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Ashurst and Practical Law Company Q1 2022

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    The articles below were written by Ashurst LLP and Practical Law Corporate in Q1 2022 and first published in the company law section of PLC Magazine, the leading monthly magazine for business lawyers advising companies active in the UK.

    1. Non-financial reporting: climate-related disclosures
    2. Director disqualification: duties of non-executive director
    3. Wates Principles: FRC report on quality of reporting
    4. Corporate culture: FRC report
    5. Women on boards: FTSE Women Leaders Review report
    6. Investment Association: 2022 principles of remuneration
    7. ISS: 2022 proxy voting guidelines
    8. PLSA stewardship and voting guidelines 2022
    9. Glass Lewis: 2022 proxy paper guidelines
    10. Executive compensation: updated COVID-19 guidance

    1.  Non-financial reporting: climate-related disclosures, 24/2/22 and 24/3/22

    Summary. The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/31) (the Company Regulations) and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/46) (the LLP Regulations) (together, the 2022 Regulations) have been published. The Department for Business, Energy & Industrial Strategy (BEIS) has issued guidance to help companies and LLPs meet the mandatory climate-related financial disclosure requirements (the guidance).

    Background. In June 2017, the Task Force on Climate-related Financial Disclosure published its final report containing recommendations that businesses voluntarily and consistently provide climate-related financial disclosures in their annual financial reports to interested parties such as investors and lenders (the recommendations).

    BEIS consulted on climate-related financial disclosures by publicly quoted companies, large private companies and limited liability partnerships (the consultation) in March 2021, and published its response in October 2021.

    Facts. The 2022 Regulations require in scope companies and limited liability partnerships (LLPs) to disclose climate-related financial information in their annual financial reports in line with the recommendations.

    The Company Regulations are in substantially the same form as the draft version published in October 2021 and will apply to:

    • UK companies with more than 500 employees, which either have transferable securities admitted to trading on a UK regulated market, such as the Main Market of the London Stock Exchange, or are banking or insurance companies.
    • UK-registered companies with more than 500 employees and securities admitted to AIM.
    • UK-registered companies with more than 500 employees and a turnover of more than £500 million.

    The LLP Regulations will apply to:

    • UK-traded LLPs with more than 500 employees.
    • UK banking LLPs with more than 500 employees.
    • UK LLPs with more than 500 employees and a turnover of more than £500 million.

    The 2022 Regulations come into force on 6 April 2022. They will apply in respect of any financial year of a company or LLP commencing on or after that date.

    The guidance is non-binding and aims to help companies and LLPs to meet the requirements of the 2022 Regulations. It covers, among other things:

    • The scope of the 2022 Regulations, including whether disclosure is required at group or subsidiary level and whether UK companies are required to report on global or UK operations. It also covers whether UK companies with an overseas parent company are exempt and the consequences if a company or LLP does not comply with the requirements.
    • The information that should be included in relation to each element of the disclosure requirements in the 2022 Regulations, including the desired outcomes that companies and LLPs should aim for in their disclosures against each requirement.
    • The level of detail required, as the disclosures must enable a reader to understand the effect of climate-related financial risks and opportunities on the business without needing to refer to other sources of information produced by the company, and how they relate to the other information presented in the annual report. The disclosures should not omit information which, if disclosed, would influence the decisions of investors.
    • Whether third-party information can be relied on to make the disclosures. A company or LLP may make use of information generated by a third party to help them to assess the climate-related risks, but the duty will remain with the directors.
    • How the 2022 Regulations interact with other legislation and frameworks. Disclosures made in a manner that is consistent with all of the Financial Stability Board's Task Force on Climate-Related Disclosures recommendations and recommended disclosures for the purposes of the FCA's Listing Rules are likely to meet the requirements of the 2022 Regulations.

    Source: Company Regulations, LLP Regulations, BEIS: Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs: non-binding guidance

    2.  Director disqualification: duties of non-executive director, 27/1/22

    Summary. The High Court has held that a non-executive chair was unfit for the purpose of section 6 of the Company Directors Disqualification Act 1986 (1986 Act) (section 6) and disqualified him for four years.

    Background. Under section 174 of the Companies Act 2006 Act (2006 Act), a company director must exercise reasonable care, skill and diligence (the section 174 duty). This means the care, skill and diligence that would be exercised by a reasonably diligent person with both:

    • The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (the objective test).
    • The general knowledge, skill and experience that the director actually has (the subjective test).

    Every director must show the knowledge, skill and experience set out in the objective test. Where a director has specialist knowledge or is particularly experienced, the subjective test enhances the objective test and a higher standard applies to that director. Directors must keep themselves informed about the company's affairs. They can delegate tasks provided that the delegating director supervises the delegation and assesses the end result (Re Keeping Kids Company [2021] EWHC 175 (Ch); Sharp v Blank [2019] EWHC 3096 (Ch)).

    The court can disqualify directors of a company that has become insolvent if their conduct makes them unfit to manage a company (section 6(1)). In evaluating this, the court will consider the matters specified in Schedule 1 to the 1986 Act (section 12C, 1986 Act). The court must determine whether a director's conduct has fallen below the required standards of probity and competence (Re Grayan Building Services Limited (in liquidation) [1995] Ch 241). The burden of proof rests on the Secretary of State, to the ordinary civil standard. The minimum period of disqualification is two years and the maximum period is 15 years (section 6(4)).

    Facts. In 2012, DS and AS ran a water equipment and purification business through a limited company, X. The shares in X were held by DS's partner and AS's wife. The directors included A and B, B having been approached to be a non-executive director (NED). Among other things, B helped to introduce new shareholders to X and signed annual accounts on behalf of the board.

    X expanded its business to include the supply of pumping equipment for use in fracking and, between September 2012 and March 2013, it entered into 28 separate transactions (the 28 deals). HM Revenue & Customs (HMRC) suspected X of involvement in a missing trader intracommunity (MTIC) fraud because of its involvement in the 28 deals. HMRC's investigation led to the cancellation of X's VAT registration, the disallowance of input tax on the 28 deals and the raising of penalties and assessments against X. In 2015, X ceased trading and, in 2016, it went into creditors' voluntary liquidation with creditors owed £4.1 million.

    B remained a director until January 2016. In 2015, B had been the sole director of X from February until November when DS was appointed director, although DS was later adjudged to have been at all material times before his appointment a de facto director. A had resigned as a director in October 2012 but had continued as an employee. AS was a director between October 2012 and May 2013.

    The Secretary of State (SoS) applied for A, B, DS and AS to be disqualified as company directors.

    B argued that, as a NED, he had taken no active part in the day-to-day management of X but instead had delegated responsibility for X's operations to his fellow directors.

    Decision. The court held that A, DS and AS were unfit for the purpose of section 6 and disqualified them for 11 years, 14 years and 13.5 years respectively. It held that B was unfit for the purpose of section 6 and disqualified him for four years.

    On the facts, the 28 deals were connected to MTIC fraud and DS, AS and A had known that these deals were connected to the fraudulent evasion of VAT.

    There were no written terms of engagement setting out B's precise role. However, the court discerned that B's role as a NED in X included protecting shareholders' investments and ensuring that the business was run properly with a view to eventually preparing X for a possible flotation.

    In addressing B's shortcomings as a director, the court noted that B had failed to inform himself adequately about the business, including failing to investigate the reasons for a dramatic leap in turnover attributable to the 28 deals. Until a meeting he attended with HMRC in 2013, he was unaware of the 28 deals although, earlier that year, he had signed X's accounts, which encompassed 27 of the deals. B's failure to investigate was a reprehensible abrogation of duty, particularly given his role of protecting shareholders' investments and preparing X for a future flotation. B had failed to obtain basic information that any NED would require to inform themselves as to how the business was being run by those to whom it had been delegated.

    B had repeatedly failed to engage with HMRC, including failing to respond to correspondence specifically addressed to him and only being available for one meeting between October 2013 and X's liquidation. B had continued to leave matters to DS and AS, even when advised that DS was not co-operating with HMRC. In the context, this was also an abrogation of duty by B.
    B's previous distinguished business career should have no material effect on the length of his disqualification period given his continuing lack of appreciation of what went wrong and his unapologetic stance.

    Comment. This decision reiterates that neither the 2006 Act nor the 1986 Act make any explicit distinction between the duties owed by executive directors and NEDs, and that the term "directors" includes de facto directors or directors in fact; that is, those who assume responsibility to act as directors although they are never actually appointed.

    The decision is a stark reminder of the difference between knowing what one's duties as a director are and doing enough to discharge them. Although B had little operational involvement and was not an executive director, aspects of his role, compounded by his experience and qualifications, served only to increase expectations of him. Under the section 174 duty, B had to do more, not less. He should have made proper investigations into X's situation, acted on warning signs and engaged properly with HMRC. In acting, or failing to act, as he did, B breached his duties. As this was a director disqualification case rather than a breach of duty or misfeasance case, there was no need to prove loss to X by reason of B's breach of duty.

    Case: Secretary of State for Business, Energy and Industrial Strategy v Selby and others [2021] EWHC 3261 (Ch)

    3.  Wates Principles: FRC report on quality of reporting, 24/3/22

    Summary. The Financial Reporting Council (FRC) has issued a report on the quality of corporate governance reporting by private companies (the report).

    Background. In December 2018, the FRC published the Wates Corporate Governance Principles for Large Private Companies (Wates Principles). The introduction to the Wates Principles sets out the requirement in the Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) (2018 Regulations) for in-scope private companies to include a statement of corporate governance arrangements in the directors' report.

    Facts. The report was commissioned to identify which companies within the scope of the 2018 Regulations provided a corporate governance statement for financial years beginning on or after 1 January 2019. Although it is too early to draw many conclusions as a lot of companies were in their first cycle of reporting, the report highlights that there is much room for improvement. In particular, it suggests that companies need to:

    •  Disclose more detailed information in relation to the application of the six Wates Principles in order to provide readers with a comprehensive understanding of the corporate governance arrangements in place and how they relate to the respective principles.
    • Provide more examples relating to a given corporate governance practice to evidence how they have applied the Wates Principles.
    • Use more cross-references because, in several cases, the disclosure of some items could be found in other sections of the annual reports, but they were difficult to track down without the provision of cross-references.

    The report also includes examples of good reporting.

    Source: FRC: The Wates Corporate Governance Principles for Large Private Companies - The Extent, Coverage and Quality of Corporate Governance Reporting

    4.  Corporate culture: FRC report, 27/1/22

    Summary. The Financial Reporting Council (FRC) has issued a report on corporate culture (the report).

    Background. In July 2016, the FRC published a report on the relationship between corporate culture and long-term business success.

    Facts. The report draws on the experiences and views of leading companies and is intended to showcase some of the actions they are taking to better communicate their culture and link it to their strategic objectives. Key conclusions in the report include that:

    • Leadership should come from the top, through actions and attitudes, but the workforce must feel engaged and able to contribute. The board should ensure that the organisation's culture is aligned with its purpose, values and strategy. The CEO plays an essential role in driving and embedding culture throughout the company. When managers are empowered and supported, they are critical to achieving culture change.
    • While companies are now collecting a vast amount of culture-related data and information, in many cases the benefits that can be gained from co-ordinating across different functions are not being used effectively. For example, by encouraging greater co-operation and communication between HR, internal audit, ethics, and compliance and risk functions, companies may be able to better assess, monitor and embed their culture. Timely implementation of any follow-up action points and regular assurance are equally important.
    • Creating a positive culture should improve performance. Trust, empathy and psychological safety are crucial to foster positive culture. Everyone should be encouraged to speak up, share concerns and have candid conversations. However, the key challenge for companies and their boards is to acknowledge that culture requires patience, openness and commitment to continuous development through any future changes to senior personnel.

    Based on its findings, the FRC will consider what further action to take, including any amendments to its guidance on board effectiveness. It also plans to monitor corporate disclosures in this area.

    Source: FRC: Creating Positive Culture: Opportunities and Challenges

    5.  Women on boards: FTSE Women Leaders Review report, 24/3/22

    Summary. The FTSE Women Leaders Review has issued its first report on gender balance in FTSE leadership (the report).

    Background. In February 2021, the Hampton-Alexander review issued its fifth and final annual report on improving gender balance in FTSE leadership (

    In November 2021, the Department for Business, Energy & Industrial Strategy announced government support for a new five-year independent review, the FTSE Women Leaders Review, to monitor the representation of women among leaders of FTSE 350 companies, focusing on both board membership and senior leadership roles.

    Facts. The report states that:

    • Women held 39.1% of FTSE 100 board positions, up from 36.2% in 2020, but 15 FTSE 100 companies had not yet achieved the 33% target.
    • Women held 36.8% of FTSE 250 board positions, up from 33.2% in 2020, but 57 FTSE 250 companies had not yet achieved the 33% target.
    • Across the FTSE 350 there were only 48 women chairs (16 in the FTSE 100), 115 women senior independent directors (32 in the FTSE 100) and 18 women CEOs (8 in the FTSE 100). There were only 75 women executive directors (29 in the FTSE 100), being 12.3% of executive directors in the FTSE 350.
    • The FTSE 350 again had no all-male boards, but still had six companies with only one woman on the board.

    The report also announced new recommendations, including:

    • An increased target of a minimum of 40% women for FTSE 350 boards by the end of 2025.
    • For FTSE 350 companies to have at least one woman in the chair or senior independent director role on the board, or one woman in the CEO or financial director role, by the end of 2025.
    • That key stakeholders set best practice guidance, or have mechanisms in place, to encourage FTSE 350 boards that have not achieved the previous 33% target to do so.
    • The extension of the scope of the FTSE Women Leaders Review to include the largest 50 private companies in the UK by sales.

    Source: FTSE Women Leaders Review Achieving Gender Balance

    6.  Investment Association: 2022 principles of remuneration, 27/1/22

    Summary. The Investment Association (IA) has published its 2022 principles of remuneration (the principles).

    Background. The IA updates the principles annually in advance of the next AGM season and the last principles were published in November 2020 (the 2021 principles).

    Facts. The principles amend the 2021 principles, including changes to the following areas:

    • Environmental, social and governance (ESG) risks, as the IA notes that companies are increasingly incorporating the management of material ESG risks and opportunities into their long-term strategy and therefore into their incentive plans. Companies should use ESG metrics that are quantifiable, appropriately stretching and demonstrably linked to company strategy. Companies that have not yet incorporated ESG metrics into their remuneration policy should explain to shareholders what their intentions are in this regard.
    • Executive pensions, as investors expect new executive directors, or any director changing roles, to be appointed on a pension contribution rate that is aligned with the rate given to the majority of the company's workforce. The contribution rates for incumbent directors should be aligned to the workforce contribution rate by 31 December 2022 and shareholders do not expect compensation will be awarded for this change. The IA has stated that over 90% of FTSE 100 companies analysed have already met its expectations on aligning executive pension contributions with the majority of the workforce rate.
    • Value creation plans (VCPs), as investors are generally sceptical of VCPs and they should be used only where there is an appropriate and clear rationale. They must incorporate a limit on the overall number of shares and valuable awards, and the remuneration committee should be able to explain why the cap on value is appropriate. The remuneration committee must justify the performance targets, which should be stretching and robust. The remuneration committee should also be able to justify the percentage of value shared with management and the predetermined hurdle rate. VCPs can be very dilutive, and the remuneration committee should be mindful of this.
    • Other changes such as a new requirement for remuneration committees to provide a clear rationale for any increases in remuneration. In relation to grant size where the share price has fallen, such as where awards of long-term incentives are calculated as a multiple of salary, there can be windfall gains if the share price falls substantially but investors expect award sizes to be scaled back in those circumstances.

    Comment. It is interesting to see that, for the first time, the principles expressly set out investors' views on VCPs, but those views are unsurprising.

    Source: IA: Principles of remuneration for 2022

    7.  ISS: 2022 proxy voting guidelines, 27/1/22

    Summary. Institutional Shareholder Services (ISS) has issued its UK proxy voting guidelines for 2022 (2022 guidelines).

    Background. In November 2020, ISS published its guidelines for 2021. ISS revises the guidelines annually.

    Facts. The 2022 guidelines set out climate management proposals on: climate shareholder proposals; board accountability on climate, board gender and ethnic diversity; and the use of environmental, social and governance performance conditions in variable remuneration schemes.

    The ISS has also changed its policy for investment companies by removing share issuance proposals that involve the issue of C shares from its general approach to resolutions seeking authority to issue equity.

    The 2022 guidelines will be effective for meetings held on or after 1 February 2022.

    ISS intends to publish full updated policy documents for 2022 in due course, and to release more information about its new climate-related policies before they come into effect.

    Source: ISS: Europe, Middle East and Africa (EMEA): Proxy Voting Guidelines for 2022

    8.  PLSA stewardship and voting guidelines 2022, 24/3/22

    Summary. The Pensions and Lifetime Savings Association (PLSA) has issued its 2022 stewardship and voting guidelines (2022 guidelines).

    Background. In March 2021, the PLSA published its 2021 stewardship and voting guidelines (2021 guidelines). The PLSA updates its guidelines annually.

    The Hampton-Alexander review is an independent business-led initiative supported by the government, which was initiated in 2016 with the purpose of increasing the representation of women in senior leadership positions and on boards of FTSE 350 companies.

    In November 2016, the Parker review recommended that, among other things, there should be at least one director from a minority ethnic group on each FTSE 100 board by 2021 and on each FTSE 250 board by 2024.

    In June 2017, the Task Force on Climate-related Financial Disclosures (TCFD) developed recommendations on climate-related disclosures (the TCFD recommendations) relating to governance, strategy, risk management, metrics and targets.

    Facts. Changes to the 2021 guidelines include the following amendments:

    • The move online has not affected voter turnout, and so the PLSA continues to support the use of virtual AGMs to ensure participation during these unprecedented times. It no longer specifically advises voting against any motion that would make virtual AGMs permanent. However, it notes concerns that virtual-only AGMs becoming permanent may reduce opportunities for shareholder engagement with the board and urges companies to look at how they can increase investor engagement opportunities.
    • Companies should disclose how they are responding, in terms of board leadership and company purpose, to the challenges posed by the COVID-19 pandemic on the workforce.
    • The board's policy on diversity has been amended to be a policy on board composition with regards to diversity and inclusion, which should also include protected characteristics such as:
      • gender and matching the Hampton-Alexander review target of at least 33% of FTSE 350 board members;
      • ethnicity and matching at least the Parker review target of at least one board member by 2021 (2024 for FTSE 250) and could also include whether it is a signatory to the Race at Work Charter or equivalent;
      • disability (which could include whether they are a Disability Confident employer);
      • sexuality;
      • gender reassignment;
      • marital status; and
      • religion and belief systems.

      Other non-protected characteristics should also be considered, such as socio-economic background, neurodiversity, and veterans and returners to the workplace. Investors should consider voting against the re-election of the chair if the board has not established a diversity and inclusion policy and strategy.
    • Companies should demonstrate caution in remuneration packages in 2022 due to the effects of the COVID-19 pandemic and rising living costs, particularly in companies that have previously received government support over the past two years or continue to do so. The PLSA also welcomes the increased consideration of remuneration associated with environmental, social, and governance factors, and would like to see more packages linked to clear targets for performance against achieving a company's ambitions to meet climate goals.
    • Investors now expect that the disclosure, monitoring, assessment and oversight of climate risks and sustainability is considered a priority. Companies should be referencing the TCFD recommendations in disclosures.

    Source: PLSA: Stewardship and Voting Guidelines 2022 

    9.  Glass Lewis: 2022 proxy paper guidelines, 27/1/22 

    Summary. Glass Lewis has published its 2022 proxy paper guidelines (2022 guidelines) setting out its approach to proxy voting for 2022 in the UK.

    Background. In November 2020, Glass Lewis published its proxy paper guidelines for 2021 (2021 guidelines). The guidelines are updated annually.

    Facts. The 2022 guidelines amend the 2021 guidelines to include the following:

    • From 2022, Glass Lewis will generally recommend against the re-election of the chair of the nomination committee at any FTSE 100 board that has failed to appoint at least one director from a minority ethnic group and has failed to provide clear and compelling disclosure for why it has been unable to do so.
    • Where Glass Lewis recommends against a committee chair but the chair is not up for re-election due to the company having a staggered board, it may, depending on the circumstances, recommend that shareholders vote against the re-election of any long-serving committee members.
    • Glass Lewis may recommend that shareholders vote against the re-election of the remuneration committee chair where there are substantial concerns with the remuneration policy presented for shareholder approval or the pay practices outlined in the remuneration report. In staggered boards where the committee chair is not up for re-election, Glass Lewis may recommend that shareholders oppose the re-election of a long-serving committee member.
    • From 2022, Glass Lewis will generally recommend that shareholders vote against the re-election of the governance committee chair, or equivalent, of FTSE 100 companies that fail to provide explicit disclosure concerning the board's role in overseeing material environmental and social issues.

    Source: Glass Lewis: 2022 Policy Guidelines

    10.  Executive compensation: updated COVID-19 guidance, 27/1/22

    Summary. Glass Lewis has issued an updated version of its guidance on executive compensation for the Europe, Middle East and Africa (EMEA) region in the context of the COVID-19 pandemic (the updated guidance).

    Background. In January 2021, Glass Lewis published guidance on executive compensation for the EMEA region in the context of the COVID-19 pandemic (the 2021 guidance), which addressed the application of Glass Lewis's existing policies to executive compensation under a number of expected scenarios.

    Facts. The updated guidance states that the 2021 guidance will apply throughout the course of the COVID-19 pandemic, particularly for companies and industries that continue to be affected by the pandemic. Specific references to fiscal years have been removed.

    For companies that continue to be affected by the pandemic, Glass Lewis has clarified that, when assessing a board's decisions on executive compensation, it will expect, among other things, overall lower outcomes than compared to pre-pandemic levels. This is as opposed to expecting lower outcomes than in the previous year.

    Source: Glass Lewis: Approach to Executive Compensation in the Context of the COVID-19 Pandemic 

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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