Essential Corporate News – Week ending April 27, 2018

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

In March 2018, Pensions and Investment Research Consultants Ltd (PIRC) published the 25th edition of its UK Shareowner Voting Guidelines.

PIRC has made several key changes in the 2018 Guidelines from those published in 2017, including the following:

• Chairman: PIRC will oppose re-election of a chairman with significant independence issues (excluding tenure length), extending beyond their initial appointment.
• Chief executive becoming chairman: If the CEO or finance director becomes chairman, PIRC will not support the re-election of that chairman.
• Executive chairman: The chairman of the board should act independently from the company’s management team when exercising his or her oversight of the functioning of the board. Holding an executive position is incompatible with this role and so PIRC will recommend a vote against the appointment of an executive chairman.
• Committee independence: PIRC requires the audit, remuneration and nomination committees to be exclusively comprised of independent directors. PIRC will oppose the re-election of any non-independent member to either the audit or remuneration committee to avoid conflicts of interest arising.
• Parker Review: At a minimum PIRC expects companies to acknowledge the recommendations made in the 2017 Parker Review and requires each FTSE 100 company to set a target of one ethnic minority director by 2021 unless the company discloses why the target does not apply.
• Commitment: PIRC considers that a chair of a listed company should not also be a chair of another listed company.
• Meeting attendance: Previously PIRC’s policy was to abstain on a director's re-election where a director misses either two board meetings or one audit committee meeting without adequate justification. Now PIRC will oppose any director who misses any meeting without adequate justification provided, as PIRC considers this is a sign of over-boarding or inability to meet commitments.
• Right to attend meetings in person: PIRC will oppose amendments to company articles which permit virtual-only meetings and will consider withdrawing support for the re-election of the chairman and other directors who propose such amendments.
• Response to “significant” vote: Where a company receives “significant” votes against a resolution, PIRC will consider opposition levels of 10 per cent and above as “significant”.
• Financial motivation: PIRC expects genuine attempts to align with shareowners to exclude long-term incentive plans (LTIPs) altogether to prevent the substantial additional costs associated with removing underperforming chief executives.
• Remuneration report votes: PIRC supports an annual binding vote on the remuneration report by shareholders and other stakeholders.
• Restricted Shares: PIRC notes that the traditional LTIP model has faced criticism and interest groups now favour a restricted shares model which has no performance conditions attached. If a company seeks to adopt this model, PIRC’s analysis will incorporate factors including, but not limited to: the quantum available under variable incentive schemes, the existence or not of an LTIP in addition to such a plan and the company’s overall approach to remuneration within the context of reasonableness.

The PIRC UK Shareowner Voting Guidelines 2018 can be purchased from PIRC - click here.

On April 25, 2018 the Quoted Companies Alliance (QCA) published a revised QCA Corporate Governance Code (QCA Code) which replaces the previous version published in May 2013.

The revised QCA Code is constructed around 10 broad principles, accompanied by an explanation of what those principles entail (rather than the 12 principles in the 2013 QCA Code), together with a set of disclosures. It sets out what the QCA considers to be appropriate arrangements for growing companies and asks companies to provide an explanation about how they are meeting the principles through the prescribed disclosures.  The QCA Code operates on a “comply or explain” basis so where a company departs from the principles and their application, it will be expected to provide a well-reasoned explanation for doing so as part of its reporting on corporate governance. 

The disclosures set out after each principle indicate the areas that companies need to address in their reporting on corporate governance and these should reflect how the company has applied the principles and be tailored to the company’s circumstances. In addition to these disclosures, the correct application of the QCA Code also requires that the chair provides a clear explanation of how the company applies the QCA Code in a corporate governance statement and it is recommended that this be included both in the annual report and on the company’s website.

The 10 principles are as follows:

• Principle 1 – Establish a strategy and business model which promote long-term value for shareholders.
• Principle 2 – Seek to understand and meet shareholder needs and expectations.
• Principle 3 – Take into account wider stakeholder and social responsibilities and their implications for long-term success. 
• Principle 4 – Embed effective risk management, considering both opportunities and threats, throughout the organisation. 
• Principle 5 – Maintain the board as a well-functioning, balanced team led by the chair. 
• Principle 6 – Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities. 
• Principle 7 – Evaluate all performance based on clear and relevant objectives, seeking continuous improvement. 
• Principle 8 – Promote a corporate culture that is based on ethical values and behaviours. 
• Principle 9 – Maintain governance structures and processes that are fit for purpose and support good decision-making by the board. 
• Principle 10 – Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders.

The QCA Code also includes sections on good corporate governance and on the roles and responsibilities of the board, the chair, the senior independent director, the non-executive director, the executive directors, the audit committee, the remuneration committee, the nomination committee, the company secretary and shareholders.

The QCA’s press release announcing the revised Code notes that, as a result in a change to the AIM Rules with effect from 30 March 2018, all AIM companies will be required to apply a recognised corporate governance code and explain how they do so from September 2018.  The QCA’s research indicates that currently over half of the companies on AIM refer to the QCA Code but a significant minority of AIM companies do not currently apply any code. A copy of the QCA Code can be purchased from the QCA.

(QCA, New QCA Corporate Governance Code, 25.04.18)

On April 26, 2018 the London Stock Exchange (LSE) published AIM Notice 51, a consultation on proposed changes to the AIM Rules for Nominated Advisers. This follows on from the Discussion Paper “AIM Rules the Review”, published in July 2017.

The proposed amendments are to provide more detail and clarity in relation to the LSE’s supervisory powers and its considerations in relation to the eligibility and continuing eligibility of firms. The proposed amendments are as follows:

• Rule 2 – Eligibility criteria: introduces new criteria in order to provide further clarity about the resources and standards of conduct the LSE expects from prospective and existing nominated adviser firms when performing their nominated adviser responsibilities.
• Rule 12 – Notification obligations: clarifies the types of information that a firm is required to provide to the LSE regarding changes relevant to their nominated advisers.
• Rule 27 – Supervision of nominated advisers: clarifies in which circumstances the LSE may require a nominated adviser to undertake remedial action and may restrict a nominated adviser’s status.
• Rule 27(c) – Supervision of Qualified Executives: under existing Rule 27 the LSE may remove a Qualified Executive’s status in certain circumstances. The LSE’s preferred approach is to work with nominated advisers so it is including provisions to require remedial action and/or restrictions on the status of a Qualified executive.
• Rule 31 – Moratorium on acting for further AIM companies: seeks to provide further clarity regarding the examples of circumstances when the LSE may place a firm under moratorium.
• Jurisdiction and Appeals: the LSE proposes the removal of existing Rule 28 and amendment of Rule 32 as it is not necessary to have two separate rules regarding appeals. It also proposes clarifying that the LSE has jurisdiction over nominated advisers that are no longer approved for breaches or suspected breaches of the AIM Rules for Companies or Nominated Advisers that occurred while the firm was still approved as a nominated adviser.
• NA1 and NA2 forms: amendments will be made to the NA1 (applicant nominated adviser) and NA2 (applicant qualified executive) forms.

Next steps

The LSE welcomes comments and responses on the proposals contained in this consultation by May 25, 2018.

(LSE, AIM Notice 51, 26.04.18)

On April 19, 2018, the European Parliament adopted, with amendments, the European Commission’s proposal for a directive to amend the Fourth Money Laundering Directive.

Changes to the European Commission’s proposals on amending the Fourth Money Laundering Directive include the following:

• The European Commission had proposed that the definition of beneficial ownership in Article 3(b) be amended to provide that for the purposes of Article 30, the indication of ownership or control should be reduced to 10 per cent if the legal entity is a “Passive Non-Financial Entity” (essentially an entity that functions as an intermediary structure, does not create income on its own but mainly channels income from other sources). This change is not being made but a new Article 65 provides that the European Commission may, if appropriate, issue a report to assess the need to lower the percentage for identification of beneficial owners of legal entities.
• Provisions have been added to the requirements in Article 30(1) of the Fourth Money Laundering Directive (beneficial ownership information) to require Member States to ensure that breaches of Article 30 are subject to effective, proportionate, dissuasive measures or sanctions, and that beneficial owners of corporate or other legal entities provide those entities with the information necessary for the entity to comply with the requirement to hold adequate, accurate and current information on their beneficial ownership.
• It is made clear in Article 30(5) that information on beneficial ownership should be accessible in all cases to any member of the general public (not just to people who can demonstrate a legitimate interest in accessing the information).
• The exceptional circumstances, where Member States may provide for an exemption from access to all or part of the information on beneficial ownership on a case-by-case basis in Article 30(9), have been amended to include where the beneficial owner could be exposed to extortion or harassment. In addition a requirement is being introduced that if a Member State grants exemptions from access, it should publish annual statistical data on the number of exemptions granted and reason stated and report that data to the European Commission.
• The information must remain publicly available through the national central registers and the system of interconnection of registers for at least five years and no more than 10 years after the company has been struck off the register. This is provided for in Article 30(10).

Next steps

The Fifth Money Laundering Directive will enter into force 20 days after its publication in the Official Journal. Member States will need to set up beneficial ownership registers for corporate and other legal entities by the date which is 18 months after the date of entry into force of the Directive.

(European Parliament, Fifth Money Laundering Directive, 19.04.18)

On April 25, 2018 the European Commission published a proposal to amend Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions. The European Commission aims to promote the potential of the Single Market by breaking down barriers to cross-border trade, facilitating access to markets, increasing confidence and stimulating competition while offering effective and proportionate protection to stakeholders.

The proposal put forward by the European Commission will retain the current cross-border merger procedures found in the Companies (Cross-Border Mergers) Regulations 2007 but will also include a fast-track process for ‘simple’ mergers and additional safeguards for shareholders and creditors.

The objectives of the proposal are to:

• provide harmonised rules on how a company can move from one EU country to another, merge or divide into two or more new entities across borders;
• provide specific and comprehensive procedures for cross-border conversions to allow companies to move their seat from one Member State to another;
• foster cross-border mobility in the EU; and
• include specific measures that will help national authorities fight against abuse.

The European Commission has proposed that the new procedure will include the following:

• management reports for shareholders and employees so that they are better informed about the impact of the proposed conversion or merger on their position in the company;
• an independent expert report to assess whether the safeguards are effective against abusive arrangements to circumvent tax rules, undermine workers' rights or jeopardising creditors' or minority shareholders' interests; and
• ensure final checks by the departure and destination Member States as to fulfilment of the conditions are carried out.

The proposal will be submitted to the Council of the European Union and the European Parliament for their consideration and final adoption. Once adopted, the new Directive would have to be implemented into the laws of all EU Member States.

(European Commission, Amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, 25.04.18)

(European Commission, FAQs on cross-border conversions, mergers and divisions, 25.04.18)

On April 25, 2018 the European Commission published a proposal for a directive amending Directive (EU) 2017/1132 regarding the use of digital tools and processes in company law. Currently only 17 Member States provide a fully online procedure for registering companies; however, under the new rules, companies in all Member States will be able to register, set up new branches or file documents to the business register online.

Proposals set out in the proposed Directive include the following:

• A new legal framework will allow national authorities to rely on one another's information about disqualified directors in order to prevent fraud and abuse. Member States will be able to refuse the appointment of a someone as a director of a company if they are currently disqualified from acting as a director in another Member State.
• The data that must be available free of charge by all business registers is expanded to include a company’s legal status, any former or other names, their website, information on any branches in other Member States, and the names of those authorised to act on the company's behalf.
• A system of interconnected registers will allow the Member State in which the company is registered to inform any other Member State where a branch of the company is and to record any relevant changes in certain information.

The proposal will be forwarded to the Council of the European Union and the European Parliament under the ordinary legislative procedure.

(European Commission, Amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law, 25.04.18)

On April 24, 2018 the Board of the International Organization of Securities Commissions (IOSCO) published a consultation report which seeks input to a possible Good Practices Report on how audit committees of listed companies can support external audit quality.

The consultation report notes that the quality of a company’s financial report, supported by an independent external audit, is key to market confidence and informed investors and while the auditor has primary responsibility for audit quality, the audit committee can promote and support that audit quality. The Good Practices Report should help audit committees do this. The consultation report also notes that there is inconsistency in the way audit committees carry out their responsibilities and findings by audit regulators indicate a need to improve audit quality and the consistency of audit execution.

The consultation report considers the role of audit committees and audit quality and proposes good practices regarding the features in promoting and supporting audit quality. These features include the qualifications and experience that audit committee members should possess. The consultation report also proposes good practices that audit committees should consider when:

• recommending the appointment of an auditor to members/shareholders;
• assessing potential and continuing auditors;
• setting the audit fees;
• facilitating the audit process;
• communicating with the auditor;
• assessing auditor independence;
• Communicating with the auditor; and
• assessing audit quality.

Next steps

The consultation report seeks feedback on the proposed good practices and role of the audit committee in achieving sound audit quality. IOSCO requests that all comments are submitted by July 24, 2018.

(IOSCO, Good Practices for Audit Committees in Supporting Audit Quality, 24.04.18)

On April 25, 2018 TheCityUK, an industry-led body representing UK-based financial and related professional services) published a report which sets out a new framework for boards to meet the growing threat of cyber crime that faces companies. The report found that boards are generally less informed about the ways in which they should approach cyber risks and aims to provide practical insights on how best to govern such risks.

The report is based on research taken from 30 companies across the financial and related professional services industry, all of which had management teams working on cyber security. The report identifies six elements against which to benchmark cyber risk governance:

• Strategy: How well does the board understand the company’s priorities and strategic approach to cyber risk and to what extent is cyber risk being factored into broader board-level decision making?
• Board ownership: To what extent does the board drive the strategy and how well is it integrated into board-level risk management processes?
• Financial resilience: Are cyber risks quantified and built into a stress-tested crisis recovery plan?
• Executive accountability: How are executive responsibilities for cyber risk management structured and how are individuals held to account?
• Assurance: Where does the board get validation that cyber risk has been properly assessed and that the management response is robust?
• Reporting: How is the company’s cyber risk position and progress reported to the board?

(The CityUK, Governing cyber risk – A guide for company boards, 25.04.18)