Essential Corporate News – Week ending July 23, 2021

BEIS: National Security and Investment Act 2021 - Guidance and information published

On July 20, 2021 the Government announced that the National Security and Investment Act 2021 (NS&I Act) will come fully into force on January 4, 2022. At the same time it published a draft statutory instrument (SI) which sets out how the 'mandatory notification' process will work under the NS&I Act, together with a consultation paper and certain guidance notes. 

Draft SI - The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021

The draft SI sets out the proposed acquisitions of qualifying entities in the 17 sectors of the economy that will be subject to the mandatory notification requirements set out in the NS&I Act. It has been published to update businesses and investors about the mandatory notification requirements ahead of commencement of the NS&I Act but its contents are subject to change. The Government expects to lay the final SI later this year, subject to Parliamentary timetabling.

Consultation on statement on the use of the power to call in acquisitions

The NS&I Act requires the Secretary of State to publish a statement explaining how the power to call in acquisitions under the Act is expected to be used. The statement is to help parties to an acquisition understand whether their acquisition is likely to be called in by the Secretary of State and to plan accordingly. This consultation follows earlier drafts of the statement and it seeks views on the revised draft content of the statement (to be referred to as the ‘Section 3 Statement’) ahead of the final version being laid before Parliament in due course. Responses to the consultation are requested by August 30, 2021. 

Guidance on the new rules

The Government has also published a series of guidance notes to help businesses and investors prepare for the new rules:

• National Security and Investment Act: prepare for new rules about acquisitions – this guidance sets out what types of acquisitions are covered by the new rules, whether the Government needs to be told about an acquisition and how the Government will scrutinise the acquisition.
• How the National Security and Investment Act could affect people or acquisitions outside the UK - this guidance sets out what type of acquisitions outside of the UK are covered by the new rules, common circumstances that would put an acquisition in scope of the new rules and examples of how the rules may affect parties not based in the UK.
• The National Security and Investment Act alongside regulatory requirements – this guidance sets out how the NS&I Act interacts with the Enterprise Act 2002, the Competition and Markets Authority, the Export Control Joint Unit, the Takeover Code, the Financial Conduct Authority and the Prudential Regulation Authority.

In addition, sector-specific guidance for the higher education and research-intensive sectors has been published.  

(BEIS, National Security and Investment Act, Guidance and information, 20.07.2021)

FRC: Reporting on stakeholders, decisions and Section 172

On July 19, 2021 the Financial Reporting Council’s Financial Reporting Lab published a report which sets out what investors are looking for when companies report on their stakeholders and on how their perspectives are taken into account when key decisions are made. While the Section 172 statement is seen as a helpful bridge between these two types of information, the report looks at how companies can improve their reporting in these areas to better meet the needs of investors. It also provides examples from current reporting practice that reflect possible helpful ways of addressing these needs.

The report is divided into three sections to address the overarching need for information on how a company is progressing towards its purpose and long-term success: 

• In the first section, the report highlights that investors view information on a company’s key stakeholders as critical to understanding the company and its prospects. It outlines how investors want to see information on stakeholders’ relevance to the business model and strategy, the strength of stakeholder relationships, risks and opportunities, and performance and metrics. 
• In the second section, the report highlights that investors want to know what the strategic decisions were during the period, how such decisions were made, including how stakeholders were considered in reaching them, the difficulties encountered, and the outcomes of these decisions. 
• The final section addresses better practice Section 172 statements, highlighting that the statements are not just about stakeholder engagement, but should reflect all aspects of the Section 172 duty to allow a better understanding of how a company is progressing in its pursuit of its purpose and long-term success. 
• Each section includes examples which reflect possible helpful ways of addressing some of the aspects highlighted by investors. 

Building on the Tips on Section 172 statements published by the Financial Reporting Lab in October 2020, the Financial Reporting Council has also published a summary of questions companies should consider in determining what information to report on stakeholders and decisions which meets the needs of investors. 

(FRC, Reporting on stakeholders, decisions and Section 172, 19.07.2021)

FRC: Board diversity and effectiveness in FTSE 350 companies

On July 20, 2021 the Financial Reporting Council (FRC) published the results of research it has conducted with the London Business School Leadership Institute and SQW into both the implications of increased gender and ethnic diversity on FTSE 350 boards (in light of the Hampton-Alexander Review and the Parker Review) and how the resulting changes can be accelerated.

The report addresses three key questions:

• How have board effectiveness and dynamics been impacted by the increased gender and ethnic diversity of board membership?
• What attributes, skills and experience do today’s board members expect to be needed in the diverse boardrooms of the future?
• How can nomination committees be helped to take a more objective and diversity-friendly approach to board recruitment?

The report states that the results of the research reveal a lagged effect associated with gender diversity. Higher levels of gender diversity of FTSE 350 boards positively correlate with better future financial performance (as measured by EBITDA margin), with the effect being the strongest after three to five years. Better-performing firms experience greater benefits in terms of financial performance from gender diversity. Specifically, based on average EBITDA margin, the analysis shows that the top 50 per cent of the sample of companies that had at least one woman on the board experienced higher levels of EBITDA margin after three years. Likewise, FTSE 350 boards with well managed gender diversity contribute to higher stock returns, and are less likely to experience shareholder dissent. The results of the research also show a significant but weaker relationship between a greater ethnic diversity of FTSE 350 boards and a reduction in shareholder dissent. Ethnic minority diversity, however, is both low and not changed enough to measure the impact of change with any confidence.

Among other things, the report does the following:

• Highlights the importance of healthy board dynamics and culture for board effectiveness; crucially not just what the board does, but how it makes decisions.
• Presents the evidence on how board effectiveness and dynamics have been impacted by the gender, ethnic and socioeconomic diversity of board membership.
• Identifies the attributes, skills and experience that board members expect to be needed in boardrooms of the future.
• Sets out how nomination committees can be helped to take a more objective and diversity-friendly approach to board recruitment.

It also includes a set of questions for boards to reflect on, consider, and discuss how they can be better at managing diverse boardrooms of the future, with questions aimed at Chairs, boards, CEOs, shareholders and stakeholders. 

(FRC, Board diversity and effectiveness in FTSE 350 companies, 20.07.2021)

HMRC: Modernisation of the Stamp Taxes on Shares Framework – Summary of responses

On July 21, 2021 HM Revenue and Customs (HMRC) published a summary of responses following its July 2020 Call for Evidence on the principles and design of a new Stamp Duty and Stamp Duty Reserve Tax (SDRT) framework to inform a longer-term modernisation of Stamp Duty and SDRT.

Many respondents to the Call for Evidence agreed that modernisation is much needed and there was majority support for a single tax for listed and unlisted securities that is self-assessed, with digitisation and movement away from the traditional paper stamping methods. There was very strong support for measures that would reduce the length of time between a transaction being completed and company share registers being updated. There was also very strong support for keeping the COVID-19 temporary measures in place as an interim step towards digitisation, with some suggestions for improvements that could be made to them.

In the summary, HMRC notes that the Government has carefully considered the responses and is committed to exploring potential options for modernisation, including through further engagement and dialogue with stakeholders. It points out the announcement, on June 18, 2021, of the removal of the requirement to physically stamp documents due to the permanent adoption of the COVID-19 temporary processes which give the option of electronic notification and under which HMRC issues a confirmation letter rather than physically stamping the document.

Owing to legislative changes made in 2019 in anticipation of potential changes to the stamping method, these processes are legally valid and ‘duly stamp’ transfer instruments for all purposes. There is no requirement for any instruments processed since March 2020 to be resubmitted to HMRC. 

The Government’s next steps for this work are to:

• explore the feasibility and implications associated with the key priority areas identified by respondents, including a single self-assessed tax on shares, territorial scope and digitisation, and build a full picture of all the risks and benefits involved; and
• set up a Working Group to work collaboratively with stakeholders and help inform the development of policy proposals and frame subsequent consultation documents.

(HMRC: Modernisation of the Stamp Taxes on Shares Framework – Summary of responses, 21.07.2021)