Essential Corporate News – Week ending July 20, 2018

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

On July 16, 2018 the Financial Reporting Council (FRC) published its new 2018 UK Corporate Governance Code (2018 Code). This follows the FRC’s consultation on proposed amendments to the 2016 UK Corporate Governance Code published in December 2017 and the 2018 Code will apply to accounting periods beginning on or after January 1, 2019. With the 2018 Code, the FRC has also published updated Guidance on Board Effectiveness (Guidance).

In light of feedback received during the consultation process, the FRC has revised some of the Principles and Provisions in the 2018 Code from those consulted on. Key changes to note include the following:

• Provision 5 requires the board, in the annual report, to describe how the interests of key stakeholders and the matters in section 172 Companies Act 2006 have been considered in board discussions and decision-making. In relation to engagement with the workforce, it permits one or more of a combination of the following methods to be used:
  • A director appointed from the workforce;
  • A formal workforce advisory panel; or
  • A designated non-executive director.

• However, the FRC has introduced flexibility by stating that if the board has not chosen one or more of these methods, then the company must explain the alternative arrangements it has in place and why these are effective. The Guidance describes “workforce” in this context, making it clear that it is not meant to align with legal definitions of workforce, employee, worker or similar and companies will need to be able to explain who they have included in determining their workforce, and why.

• In relation to the independence of the chair, the FRC states that it recognises the “special” role of the chair, their close involvement with the company and close relationship with the executives throughout their tenure and so, as a result, has reverted in Provision 9 to the approach in the 2016 UK Corporate Governance Code (2016 Code) for the chair to be “independent on appointment” rather than throughout their tenure. However, far as the chair’s tenure is concerned, Provision 19 states that the chair should not remain in office for more than nine years from their first appointment to the board, and where a non-executive director is appointed as chair, time served in that capacity will count towards the nine year period. A limited extension will be permitted if the chair was previously a board member, the appointment supports the company’s succession plan and its diversity policy, and a clear explanation is provided.
• So far as the independence of non-executive directors is concerned, Provision 10 has been amended in light of feedback. Provision 10 only relates to non-executive directors and not also to the chair, as proposed in the consultation, and while it sets out a list of criteria against which independence is to be determined, the board retains the discretion as in the 2016 Code, to consider a non-executive director to be independent even if any of those or other relevant circumstances apply, provided that a clear explanation is given.
• Provision 11 requires at least half (excluding the chair), rather than the majority, of the board to be independent non-executive directors, so reflects the wording in the 2016 Code.
• To deal with concerns about over-boarding of directors, Provision 15 requires boards, on making new appointments, to take into account other demands on directors’ time and prior board approval must be obtained before a director takes on additional external appointments. The reasons for permitting significant appointments should be explained in the annual report.
• So far as smaller companies are concerned, they will not be obliged to have an external board evaluation but Provision 21 encourages all chairs to consider using such evaluations.
• So far as membership of the audit and remuneration committees are concerned, the FRC has reverted in the 2018 Code to the requirements in the 2016 Code, namely that companies below the FTSE 350 can have such committees comprising two rather than three independent non-executive directors. However, in a change from the 2016 Code, the board chair of a smaller company can no longer be a member of the audit committee.
• In relation to remuneration, Principle R makes it clear that it is the responsibility of the remuneration committee rather than the board, to exercise discretion over remuneration outcomes. Remuneration committees will be expected annually to consider whether there are circumstances which warrant the exercise of discretion when determining remuneration outcomes.
• Provision 33 clarifies that the remuneration committee only has responsibility for reviewing workforce remuneration and related policies, rather than having oversight of these matters as the FRC originally proposed.
• Total vesting and holding periods of five years or more (rather than the current three years) should apply to share awards granted to executives and remuneration committees should have a formal policy in place relating to post-employment shareholding requirements covering both unvested and vested shares. This is set out in Provision 36.
• Provision 38 makes it clear that executive pension contributions should be in line with those available to the rest of the workforce.

(FRC, UK Corporate Governance Code, July 2018, 16.07.18)

On July 16, 2018, the Financial Reporting Council (FRC) published its revised Guidance on Board Effectiveness (Guidance) together with the new 2018 UK Corporate Governance Code (2018 Code). The Guidance supplements the 2018 Code by suggesting good practice to assist companies in applying the 2018 Code’s Principles and reporting on that application.

 The Guidance was consulted on in December 2017 and in light of feedback a number of changes have been made to the draft previously consulted on. These include the following:

• The language has been made less prescriptive as it was felt that it could be viewed otherwise as a set of requirements. 
• Changes have been made to the introduction to emphasise the importance of the Guidance in promoting high standards and to encourage its use alongside the 2018 Code. 
• The Principles and Provisions in the 2018 Code related to the content of the Guidance are referenced through footnotes 
• A new section on externally facilitated board evaluations has been included in section 3. 
• An appendix has been included showing the overlaps between the 2018 Code and the Financial Conduct Authority’s Handbook.

(FRC, Guidance on Board Effectiveness, 16.07.18)

On July 16, 2018, the Financial Reporting Council (FRC) published its Feedback Statement following its December 2017 consultation on a revised UK Corporate Governance Code. The Feedback Statement has been published together with the revised 2018 UK Corporate Governance Code (2018 Code) and updated Guidance on Board Effectiveness. 

The Feedback Statement summarises the main points raised in relation to the consultation questions and the resulting decisions taken by the FRC. It also includes a table showing how the 2018 Code differs from the 2016 version and in an annex, it tracks the changes from the version consulted on in December 2017 to the 2018 Code. 

The FRC notes in the Feedback Statement that it will be monitoring how governance practices and reporting develop in response to the 2018 Code. This will include more in-depth reviews of annual reports to engage with companies on their reporting against the 2018 Code.  It expects some companies to adopt the 2018 Code early and states that this will help the FRC determine whether additional guidance or support might be necessary. 

The Feedback Statement also includes a summary of the responses to the high-level questions posed on stewardship and the UK Stewardship Code as part of the December 2017 consultation. The FRC is to consult on a revised UK Stewardship Code later in 2018. 

(FRC, Feedback Statement – Consulting on a revised UK Corporate Governance Code, 16.07.18)

(FRC, Feedback Statement – Annex: Code changes since the December 2017 consultation 16.07.18) 

On July 18, 2018 the Department for Business, Energy and Industrial Strategy published an Explanatory Memorandum to accompany the draft Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (Draft Regulations).

The Draft Regulations amend the reporting requirements in both the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (2008 Regulations) and the Limited Liability Partnerships (Accounts and Audit) Application of Companies Act 2006) Regulations 2008. The Draft Regulations stem from the decision to abolish the CRC Energy Efficiency Scheme after the 2018-2019 compliance year and replace it with a new Streamlined Energy and Carbon Reporting framework. This was consulted on in October 2017 when views were sought on introducing that framework through company annual reports to replace the reporting element of the CRC Energy Efficiency Scheme.

Key points to note in relation to the Draft Regulations are as follows:

• The 2008 Regulations are amended to require quoted companies to include statements in their directors’ report concerning the company’s energy use from activities for which the company is responsible and from purchases for its own use, and action taken to increase its energy efficiency.
• A new Part 7A is being inserted into Schedule 7 of the 2008 Regulations to require large unquoted companies to make statements in their directors’ report concerning the company’s greenhouse gas emissions, energy use and action taken to increase energy efficiency within the UK. If the company’s activities consist of wholly or mainly offshore activities, the company must also include statements about certain activities in the offshore area.
• If the report is a group report, the company or limited liability partnership (LLP) must make the required statements on the basis of its information and its subsidiaries though it can exclude information which a subsidiary would not itself be required to disclose in its report.
• Large LLPs will have to prepare an equivalent report, an “energy and carbon report” for each financial year. This will mirror the content requirements for large unquoted companies.

If approved by Parliament in their current form, the Draft Regulations will come into force on April 1, 2019 and apply to financial years beginning on or after that date. Detailed guidance on how to comply with the new requirements is expected to be published by January 2019.

(Draft Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018, 18.07.18)

(Explanatory Memorandum, Draft Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018, 18.07.18)

On July 13, 2018 the European Securities and Markets Authority (ESMA) launched a public consultation on draft guidelines to assist competent authorities in their review of risk factors included in a prospectus. The aim of the draft guidelines is to provide competent authorities with a means of ensuring that risk factor disclosure is material and specific to the issuer concerned and that competent authorities can ensure that risk factor disclosure is prepared in a concise and succinct form. The Prospectus Regulation entered into force in July 2017 and will be fully applicable by July 21, 2019.  

The closing date for the consultation is October 5, 2018. ESMA will deliver its technical advice to the European Commission and publish its final report by March 31, 2019. 

(ESMA, Guidelines on risk factors under the Prospectus Regulation Consultation Paper, 13.07.18)

On July 13, 2018, the European Securities and Markets Authority (ESMA) launched a consultation on proposed technical advice on exempt documents produced for the purpose of offers or admission of securities to trading connected to a takeover, merger or division. 

Issuers may offer or admit securities connected with a takeover, merger or division without publishing a prospectus, provided that a document is made available to investors describing the transaction and its impact on the issuer. 

ESMA is consulting on its draft technical advice regarding the minimum information content of this document, specifically in relation to: 

• the offer of securities to the public or the admission to trading of securities on a regulated market; and 
• the description and impact that a takeover, merger or division may have on the issuer’s operational and financial activities. 

In addition, ESMA proposes the operative provisions that are necessary to ensure that exempt documents are fit for purpose and sets out the methodology followed in preparation of the technical advice. 

The consultation closes on October 5, 2018 and ESMA will deliver its technical advice to the European Commission and publish its final report by March 31, 2019.

(ESMA Draft technical advice on minimum information content for prospectus exemption – Consultation, 13.07.18)

On July 17, 2018 the European Securities and Markets Authority (ESMA) published its final report on the regulatory technical standards (RTS) specifying the implementation of certain provisions in the Prospectus Regulation which entered into force in July 2017 and will be fully applicable by July 21, 2019. 

 The draft RTS cover requirements in relation to the following areas of the Prospectus Regulation:

• key financial information to be disclosed by issuers for the prospectus summary;
• data for classification of prospectuses and practical arrangements to ensure that such data is machine readable;
• advertisements disseminated to retail investors;
• requirements to publish supplements to a prospectus;
• publication of a prospectus; and
• arrangements fr the notification portal used for passporting prospectuses.

 The draft RTS have been sent to the European Commission for endorsement.

 (ESMA, Final Report on draft Regulatory Technical Standards for Prospectus Regulation, 17.07.18)

The Institute of Chartered Secretaries and Administrators (ICSA) Governance Institute and Board Intelligence have produced three resources to help organisations with the preparation and presentation of their board reporting. This follows on from publication of a summary of their research into how board reporting (the preparation of reports and other papers discussed at board meetings) operates in organisations and this was published in December 2017.

While only available to ICSA members, the three resources produced are as follows:

• Guidance: This consists of four sections, each of which deals with one of the main stages in the development of a board pack, namely identifying the information the board needs, commissioning board papers, writing board papers and collecting and distributing the packs. 
• Self-assessment tool: This enables organisations to assess the length and balance of their board packs and identify ways in which they can be improved. It enables organisations to assess their board reports in relation to style (the quantity and accessibility of their reports), scope and content (the equality and effectiveness of their reports) and process (the efficiency, security and timeliness of their board reporting cycle). 
• Cost calculator: This allows users to uncover the hidden cost of board reporting to understand just how much time and money their organisation is spending on board reports. It covers the time spent writing, reviewing, compiling and distributing board and committee papers, and the time the board and committee members spend reading those papers. Data is adjusted for size, sector and regulatory burden, generating a cost per year in pounds sterling or euros, as well as the number of days needed to prepare the board papers.

 (ICSA, Effective Board Reporting 11.07.18)