Ashurst and Practical Law Company Q3 2022
17 October 2022
The articles below were written by Ashurst LLP and Practical Law Corporate in Q3 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.
Regulations relating to the register of overseas entities (the register) have come into force.
Background. The Economic Crime (Transparency and Enforcement) Act 2022 (2022 Act) requires entities that are incorporated overseas and which hold certain types of real estate in the UK to register with Companies House, providing details of beneficial owners with significant influence or control and of certain managing officers and trusts.
Information supplied by a relevant entity must be verified and updated annually. It is a criminal offence for a relevant entity not to register.
The register went live online on 1 August 2022.
Facts. The Economic Crime (Transparency and Enforcement) Act 2022 (Commencement No 3) Regulations 2022 (SI 2022/876) came into force on 1 August 2022, bringing into effect most of the provisions of Part 1 of the 2022 Act relating to the registration of overseas entities.
This includes provisions relating to obtaining, updating and verifying information, exemptions, language requirement, inspection of the register and protection of information, correction or removal of material on the register, false statements, financial penalties, and land ownership and transactions.
The Register of Overseas Entities (Delivery, Protection and Trust Services) Regulations 2022 (SI 2022/870) came into force on 25 July 2022, bringing into effect provisions concerning the electronic delivery of documents, the protection of information and the definition of registrable beneficial owners.
The Department for Business, Energy & Industrial Strategy (BEIS) has also issued guidance in relation to the register which covers, among other things:
Sources: Economic Crime (Transparency and Enforcement) Act 2022 (Commencement No 3) Regulations 2022 (SI 2022/876), 1 August 2022; Register of Overseas Entities (Delivery, Protection and Trust Services) Regulations 2022 (SI 2022/870), 27/7/22; BEIS: Guidance for the registration of overseas entities on the UK Register of Overseas Entities: technical guidance for registration and verification , 1 August 2022.
The High Court has held that one of two directors of a company lacked authority to instruct solicitors to restrain the presentation of a creditor’s petition to wind up the company.
Background. Company articles of association usually empower directors to manage company business and permit the delegation of powers to a managing director (MD) or other executive director.
MDs may sometimes have power by virtue of their appointment to commence proceedings on a company’s behalf (Smith v Butler [2012] EWCA Civ 314).
Where a company has not appointed an MD, the general rule is that no one director may authorise the commencement of proceedings without a board resolution (Mitchell & Hobbs (UK) Ltd v Mill [1995] 7 WLUK 316).
However, much will depend on the facts. In Fusion Interactive Communication Solutions Ltd v Venture Investment Placement Ltd, the High Court noted that the courts would not allow two conflicted nominee directors to take advantage of their breach of duty by blocking proceedings brought by the company against their appointor through solicitors instructed by the other two directors ([2005] EWHC 736 (Ch)).
The duty of directors to have regard to the interests of creditors may be triggered where a company’s circumstances fall short of actual established insolvency but directors know or should know that the company is, or is likely to become, insolvent (BTI 2014 LLC v Sequana SA).
Facts. A and B, the directors and co-owners of a company, R, fell out after A accused B of breach of duty in diverting a corporate opportunity. Although R’s articles permitted the directors’ powers to be delegated to an MD, R had not appointed a MD.
A creditor of R presented a petition to wind up R and, unusually, this was supported by B.
A argued that B, in supporting the petition, was hoping to avoid a potential claim against him for breach of duty (Fusion). A applied for an injunction to restrain the presentation of the creditor’s petition, arguing that he was authorised on R’s behalf to do so.
Decision. The court struck out A’s application.
B was not the object of the current proceedings and so was not taking advantage of his breach of duty to block proceedings against him. Nor was it correct to say that, in supporting the petition, B was acting in breach of duty. R’s financial position had deteriorated to such an extent that the common law duty on directors to put the interests of creditors first had arisen (BTI). This explained B supporting the creditor rather than R. Therefore, A had lacked authority to instruct solicitors to make the application on R’s behalf.
Case: Rushbrooke UK Ltd v 4 Design Concepts Ltd [2022] EWHC 1110 (Ch).
The Financial Reporting Council (FRC) has issued guidance on good practice for general meetings that listed companies should consider adopting in order to enhance effective shareholder participation when planning and conducting AGMs and other general meetings (the guidance).
Background. In October 2020, the FRC issued a review aiming to open up further debate between stakeholders to determine how future AGMs can be conducted to ensure that the maximum number of shareholders can engage if they choose to do so, and to encourage companies to consider a mixture of approaches in line with their size and shareholder base.
Facts. The guidance sets out the principles and suggested actions that listed companies should consider when arranging an AGM. Information that is provided before meetings must offer clear instructions on how to attend and participate. It should clarify the form and scope of any electronic meeting facilities. Notices should make clear that unacceptable behaviour will not be tolerated.
Shareholders should be able to engage in meetings as far as possible, whether this is through physical, hybrid or, if permitted, virtual attendance. The FRC notes the uncertainty about whether the law permits virtual-only meetings and states that independent legal advice should be sought for these. Details, and a clear timeframe for submitting questions and how they will be answered, should be given well in advance. Companies could consider answering questions before meetings.
Boards should provide an update at AGMs on matters raised by stakeholder groups which they consider materially affect the company's strategy, performance and culture.
Companies should seek the broadest access to and participation in meetings by a diverse range of shareholders. Shareholders should be able to raise questions, regardless of how they are participating in the meeting. Companies should provide online functionality for real-time questions to be submitted during virtual meetings.
Shareholders should be able to cast real-time votes or submit voting instructions in advance through proxies, depending on meeting formats. Appropriate technology should be provided to ensure that shareholders can appoint and instruct proxies before meetings. Companies should consider holding live webcasts or audiocasts of physical meetings.
Companies should be as transparent as possible with shareholders regarding matters that are discussed and raised by shareholders at meetings. Recordings of hybrid or virtual meetings could be made available to shareholders for a certain period after meetings. Companies should seek feedback from meetings and analyse trends in opinions.
Shareholder engagement should not be limited to an annual event. Opportunities to update shareholders should be offered throughout the year, with an emphasis on ensuring that all shareholders have access to similar information. Summaries of previous shareholder events could be made available on company websites before meetings. Shareholders could be invited to observe non-confidential meetings with wider stakeholders. Presentations delivered at non-confidential stakeholder events should be made available. After a meeting notice is published, companies could offer a shareholder event before the meeting to discuss matters pertinent to voting decisions.
Source: FRC: Good Practice Guidance for Company Meetings: guidance, 21 July 2022.
The Financial Reporting Council (FRC) has published an updated version of its guidance on the strategic report.
Background. The Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 (SI 2013/1970) introduced a requirement for all companies, other than those entitled to the small companies exemption, to prepare a standalone strategic report in addition to their directors' report. In July 2018, the FRC published revised guidance on the strategic report (the guidance).
In April 2022, the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/31) and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/46) (together, the 2022 Regulations) introduced mandatory climate-related financial disclosures for certain entities, including public interest entities (PIEs), large private companies and limited liability partnerships (LLPs). These disclosures must be made in the renamed non-financial and sustainability information (NFSI) statement or in the energy and carbon report for LLPs.
Facts. The updated guidance reflects the new requirements for disclosures under the 2022 Regulations, including:
Source: FRC: Guidance on the Strategic Report, 3 June 2022.
The Financial Conduct Authority (FCA) has issued a report following a review of the climate-related disclosures that apply to premium-listed commercial companies (the report).
Background. 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.
In January 2021, the FCA issued proposals intended to enhance climate-related disclosures by listed issuers and clarify existing environmental, social and governance (ESG) disclosure obligations, along with its final rules and guidance, and the final text of its technical note (www.practicallaw.com/w-029-3215).
Listing Rule 9.8.6R(8) requires premium-listed companies to state in their annual report whether they have included disclosures that are consistent with the TCFD recommendations.
Facts. The report involved a high-level quantitative review of the climate-related disclosures made by 171 premium-listed commercial companies that published disclosures by 30 April 2022, and a more detailed qualitative analysis of the consistency of disclosures with the TCFD framework for 31 of those companies.
The report's key observations include that:
The FCA noted the improvement in the completeness and consistency of disclosures with the TCFD framework but reiterated its expectations of issuers when preparing climate-related disclosures in future annual financial reports. The FCA hopes that its work will encourage progress towards a common global baseline sustainability-related reporting standard and expects the government to consult in due course on a mechanism to adopt the International Sustainability Standards Board's standards in the UK.
Source: FCA: Review of TCFD-aligned disclosures by premium listed commercial companies, 29 July 2022. http://www.fca.org.uk/publications/multi-firm-reviews/tcfd-aligned-disclosures-premium-listed-commercial-companies.
The Financial Reporting Council (FRC) has issued a report following a review of climate-related reporting in the financial statements of a sample of premium-listed companies (the report).
Background. 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.
Listing Rule (LR) 9.8.6R(8) requires premium-listed companies to state in their annual report whether they have included disclosures that are consistent with the TCFD recommendations (TCFD disclosures).
Facts. The report covers the TCFD disclosures and climate-related reporting in the annual reports and accounts of 25 premium-listed companies with December 2021 year-ends. In particular, the FRC has considered whether the sampled companies complied with LR 9.8.6R(8) and the extent to which they considered climate change risks in meeting International Financial Reporting Standard requirements.
The report highlights that the sampled companies, particularly the larger entities in sectors that are more exposed to climate change, were broadly able to provide the TCFD disclosures. Most companies also made reference to climate-related risks in their financial statement disclosures, representing a significant improvement.
The report also identifies the following five key areas for improvement:
The report also summarises the FRC's expectations against the respective Listing Rule and TCFD requirements. It includes examples of better practice disclosures, which companies are encouraged to use as reference points when preparing their disclosures.
Source: FRC: CRR Thematic review of TCFD disclosures and climate in the financial statements, 29 July 2022.
The Financial Reporting Council has issued a report by the Financial Reporting Lab (the Lab) on company disclosure relating to digital security and strategy risk (the report).
Background. Digital security and the management of related risks and opportunities can be critical to the ability of many companies to continue operating and generating value. Reporting on these areas can provide relevant information to stakeholders to assist them in assessing a company’s ability to remain viable and resilient.
In March 2021, the Department for Business, Energy & Industrial Strategy consulted on major reforms to the UK audit industry and corporate governance regime (the consultation), which included proposals to add digital security risk into companies’ assessments and resilience disclosures, highlighting the growth in relevance of digital security risk to businesses and investors. In May 2021, the government issued a response to the consultation.
Facts. The report indicates that while many FTSE 350 companies reported at least one digital-related principal risk, mainly cyber risk, most company disclosures are not meeting investor needs, are often boilerplate and overly static. The report suggests that disclosures in this area could be improved by:
The report also includes detailed practical examples to help companies improve their digital security risk reporting, and provides a number of questions to assist boards and audit committees when assessing whether the company’s disclosures in this area meet investor needs.
Source: The Lab: Digital Security Risk Disclosure, 3 August 2022.
The Financial Reporting Council (FRC) has issued a report by the Financial Reporting Lab (the Lab) on environmental, social and governance (ESG) data production by companies (the report).
Background. There is an increasing focus on how companies report on ESG issues. In July 2021, the FRC issued a statement of intent on ESG challenges that identified a number of steps towards attaining an effective system of ESG reporting.
Facts. The report sets out a recommended step-by-step approach to ESG data production, including:
Source: The Lab: Improving ESG data production, 30 August 2022
The Financial Reporting Council (FRC) is consulting on the public reporting of audit firms' firm-level audit quality indicators (AQIs) (the consultation).
Background. In May 2020, the FRC issued a report setting out the findings of a thematic review carried out by its audit quality review team into audit quality indicators, that is, those at the level of the audit practice as a whole. The review aimed to provide an understanding of the AQIs being used by the large audit firms for internal audit quality management purposes, along with their systems of monitoring and reporting. Its objective was to promote continuous improvement in audit quality.
Facts. The FRC is consulting on the public reporting of audit firms' firm-level AQIs with a view to providing users of audit services and other stakeholders with a range of comparable indicators on audit quality.
Matters on which the FRC is seeking views include:
The FRC's proposals and accompanying guidance are expected in late 2022. Subject to responses, the reporting of AQIs is expected to cover the period of 1 April to 31 March each year, taking effect from 1 April 2023, with a view to reporting them to the FRC by the end of May 2024 for publication by the FRC shortly afterwards. However, a transitional period may be necessary for firms that do not currently publish AQIs.
Source: FRC: Firm-level Audit Quality Indicators: consultation document, 1 June 2022.
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.