision-making. Having spoken to investors to understand commonalities in evaluating investment decisions and what information they need so as to help companies better assess what information is material, Part 2 of the report focuses on some of the key areas of interest. These are the following:

• How does this business generate value?
• What is the future strategy?
• What potential risks are there?
• How do investors evaluate and use information in annual reports and accounts?

Part 3 - Take a holistic approach to materiality

Part 3 of the report comments that deciding what information is material can be difficult as what may be material to one person, may not be to another. It is subjective and requires boards and management to use judgement about what matters most, and it is intrinsically linked to business model and strategy. As a result, Part 3 sets out some practical tips that may help companies take a more holistic view and align with investor information needs:

• Get the right people together
• Leverage and connect what you are already doing
• Narrow to your real priorities
• Challenge your assessment
• Document and communicate your assessment
• Regularly horizon scan

Part 4 – Embed a materiality mindset

In Part 4 of the report, the FRC set out some advice and tips shared by companies to embed a materiality mindset in their corporate reporting. Many of these tips focus primarily on narrative reporting, as applying materiality is often more challenging for this area of reporting and the FRC comment that Section 5 of the Guidance on the Strategic Report provides a detailed discussion on materiality to aid companies.

The FRC also point out that companies may also find it useful to consider the process map for accounts preparation set out in Appendix 3 to What Makes a Good Annual Report and Accounts.

Materiality in practice: Better not more

Noting that materiality in practice means better, rather than more disclosure, the FRC has announced that in the next 12 months it will be doing the following:

• Provide this first set of suggestions for companies on applying a materiality mindset.
• Continue to engage with standard-setters, policy makers and other parties to consider how new or updated standards, regulations and policy drive reporting requirements, and how to best integrate those into a package of decision useful information.
• Encourage the wider discussion of materiality and reporting at a global level and support practical advice and research to aid companies in preparing high-quality, decision useful information.
• Publish further research on how investors use business model disclosures, as well as undertaking work in 2024 on what stakeholders need from corporate reporting.
• Continue to bring together members of the corporate reporting ecosystem to discuss concerns and pressures faced by all parties.
• Build on the lessons of the FRC’s December 2022 report What Makes a Good Annual Report and Accounts by using the FRC’s supervision work to identify examples where materiality has been used effectively to drive high quality reporting.

Guidance for companies on improving their ESG data practices

The FRC notes that applying a holistic mindset is also essential for sustainability-related reporting, as highlighted by two previous FRC reports on ESG data practices. The recommendations for companies from those reports on collecting, using, and effectively reporting material ESG data to investors have now been brought together in one summary.

(FRC, FRC report looks at "Materiality Mindset" for better corporate reporting, 30.10.2023)

CGI: Boards need to step up governance approach to prepare for AI

On 30 October 2023, the Corporate Governance Institute (CGI) published a press release urging company boards to start preparing for the challenges resulting from artificial intelligence (AI) developments. This followed the announcement of the setting up of a UK AI Safety Institute and other AI developments.

The CGI notes that developing effective governance for AI will be fundamental, with the primary objective being to ensure adoption of AI marked by consistency, openness, accountability, and transparency.

The CGI believes boards will need to develop a governance framework for AI that sets out clear roles and responsibilities, as well as policies and procedures for managing AI risks and opportunities. This framework will need to be regularly reviewed and updated to reflect changes in the business and the AI landscape.

It suggests that, as a minimum, boards should consider that:

• AI systems must be transparent and accountable so that it is possible for internal decision makers as well as stakeholders and regulators to understand how they have been utilised and factored into company decisions.
• Companies must recognise the potential for bias within AI systems and establish checks and reviews to audit and mitigate this risk to ensure that their systems are fair and non-discriminatory.
• Data governance policies and procedures should be kept under review to protect the privacy and security of the data collected and processed and provide assurances that it is used in a responsible and ethical manner. Boards will also need to ensure that their organisations have access to the high-quality data that is needed to train and deploy AI systems effectively.