uk quoted company newsletter 15 Apr 2021

UK Quoted Company Newsletter Q1 2021

1. Reforming audit and corporate governance

On 18 March 2021, the government published its long-anticipated white paper on restoring trust in audit and corporate governance. The government's aim is clear: it wants to improve the quality, accuracy and reliability of the information published by the largest companies.

Precipitated by various corporate failures - Carillion, Thomas Cook, BHS and Patisserie Valerie chief among them, together with long-standing concerns about the lack of competition and resilience in the statutory audit market, the proposals take forward most of the recommendations of the three government-commissioned independent reviews: the Review of the Financial Reporting Council (FRC) led by Sir John Kingman KCB, the Competition & Markets Authority's (CMA) Statutory audit services markets study, and the Review of the Quality and Effectiveness of Audit by Sir Donald Brydon CBE.

The consultation contains significant, far-reaching and, in some cases, controversial reforms in its 233 pages, as well as 98 consultation questions. Reflecting this, the normal period in which responses can be submitted has been extended to 16 weeks and will close on 8 July 2021.

The government also published an impact assessment, a summary of stakeholder responses to the government’s initial consultation on the recommendations of the CMA’s Market Study, and a summary of how each of the 150-plus recommendations of the three reviews is addressed either by the White Paper or through action by the FRC.

Acknowledging the urgency of audit reform but also the need to manage additional requirements on businesses, the government intends a staggered approach to implementation.

Measures which do not have a direct impact on companies will be brought into effect more quickly, such as the constitution of the replacement for the FRC, the Audit, Reporting and Governance Authority (ARGA).

Measures with a significant impact on businesses will be phased in, with many likely to be subject to transitional arrangements.

Larger companies, particularly those with a premium listing, are likely to be subject to new requirements before others, although consideration may also be given to excluding emerging growth companies from some of the new measures for a period of time after an Initial Public Offering designed to ensure that they do not present a deterrent to seeking a listing.

Key consultation proposals. The key proposals in the consultation are set out in the following table. Many of the proposals centre on public interest entities (PIEs) - currently, credit institutions, insurance undertakings, and those with securities admitted to UK regulated markets, such as the main market of the London Stock Exchange.

To ensure that the most economically significant entities in the UK are caught, the government is proposing an extension to the scope of the definition of a PIE to include the very largest private companies (one option sets the bar as low as those companies with more than 500 employees and a turnover of more than £500m) and AIM companies above a specified level of market capitalisation (€200m).

Timing. Timing for the introduction of the reforms is opaque: "when Parliamentary time allows". These are very significant reforms. Each will need to be carefully considered both individually and in the round, especially to ensure that there are no unintended consequences and that the benefits outweigh the costs.

AUDIT AND CORPORATE GOVERNANCE: KEY CONSULTATION PROPOSALS
Directors' accountability Strengthening disclosure and attestation requirements relating to dividends and capital maintenance to ensure that when distributions are made they do not put a company into financial difficulty. Companies should disclose the total amount of distributable reserves and directors should be required to state that any proposed dividend will not, in their opinion, threaten the company's solvency over the next two years. Requiring directors to carry out an annual review of the effectiveness of internal controls and to make a statement as to that effectiveness as part of their annual report, with that statement potentially being subject to audit.
Corporate reporting for PIEs Mandating an annual Resilience Statement which sets out how directors assess the company's prospects and challenges over the short, medium and long-term, including risks posed by climate change (incorporating and developing existing going concern assessments and viability statements). Requiring publication of an Audit and Assurance Policy, describing the directors' approach (over a rolling three year "forward look") to seeking internal and external assurance of the information they report to shareholders. Seeking views on how annual reports could include information on supplier payment policies and practices.
Strengthening reporting supervision Providing ARGA with powers to direct changes to company accounts without the need to seek a court order and extending the scope of ARGA's reviews to the entirety of the annual report.
Strengthening enforcement powers against directors Providing ARGA with additional investigative and enforcement powers in relation to breaches of statutory duties relating to corporate reporting and audit by directors of PIEs. Strengthening "malus and clawback" arrangements within executive directors' remuneration arrangements to counter the potential for rewarding failure.
Audit purpose and scope - closing the audit expectations gap Creating new overarching principles for auditors to reinforce good practice, while requiring them to take into account a wider range of information in reaching audit opinions, in particular whether financial statements give a "true and fair view". Imposing new obligations on both auditors and directors relating to the detection and prevention of material fraud.
Audit committee oversight and shareholder engagement Providing ARGA with powers to set and enforce additional requirements for audit committees of FTSE 350 companies regarding the appointment and oversight of auditors, enabling quoted company shareholders to propose additional matters for emphasis within the scope of a company's external audit and requiring better communication with shareholders following the resignation or dismissal of the auditor.
Improving competition, choice and resilience within the audit market Creating a "managed shared audit regime" in the FTSE 350 market to increase choice, mandating operational (as opposed to structural) separation between the audit and non-audit arms of certain auditors, and providing ARGA with significant additional powers while making it accountable to Parliament.

AUDIT AND CORPORATE GOVERNANCE: KEY CONSULTATION PROPOSALS

Directors' accountability

Strengthening disclosure and attestation requirements relating to dividends and capital maintenance to ensure that when distributions are made they do not put a company into financial difficulty. Companies should disclose the total amount of distributable reserves and directors should be required to state that any proposed dividend will not, in their opinion, threaten the company's solvency over the next two years.
Requiring directors to carry out an annual review of the effectiveness of internal controls and to make a statement as to that effectiveness as part of their annual report, with that statement potentially being subject to audit.

Corporate reporting for PIEs

Mandating an annual Resilience Statement which sets out how directors assess the company's prospects and challenges over the short, medium and long-term, including risks posed by climate change (incorporating and developing existing going concern assessments and viability statements).
Requiring publication of an Audit and Assurance Policy, describing the directors' approach (over a rolling three year "forward look") to seeking internal and external assurance of the information they report to shareholders.
Seeking views on how annual reports could include information on supplier payment policies and practices.

Strengthening reporting supervision

Providing ARGA with powers to direct changes to company accounts without the need to seek a court order and extending the scope of ARGA's reviews to the entirety of the annual report.

Strengthening enforcement powers against directors

Providing ARGA with additional investigative and enforcement powers in relation to breaches of statutory duties relating to corporate reporting and audit by directors of PIEs.
Strengthening "malus and clawback" arrangements within executive directors' remuneration arrangements to counter the potential for rewarding failure.

Audit purpose and scope - closing the audit expectations gap

Creating new overarching principles for auditors to reinforce good practice, while requiring them to take into account a wider range of information in reaching audit opinions, in particular whether financial statements give a "true and fair view".
Imposing new obligations on both auditors and directors relating to the detection and prevention of material fraud.

Audit committee oversight and shareholder engagement

Providing ARGA with powers to set and enforce additional requirements for audit committees of FTSE 350 companies regarding the appointment and oversight of auditors, enabling quoted company shareholders to propose additional matters for emphasis within the scope of a company's external audit and requiring better communication with shareholders following the resignation or dismissal of the auditor.

Improving competition, choice and resilience within the audit market

Creating a "managed shared audit regime" in the FTSE 350 market to increase choice, mandating operational (as opposed to structural) separation between the audit and non-audit arms of certain auditors, and providing ARGA with significant additional powers while making it accountable to Parliament.

2. FCA Primary Market Bulletin 33

On 29 March 2021, the Financial Conduct Authority (FCA) published Primary Market Bulletin 33, which includes information on various matters including:

the audit of financial statements by EEA audit firms post-Brexit;
the FCA's new online portal for submitting major shareholding notifications;
notification and disclosure obligations under the UK Short Selling Regulation (following the FCA's first enforcement action in October 2020 for failure to disclose net short positions in a timely manner);
an update to the consultation on proposed Technical Note - When a prospectus is required where securities are issued pursuant to schemes of arrangement;
a review of "payments to governments" disclosures by issuers in the extractive industries;
a review of net changes to share capital (total voting rights and major shareholding) disclosures; and
feedback on the FCA's review of delayed disclosure of inside information.

New online portal for major shareholding notifications. On 22 March 2021, the FCA launched a new online portal for Form TR-1 notifications. Chapter 5 of the Disclosure Guidance and Transparency Rules (DTRs) requires holders of shares with voting rights and certain financial instruments to notify the FCA and the relevant issuer when particular thresholds are reached or crossed. These notifications were previously sent to the FCA by submitting a Form TR-1 via e-mail.

As of 22 March 2021, all TR-1 notifications for holders of shares with voting rights and certain financial instruments must now be submitted to the FCA through the new major shareholdings notification portal via the FCA's Electronic Submission System (ESS). A two-step registration process must be completed in order to gain access to ESS and the new "major shareholding" reporting section within the ESS. The FCA has published an updated DTR 5 User guide.

Securities issued pursued to schemes of arrangement. Primary Markets Bulletin 30 (August 2020) included a consultation on proposed draft Technical Note 606.1 - When a prospectus is required where securities are issued pursuant to schemes of arrangement (see QCN Q3 2020).

The draft Technical Note provides that "the longstanding and common view among practitioners is that issuances of securities in this instance should not trigger the requirement for a prospectus as the issuance does not fall within the definition of public offer" on the basis that there is no offer enabling investors to buy or subscribe for shares, but rather a court procedure resulting in the allotment of shares.

However, the draft Technical Note goes on to say that if a shareholder is asked to make a choice between different forms of consideration, where a scheme includes mix and match facilities, for example, "an issuer may reasonably conclude that a prospectus should be produced (absent an exemption) because an investor is deciding to buy or subscribe for the securities in question".

The FCA notes that respondents to the consultation felt that a prospectus is not required even where a scheme includes mix and match facilities. The FCA is continuing to consider the responses and will provide further information in a future Primary Market Bulletin.

Net changes to total voting rights and major shareholding disclosures. In 2020, the FCA carried out a review of the way UK issuers announce changes to total voting rights and the effect on major shareholding notifications. The FCA noted that some disclosures of total voting rights lacked clarity and this contributed to the level of missing notifications by major shareholders. Following the review, the FCA reminds:

position holders that DTR 5.1.2R(2) places a responsibility on them as shareholders to assess whether their position has changed as a result of an event changing the breakdown of voting rights; and
issuers to report changes to total voting rights clearly, on time and with the correct headline and classification (even where this information has been disclosed previously).

Delayed disclosure of inside information. Primary Market Bulletin 31 (November 2020) featured the FCA's review of delayed disclosure of inside information under the Market Abuse Regulation (now, the UK Market Abuse Regulation - UK MAR) (see QCN Q4 2020). The FCA notes that the review did not contain any new guidance and it was not the FCA's intention to drive wholesale change to market practice. Since the publication of the review, the FCA has received several queries and has provided the following responses:

Periodic financial information

The FCA notes that guidance for periodic financial information and delayed disclosure under Article 17(4) of UK MAR is contained in Technical Note 506.2.– Periodic financial information and inside information.

In response to feedback that the data set used for the review covered a period which preceded the Technical Note, the FCA states that the review repeats existing FCA guidance which encourages issuers to begin with the assumption that information relating to financial results could constitute inside information, and provides that the FCA expects issuers to exercise judgement in assessing whether inside information exists. The review was not intended to change this guidance.

The FCA also notes that the factors highlighted in the review do not indicate that its intention was to challenge market practice. This practice might reasonably be expected to involve considerations such as the extent to which:

The periodic financial information contains an item or items that are themselves inside information for which no legitimate interest to delay disclosure exists where Article 17 of UK MAR would require the inside information to be announced without delay. Where there is no delay in disclosure of inside information or no inside information exists, no notification under Article 17(4) of UK MAR would be required.
The totality of the periodic financial information is inside information, which typically includes an assessment of whether the results and other content differ from market expectations, where such expectations can be ascertained. The FCA confirms that where a decision is reached that periodic financial information is not itself, and does not contain, inside information, no notification needs to be submitted.

Board changes

The FCA received feedback on the challenges of complying with Article 17 of UK MAR in the context of board changes; comments were made in relation to the extent to which information is "precise" (under Article 7 of UK MAR) and concerns around presenting an orderly transition.

The FCA appreciates that the "precise" definition requires judgement to be exercised and, on presenting an orderly transition, the FCA refers to Technical Note 521.3 – Assessing and handling inside information, which states:

"It is generally not acceptable for issuers to attempt to choreograph the assessment and possible disclosure of various and offsetting information that may individually meet the tests for inside information. It is vital that issuers disclose all inside information they have in accordance with MAR and do not attempt to delay the publication of negative news, for example, until there is offsetting positive news."

3. UK Listings Review by Lord Hill

On 3 March 2021, and further to its Call for Evidence on the UK listing regime, HM Treasury published Lord Hill's UK Listings Review (the Review).

The Review sets out a range of recommendations to modernise the FCA's Listing Rules whilst attempting to maintain the UK's high standards of regulation. Some of the proposals, notably, the reframing of the prospectus regime, will require primary legislation. The FCA has welcomed the Review's recommendations and is aiming to publish a consultation paper by the summer. Subject to consultation feedback, the FCA is aiming to implement rule changes by late 2021.

In relation to the proposals concerning special purpose acquisition companies (SPACs) however, the FCA is consulting on an earlier timeframe and intends for new rules and guidance to be implemented by early summer (see Statement: Future consultation on strengthening investor protections in SPACs).

Some of the Review's key recommendations are set out in the following table. We have also written a more detailed briefing about the Review which is available by clicking here.

KEY RECOMMENDATIONS OF LORD HILL'S UK LISTINGS REVIEW
Dual class share structures With a view to attracting companies in innovative growth sectors, especially founder-led companies, the Review recommends permitting companies with dual class structures to list in the premium listing segment. Dual class structures allow founders to retain control (and are well-established in the USA, Facebook being a notable example) but are currently only permitted on the standard listing segment (although they were, until relatively recently, also permissible on the premium listing segment). The Review envisages high corporate governance standards being maintained by certain restrictions being imposed on dual class structures, including: (i) a maximum duration of five years; (ii) a maximum weighted voting ratio of 20:1; (iii) requiring a holder of 'B' class shares to be a director of the company; (iv) voting matters being limited to ensuring the holder is able to continue as a director and able to block a change of control of the company; and (v) limitations on transfer of 'B' class shares.
Free float requirements The current free float requirement is considered a key deterrent when potential listing venues are chosen, particularly for high growth and private equity backed companies. In response, the Review recommends that the free float requirement be reduced from 25 per cent to 15 per cent for all companies in both listing segments. The Review looks to competitor listing venues that adopt a more flexible approach, using alternative measures to establish liquidity – the key determinant - and recommends that companies of different sizes should be able to use alternative measures to the absolute percentage of 15 per cent to demonstrate sufficient liquidity. The Review also recommends that the definition of "free float" be reviewed and amended to consider whether the shares are in fact contributing to liquidity.
Special purpose acquisition companies (SPACs) In a bid to make London a viable competitor to the US and, more recently, Amsterdam, the Review suggests a relaxation of the Listing Rules in relation to SPACs or "blank cheque" shell companies – a key trend in the last year which many believe will continue. Until 2018, upon the announcement (or leak) of a reverse takeover, the presumption of suspension applied for all issuers with a premium or standard listing. Whilst this presumption was removed by the FCA in 2018 in respect of commercial companies, it was retained expressly for shell companies, including SPACs. The Review seeks to put SPACs on a level playing field with commercial companies by recommending the removal of the rebuttable presumption of suspension for SPACs, but with appropriate investor protections being put in place.
Review of the prospectus regime Rather than proposing stop-gap amendments to the existing regime, an urgent and fundamental review of the prospectus regime is recommended to better accommodate the breadth and maturity of UK capital markets and the evolution in the types of companies coming to market, as well as those already listed. Key considerations (which contemplate a regime more akin to that in place pre-Prospectus Directive and pre-EU Prospectus Regulation) include: (i) changing prospectus requirements so that admission to trading on a regulated market is treated separately from an offer to the public; (ii) changing how the prospectus exemptions function so that documentation is required only where it is appropriate for the type of transaction and it suits the circumstances of the capital issuance; and (iii) the use of alternative listing documentation where appropriate and possible, such as further issuances by a listed issuer on a regulated market.

KEY RECOMMENDATIONS OF LORD HILL'S UK LISTINGS REVIEW

Dual class share structures

With a view to attracting companies in innovative growth sectors, especially founder-led companies, the Review recommends permitting companies with dual class structures to list in the premium listing segment.
Dual class structures allow founders to retain control (and are well-established in the USA, Facebook being a notable example) but are currently only permitted on the standard listing segment (although they were, until relatively recently, also permissible on the premium listing segment).
The Review envisages high corporate governance standards being maintained by certain restrictions being imposed on dual class structures, including: (i) a maximum duration of five years; (ii) a maximum weighted voting ratio of 20:1; (iii) requiring a holder of 'B' class shares to be a director of the company; (iv) voting matters being limited to ensuring the holder is able to continue as a director and able to block a change of control of the company; and (v) limitations on transfer of 'B' class shares.

Free float requirements

The current free float requirement is considered a key deterrent when potential listing venues are chosen, particularly for high growth and private equity backed companies. In response, the Review recommends that the free float requirement be reduced from 25 per cent to 15 per cent for all companies in both listing segments. The Review looks to competitor listing venues that adopt a more flexible approach, using alternative measures to establish liquidity – the key determinant - and recommends that companies of different sizes should be able to use alternative measures to the absolute percentage of 15 per cent to demonstrate sufficient liquidity. The Review also recommends that the definition of "free float" be reviewed and amended to consider whether the shares are in fact contributing to liquidity.

Special purpose acquisition companies (SPACs)

In a bid to make London a viable competitor to the US and, more recently, Amsterdam, the Review suggests a relaxation of the Listing Rules in relation to SPACs or "blank cheque" shell companies – a key trend in the last year which many believe will continue. Until 2018, upon the announcement (or leak) of a reverse takeover, the presumption of suspension applied for all issuers with a premium or standard listing. Whilst this presumption was removed by the FCA in 2018 in respect of commercial companies, it was retained expressly for shell companies, including SPACs. The Review seeks to put SPACs on a level playing field with commercial companies by recommending the removal of the rebuttable presumption of suspension for SPACs, but with appropriate investor protections being put in place.

Review of the prospectus regime

Rather than proposing stop-gap amendments to the existing regime, an urgent and fundamental review of the prospectus regime is recommended to better accommodate the breadth and maturity of UK capital markets and the evolution in the types of companies coming to market, as well as those already listed.
Key considerations (which contemplate a regime more akin to that in place pre-Prospectus Directive and pre-EU Prospectus Regulation) include: (i) changing prospectus requirements so that admission to trading on a regulated market is treated separately from an offer to the public; (ii) changing how the prospectus exemptions function so that documentation is required only where it is appropriate for the type of transaction and it suits the circumstances of the capital issuance; and (iii) the use of alternative listing documentation where appropriate and possible, such as further issuances by a listed issuer on a regulated market.

4. Consultation on climate-related financial disclosures

On 24 March 2021 BEIS published a consultation seeking views on proposals to mandate climate-related financial disclosures by publicly quoted companies, large private companies and LLPs. The key proposals are set out in the following table.

CLIMATE-RELATED FINANCIAL DISCLOSURES: KEY PROPOSALS
Which entities are in scope? The proposed requirements apply to all UK companies currently required to produce a non-financial information statement, being: UK companies that have more than 500 employees and transferable securities admitted to trading on a UK regulated market, banks or insurance companies; UK registered companies with securities admitted to AIM with more than 500 employees; other UK registered companies which have more than 500 employees and a turnover of more than £500 million; or LLPs which have more than 500 employees and a turnover of more than £500 million.
What needs to be disclosed? Relevant companies and LLPs will be required to disclose climate-related financial information in line with the four overarching pillars of the Task Force on Climate-related Financial Disclosure recommendations (Governance, Strategy, Risk management, Metrics and targets).
Where must the disclosures be set out? Companies will be required to present climate-related financial information in the non-financial information statement (which forms part of the strategic report). LLPs will be required to present climate-related financial information in either the non-financial information statement which forms part of the strategic report, or the energy and carbon report (which forms part of the annual report).

CLIMATE-RELATED FINANCIAL DISCLOSURES: KEY PROPOSALS

Which entities are in scope?

The proposed requirements apply to all UK companies currently required to produce a non-financial information statement, being:
- UK companies that have more than 500 employees and transferable securities admitted to trading on a UK regulated market, banks or insurance companies;
- UK registered companies with securities admitted to AIM with more than 500 employees;
- other UK registered companies which have more than 500 employees and a turnover of more than £500 million; or
- LLPs which have more than 500 employees and a turnover of more than £500 million.

What needs to be disclosed?

Relevant companies and LLPs will be required to disclose climate-related financial information in line with the four overarching pillars of the Task Force on Climate-related Financial Disclosure recommendations (Governance, Strategy, Risk management, Metrics and targets).

Where must the disclosures be set out?

Companies will be required to present climate-related financial information in the non-financial information statement (which forms part of the strategic report).
LLPs will be required to present climate-related financial information in either the non-financial information statement which forms part of the strategic report, or the energy and carbon report (which forms part of the annual report).

The consultation closes on 5 May 2021. If taken forward, it is intended that the relevant regulations will apply to accounting periods starting on or after 6 April 2022. BEIS plans to produce non-binding Q&As to support the application of the requirements.

By way of reminder, in QCN Q4 2020 we reported on the new Listing Rule (LR 9.8.6(8)) requiring every premium listed commercial company to include climate-related disclosures in its annual financial report consistent with the Taskforce for Climate-Related Financial Disclosures for financial periods beginning on or after 1 January 2021.

5. Climate change reporting and pension schemes

Pension Schemes Act 2021. On 2 March 2021, a written parliamentary statement was published by the government's pensions minister following the grant of Royal Assent to the Pension Schemes Act 2021 (the Act) on 11 February 2021. The Act will make major changes to both defined benefit and defined contribution pension schemes, including granting new powers to the Pensions Regulator.

The parliamentary statement sets out the government's plans for bringing the Act's provisions into force and consulting on draft regulations that are due to be made under it.

Among other things, the minister indicated that the government plans to lay before Parliament "this summer" the draft regulations published in January 2021 that will introduce climate-related risk governance and disclosure requirements for pension trustees in line with the recommendations of the Task Force on Climate-related Financial Disclosures. These regulations will come into force ahead of the 2021 United Nations Climate Change Conference (COP26) scheduled to be held in Glasgow from 1 to 12 November 2021.

Investment Association response to climate change reporting by pension schemes. On 12 March 2021, the Investment Association (IA) published Response document - Taking action on climate risk: improving governance and reporting by occupational pension schemes, which sets out the IA's response to the government’s proposals to improve governance and reporting by occupational pension schemes in relation to climate risks and opportunities. The key points arising from the IA's Response document are set out in the table below. The FCA has also signalled that it will consult on enhancing investment managers’ climate related disclosures later this year.

CLIMATE CHANGE REPORTING BY PENSION SCHEMES: IA RESPONSE
A 'pragmatic and proportionate' approach to assessing pension schemes' compliance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) should be encouraged, initially focusing on how schemes embed climate risk into their investment governance and decision-making structures. There is a need for greater coherence of approaches to TCFD reporting through the global investment chain and time is needed for the quality of appropriate data to improve. The IA is happy to work with government and the pensions industry to develop mechanisms for standardising client information requests and supporting the development of meaningful scheme level data across a variety of asset classes. The government should be mindful of the necessary consistency between the TCFD reporting for pension schemes and the FCA's future requirements for investment managers’ client facing TCFD disclosures.

CLIMATE CHANGE REPORTING BY PENSION SCHEMES: IA RESPONSE

A 'pragmatic and proportionate' approach to assessing pension schemes' compliance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) should be encouraged, initially focusing on how schemes embed climate risk into their investment governance and decision-making structures.
There is a need for greater coherence of approaches to TCFD reporting through the global investment chain and time is needed for the quality of appropriate data to improve.
The IA is happy to work with government and the pensions industry to develop mechanisms for standardising client information requests and supporting the development of meaningful scheme level data across a variety of asset classes.
The government should be mindful of the necessary consistency between the TCFD reporting for pension schemes and the FCA's future requirements for investment managers’ client facing TCFD disclosures.

6. 2021 AGM and reporting season: what to expect next?

AGMs saw an unprecedented amount of upheaval in 2020 due to the COVID-19 pandemic, and this is set to continue for the 2021 season. The Financial Reporting Council has urged companies to learn from the 2020 season and prepare early for the 2021 season and, if they wish to use technology more (which it recommends), to speak with technology providers and experts.

On 11 February 2021, we published our annual client briefing, 2021 AGM and reporting season: what to expect, which summarises developments to be aware of when preparing for 2021 annual general meetings and compiling the narrative aspects of annual reports.

The briefing is aimed principally at premium listed companies but may also be useful for AIM companies or standard listed companies who choose voluntarily to comply with the UK Corporate Governance Code and other legal or regulatory requirements applying to premium listed companies.

The AGM part of the briefing includes detailed commentary on:

2021 AGM issues;
options for AGMs in 2021;
best practice guidance for AGMs;
specific resolutions;
shareholder activism;
updated voting guidelines; and
the future of AGMs.

The narrative reporting part of the briefing includes detailed commentary on:

filing extensions for annual reports;
new requirements for energy and carbon reporting;
corporate governance reporting;
climate related reporting (including the new Listing Rule);
remuneration reporting developments;
diversity reporting; and
other reporting developments.

7. FCA and FRC statement on corporate reporting

On 27 January 2021, the FCA and FRC published a joint statement (the Statement) reminding companies of certain continuing temporary reliefs for reporting published financial information (as well as a summary of the temporary reliefs and a Q&A section). The reliefs included:

Temporary relief for corporate reporting by listed companies, being an additional 2 months to publish annual financial reports (within 6 rather than 4 months of a company's financial year-end) and an additional month to publish half yearly financial reports (within 4 rather than 3 months of a company's financial year-end).
The automatic extension for filing any accounts with Companies House by 3 months. While this expired on 5 April 2021, it has been replaced with an application process to Companies House, with companies granted a discretionary 3-month extension where they cite the COVID-19 pandemic as a factor impacting the timely completion and/or audit of accounts. Only one filing extension is permissible for an accounting period and the extension cannot take the filing date later than 12 months after the end of the accounting period.
Certain measures in the Corporate Insolvency and Governance Act 2020 to provide flexibilities around the conduct of AGMs, which were extended to 30 March 2021. Please see the article below regarding new ICSA guidance to assist public companies holding AGMs and other general meetings after 30 March 2021.

The Statement:

encourages stakeholders, particularly listed company boards, to re-familiarise themselves with the measures and use the extra time they afford to ensure the quality of reporting is not compromised;
alerts investors and other users of financial information, including lenders assessing covenant breaches, that reporting timetables for companies might be extended and view any changes sympathetically;
reminds companies of their obligations under UK MAR, including that they must continue to assess carefully what constitutes inside information, recognising that the pandemic and policy responses may alter the nature of information material to a business's prospects; and
suggests audit committees consider disclosing in their annual reports the measures taken to ensure high-quality reporting and audit for the period affected.

8. Guidance on COVID-19 and general meetings

On 22 February 2021, the Chartered Governance Institute (ICSA) published new guidance to assist public companies holding AGMs and other general meetings during the COVID-19 pandemic (the Guidance).

By way of reminder, the Corporate Insolvency and Governance Act 2020 (CIGA 2020), which came into effect in June 2020, includes a range of temporary business protection measures for shareholder meetings in light of disruption caused by the COVID-19 pandemic. In December 2020, the temporary measures were extended to include shareholder meetings taking place up to 30 March 2021.

ICSA convened a working group comprising itself, the City of London Law Society and Martin Moore QC to develop the Guidance in order to help companies holding AGMs and general meetings, particularly after 30 March 2021.

The Guidance is split into three sections. The key recommendations in the first section of the Guidance are highlighted in the following table.

COMPANIES WITH UPCOMING GENERAL MEETINGS: ICSA GUIDANCE
Without the temporary measures of the 2020 Act, closed meetings will only be possible after 30 March 2021 if legislation and guidelines at the time preclude gatherings of more than a very limited number. If there is no specific legislation in force at the time of the meeting, companies are not able to preclude shareholder attendance or impose a limit on the numbers permitted to attend. However, companies can strongly recommend that shareholders do not attend due to unpredictable circumstances. Companies should plan for holding the meeting based on restrictions on gatherings at the time the notice is sent out and at the place of the meeting, but should also consider contingency plans in case the situation changes ahead of the meeting. It will be necessary for companies to react to the situation at the time. For example, government health and safety measures may restrict public gatherings in a particular way, and any meetings held will need to reflect those restrictions. Venue capacities are also likely to be significantly reduced due to social distancing rules. Companies should consider offering shareholders as much electronic engagement as possible to give shareholders confidence that they can engage with the business of the meeting without physical attendance. Companies can hold hybrid meetings even if their articles do not expressly permit this, provided that there is nothing in the articles which prevents them from doing so. The Guidance, however, recommends that companies should include specific powers in their articles to secure that all the procedural mechanics such as voting, adjournment, security and technology features are addressed with certainty.

COMPANIES WITH UPCOMING GENERAL MEETINGS: ICSA GUIDANCE

Without the temporary measures of the 2020 Act, closed meetings will only be possible after 30 March 2021 if legislation and guidelines at the time preclude gatherings of more than a very limited number.
If there is no specific legislation in force at the time of the meeting, companies are not able to preclude shareholder attendance or impose a limit on the numbers permitted to attend. However, companies can strongly recommend that shareholders do not attend due to unpredictable circumstances.
Companies should plan for holding the meeting based on restrictions on gatherings at the time the notice is sent out and at the place of the meeting, but should also consider contingency plans in case the situation changes ahead of the meeting.
It will be necessary for companies to react to the situation at the time. For example, government health and safety measures may restrict public gatherings in a particular way, and any meetings held will need to reflect those restrictions. Venue capacities are also likely to be significantly reduced due to social distancing rules.
Companies should consider offering shareholders as much electronic engagement as possible to give shareholders confidence that they can engage with the business of the meeting without physical attendance.
Companies can hold hybrid meetings even if their articles do not expressly permit this, provided that there is nothing in the articles which prevents them from doing so. The Guidance, however, recommends that companies should include specific powers in their articles to secure that all the procedural mechanics such as voting, adjournment, security and technology features are addressed with certainty.

In relation to the final bullet point above, it is nevertheless best practice for a company proposing to hold a hybrid meeting to ensure that its articles expressly permit hybrid meetings. The second section of the Guidance sets out good practice recommendations for companies and the third section includes sample wording for companies to put into AGM notices, covering closed meetings and hybrid meetings in a restricted local or national lockdown scenario, as well as meetings where shareholders can attend physically. The Guidance is available by clicking here (although it is necessary to register).

9. FRC guidance on the UK Corporate Governance Code

In its annual review of corporate governance reporting (issued in November 2020), the Financial Reporting Council (FRC) noted that some companies that are not compliant with the UK Corporate Governance Code (the Code) often do not declare non-compliance but instead offer vague explanations, and continue this pattern every year. Consequently, on 26 February 2021, the FRC published guidance for companies on how they should report on departures from the UK Corporate Governance Code (the Guidance).

Effective governance. The Guidance emphasises that companies should embrace the flexibility offered by the Code, consider their circumstances carefully and choose what is best for them, while clearly explaining any departures from the Code. Companies should not favour strict compliance over effective governance and transparency.

Compliance statement. Companies should make it easy for readers to see which provisions of the Code they have departed from in their annual report. In particular, companies should provide the explanation for non-compliance in one of the following ways:

as part of the compliance statement (particularly when the company has only departed from one or two provisions); or
signpost to another page or section of the annual report, where the reader can easily find the explanation.

Transparency. The Guidance urges companies to be transparent about any departures from the Code. The FRC has noted a particular lack of transparency in relation to certain provisions of the Code, such as those addressing: (i) stakeholders’ interests and workforce engagement; (ii) chair tenure; (iii) executive pensions alignment with the workforce; (iv) post-employment shareholding; (v) the work of the nomination, audit and remuneration committees; and (vi) engagement with shareholders and workforce on remuneration. The Guidance offers useful insight on how companies can endeavour to comply with these provisions.

Clear and meaningful explanations. Companies should ensure that they provide full, clear and meaningful explanations for any departures which show that an alternative arrangement is more appropriate and beneficial in upholding high standards of governance. Explanations should:

demonstrate that the departure is justified given the company’s specific circumstances;
set out the context and background and give a convincing rationale for the approach being taken;
consider any risks and describe any mitigating actions;
set out when the company intends to comply; and
be understandable and persuasive.

Consulting shareholders. The Guidance emphasises that it is always beneficial to consult with shareholders, and it is a good addition to a full and effective explanation to state that shareholders are supportive of the departure.

10. Shareholder priorities in 2021

On 18 January 2021, the Investment Association (IA) published a statement on shareholder priorities for listed companies in 2021 (the Statement). Institutional Voting Information Service (IVIS), the IA's corporate governance research service, issues colour-coded reports when analysing the governance of listed companies on behalf of investors. An amber top raises awareness of areas that require a significant shareholder judgement. A red top indicates the strongest level of concern and highlights a serious breach of IA guidelines, the UK Corporate Governance Code and other standards, or best practice.

The Statement sets out the IA's insights into the progress of companies in 2020 and investors' expectations for 2021 regarding the priority areas of response to climate change, audit quality, stakeholder engagement and diversity. It also sets out IVIS's approach to assessing companies against these expectations.

There are several developments since the IA's last statement in 2020, including those set out in the table below.

SHAREHOLDER PRIORITIES IN 2021: INVESTMENT ASSOCIATION STATEMENT
Climate change IVIS will issue amber-topped reports for companies in high-risk sectors, such as finance and energy, that do not address all four pillars of the Taskforce for Climate-related Financial Disclosures' final report. IVIS will also highlight matters concerning the linkage of capital management plans to strategy, and statements from directors confirming that they have considered the relevance of material climate-related matters such as climate change risks and transition risks associated with the goals of the Paris Agreement on climate change.
Audit quality IVIS notes that there have been disappointing disclosures in relation to demonstrating how audit quality was assessed and how audit committees challenged management's judgements.
Stakeholder engagement IVIS confirms that investors expect companies to make quality disclosures outlining the approach they have taken to engaging and communicating with, and supporting, their stakeholders during the COVID-19 pandemic. These should include how the board reflected stakeholders' views in key decision-making.
Board diversity IVIS will issue an amber top report on any FTSE 350 company that does not disclose either the ethnic diversity of its board or a credible action plan to achieve the Parker Review targets for ethnic diversity on boards (see the next item below). IVIS will issue a red top report for any FTSE 350 company that has female representation of 30% or less on its board or where the executive committee and its direct reports have female representation of 25% or less.

SHAREHOLDER PRIORITIES IN 2021: INVESTMENT ASSOCIATION STATEMENT

Climate change

IVIS will issue amber-topped reports for companies in high-risk sectors, such as finance and energy, that do not address all four pillars of the Taskforce for Climate-related Financial Disclosures' final report.
IVIS will also highlight matters concerning the linkage of capital management plans to strategy, and statements from directors confirming that they have considered the relevance of material climate-related matters such as climate change risks and transition risks associated with the goals of the Paris Agreement on climate change.

Audit quality

IVIS notes that there have been disappointing disclosures in relation to demonstrating how audit quality was assessed and how audit committees challenged management's judgements.

Stakeholder engagement

IVIS confirms that investors expect companies to make quality disclosures outlining the approach they have taken to engaging and communicating with, and supporting, their stakeholders during the COVID-19 pandemic. These should include how the board reflected stakeholders' views in key decision-making.

Board diversity

IVIS will issue an amber top report on any FTSE 350 company that does not disclose either the ethnic diversity of its board or a credible action plan to achieve the Parker Review targets for ethnic diversity on boards (see the next item below).
IVIS will issue a red top report for any FTSE 350 company that has female representation of 30% or less on its board or where the executive committee and its direct reports have female representation of 25% or less.

IVIS's approach, as set out in the Statement, will apply to IVIS's analysis of all companies with year-ends on or after 31 December 2020.

11. Board and senior manager diversity

FCA - Why diversity and inclusion are regulatory issues. In a speech given at the launch of the HM Treasury Women in Finance Charter Annual Review (17 March 2021) on why diversity and inclusion are regulatory issues, Nikhil Rathi, the FCA's CEO, warned that if the FCA does not start seeing improvements in diversity at senior levels and better answers to its diversity and inclusion related questions, it will consider how best to use its powers.

Rathi highlights that the FCA can call upon, for example, expanding the remit of senior manager applications to include consideration of the diversity of management teams and the inclusivity of the management culture they create. How capital markets work could also be a focus, including exploring whether diversity requirements should be part of the premium listing rules.

It is clear that, while the specifics of what the FCA expects in terms of diversity and inclusion is yet to come, this issue is assuming greater urgency and, to the extent they have not already done so, firms and their senior managers ought to follow suit.

Ethnic diversity of boards. On 12 March 2021, the Parker Review Committee published its 2021 update report setting out survey results of FTSE 100 companies on the ethnic diversity of their boards. The survey results (as at 2 November 2020) found that:

74 FTSE 100 companies reported they have a director from a minority ethnic group on their board (this was 52 in January 2020);
21 FTSE 100 companies reported that they do not have any directors from a minority ethnic group on their board;
two companies reported that their current board composition was unknown at the time of the survey, while three companies did not respond to the request to submit their data; and
after the survey deadline, a further seven FTSE 100 companies reported that they had appointed a director from a minority ethnic group.

FTSE 250 companies will be surveyed by the end of 2021 and have until 2024 to appoint at least one ethnic minority director on their boards.

Women on boards. The Hampton-Alexander Review published its fifth and final annual report on improving gender balance in FTSE leadership (the Report).

The Report states that (as of 11 January 2021):

Women held 36.2% of FTSE 100 board positions (up from 32.4% in 2019), but 32 FTSE 100 companies had not yet achieved the 33% target.
Women held 33.2% of FTSE 250 board positions (up from 29.6% in 2019), but 98 FTSE 250 companies had not yet achieved the 33% target.
Across the FTSE 350 there were only 39 female chairs (11 in the FTSE 100), 89 female senior independent directors (23 in the FTSE 100) and 17 female CEOs (8 in the FTSE 100, including one appointment on 21 January 2021). There were only 76 female executive directors (31 in the FTSE 100), being 12.1% of executive directors in the FTSE 350.

As of 28 January 2021, the FTSE 350 no longer had any all-male boards, but still had 16 companies with only one woman on the board.

12. Independent board evaluation

On 21 January 2021, the Chartered Governance Institute (ICSA) published a final report following its review of the effectiveness of independent board evaluation in the UK listed sector (the Report).

ICSA considers that there is scope for the broader adoption of good practice and greater transparency by board reviewers and companies using their services. The Report sets out a series of recommendations and a package of proposed measures, which include the following:

a voluntary code of practice for providers of external board performance reviews for FTSE 350 companies;
voluntary good practice principles for listed companies; and
guidance for listed companies when reporting on their annual board performance reviews, which is designed to assist companies with their reporting obligations under the UK Corporate Governance Code.

It is intended that the package of proposed measures will develop into a market-based mechanism for raising standards and increasing accountability, without the need for regulatory intervention. ICSA's view is that any actions proposed as a result of the review should be voluntary, at least initially. The Department for Business, Energy & Industrial Strategy (BEIS) will consider whether it agrees with the report's recommendations and, if so, a timetable for implementing them.

13. Executive compensation guidance

On 26 January 2021, Glass Lewis issued guidance setting out its approach to executive compensation for the Europe, Middle East and Africa (EMEA) region in the context of the COVID-19 pandemic (the Guidance).

Glass Lewis's existing approach to executive compensation includes the expectation of strong alignment between executive pay and company performance. While the COVID-19 pandemic has not changed Glass Lewis's approach to executive compensation, the Guidance is intended to demonstrate the application of its existing policy approach to executive remuneration under various scenarios that are expected to arise due to the ongoing crisis.

In assessing the alignment between executive pay and company performance for fiscal year 2020/21, Glass Lewis will focus on the following:

Dividends and whether a company has cancelled, reduced or not paid dividends due to the ongoing crisis, in which case Glass Lewis would expect executive pay to be affected.
Employees and the need for consistency between changes in the yearly disbursements for employee pay and executive pay. Companies should explain in theirremuneration reports how the board took any significant layoffs, furloughs or cuts in salaries into account when determining variable pay outcomes and salary adjustments for executives.
Stakeholder perspectives and whether, if relevant stakeholders publicly express concerns regarding proposed pay-outs or pay policies, a company has given a compelling explanation, in public disclosures prepared for shareholder review, as to how it has accounted for those perspectives.
Equity grants and share price, and whether, where its share price has been significantly adversely affected by the ongoing crisis, a company has addressed the potential inflation of the final value of an award on vesting. A board should adjust the grant value accordingly or make other adjustments to mitigate any effect of potentially significant windfall gains.

The Guidance also states that, despite Glass Lewis' general opposition to discretionary adjustments to the terms of incentive plans, it will maintain some flexibility in accepting certain limited deviations from a remuneration policy provided that appropriate safeguards are in place. Glass Lewis also states that it will adopt a holistic view when assessing a board's decisions on executive remuneration for fiscal year 2020/21. It will look at year-on-year variations in total pay and expect overall lower incomes than in the previous years for companies affected by the COVID-19 pandemic.

14. Ashurst publications in the first quarter of 2021

Ashurst has published a number of client updates in the first quarter of 2021, a selection of which are set out below.

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Q1 2021

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UK Quoted Company Newsletter Q1 2021

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UK Quoted Company Newsletter Q1 2021

1. Reforming audit and corporate governance

2. FCA Primary Market Bulletin 33

3. UK Listings Review by Lord Hill

4. Consultation on climate-related financial disclosures

5. Climate change reporting and pension schemes

6. 2021 AGM and reporting season: what to expect next?

7. FCA and FRC statement on corporate reporting

8. Guidance on COVID-19 and general meetings

9. FRC guidance on the UK Corporate Governance Code

10. Shareholder priorities in 2021

11. Board and senior manager diversity

12. Independent board evaluation

13. Executive compensation guidance

14. Ashurst publications in the first quarter of 2021

Corporate, Finance and Restructuring

Digital Economy

Dispute resolution

Employment, Incentives and Pensions

Infrastructure

Tax

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