Legal development

Ashurst Governance and Compliance Update Issue 9

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    in this edition we cover the following:

    Public markets enforcement action

    1.  AIM Regulation censure and fine Sensyne Health plc 


    2. Practical Law publishes review of annual reporting and AGMs in 2021

    Financial Reporting

    3. FRC publishes 2021 review of reporting against UK Stewardship Code 2020

    4. FRC announces areas of supervisory focus for 2022/2023

     Corporate Governance

    5. QCA publishes AIM Good Governance Review 2021/22


    6. Glass Lewis updates approach to executive compensation in light of Covid-19

     Changes to the Listing Rules

    7. FCA finalises changes to its Handbook as part of Primary Markets Effectiveness Review



    1. AIM Regulation censure and fine for Sensyne Health plc 

    The AIM Regulation team at the London Stock Exchange has censured and fined Sensyne Health plc £406,000 (discounted from £580,000 for early settlement) for breaches of AIM Rule 13 (Related party transactions) and Rule 31 (AIM company and directors' responsibility for compliance).


    A few months after its IPO, Sensyne resolved to award one-off cash bonuses to its CEO and CFO in the sums of £850,000 and £200,000 respectively. These were characterised as bonuses to reflect the work of both individuals on the IPO. Nevertheless, the possibility of IPO-related bonuses had not been referred to in the company’s admission document.

    The company's nominated adviser (Nomad) was not properly consulted in relation to the bonuses which constituted related party transactions and were subject to the protections afforded by AIM Rule 13. The company only provided its Nomad with very limited information in two text messages which suggested that the bonuses were proposals and not, as was the case, finalised and about to be paid. Despite this, the Nomad advised unequivocally against the payment of the bonuses.

    It was not until eight months later, on receipt of the company's draft remuneration committee report , that the Nomad became aware that the payments were still in contemplation (the report did not make it clear that the payments had, in fact, been made) and advised that the bonuses would likely be treated as related party transactions under the AIM Rules. As part of that treatment, they would require the Nomad to provide a statement that the transactions were 'fair and reasonable' as far as shareholders were concerned, an opinion which the Nomad said it was unlikely to be able to give.

    It was only after a further month of discussions with the company that it was made clear to the Nomad that the payments had been made. Details were subsequently announced to the market but without a 'fair and reasonable' assessment from the Nomad.

    Following notification, the company undertook various actions to improve its governance, including the appointment of additional board members with greater public company experience.

    Breaches of the AIM Rules

    • AIM Rule 13

    The bonuses were awarded to related parties (directors), were not within the usual remuneration parameters of the executive directors, and exceeded the 5% threshold pursuant to the class tests in the AIM Rules. Accordingly, prior to agreeing the bonuses, it was incumbent on the company's board to consider the AIM Rule 13 implications and seek advice from its Nomad. As such, the company should have made a disclosure without delay as soon as the terms of the bonuses had been agreed, with the accompanying 'fairness' opinion from the Nomad. When disclosure was made 10 months after the obligation arose, the company was unable to satisfy all the Rule 13 requirements, as its Nomad was unable to provide a fairness opinion.

    • AIM Rule 31

    The company's conduct involved serious failures to comply with its AIM Rule 31 responsibilities, including failures to:

    • properly understand its AIM Rule obligations;
    • allow its Nomad to advise on the company's AIM Rule 13 obligations and to engage properly with it;
    • provide its Nomad with accurate and not misleading information;
    • consider and follow up on the Nomad's clear concerns about the award of the proposed bonuses; and
    • have in place sufficient procedures and controls in respect of the award of the bonuses.

    Expected standards for AIM companies

    The AIM Regulation team decided to publish the censure to clarify the standards it expects of AIM companies. In particular, it reminds AIM companies to 'engage openly and transparently with their [Nomads]' so that Nomads are in a position to advise and guide on the AIM Rules on a fully informed basis. A company's obligations are not discharged by simply mentioning a matter or providing incomplete and/or misleading information. In this instance, communicating in this way had the direct and foreseeable consequence of breaching the AIM Rules.


    2. Practical Law publishes review of annual reporting and AGMs in 2021

    Practical Law has published an analysis of key trends relating to certain aspects of narrative reporting, resolutions proposed and voting trends of FTSE 350 companies from the 2021 reporting and AGM season. The report includes a Q&A with Lumi UK, a provider of 'real-time audience engagement technology', which reflects on the changing landscape of virtual shareholder meetings and input from the FRC on the reporting of workforce engagement.

    Based on Practical Law's 'What's market' platform and a survey of 272 AGMs and annual reports of FTSE 350 companies, the report considers and provides useful trend analysis of, among other things:

    • the format of AGMs over the past year and prevalence of other stakeholder events;
    • board composition, with a particular focus on diversity and the attainment of the Hampton-Alexander and Parker Review targets;
    • workforce engagement mechanisms, where the view of the FRC on the effectiveness of those mechanisms and disclosure relative to them is also set out;
    • statistical compliance with the UK Corporate Governance Code, highlighting areas of the Code where non-compliance was most prevalent;
    • the disclosure of principal risks and viability statements, with a particular focus on the impact of Covid-19 on risk; and
    • the nature and success of climate-related AGM resolutions.

    3. FRC publishes 2021 review of reporting against UK Stewardship Code 2020

    The Financial Reporting Council has published a 'Review of Effective Stewardship Reporting' which aims to encourage 'fair, balanced and understandable' reporting about stewardship and explain what the FRC expects a stewardship report to include, and how improvements to it might be made, in each case illustrated with examples of good reporting. This is the second review of reporting under the UK Stewardship Code 2020 , the first having been published in September 2020. While not directly relevant to public companies, the review will be of interest given it will influence the nature and extent of engagement between them and those seeking to obtain or maintain signatory status under the Code, particularly given the Code and FRC's focus on 'continuous improvement'.

    By way of reminder, the Code took effect on 1 January 2020. It contains 12 principles for asset owners and asset managers, and a separate set of six principles for service providers, each of which work on an 'apply and explain' basis. In September 2021, we reported (see Ashurst Governance and Compliance update, Issue 5) that the FRC had published a list of the first 125 successful signatories to the Code. The FRC received a further 100 applications by its October 2021 deadline and will announce those who have been successful in Q1 2022. To remain signatories, organisations must submit a stewardship report annually.

    In its review, the FRC identifies examples of high-quality reporting in the areas of governance, resourcing and the integration of stewardship and ESG factors into investment decision-making. The FRC considers that reports should give better explanations regarding the management of stewardship-related conflicts of interest, as well as how stewardship activities are reviewed and service providers are monitored. The review sets out key areas of focus for improved reporting in 2022 as well as, in Part 5, providing a Guide to Effective Engagement Reporting. This may be of particular interest to those in Investor Relations and Secretariats given its focus on the methodology of reporting on engagement which, in turn, may alter the nature of engagement itself with those teams in 2022.

    4. FRC announces areas of supervisory focus for 2022/2023

    The FRC has announced its areas of supervisory focus for 2022/23, including priority sectors, for corporate reporting reviews and audit quality inspections.

    Priority sectors

    In selecting corporate reports and audits for review, the FRC will give priority to the following sectors considered to be higher risk:

    • travel, hospitality and leisure;
    • retail;
    • construction and materials; and
    • gas, water and multi-utilities.

    Thematic reviews of corporate reporting

    The Corporate Reporting Review team will conduct six thematic reviews in 2022 which will focus on:

    • TCFD reporting and climate-related reporting in financial statements (to be conducted in collaboration with the FCA with a focus on premium listed companies, and on the extent to which financial statements reflect the impact of climate change);
    • business combinations (IFRS 3);
    • earnings per share (IAS 33);
    • deferred tax (IAS 12);
    • discount rates; and
    • judgements and estimates.

    Audit quality inspections

    The FRC's Supervision programme of audit quality inspections will pay particular attention to the auditor’s work in the following areas:

    • climate-related risks;
    • fraud risks;
    • cash and cash flow statements;
    • provisions and contingent liabilities;
    • impairment of assets;
    • revenue; and
    • group audits.

    5. QCA publishes AIM Good Governance Review 2021/22

    The Quoted Companies Alliance and UHY Hacker Young have published their annual 'AIM Good Governance Review 2021/22'. In producing the report, the QCA and UHY analysed the governance disclosures of 50 small and mid-sized quoted companies and conducted interviews with a number of investors in such companies in order to investigate:

    • the 'post Covid-19 recovery' – specifically how companies are managing their recovery from it and the return to the workplace;
    • environmental, social and governance issues – specifically, the growing importance and operation of ESG-related policies and expectations of disclosure in relation to the issue generally and policies in particular; and
    • board performance evaluations – specifically focusing on their prevalence, investor expectations and the quality of disclosure where an evaluation has taken place.

    The Review  also considers compliance with the QCA Code of Corporate Governance, setting out, relative to each principle, the percentage of companies in the sample which included the minimum recommended disclosures, with comparable statistics from 2020 and 2019. This highlights that several areas of disclosure require attention in 2022, including the disclosure of the time commitment expected of directors, how directors keep their skills up to date, the nature of advice given to the board on significant matters, and the outcomes of all votes at general meetings.



    6. Glass Lewis updates approach to executive compensation in light of Covid-19

    Glass Lewis has published an updated version of its approach to executive compensation in the context of the Covid-19 pandemic for companies and industries that continue to be affected – to this end, references to specific fiscal years to which the previous version of the guidance applied have been removed.

    The update also makes it clear that when Glass Lewis assesses a board's decisions on executive remuneration, it will look at year-on-year variations in total pay and expects overall lower outcomes than pre-pandemic levels for all companies that continue to be affected by the crisis. This holistic view implies that its concerns about artificially higher outcomes deriving from one incentive element may be mitigated by lower outcomes in another element, as long as the final year-on-year variation in total remuneration appears adequate. Although Glass Lewis does not expect any adjustments to base salaries, it believes boards should exercise their discretion to suspend foreseen salary increases, where appropriate. In addition, while it recognises the forfeiture of a portion of base salary for a period of time represents a positive signal to the market, this 'token' may not be enough to guarantee an appropriate pay-for-performance connection at companies which have been heavily affected by the pandemic.


    7. FCA finalises changes to its Handbook as part of Primary Markets Effectiveness Review

    The Financial Conduct Authority has published a policy statement on targeted changes to the Listing Rules proposed as part of its Primary Markets Effectiveness Review (CP21/21). The policy statement includes final amendments to the Listing Rules, together with minor changes to the Disclosure Guidance and Transparency Rules and Prospectus Regulation Rules.

    The final changes are broadly in the form consulted on (and as set out in Ashurst Governance and Compliance update, Issue 3) with the most notable:

    • allowing a targeted form of dual class share structure within the premium segment in order to encourage innovative companies onto the market within certain prescribed limits;
    • reducing the free float (shares in public hands) requirement from 25 per cent to 10 per cent for both premium and standard listed segments;
    • increasing the minimum market capitalisation requirement (MMC) of commercial companies to be admitted to both premium and standard listed segments from £700,000 to £30 million (reduced from £50 million as proposed in the consultation). Certain transitional provisions have also been introduced, including a provision allowing companies with existing classes of shares admitted to listing prior to 3 December 2021 and that continue to have at least one class of share listed, to list additional classes of shares based on the £700,000 MMC requirement. This dispensation is not limited in time; and
    • making minor modernisations to the Listing Rules, Disclosure Guidance and Transparency Rules and Prospectus Regulation Rules, for example providing that references to a copy of a document includes a copy recorded using electronic means.

    All changes are now in force with the exception of those making minor modifications to the Listing Rules etc. which will come into force on 10 January 2022.

    The FCA has stated that it will provide feedback on the discussion part of its consultation, which sought views on the functioning of the listing regime, including in respect of financial track record requirements, in the first half of 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.


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