Essential corporate news week ending: November 1, 2019

FRC: UK Stewardship Code 2020

On October 24, 2019 the Financial Reporting Council (FRC) published an updated version of the UK Stewardship Code (Code). The Code contains substantial and ambitious revisions to the previous version, which was last revised in 2012, and updates the consultation draft published in February 2019. The FRC also published a Feedback Statement to the February 2019 consultation alongside the Code. The Code significantly raises expectations for how money is invested on behalf of UK savers and pensioners, and establishes a clear benchmark for stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.

The Code highlights a new emphasis on creating long-term value and on considering beneficiary and client needs and directly addresses concerns raised by Sir John Kingman’s independent review of the FRC in December 2018 in respect of the previous code. The new Code also expects signatories to work together with regulators and industry bodies to identify and respond to the risk of market and systemic failure.

Key amendments in the Code include:

• An extended scope to include asset owners (such as pension funds and insurance companies) and service providers (such as proxy advisors and investment consultants) as well as asset managers to help align the approach of the whole investment community in the interest of end-investors and beneficiaries.
• A restructure comprising 12 apply and explain principles for asset owners and asset managers with reporting expectations, and six apply and explain principles for service providers with reporting expectations, (rather than ten comply and explain principles with supporting provisions, alongside detailed guidance).
• Amendments to the definition of stewardship, to clarify that the purpose is to create value for clients and beneficiaries. The new definition of Stewardship is ‘the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society’.
• A requirement to report annually on stewardship activity and its outcomes. Signatories’ reports will show what has actually been done in the previous year, and what the outcome was, including their engagement with the assets they invest in, their voting records and how they have protected and enhanced the value of their investments. In addition, the FRC highlights that all reports should be fair, balanced and understandable, and include examples of both successful and unsuccessful outcomes.
• The Code requires a single annual report to be produced and submitted to the FRC for approval before the organisation becomes a signatory to the Code, and then each following year to remain a signatory.
• A requirement for signatories to explain their organisation’s purpose, investment beliefs, strategy and culture and how these enable them to practice stewardship. They are also expected to show how they are demonstrating this commitment through appropriate governance, resourcing and staff incentives.
• Material environmental, social and governance issues and climate change factors should be taken into account when fulfilling stewardship responsibilities.
• An expectation for signatories to explain how they have exercised stewardship across asset classes beyond listed equity, such as fixed income, private equity and infrastructure, as well as in investments outside the UK.

The new Code will take effect on January 1, 2020.

(FRC: UK Stewardship Code 2020, 24.10.19)

(FRC: Revised and strengthened UK Stewardship Code sets new world-leading benchmark press release, 24.10.19)

(FRC: Feedback Statement - Consulting on a revised UK Stewardship Code, 24.10.19)

FRC: Annual Review of Corporate Governance and Reporting 2018/2019

On October 30, 2019 the Financial Reporting Council (FRC) published its annual review of corporate governance and reporting for 2018/2019 (Review). Alongside the Review, the FRC published an open letter to audit committee chairs and finance directors reflecting the findings of the Review and highlighting areas for improvement. The Review also sets out its expectations for the next season of reporting.

The Review reports that despite continued effort from companies to meet expectations from the FRC and investors in relation to corporate reporting, there is still scope for improvement, particularly in respect of forward looking information, the potential impact of known and emerging risks and opportunities on future business strategy and the carrying value of assets and the recognition of liabilities. The report is structured around the FRC’s overall assessment of corporate reporting and the two key elements of annual reports and accounts, the financial statements and the strategic report.

The Report highlights several points, including:

• Non-financial information statements – The FRC notes that non-financial information statement from relevant companies met a mixed response in terms of providing the required content and in manner of presentation. The FRC reminds companies that the statement should be separately identifiable, but can cross-refer to where the required disclosures are provided within the strategic report.
• Section 172 report – The FRC highlights the requirement for boards to include a further statement within their strategic report, describing how they have had regard to a number of factors when working to promote the success of their business for periods commencing after January 1, 2019. The FRC encourages boards, in their section 172 report, to disclose the issues, factors and stakeholders that they consider relevant in complying with section 172 and the basis on which they came to their view, the main methods they have used to engage with stakeholders and to understand the issues to which they must have regard, as well as information about the effect of that consideration on the company’s decisions and strategies during the financial year.
• Environmental disclosures, including reporting on climate risk – Consistent with the UK Corporate Governance Code’s focus on emerging risks, companies should, where relevant, report on the effects of climate change on their business. The FRC encourages companies to include information on how the board has taken account of the resilience of the company’s business model and its risks, uncertainties and viability in the immediate and longer term in light of climate change and to consider the impact on the financial statements, (in particular in relation to asset valuation and impairment testing assumptions). In addition, the FRC expects companies to disclose risks that extend beyond the period covered in their viability statement.
• 2019 year-end reporting environment – The Review encourages companies to consider carefully the detail provided in those areas of their reports that are exposed to heightened levels of risk. The FRC discourages the use of boilerplate in relation to issues such as climate change, cyber risk and Brexit, and instead asks that where such risks are material, that disclosure be made of the specific areas of risk to which the company is exposed. It identifies a specific issue affecting this season’s year end reporting, being the published amendments to IFRS 9 and IAS 39, reflecting the global reforms of interest rate benchmarks, such as LIBOR. The FRC encourage all companies that are parties to contracts referencing LIBOR, or any other rate subject to the reforms, to start planning now for the transition to new rates including early consideration of the need to re-negotiate relevant contracts and agreements.
• Narrative reporting – The Report identified that a number of strategic reports did not appear to provide a fair, balanced and comprehensive analysis of the development and performance of the business during the year. Examples included business reviews that failed to discuss the performance of acquisitions, the progress of transformation programmes or significant changes or concentrations of credit risk. The FRC reminds companies that more focus is required on the reporting of the impact of the company’s business on the environment, as well as the risks environmental matters may pose to the company. In addition, the Review highlights cases where there have been absent or unclear definitions of Alternative Performance Measures (APMs) and their reconciliation to the closest IFRS line item. The Review therefore recommends the European Securities and Markets Authority (ESMA) Guidelines to all report preparers and issues a reminder that it expects full compliance with ESMA's guidelines by all companies that use APMs.

The FRC has undertaken assessment of both early adoption of the new UK Corporate Governance Code and reporting on the 2016 Code in 2019 and expects to publish its findings and expectations for reporting in 2020 later this year.

(FRC: Annual Review of Corporate Governance and Reporting 2018/2019, 30.10.19)

(FRC: Summary of key developments for 2019/20 annual reports (open letter), 30.10.19)

BEIS: EU Exit and Company Law Guidance published

On October 25, 2019 the Department for Business, Energy and Industrial Strategy (BEIS) published Guidance on EU Exit and Company Law (Guidance) covering legislative and practical changes to the UK’s company law framework as a result of Brexit in a no deal scenario. The Guidance sets out the relevant changes to the Companies Act 2006 (CA 2006) and associated UK corporate law and accounting and audit regulations. The Guidance collates previous guidance published by BEIS and Companies House, and clarifies and updates it.

Matters addressed in the Guidance include:

• Filing and disclosure changes – Changes will be brought into effect on exit day and will primarily impact UK companies that appoint or that have appointed the services of an EEA corporate officer as well as EEA-registered companies that have registered a UK establishment. These entities will need to provide additional information to Companies House (and in some cases add information to public-facing material) within three months of exit day.
• Cross-border mergers – After exit day UK companies will no longer be able to make use of the EU cross-border merger regime. This means that any cross-border merger involving a UK and EEA company that has not been completed before exit day may not be viable. Contractual or other transfer mechanisms will need to be used going forward.
• SEs and EEIGs – On exit day, Societas Europaea (SEs) and European Economic Interest Groupings (EEIGs) will no longer be available as company structures for UK companies. UK companies that used these company structures before exit day can convert to a new form of UK corporate entity or move their registered office outside the UK. Any entities that have either not completed the conversion process or have not transferred out of the UK before exit day, will automatically be converted to a new UK corporate entity. The new corporate entities will preserve many of the features of the SE and EEIG framework but without the ability to transfer their registered office out of the UK. SEs registered in the EU with branches or establishments in the UK will have to register the branch or establishment with Companies House under the Overseas Company Regulations.
• Removal of benefits for certain UK companies only listed on an EEA market – Leaving the EU necessitates an update to the definition of ‘regulated market’ as it appears in the CA 2006 (and related legislation). Intermediaries dealing in securities that do not have access to a UK regulated market will no longer be able to exercise voting rights attached to those shares. UK investment companies listed on an EEA regulated market and not a UK regulated market will no longer be able to make use of relaxations on controls on their distribution of profits.
• Shareholder approval of political donations – Part 14 of the CA 2006 sets out the shareholder authorisations required to allow a company to donate to political parties, organisations and candidates for electoral office. After exit, these authorisations will only apply to donations and expenditure relating to UK based political parties, organisations and candidates. Political donations to non-UK parties, organisations and candidates will be covered by the rules in the relevant country.
• Accounting requirements – The UK’s accounting framework will remain largely unchanged after exit day and UK private companies that use UK GAAP will face no changes to their accounting and reporting requirements as a result of the UK leaving the EU. However, UK companies currently required to use EU-adopted international accounting standards (IAS) will instead need to use ‘UK-adopted IAS’ for financial years beginning after exit day. Initially these standards will be the same; however there may be differences later if the UK and the EU take different approaches to future standards or amendments. UK-incorporated companies admitted to trading on an EEA regulated market will need to check and comply with local requirements, as well as producing accounts in accordance with CA 2006. UK companies operating a branch in the EEA or with EEA subsidiaries will need to check local reporting requirements. UK companies (including dormant companies) with an EEA parent may no longer be able to rely on certain exemptions from producing accounts/non-financial information statements, as applicable.
• Audit committees – The Guidance notes that the DTRs for an audit committee will no longer apply to UK public interest entities that are only trading in the EEA. UK public interest entities that have claimed an exemption from the DTRs before exit day because they have an EEA parent will no longer be able to do so.

(BEIS: EU Exit and Company Law Guidance published, 25.10.19)

FRC: Climate related corporate reporting – Questions for companies

On October 30, 2019 the Financial Reporting Council’s (FRC) Reporting Lab (Lab) published its Questions for companies in relation to climate-related corporate reporting – Questions for companies (Questions). The Questions follow the Lab’s report Climate-related corporate reporting – Where to next? (Report), which was published earlier in October and sets out questions for companies to consider when preparing reports on climate-related information.

The Lab identifies questions that companies should ask themselves in line with the expectations of the Task Force on Climate-related Financial Disclosures framework (TCFD), and provides examples for each as well as cross-referring to findings and guidance from the earlier October Report.

• Governance and management – The TCFD expects companies to disclose their governance around climate-related risks and opportunities by describing the board’s oversight of these issues and management’s role in assessing and managing them. The Lab suggests that companies should ask themselves questions including:

• What arrangements does the board have in place for assessing and considering climate-related issues? Who has responsibility for climate-related issues?
• How are the board and/or committees involved and how often are climate-related issues considered?
• What insight does the information give the company and how is it being integrated into strategic planning?

• Business model and strategy – The TCFD expects companies to disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material, including the relevant risks and opportunities the organisation has identified over the short, medium and long term and the resilience of the organisation’s strategy. The Lab suggests that companies should ask themselves questions including:

• Where do the biggest risks and opportunities sit?
• What does the company look like in the future and how will it continue to generate value?
• What strategy does the company have for responding to the challenges?
• How was the decision about the materiality of climate-related issues made?

• Risk management – The TCFD expects companies to disclose how the organisation identifies, assesses, and manages climate-related risks. The Lab suggests that companies should ask themselves questions such as:

• What oversight does the board have of climate-related opportunities and risks?
• What systems and processes are in place for identifying, assessing and managing climate-related risks?
• To what extent can current processes be developed to assist?
• How will transitional and physical risks affect the company?

• Metrics and targets – In line with the TCFD recommendations, companies are expected to disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material. The Lab suggests that companies should ask themselves:

• What information is most relevant to monitoring and managing the impacts of climate-related issues?
• How were these identified and how do they link to the strategy and business model?
• What signals or specific climate scenarios are monitored?
• Has the company considered whether issues regarding water, energy, land use and waste management may be material, and if so, how these should be measured?

(FRC: Climate related corporate reporting – Questions for companies, 30.10.19)

LSE: AIM Notice 57 – Amendments to AIM Rulebooks in event of hard Brexit

On October 29, 2019 the London Stock Exchange (LSE) published AIM Notice 57 (Notice). The Notice updates AIM Notice 55, which was published in March 2019, regarding the proposed changes to its AIM Rulebooks that will apply in the event of a no-deal Brexit on January 31, 2020. The purpose of the amendments is to enable the LSE to continue to operate its markets effectively and meet its regulatory objectives.

The amendments are substantially the same as those published in March 2019, and the Prospectus Regulation changes made pursuant to AIM Notice 56 have also been reflected in the drafts. The LSE has also made some clarificatory updates to the nominated adviser eligibility provisions in the AIM Rules for Nominated Advisers to reflect how it applies the rules in respect of a nominated adviser’s staffing and working arrangements for qualified executives. The changes are set out in marked up copies of the AIM Rules for Companies and the AIM Rules for Nominated Advisers attached to the Notice.

The amendments to the AIM Rules for Companies will become effective in the event of a no-deal Brexit, and the amendments to the AIM Rules for Nomads will become effective from November 1, 2019.

(LSE: AIM Notice 57, 29.10.19)

(LSE: AIM Notice 57 - AIM Rules for Companies (mark-up), 29.10.19)

(LSE: AIM Notice 57 - AIM Rules for Nominated Advisers (mark-up), 29.10.19)

HM Treasury: The Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 3) Regulations 2019

On October 25, 2019 the Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 3) Regulations 2019 (Regulations) were published along with an explanatory memorandum. The purpose of the Regulations is to ensure a coherent and functioning financial services regulatory regime once the UK leaves the EU by addressing deficiencies in UK domestic law and retained EU law arising from the UK’s withdrawal from the EU.

The Regulations remain substantially unchanged from the draft Regulations published in July.

Some of the Regulations came into force immediately, with others coming into force the day after publication. The remaining Regulations will come into force on exit day (including those amendments to the Criminal Justice Act 1993 and the Insider Dealing (Securities and Regulated Markets) Order 1994).

(HM Treasury: The Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 3) Regulations 2019, 25.10.19)

(HM Treasury: The Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 3) Regulations 2019 explanatory memorandum, 25.10.19)

BEIS: Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019

On October 23, 2019 the Department for Business, Energy and Industrial Strategy (BEIS) published the Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019 (Regulations) along with an explanatory memorandum.

The Regulations continue the process of addressing failures of retained EU law to operate effectively and other deficiencies arising from the withdrawal of the UK from the EU, and intend to ensure that the frameworks for the application of international accounting standards under UK law, and for regulatory oversight and professional recognition of statutory auditors and third country auditors in the UK, work effectively following the UK’s withdrawal from the EU.

The Regulations remain substantially the same form as the draft Regulations published in July 2019.

Regulations 2 and 3, which amend the commencement provisions of the Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 will come into force 21 days after the Regulations are made and the remainder will come into force immediately before exit day.

(BEIS: Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019, 23.10.19)

(BEIS: Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019 explanatory memorandum, 23.10.19)

European Parliament: Corrigendum to position on Company conversions, mergers and divisions

On October 22, 2019 the European Parliament approved a corrigendum to its position at first reading with regards to the European Commission's proposal for a directive amending Directive (EU) 2017/1132 in relation to cross-border conversions, mergers and divisions. It had resolved to adopt the European Commission's proposal for the regulation on April 18, 2019. The corrigendum makes minor corrections to the adopted text.

(Corrigendum to the position of the European Parliament adopted at first reading on 18 April 2019, 22.10.19)