UK Quoted Company Newsletter March 2019

Brexit update

The UK Financial Conduct Authority (FCA) has published Primary Markets Bulletin 20 (PMB 20). The FCA reminds listed issuers of their on-going disclosure obligations under Article 17 of the Market Abuse Regulation in relation to Brexit, noting that Brexit is likely to affect issuers differently, depending on their sector and specific business model and operations.

We have published an update on how a no-deal Brexit may affect listed issuers covering the market abuse, transparency and prospectus regimes. The briefing notes that the aim of the FCA and UK Government has been to ensure that the existing regimes continue to operate effectively in a UK-only context and that therefore no major changes are expected.

We have also published a more general briefing on key legal considerations in a no-deal scenario.

UKLA

PMB 20 also explains that going forwards the FCA will no longer use the names UK Listing Authority or UKLA as the terminology has confused some market participants. Instead the term FCA should be used instead.

FRC replacement and consultation on the Kingman recommendations

In March 2019, the Department for Business, Energy and Industrial Strategy (BEIS) confirmed the Government's intention to replace the Financial Reporting Council (FRC) with a new enhanced regulator called the Audit, Reporting and Governance Authority (ARGA). ARGA will have a new mandate, new leadership and stronger powers. 

The confirmation, which follows on from the publication of the final report of the independent review of the FRC led by Sir John Kingman (see our December 2018 newsletter), is also accompanied by an initial consultation on some of the Kingman recommendations. The consultation paper notes three categories into which the Kingman recommendations fall, namely (i) those that can and should be delivered immediately; (ii) those not requiring legislation but where there are significant policy choices requiring consultation (either in this consultation paper or later); and (iii) those requiring legislation. In some of the areas that cannot be actioned straight away, the FRC will voluntarily follow the agreed approach. The table below sets out some, but not all, of the Kingman recommendations that are particularly pertinent to listed companies and that fall within the "deliver immediately" group.

Included in the "can be implemented once considered and in advance of legislation" group of Kingman recommendations are: (i) considering whether there is a case for strengthening qualitative regulation; and (ii) a more effective Stewardship Code (currently being consulted on, see below).

Included in the "legislation required" group of Kingman recommendations are: (i) establishing a new statutory regulator (as soon as Parliamentary time allows); (ii) a review of the definition of Public Interest Entity to consider expanding its scope (iii) CRR findings to be reported publically by ARGA; (iv) establishment of an effective enforcement regime that holds directors to account for annual reports and accounts (regardless of whether the individual concerned is an accountant); (v) a new duty of alert for auditors to report viability or other serious concerns; and (vi) a range of new powers for ARGA including powers to direct that changes are made to a company's accounts rather than having to go to court, to commission a skilled person's report, to require additional assurances on the viability statement and, in cases of the most serious concern, to issue a report to shareholders suggesting the dividend policy be reviewed or that there is a need to replace some officers. 

The consultation closes on 11 June 2019.

FRC Stewardship Code consultation

In January 2019, the FRC issued its revised Stewardship Code for consultation. The updated code sets higher expectations for stewardship practice with more regular and rigorous public reporting.

The consultation closed on 29 March 2019.  A final version of the code is due to be published in summer 2019.

Investment Association publications

Ahead of the 2019 AGM season, the Investment Association (IA) has issued a number of publications.

Redemption or cancellation of irredeemable preference shares. The IA has issued guidelines for listed companies on the redemption or cancellation of irredeemable preference shares mentioning, amongst other things, the need for a fair process, including consultation and a fair market price.

One in five FTSE companies are failing on gender diversity. In March 2019, together with the Hampton-Alexander Review, the IA wrote to 69 FTSE 350 companies stating concerns about the lack of gender diversity on their boards and asking the companies to outline action they are taking to meet the Hampton-Alexander target of board membership of FTSE 350 companies being 33 per cent female by 2020. In its accompanying press release, the IA published the names of the companies to which the letter had been sent.

More repercussions as regards board diversity and executive pensions. In February 2019, the IA announced Institutional Voting Information Service (IVIS) policy changes as regards gender diversity on boards and pensions for executive directors (see below):

2019 AGM and Reporting Season Briefing

In February 2019, we published our annual client briefing on "The 2019 AGM and reporting season: what to expect". 

Key areas covered include points on the notice of meeting deriving from the 2018 UK Corporate Governance Code (2018 Code); the 2018 Code's boosted Provision 4 on actions for companies to take after receiving 20 per cent or more votes against a resolution; and points on specific resolutions.

Key areas covered  in relation to narrative reporting include reminders on non-financial and diversity reporting; updates on remuneration and climate change reporting; and mention of new FRC publications and updated voting guidelines. 

In relation to future developments, we mentioned the new and increased reporting that will be required in 2020 annual reports for premium listed companies as a result of the 2018 Code and for those companies in scope of the new Companies (Miscellaneous Reporting) Regulations 2018.

PIRC 2019 shareowner voting guidelines

In March 2019, PIRC published its 2019 shareowner voting guidelines. They have been updated in part for the 2018 Code, but not fully. Changes from the previous version include the following:

• PIRC will recommend opposition to the re-election of any chair with over nine years tenure, but will consider any justifications provided by the company
• PIRC will recommend opposition to the re-election of a chief executive who sits on a nomination committee
• PIRC will recommend abstention on the re-election of the nomination committee chair for a FTSE 350 company that lacks disclosure on progress in line with the Parker Review on the ethnic diversity of UK boards
• PIRC will withhold support for a director's re-election where it has concerns over his/her aggregate time commitments, unless he/she has a 100 per cent attendance record at board and committee meetings
• in the area of audit, changes include that PIRC considers the incumbent auditor should not be part of any tender for the external audit; PIRC may not support for re-election an audit firm with more than a five year tenure; and PIRC will recommend opposition to re-election of the audit committee chair where the nature of non-audit fees is not adequately disclosed
• various updates on sustainability and corporate responsibility reporting which that PIRC expects to see, including disclosures around anti-bribery and corruption practices, resilience to climate change and employment standards (including diversity and living wages).

More reporting on energy consumption and efficiency

In previous newsletters, we covered the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (the regulations). These implement part of the Government's policy on Streamlined Energy and Carbon Reporting (SECR). 

The regulations came into force on 1 April 2019  and apply to financial years beginning on or after that date. March year-end companies will therefore be the first to have to report on the regulations in 2020, but all companies in scope will need to consider what steps, if any, they will need to put in place to be ready to report. 

In March 2019, environmental reporting guidelines were updated to cover, amongst other things, the regulations and SECR. The table covers some key points noted in the guidelines.

Climate change developments

In our December 2018 newsletter, we wrote about a variety of climate change developments. At the time of writing, the promised guidance from the FCA has not yet materialised. 

In a new development in February 2019, the European Commission published, as part of its Action Plan on Financing for Sustainable Growth, a consultation seeking views on a proposed supplement to its non-binding guidelines on non-financial reporting as regards climate-related information. The draft guidelines propose climate-related disclosures for each of the five reporting areas in the Non-Financial Reporting Directive (business model, policies, due diligence processes, risks and risk management and outcomes including key performance indicators). The proposed disclosures are split into disclosures that a company should consider if climate-related information is necessary for an understanding of its development, performance, position and impact of its activities and additional voluntary disclosures that companies may consider to provide more enhanced information.

The European Commission states that it expects that most companies within the scope of the Directive are likely to conclude that climate change is a material issue. Moreover, it suggests that companies which conclude that climate change is not a material issue should consider stating as much and explaining how they reached that conclusion.

The consultation closed on 20 March 2019.

Audit developments

In our December 2018 newsletter we wrote about a number of audit developments. The deadline for responses to the Competition and Markets Authority (CMA) market study of statutory audit was 21 January 2019 and, while a number of responses have been published, the final report is still awaited. The BEIS commissioned independent review of UK audit standards, also known as the Brydon review, is currently under way and is expected to report before the end of 2019.

In March 2019, the House of Commons BEIS Committee inquiry on the future of audit issued its report concluding that radical change is needed. Recommendations are far-reaching and include:

• the need for audits to detect material fraud as a priority and be more forward-looking and extend to the whole of the annual report including corporate governance statements and payment practices;
• empowering auditors to disclose openly and clearly in audit reports (with a view to removing obstacles such as unlimited liability);
• requiring auditors to present at annual general meetings on how they have challenged management, exercised professional scepticism and on any major concerns;
• increasing oversight of audit committees;
• revision of the capital maintenance regime including a clear and prudent definition of realised profits for distributions, more disclosures from companies and more challenge from auditors; and
• advising the CMA to aim for full legal separation of audit from non-audit service (and, if only an operational split is chosen by the CMA, this decision should be reviewed within three years).

It remains to be seen which, if any, of these recommendations are taken up by either the CMA or the Brydon review.

Remuneration developments

The House of Commons BEIS Committee has made a number of recommendations in a hard-hitting report on Executive Rewards: Paying for Success (also published in March 2019). These include the following:

• strengthened guidance from ARGA to exert downward pressure on executive remuneration;
• monitoring of the new section 172 reporting to ensure there is more transparency evidencing alignment of pay with objectives;
• remuneration committees to have at least one employee representative on them;
• pay ratio reporting to be expanded; and
• remuneration committees to set, publish and explain an absolute cap on total remuneration for executives in any year.

Again, it remains to be seen which, if any, of these recommendations the Government takes up.

Payment practices developments

In his Spring Statement Speech, the Chancellor, Phillip Hammond, stated an intention to require company audit committees to review payment practices and report on them in annual accounts and said that further details will be announced in due course by BEIS. The Government feedback statement on its call for evidence on creating a responsible payment culture is also due to be issued shortly. 

Directors' Duties

The recent case of Stobart Group Limited v William Andrew Tinkler is a useful reminder of directors' duties in the context of a dispute between the majority of a company's directors and a dissenting director, Mr Tinkler, who had considerable support from certain shareholders. Stobart Group Limited (Stobart) is incorporated in Guernsey and listed on the premium segment of the Official List. The facts of the case and the surrounding events are very complex but some important areas to note are set out below.

The High Court held that Mr Tinkler had committed four serious breaches of duty as follows:

• in briefing against the board when in meetings with selected shareholders. This was in breach of his fiduciary duty to act in the best interests of the company, in breach of his services agreement and implied terms of trust and confidence and fidelity. The judge noted that any discussion by a director of matters relating to management of a company's business should either be in the presence of the rest of the board or with the prior approval of the board. If a dissenting director feels strongly about a proposed course of action, having fought unsuccessfully to dissuade the majority of the board from pursuing it, he should resign or raise the matter at a general meeting of the company, when he can express his views to all shareholders;
• in handing over a confidential budget relating to a company in which Stobart had a joint venture interest without the board's permission, he had breached his duty of confidentiality set out in his services agreement and his duty to act in good faith and in the best interests of the company;
• by sending a letter to shareholders in his capacity as a director of Stobart, criticising the Chairman and explaining that there was a "fundamental disagreement amongst the directors over the implementation of the future strategy of the Stobart Group" (which he then circulated to all employees with an email address), Mr Tinkler had committed a serious breach of his duty of loyalty to Stobart, owed both as a fiduciary and under the implied terms of his services agreement;
• by becoming involved in the content of a letter sent by senior managers to the board, which criticised the board for releasing an RNS announcement relating to the dispute and stated that the Chairman should resign, Mr Tinkler was also committing a serious breach of his duty of loyalty to Stobart.

The High Court also held that:

• by deciding to transfer 5.3 million shares from treasury to Stobart's employee benefit trust, the directors' primary purpose was to secure the trustee's vote at the Stobart AGM in favour of a resolution to re-elect the Chairman, which was not a proper purpose. The fact that the decision had been made in the best interests of Stobart did not mean that it did not infringe the proper purposes rule. The transfer would therefore be voidable not void. This aspect of the judgment is a useful reminder of the conclusions reached by the Supreme Court in the Eclairs case;
• the directors had not acted in breach of their duties by exercising powers under Stobart's articles of association to remove Mr Tinkler as a director, even though he had been re-elected by shareholders at Stobart's AGM the previous day.

Ashurst publications in the last quarter

Ashurst has published a number of client updates in the first quarter of 2019 and a selection of them are collected below:

Business conduct and risk

• Bribery Act exemplary but investigations too slow
• UK's first monetary penalty for a breach of financial sanctions
• Disclosure of confidential SFO documents ordered in Tesco shareholder action
• Bribery and corruption – what now for 2019
• In the shadow of nationalism – what recourse exists for investors

Competition

• Lightning strikes twice as Commission prohibits two mergers on the same day
• EU Commission loses UPS-TNT appeal
• Guess what? Fashion label fined for online and territorial sales restrictions
• Balmoral appeal tanks in Court of Appeal: one-off information exchange can breach competition law
• CMA Sainsbury's/Asda merger review deadlines unfair
• CMA requires substantial remedies in Rentokil/Cannon merger
• Competition law themes to look out for in 2019: a multi-jurisdictional outlook (Jan 2019)

Corporate law

• Important new reporting requirements for UK private companies

Pensions, Employment and Incentives

• 2019 themes for Remuneration Committees of listed companies
• The Government sets out its plans to protect defined pension scheme members and enhance the Pensions Regulator's powers
• Pensions news
• The Pensions Regulator's annual funding statement - a firmer stance on dividend payments
• Brexit and a brave new immigration world e-seminar
• Save the date - UK employment law changes – March

Tax

• Investment platform or abusive conduit?
• Recent UK Real Estate Tax Changes