Essential Corporate News – Week ending November 5, 2021

BEIS: Government response to the consultation on the draft statement for the purposes of section 3 of the National Security and Investment Act 2021 and Section 3 Statement

On November 3, 2021 the Government published its response following a consultation in July and August 2021 on the draft statement that the Secretary of State must lay before Parliament for the purposes of section 3 National Security and Investment Act 2021 (NSI Act and Statement). The Statement is required by the NSI Act to be laid before Parliament and published before the Secretary of State can use the call-in power provided by the NSI Act (i.e. the power to call-in a transaction for a full assessment where there is a reasonable suspicion of a possible risk to national security either: (i) after BEIS’s initial review of a transaction that has been notified; or (ii) where a transaction has not been notified). The Statement is intended to help parties to acquisitions to determine whether their acquisition is likely to be called in, so helping parties to plan their acquisitions more easily and, for acquisitions outside the mandatory notification system, to decide whether to submit a voluntary notification.

The Government notes that responses to the consultation tended to ask for additional detail on decision-making processes in the NSI system. For example, what does  “closely linked” mean in the context of acquisitions made in areas “closely linked” to the mandatory notification sectors? Some sought clarity on where the Government appears to have discretion in its decisions, with some stating that language such as “may be likely to…” did not give enough certainty to businesses about whether the Government would take action in some situations. Several respondents thought that the Statement went beyond national security by referring to “economic prosperity” and since the Government is explicit that the NSI regime is solely for national security purposes and will not be used to further economic or competition objectives, this is now reflected in the Statement.

Following the feedback, the Government has made changes to the Statement although it has maintained the general direction and narrative of the Statement as consulted upon. In terms of particular questions asked, the following should be noted:

• ‘Closely linked’ - Several responses queried the meaning of acquisitions being “closely linked” to the 17 mandatory sectors. However, the Government states that the phrase ‘closely linked’ is as precise as the Government can be, given the fast-moving development of the 17 sectors and related industries. This means that while only acquisitions falling into the regulations made under section 6 must be notified to the Government, acquisitions which are outside those definitions, but only just, are more likely to be of interest to the Secretary of State than acquisitions not at all related to the 17 sectors. However, in the light of some responses, some language from previous versions of the Statement has been reinstated to reduce uncertainty, to make clear that state-owned entities are not considered inherently risky and to reassure parties that most loans and conditional acquisitions will not be called in.
• Uncertainty around acquisitions - While respondents generally thought that the draft Statement provided useful guidance on whether an acquisition would be called in, some felt there would still be uncertainty in acquisitions. The Government emphasises that under the NSI Act there needs to be a reasonable suspicion of a possible risk to national security before the call-in power can be used and this is expected to be the case in a small minority of acquisitions and so the majority of acquisitions in the UK economy will not be able to be called in under the NSI system. The Government also points out, in relation to concerns over the retrospective use of the call-in power,  that this is likely to be required on an infrequent basis as long as relevant acquisitions are notified to the Government before they take place.
• Risk factors  - In relation to the individual risk factors (target, acquirer and control), there was some uncertainty about whether, using the text as presented, the three risk factors would be weighed together or whether concerns about one risk factor would be enough for an acquisition to be called in. The Government states that all decisions will be made on a case-by-case basis. The Secretary of State would generally expect all three risk factors to be present before calling in an acquisition but cannot rule out exercising the call-in power on the basis of fewer risk factors. The Statement has been adjusted to reflect this.
• Too widely drawn - Some felt the draft Statement went beyond protecting national security (based on the inclusion of “economic prosperity” and “reputation” in the draft Statement). The wording has been refined in light of this feedback, to provide greater clarity of how it applies in this context. The Government is clear that the NSI system is concerned only with national security and will not be used to further competition or economic objectives. Others felt references to ‘market diversity’ seemed to be references to competition policy but the Government states that there are circumstances in which the effect of an acquisition on market diversity could have an effect on national security, so these references have been retained in the Statement. 
• Sensitive sites - Some asked what a ‘sensitive site’ is, or what happens if a site becomes sensitive. The Government states that it cannot publish a list of sensitive sites, nor give a precise definition of what a sensitive site is, as that may in itself create a risk to national security. 
• Acquirers hostile to UK - ’Some were concerned about uncertainty created by parties not knowing whether an acquirer is hostile to the UK. The Government acknowledges that the acquirer risk is likely to be the risk factor which the Government is considerably better placed to assess so the ultimate decision about whether a party poses a national security risk is for the Secretary of State. However, the Government recognises that it is important for businesses to know that the Secretary of State will take into account the potential hostility of an acquirer to the UK, so it is important for this to be included in the Statement. Although this may mean some parties to acquisitions are therefore unsure about what decision the Secretary of State is likely to make about an acquisition, since the Secretary of State may have greater knowledge than parties to an acquisition, the Statement’s primary purpose is to explain how the Secretary of State will make decisions and so this is an important inclusion in the Statement.

BEIS: Ministers renew efforts to increase opportunities for talented women at the top of UK business

On November 1, 2021 the Government announced that it would back a new five-year review to monitor women’s representation in the upper rungs of FTSE companies, namely The FTSE Women Leaders Review, and encourage firms to open up opportunities to everyone. New leadership is currently being appointed to steer the review, and take forward new targets over the coming years.

The FTSE Women Leaders Review Portal has been opened for all FTSE 350 companies to submit their Women in Leadership gender data from November 1 until November 30, 2021. The next full annual report on the progress of FTSE 350 boards and their leadership teams will be published in February 2022.

(BEIS, Ministers renew efforts to increase opportunities for talented women at the top of UK business, 01.11.2021)

FCA: A strategy for positive change – Our ESG priorities

On November 3, 2021 the Financial Conduct Authority (FCA) published its environmental, social and governance (ESG) strategy which sets out the FCA’s target outcomes and the actions the FCA expects to take to deliver these. The FCA’s aim is to support the financial sector in driving positive change, including the transition to net zero.

• Transparency – promoting transparency on climate change and wider sustainability along the value chain. 
• Trust – building trust and integrity in ESG-labelled instruments, products and the supporting ecosystem. 
• Tools – working with others to enhance industry capabilities and support firms’ management of climate-related and wider sustainability risks, opportunities and impacts. 
• Transition – supporting the role of finance in delivering a market-led transition to a more sustainable economy. 
• Team – developing strategies, organisational structures, resources and tools to support the integration of ESG into FCA activities.

For each of these themes, the FCA provides details of the key actions it is currently undertaking or intends to undertake in the near future, as well as interim milestones in the coming period. The FCA will monitor progress against its commitments and measure the success of its interventions, with interim updates provided as part of its Business Plan and Annual Report in 2022, with a more detailed stock-take on progress in 2023.

 (FCA: A strategy for positive change – Our ESG priorities, 03.11.2021)

HM Treasury: Fact Sheet – Net zero-aligned Financial Centre

On November 3, 2021 HM Treasury published a Fact Sheet in which it announced that the UK will be the world’s first net zero-aligned Financial Centre, with UK financial institutions being required to have a robust firm-level transition plan setting out how they will decarbonise as the UK meets its net zero targets.

There will be strong Government oversight of the financial sector as a whole to ensure financial flows actually shift towards supporting net zero and the UK will move towards making publication of transition plans mandatory. Initially, this will require asset managers, regulated asset owners and listed companies to publish transition plans that consider the Government’s net zero commitment or provide an explanation if they have not done so. As standards for transition plans emerge, the Government and regulators will take steps to incorporate these into the UK’s Sustainability Disclosure Requirements and strengthen requirements to encourage consistency in published plans and increased adoption by 2023. The Government intends to legislate to deliver this.

The Fact Sheet notes that a transition plan sets out how an organisation will adapt as the world transitions towards a low carbon economy. The Government believes it should set out 

• High-level targets the organisation is using to mitigate climate risk, including greenhouse gas reduction targets (e.g. a net zero commitment); 
• Interim milestones; and
• Actionable steps the organisation plans to take to hit those targets. 

The Fact Sheet notes that the FCA has proposed to reference this in its TCFD-aligned disclosure rules for listed companies, asset managers and FCA-regulated asset owners with effect from January 1, 2022.

(HM Treasury: Fact Sheet – Net zero-aligned Financial Centre, 03.11.2021)

IFRS: IFRS Foundation announces International Sustainability Standards Board, consolidation with CDSB and VRF, and publication of prototype disclosure

On November 3, 2021 the IFRS Foundation Trustees announced three developments to provide the global financial markets with high-quality disclosures on climate and other sustainability issues.

These developments are as follows:

• The formation of a new International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs. 
• A commitment by leading investor-focused sustainability disclosure organisations to consolidate into the new board. The IFRS Foundation will complete consolidation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF, which houses the Integrated Reporting Framework and the SASB Standards) by June 2022.
• The publication of prototype climate and general disclosure requirements developed by the Technical Readiness Working Group (TRWG), a group formed by the IFRS Foundation Trustees to undertake preparatory work for the ISSB. These prototypes are the result of joint work by representatives of the CDSB, the International Accounting Standards Board (IASB), the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), the VRF and the World Economic Forum (Forum), supported by the International Organization of Securities Commissions (IOSCO) and its Technical Expert Group of securities regulators. The TRWG has consolidated key aspects of these organisations’ content into an enhanced, unified set of recommendations for consideration by the ISSB.

The ISSB will develop IFRS Sustainability Disclosure Standards, including disclosure requirements that address companies’ impacts on sustainability matters relevant to assessing enterprise value and making investment decisions. The aim of this is to ensure that the ISSB’s Standards will enable companies to provide comprehensive sustainability information for the global financial markets. The Standards will be developed to facilitate compatibility with requirements that are jurisdiction specific or aimed at a wider group of stakeholders. The ISSB will build on the work of existing investor-focused reporting initiatives to become the global standard-setter for sustainability disclosures for the financial markets.

The ISSB’s work is expected to commence shortly and to begin with public consultations to inform the ISSB’s work plan and on proposals informed by recommendations from the TRWG. Following these consultations, the ISSB will lead public discussions of feedback received to the consultations and possible improvements to the proposals prior to their finalisation as Standards.

(IFRS, IFRS Foundation announces International Sustainability Standards Board, consolidation with CDSB and VRF, and publication of prototype disclosure, 01.11.2021)