Ashurst Governance and Compliance Update - Issue 33

1. Investment Association publishes updated Share Capital Management Guidelines

The Investment Association has published a revised version of its Share Capital Management Guidelines. By way of reminder, the Guidelines set out the expectations of IA members where companies seek shareholder authorisation for the general allotment of new shares and the disapplication of pre-emption rights. They have been revised to reflect the findings of the UK Secondary Capital Raising Review (UKSCRR) (see AGC update, Issue 23) and the revised Pre-Emption Group Statement of Principles (see AGC update, Issue 28).

Specifically the UKSCRR recommended that: 'Companies should continue to be able to seek annual allotment and pre-emption rights disapplication authorities from their shareholders of up to two thirds of their issued share capital, but with the authority extending not just to rights issues as is currently the case but to all forms of fully pre-emptive offers made on the basis of the [revised Pre-Emption Group Statement of Principles].'

To this end, the Guidelines have been amended to:

• reflect the updated Pre-Emption Group Statement of Principles which allows annual disapplication of pre-emption rights authorities of up to 20 per cent of a company's issued share capital and an additional four per cent for a 'follow-on offer' (noting that the disapplication of 'lesser amounts' may be appropriate for some companies);
• make it clear that, where a company is seeking authorities against the Pre-Emption Group's template resolutions, IA members expect that companies will confirm in their notice of meeting that they will follow the shareholder protections and approach to follow-on offers as set out in the Statement of Principles; and
• support the Pre-Emption Group's template resolutions and, save in the case of 'capital hungry companies', expect any company seeking a disapplication of pre-emption rights up to 24 per cent of issued share capital to follow them as far as applicable.

IA members also expect companies to explain why they have chosen their capital raising structure and state why it is appropriate for the company and its shareholders whilst noting that some retail shareholders continue to regard rights issues as their preferred method of undertaking fully pre-emptive capital raisings.

In light of these changes, Institutional Voting Information Service (IVIS), the IA's voting research service, will Red Top companies which:

• seek a routine disapplication of pre-emption rights in excess of 24 per cent of issued share capital; and
• seek a disapplication of pre-emption rights up to 24 per cent that does not: (i) follow the Pre-Emption Group's template resolutions; or (ii) confirm that the company will follow the shareholder protections or expected features of a follow-on offer as set out in the Statement of Principles.

The IA is also supportive of the approach of the UKSCRR and Pre-Emption Group to 'capital hungry companies'. Accordingly, IVIS will only Amber Top pre-emption authorities in excess of 24 per cent of the issued share capital for companies which have disclosed in their prospectus at the time of their IPO that they are a 'capital hungry company'.

In addition, the revised Guidelines include:

• a statement of expectation that, in relation to share buybacks, companies should set out their proposed approach to returns of capital including how this is aligned with the company's long-term strategy and business model. This should be supplemented with details of any distributions made to shareholders during the year under review and any expectations for the current financial year. For context, the Guidelines continue to state that dividends remain IA members' preferred method for regular distributions; and
• in relation to share issuance by investment trusts, a guideline that IVIS will Red Top pre-emption authorities greater than 20 per cent of issued share capital (excluding shares held in treasury).

The Guidelines apply to companies whose shares are admitted to the premium segment of the Official List of the Financial Conduct Authority, though companies whose shares are admitted to the standard segment of the Official List of the FCA, to trading on AIM, or to the High Growth Segment of the London Stock Exchange's Main Market, are encouraged to adopt them.

2. Investment Association publishes its shareholder priorities for 2023

The IA has published its shareholder priorities for 2023. By way of reminder, the shareholder priorities, issued annually ahead of the AGM season, outline the key areas that investment managers want companies to consider as drivers of long-term value, in order to see them succeed in the future. We covered the publication of the IA's 2022 priorities in AGC update, Issue 14 and its latest Principles of Remuneration in AGC update, Issue 29.

The IA has maintained the focus of the priorities on the issues of climate change, diversity, audit quality and stakeholder voice. In doing so, it acknowledges that corporate risks are not static and there are additional emerging risks and macro-economic challenges, including the invasion of Ukraine and the knock-on implications of it, which could have an impact on long-term shareholder value and which have put social inequalities and the need for a 'just' transition at 'the forefront of investors' minds'.

The IA also states that it expects boards to monitor other emerging risks, such as biodiversity loss, and encourages companies to start reporting against the Taskforce on Nature-related Financial Disclosures to help them:

• assess their nature-related risks and opportunities (including whether they are contributing to, or vulnerable from biodiversity loss);
• assess those over different forward-looking scenarios; and
• quantify the financial impacts.

In more detail, IVIS' 2023 approach is as follows:

Responding to climate change

• IVIS will continue to Amber Top all commercial companies that do not make disclosures against all four pillars of the Taskforce on Climate-related Financial Disclosures.

• As regards the disclosure of metrics and targets, IVIS will monitor whether companies have disclosed the framework or methodologies used to set their targets, the time periods over which the targets have been set, and whether disclosures have been included on the achievement of these targets.

• As to scenario analysis, in addition to asking companies whether they make specific reference to the impact of climate-related risks and opportunities in their approach to capital management, IVIS will also ask whether companies have disclosed how the results of the company's scenario analysis have impacted its business model and strategy.

Accounting for climate change

• IVIS will continue to monitor whether companies have made a statement that the directors had considered the relevance of climate and transition risks associated with the transition to net-zero when preparing and signing-off on company accounts.

Audit quality

• IVIS will break down its questioning into three parts to enable companies to provide targeted disclosures on how:
  • the audit committee has assessed the quality of the audit;
  • the auditor has demonstrated professional scepticism; and
  • the auditor challenged management's assumptions where necessary.
• Companies are encouraged to provide case studies to help illustrate these points.

Gender diversity

• IVIS will increase its existing diversity targets by two per cent to align with the ambitions of the FTSE Women Leaders Women on Board targets by 2025. On that basis it will Red Top FTSE 350 companies where women represent:
  • 35 per cent or less of the Board;
  • 30 per cent or less of the Executive Committee and their direct reports.
• Given the level of gender diversity on 'small cap' boards, IVIS will maintain its approach to Red Topping FTSE Small Cap companies where women represent:
  • 25 per cent or less of the Board;
  • 25 per cent or less of the Executive Committee.
• IVIS will also assess if companies are meeting the new FCA Handbook requirements for companies to disclose on a 'comply or explain' basis whether one of the four senior positions on the Board (Chair, SID, CEO or Finance Director) is held by a female (for more detail see AGC update, Issue 18). At this stage, IVIS will not 'colour top' annual reports on this issue.

Ethnic diversity

• IVIS is not changing its approach to Ethnic Diversity for 2023. Therefore, it will continue to:
  • Red Top FTSE 100 companies which have not met the Parker Review target of one director from a minority ethnic group; and
  • Amber Top FTSE 250 companies which do not disclose either the ethnic diversity of their board or a credible action plan to achieve the Parker Review targets by 2024.

Stakeholder engagement

• IVIS will monitor and highlight areas of annual reports which reflect engagement with stakeholders on the cost-of-living crisis.

Application

• IVIS will monitor companies with year-ends starting on or after 31 December 2022 against the approaches and criteria set out above.

3. FCA publishes latest Primary Market Bulletin

The FCA has published the 43rd edition of its Primary Market Bulletin. In this edition, the FCA:

• notes the launch of multi-factor authentication for FCA systems, including the Electronic Submission System. See this link for further information regarding the new process;
• reminds third country issuers of the equivalence of non-UK regimes and the financial reporting rules (DTR 4) exemption, and in particular that it deems Chinese GAAP to be equivalent; and
• reminds stakeholders of its 24 February 2023 deadline for commenting on FCA Consultation Paper 23/2: Streamlining the FCA's transparency rules on structured digital reporting of annual financial statements by companies.

4. Companies House updates on plans for filing of annual accounts

Companies House has published a blog in which it sets out its plans to introduce software-only filing of annual accounts. The plans flow from new powers proposed in the Economic Crime and Corporate Transparency Bill which is currently making its way through Parliament.

Companies House states that its vision is to create a 'single, cost-effective, sustainable way of filing accounts, which will be secure, transparent, and traceable'. It also wants to enable much wider tagging of accounts data, making it easier for users of its service to access, analyse and search for data.

A reform timetable will be published once the Bill receives Royal Assent. In the meantime, Companies House will continue to encourage the minority of companies who currently file their annual accounts in paper format or via web-based services to change to software filing before it becomes a legal requirement.

5. FRC lists successful signatories to UK Stewardship Code

The FRC has announced an increase in the number of signatories to the UK Stewardship Code following the publication of its updated list.

The list now includes successful applicants who submitted their reports at the end of October 2022. The regulator received 105 applications, of which 88 were successful, taking the total number of signatories to 254, up from 235 in September last year. This includes 179 asset managers, 58 asset owners and 17 service providers. The additional signatories bring the total assets under management of the list to £46.4tn, up from £40.7tn.

The FRC notes better reporting in this application cycle and states that it will continue to place emphasis on reporting of activities and outcomes when assessing reports received in 2023. High-quality, informative case studies are expected from all signatories.