Essential Corporate News: Week ending 7 July, 2023

Investment Association: Effective requisitioning of shareholder resolutions – Member guidance

On 30 June 2023, the Investment Association (IA) published a document which provides institutional investors with an overview of the key steps required to effectively file a resolution at a UK-incorporated company, where shareholders think it is an appropriate escalation mechanism. This is in response to one of the recommendations in a 2020 Asset Management Taskforce Report, ‘Investing with Purpose: Placing Stewardship at the Heart of Sustainable Growth’.

Among other things, one of the recommendations in that 2020 report was that shareholders should “use requisitioned resolutions more proactively as an escalation tool and develop model resolutions to escalate a range of critical concerns with investee companies, including on climate change”. It also recommended that “guidance to overcome existing barriers to requisitioning resolutions” should be developed by industry. 

As a result, the IA has developed this guidance for its members. It is centred around the key steps and actions that investors must take to effectively file a resolution for a meeting of a UK company and it sets out the key considerations at various stages of the filing process as follows: 

1. Considering escalation 
2. Establishing a route to filing a resolution 
3. Drafting the wording and clarifying objectives of the resolution 
4. Accessing and confirmation of holdings 
5. Submission of the request 
6. Post-submission engagements

The guidance sets out the key considerations and legal and operational barriers that investors may face at each of these stages (including issues relating to the Market Abuse Regulation, the rules around acting in concert under the Takeover Code and disclosure issues under the Disclosure Guidance and Transparency Rules), as well as providing some practical information on how these barriers might be overcome or mitigated. It also sets out a timeline for requisitioning a resolution. 

The IA hopes that the guidance will encourage its members and other institutional investors who have not succeeded in effecting behavioural change from companies following standard engagement and escalation activities to consider filing a requisitioned resolution with the company where appropriate. This should enable institutional investors to be better able to “coordinate and support the creation of long-term value for their clients, by more effectively requisitioning resolutions that bring about corporate change on issues that may adversely affect the long-term financial performance of investee companies”.

(Investment Association: Effective requisitioning of shareholder resolutions – Member guidance, 30.06.2023)

CGI: Board Performance Reviews

On 4 July 2023, the Chartered Governance Institute (CGI) published an updated Code of Practice for board reviewers in relation to board evaluations, together with two accompanying updated guidance notes, “Principles of Good Practice for listed companies using external board reviewers” and “Reporting on board performance reviews: Guidance for listed companies”. The CGI plans to publish similar principles and guidance for other entities, including non-listed companies, later in 2023. 

Code of Practice for board reviewers

The Code of Practice (Code), which is not mandatory, is intended to encourage greater transparency about how individual external board reviewers conduct reviews, and their qualifications for doing so, rather than prescribe or standardise how reviews should be conducted. Those who provide independent board reviews can become signatories to the Code if they abide by certain commitments, including that they will apply the four principles in the Code. Signatories to it are required to report against the Code on an “apply and explain” basis and those conducting board performance reviews for FTSE 350 companies should conduct them in accordance with the Code.

The Code’s four principles relate to competence and capacity, independence and integrity, client engagements and client disclosure. Guidance is then provided in relation to each principle to help board reviewers decide what actions they should take and what actions and procedures they should have in place to demonstrate how they apply the principles. 

Principles of Good Practice for listed companies using external board reviewers

The CGI note that the impact of a board performance review depends on the board’s commitment, as well as on the reviewer’s ability, since the board’s role is to appoint the reviewer, set the terms of the review and decide how to respond to its findings. As a result, these principles are intended to outline how a company should engage with its reviewer to achieve the maximum benefit from the engagement and give assurance to its stakeholders. They cover reviewer selection, scope of the review and process, and disclosure of the review and its process in the annual report.

Reporting on board performance reviews: Guidance for listed companies

This guidance references the requirements in the 2018 UK Corporate Governance Code for listed companies to include information in their annual report about any board evaluation that has been conducted. The purpose of the guidance is to balance the information requirements of a company’s stakeholders against the board’s legitimate desire to avoid breaching confidentiality. 

The guidance is set out under the following headings: how the board evaluation has been conducted; externally facilitated evaluations; the outcomes and actions taken; and board composition.

(CGI, Code of Practice for board reviewers, 04.07,2023)

(CGI, Principles of Good Practice for listed companies using external board reviewers, 04.07.2023)

(CGI, Reporting on board performance reviews: Guidance for listed companies, 04.07. 2023)

Law Commission: Digital assets – Final Report

On 28 June 2023, the Law Commission published a Final Report (Report) setting out recommendations for reform and development of the law relating to digital assets. These are assets represented digitally or electronically and they include cryptocurrencies and non-fungible tokens.

The Report results from a request by the UK Government for the Law Commission to make recommendations for reform to ensure that the law is capable of accommodating both crypto-tokens and other digital assets in a way which allows the possibilities of this type of technology to flourish. The analysis, recommendations and conclusions in the Report were informed by the detailed responses the Law Commission received to its call for evidence, published in April 2021 and its consultation paper, published in July 2022. It also builds on the conclusions in the Legal Statement on the Status of Cryptoassets and Smart Contracts and the Legal Statement on Digital Securities by the UK Jurisdiction Taskforce of the LawTech Delivery Panel (the UKJT). 

In the Report, the Law Commission concludes that the common law system in England and Wales is well placed to provide a coherent and globally relevant regime for existing and new types of digital asset. It also concludes that the flexibility of common law allows for the recognition of a distinct category of personal property that can better recognise, accommodate and protect the unique features of certain digital assets (including crypto-tokens and cryptoassets). More detail about its recommendations and conclusions is set out below. It will be for the UK Government to decide whether to take the recommendations forward.

Recommendations in the Report

• Recommendation 1 - There should be statutory confirmation that a thing will not be deprived of legal status as an object of personal property rights merely by reason of the fact that it is neither a thing in action nor a thing in possession.
• Recommendation 2 - The Government should create or nominate a panel of industry-specific technical experts, legal practitioners, academics and judges to provide non-binding guidance on the complex and evolving factual and legal issues relating to control involving third category things such as digital objects (and other issues relating to digital asset systems and markets more broadly). This panel should include those with expertise in the crypto-token markets, and not just those with expertise in traditional finance markets or intermediated securities markets.
• Recommendation 3 - The Financial Collateral Arrangements (No 2) Regulations 2003 (FCARs) should be amended as follows: (1) To clarify the extent to which and under what holding arrangements cryptotokens, cryptoassets (including central bank digital currencies or CBDCs and fiat currency-linked stablecoins) and/or mere record/register tokens can satisfy the definition of cash, including potentially by providing additional guidance as to the interpretation of “money in any currency”, “account” and “similar claim to the repayment of money”. (2) To confirm that the characterisation of an asset that by itself satisfies the definition of a financial instrument or a credit claim will be unaffected by that asset being merely recorded or registered by a crypto-token within a blockchain - or distributed ledger technology (DLT)-based system (where the underlying asset is not “linked” or “stapled” by any legal mechanism to the crypto-token that records them). (3) To confirm that, where an asset that satisfies the definition of a financial instrument or a credit claim is tokenised and effectively linked or stapled to a crypto-token that constitutes a distinct object of personal property rights from the perspective of and vested in the person that controls it, the linked or stapled token itself will similarly satisfy the relevant definition. The laws applicable to UK companies should also be reviewed to assess the merits of reforms that would confirm the validity of and/or expand the use of crypto-token networks for the issuance and transfer of equity and other registered corporate securities. In particular, any such review should consider the extent to which applicable laws could and should support the use of public permissionless ledgers for the issuance and transfer of legal interests in equity and other registered corporate securities.
• Recommendation 4 - As a matter of priority, the Government should set up a multidisciplinary project to formulate and put in place a bespoke statutory legal framework that better and more clearly facilitates the entering into, operation and enforcement of (certain) crypto-token and (certain) cryptoasset collateral arrangements.

Conclusions in the Report

• Conclusion 1 - Factual control (plus intention) can found a legal proprietary interest in a digital object. The Law Commission  concludes that in certain circumstances such a control-based legal proprietary interest can be separated from (and be inferior to or short of) a superior legal title.
• Conclusion 2 - It is possible (with the requisite intention) to effect a legal transfer of a crypto-token offchain by a change of control or onchain by a transfer operation that effects a state change.
• Conclusion 3 - A special defence of good faith purchaser for value without notice applicable to crypto-tokens can be recognised and developed by the courts through incremental development of the common law. The Law Commission concludes that this reasoning can also be extended to other third category things.
• Conclusion 4 - Under the law of England and Wales, crypto-token intermediated holding arrangements can be characterised and structured as trusts, including where the underlying entitlements are (1) held on a consolidated unallocated basis for the benefit of multiple users, and (2) potentially even commingled with unallocated entitlements held for the benefit of the holding intermediary itself. The best way to understand the interests of beneficiaries under such trusts are as rights of co-ownership in an equitable tenancy in common.
• Conclusion 5 - Recognition of a control-based legal proprietary interest could provide the basis for an alternative legal structure for custodial intermediated holding arrangements in addition to trusts. This could take the form of holding intermediaries being recognised as acquiring a control-based proprietary interest in held crypto-token entitlements that is subject to a superior legal title retained by users.
• Conclusion 6 - It would be constructive for the courts to develop specific and discrete principles of tortious liability by analogy with, or which draw on some elements of, the tort of conversion to deal with wrongful interferences with third category things.

(Law Commission, Digital assets: Final report, 28.06.2023)

(Law Commission, Summary of Final report, 28.06.2023)

UK Finance: Unlocking the power of securities tokenisation

On 6 July 2023, UK Finance published a report which sets out three key missions to accelerate the digital transformation of the UK’s capital markets. The report, produced in conjunction with Oliver Wyman, looks at how securities tokenisation (the digital representation of real financial assets) will transform capital markets and international banking infrastructure.

The report notes that the tokenisation of securities could improve the financial system’s operational efficiencies, but these benefits have yet to be realised at scale as the markets, globally and in the UK, are in their infancy. Currently, tokenised issuances are still a fraction of traditional securities issuance.

Key findings in the report

Based on work undertaken with the largest banks, financial market participants, investors government, regulators and other trade bodies, alongside detailed research on global innovations to date, the report finds as follows:

• The UK has built positive momentum around tokenisation from a legal and regulatory perspective, including some flagship legislative initiatives. This includes via the Financial Services and Markets Act which allows for HM Treasury to introduce financial market infrastructure (FMI) regulatory sandboxes for distributed ledger technology (DLT) projects. The report also references the work undertaken by the Law Commission and UK Jurisdiction Taskforce in this area (including the Law Commission’s Final report on digital assets).
• There has been minimal tokenised securities issuance activity in the UK, especially compared to other jurisdictions. Certain projects are underway in the UK and some key digital issuances elsewhere have had a UK nexus and have benefitted from UK expertise. More home-grown initiatives are needed in the UK so that skills and infrastructure can continue to evolve.
• The UK is behind some other jurisdictions with regards to tokenised securities issuances, but it is not irrevocably so. In the last year there have been a range of tokenisation initiatives launched across the globe, however these were either largely experimental or focused on tokenising specific parts of the lifecycle rather than end to end.
• Lessons can be learned as to how other jurisdictions are approaching tokenisation. For example, leading jurisdictions have focused first on putting in place the legal and regulatory frameworks that give industry participants the confidence to interact with tokenised securities.

Three key missions in the report

The report sets out three key areas that the UK needs to focus on to become a leader in securities tokenisation:

Mission One: Enable innovation and experimentation, underpinned by legal and regulatory certainty

Legal and regulatory certainty is essential. UK Finance commends the strong work undertaken by the Law Commission in its recent Digital Assets report and by the UK Jurisdiction Taskforce, as well as by the Law Society. Momentum should be maintained to make the necessary regulatory and statutory refinements to drive certainty and confidence in the UK. In addition, industry participants need space to innovate around securities tokenisation and a place to experiment is required to do this. A highlight of key recommendations include:

• HM Treasury should urgently further define the roadmap for the FMI Sandbox, including a view of how it will prevent cliff-edge effects when the Sandbox ends.The
• FCA, the PRA and the Bank of England should provide further flexibility on Central Securities Depositories Regulation (CSDR) and any provisions to allow industry participants to navigate the requirements to use a Central Securities Depository.
• HM Treasury and the Bank of England should continue to support the development of digital cash solutions to enable the settlement of transactions.
• HM Treasury via the Debt Management Office should issue a digital gilt within the FMI Sandbox.

Mission Two: Foster a flourishing UK digital market by promoting interoperability and safe innovation at-scale

• HM Treasury, the FCA, and the Bank of England should encourage industry participants to convene and develop voluntary standards around tokenised securities.
• HM Treasury should explore if there is industry appetite for a shared, national infrastructure for tokenised securities

Mission Three: Become a leader in global standards for the tokenised securities market

The UK needs to play an active role in facilitating the establishment of supranational standards that will enable interoperability of distributed technology networks as they evolve. These standards are still in the early stages. There is an opportunity for the UK to establish itself as a leader by convening different jurisdictions to agree the path forward, and sponsoring initiatives to drive convergence. As part of this, the UK should collaborate with other jurisdictions such as Singapore or the EU and connect to their pilots or sandboxes to align international initiatives and form the basis of cross-border tokenisation ecosystem.

(UK Finance, Unlocking the power of securities tokenisation, 06.07.2023)</