UK Quoted Company Newsletter Q3 2020

Financial support for business

Since our Q2 2020 newsletter, a few new packages of support for businesses have been introduced and some schemes are coming to an end. As noted in previous newsletters, the Government has a website listing Government financial support for businesses and linking through to more detailed provisions for each type of support. Some key new business support schemes introduced in the last quarter are highlighted in the table below.

Pre-Emption Group extends additional flexibility for equity placings

In September 2020, the Pre-Emption Group (PEG) announced that it was extending to 30 November 2020 its recommendation that investors consider supporting, on a case-by-case basis, equity placings of up to 20 per cent of an issuer's issued share capital over a 12 month period. The recommendation was introduced on a temporary basis in April 2020 in response to the business implications of COVID-19 (see our Q1 2020 newsletter) and was due to expire on 30 September 2020. The PEG explains that the extension has been made in light of the continued uncertainty of COVID-19 and the developing pipeline of equity offerings for Q3.

The PEG stresses that the additional flexibility should only be used if a company is experiencing extreme circumstances and the issuance is required to fund an immediate concern. It also reiterates that the conditions attaching to the original recommendation continue to apply, such as that the particular circumstances of the company should be fully explained, including how the company is supporting its stakeholders, and company management should be involved in the allocation process.

In view of the success of the additional flexibility in helping companies to raise funds quickly and efficiently, the PEG intends to gather views on market mechanisms for capital raisings with the aim of making the market more effective and competitive in the future.

Extension of deadline for general meetings flexibilities

As mentioned in our Q2 2020 newsletter, the Corporate Insolvency and Governance Act 2020 (CIGA) introduced temporary relaxations making it easier for companies (and other qualifying bodies) to hold general (and certain other) meetings in accordance with the Government's social distancing legislation and guidelines. The initial period for these relaxations was until 30 September 2020.

In September 2020, The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020 were published. They came into force on 29 September 2020 and extend the deadline for the meeting relaxations set out in Schedule 14 of CIGA from 30 September 2020 to 30 December 2020. See the BEIS announcement.

In terms of the temporary insolvency-related relaxations, three of the four temporary reliefs have been extended (for differing periods) and so will continue: namely (i) the exclusion for small suppliers from the scope of the ban on termination clauses in supply contracts on the happening of certain insolvency events; (ii) modifications to the operation of the new Moratorium procedure; and (iii) restrictions on the ability to issue winding-up petitions and statutory demands. However, the temporary suspension of liability for wrongful trading is not being extended and so expired on 30 September. For detail, see the briefing on the insolvency-related extensions in the Ashurst Publications part of this newsletter.

ICSA guidance on shareholder meetings following CIGA

In July 2020, ICSA The Governance Institute (ICSA) published a second supplement to its previous guidance on AGMs (see our Q1 2020 newsletter for more on the previous versions). This latest guidance is entitled - Shareholder Meetings under CIGA. It is intended to help companies understand the provisions of CIGA. 

As well as confirming what the relaxations of CIGA mean, the ICSA guidance for example, (by implication) confirms that it is legally acceptable for companies to hold closed meetings using the power to do so under CIGA, even though "lockdown" legal restrictions on holding meetings have been removed. However, it notes that as a matter of good governance, companies should ensure that they have engaged appropriately with members (for instance, where feasible, by holding an online shareholder Q&A, or an additional shareholder event once appropriate to do so). See below for more on best practice guidance for AGMs.

The ICSA guidance also notes that although open company meetings may be held if they follow Government guidance and appropriate risk mitigation at the venue, given the uncertain nature of the current situation and the possibility of local lockdowns or the tightening of national restrictions at some point in the future, the planning and holding of an open meeting may not, nevertheless, be practical.

FRC Report: AGMs - An Opportunity for Change

In October 2020, the Financial Reporting Council (FRC) issued a review which, taking account of 2020 AGM practice in the face of COVID-19, aims to open up a further debate on how future AGMs can be conducted to ensure that the maximum number of shareholders can engage if they choose to do so, and to encourage companies to consider a mixture of approaches in line with their size and shareholder base. Several suggestions, for example on new technology, will require action well ahead of normal AGM preparation time.

The FRC proposes a Stakeholder Group which includes the Government, companies and investors and their representatives to consider if there is a need for legislative change and propose alternative means to achieve some of the desired flexibilities whilst maintaining the integrity and objective of the AGM.

As well as discussing various issues, the review contains - Best Practice Guidance for AGMs – Learning Lessons from the 2020 AGM Season. The FRC states that it has assumed that most companies will wish to increase shareholders' ability to engage virtually either before or during an AGM or both, although recognising that a company's ability to act on the guidance will depend to some extent on the make-up of its shareholder base.

A few key points from the review are highlighted below.

• Prepare now. The FRC urges companies to consider what changes they might want for next year's AGM. If companies wish to use more technology, they should talk to experts and providers and consider whether their articles of association need updating.
• Prior to the meeting. The guidance mentions such matters as – dedicated areas of the website for AGM updates; additional information in the AGM notice on how to submit questions; and webcasts for an enhanced shareholder experience (over audio-only calls).
• Questions at the AGM. Questions should be facilitated in real-time, both for those shareholders who attend in person and those who choose to attend remotely, whichever option is available. Enough time should be allowed for submission of questions and unreasonable limitations on length of questions should be avoided. Advice is given on companies grouping questions, about which there are some concerns. Companies should upload Q&A transcripts of all submitted questions onto the company website following the conclusion of the AGM.
• Voting by proxy. Best efforts should be made to ensure that those who wish to vote after board presentations and Q&A are able to do so.
• Webcasts. A variety of guidance is given including on limiting the need to download specific software, sufficiency and clarity of information that shareholders will need and security risks if no specific login details are required.

Changes on the horizon for modern slavery statements

In September 2020, the Government published its response to its consultation on transparency in supply chains. The consultation had sought views on proposed measures to strengthen reporting under section 54 of the Modern Slavery Act 2015. The Government now proposes a number of changes, many of which will need Parliamentary time, so it remains to be seen how quickly they will be enacted. Updated guidance will be introduced earlier to help organisations prepare. See our Employment Update at the end of this newsletter for more.

FCA proposals to enhance climate related financial reporting

As we mentioned in our Q1 2020 newsletter, the Financial Conduct Authority (FCA) issued consultation paper 20/3 on its proposed new rule to require certain companies to make climate-related disclosures. The consultation closed on 1 October 2020. We will issue a client briefing when the response is issued and the final form of the rule is settled, but we note some key initial points below:

"We consider that climate-related risks and opportunities are relevant to all companies, and likely to be material for most. In this Consultation Paper, we are therefore proposing measures to increase transparency." FCA, PARAGRAPH 1.3, CP 20/3

Who? The proposed new rule is for premium listed commercial companies (ie not investment companies). 

When? It is proposed for accounting periods beginning on or after 1 January 2021. This means that preparations for reporting should take place in 2021 and the first reports that would have to be issued in compliance would be published in 2022.

What? The key elements of the proposed new rule would require a relevant company to state:

• whether it has included in its annual financial report climate-related financial disclosures consistent with the four recommendations and 11 recommended disclosures in section C of the final report of the Taskforce for Climate-Related Financial Disclosures (TCFD) (see table below for more);
• if it has not made such disclosures, which of the four recommendations and/or 11 recommended disclosures for which it has not disclosed and its reasons; and
• where in its annual financial report the disclosures are situated.

Where? The new rule notes that some or all of the disclosures themselves can feature in a document other than the annual financial report. If this option is taken, the company must state which disclosures feature where and the reason for including the disclosures there as opposed to the annual financial report. 

Why comply or explain? The new rule is comply or explain. The FCA is not proposing to make disclosure mandatory "at this point", recognising that companies' capabilities in this area are developing and some may not yet have the data and capabilities they need to model and report scenarios as recommended by TCFD. 

What is the TCFD final report? The TCFD was set up by the G20-endorsed Financial Stability Board in 2015 to develop voluntary disclosure recommendations for companies to use when disclosing their climate-related financial risks to investors, lenders and others. UK supporters of the TCFD include the Government, the Bank of England, many banks, insurance companies, pension funds and other investors, as well as individual companies. The TCFD final report, issued in 2017, aims to help businesses disclose climate-related financial information in a "clear, comparable and consistent" way. It is comprised of four over-arching recommendations in the areas of: governance; strategy; risk management; and metrics and targets together with 11 recommended disclosures and supporting guidance. See the table overleaf for more. 

"Adoption of these recommendations will also help companies better demonstrate responsibility and foresight in their consideration of climate issues." TCFD FINAL REPORT, LETTER FROM TCFD CHAIRMAN, MICHAEL R BLOOMBERG

Guidance. The TCFD final report contains a variety of guidance for companies, namely: guidance for all sectors; supplemental guidance for financial sector groups; and supplemental guidance for certain non-financial groups potentially most effected by climate change. The guidance seeks to assist preparers by giving context and descriptions of the type of information that should be disclosed or considered, noting information that should be provided and other information that companies should give consideration to providing.

Challenges. Whilst two of the four recommendations are not subject to a materiality test, namely describing the board's oversight of CRO and describing management's role in identifying, assessing and managing CRO, the other two are subject to a materiality test. This recognises that elements of the recommended disclosures may prove to be more challenging for companies embarking on their TCFD disclosure journey. For example, describing the resilience of the company's strategy in different climate-related scenarios and setting up systems for collecting the data to show emissions and progress with targets that have been set are likely to prove challenging.

Capital Markets Recovery Package

In July 2020, the European Commission adopted its Capital Markets Recovery Package, which includes targeted amendments to the Prospectus Regulation. One of the main proposals under the Capital Markets Recovery Package is the introduction of a short-form "EU recovery prospectus" which is intended to facilitate the raising of funds by listed issuers during the COVID-19 pandemic. 

Corporate Transparency and Register Reform

The Government has signalled its intention of introducing significant reforms aimed at increasing the transparency of UK corporate entities and enhancing the role of Companies House in a document published by BEIS in September 2020 (Corporate Transparency and Register Reform) and accompanied by a press release (Reforms to Companies House to clamp down on fraud and give businesses greater confidence in transactions). 

The proposed reforms, several of which will require further consultation, fall into four separate categories as set out in Parts A to D in the table below. The Government has stated that its proposals in relation to UK registered companies should also be understood as proposals in relation to UK registered LLPs, limited partnerships and other bodies subject to the transparency provisions of the Companies Act 2006 (modified as appropriate).

As such significant reform is envisaged, the Government intends publishing a detailed set of proposals setting out precisely how it believes the reform should be implemented. Subject to the responses received, the Government intends to proceed to legislate where necessary and when Parliamentary time allows. 

In September 2020 and following the Government's announcement, Companies House published its strategy for the next five years (Companies House strategy 2020 to 2025) and its business plan for the next year (Companies House business plan 2020 to 2021), which reiterate its role in the fight against economic crime, and driving confidence in the UK economy through organisational transformation and digital services enhancement.

Primary Market Bulletin 30

In August 2020, the FCA published Primary Market Bulletin 30 in which the following topics were covered, among others:

New draft technical note on when a prospectus is required where securities are issued pursuant to schemes of arrangement. The FCA is consulting on a new draft technical note on when a prospectus is required where securities are issued pursuant to schemes of arrangement under Part 26 of the Companies Act 2006. 

Although the area has been the subject of some debate, the FCA expresses the view that an issuer may reasonably conclude that a prospectus should be produced (absent an exemption) where a scheme includes mix and match facilities offering a choice between shares and cash, on the basis that an investor is deciding to buy or subscribe for the securities in question.

The consultation closed on 30 September 2020.

Importance of the PDMR regime under the Market Abuse Regulation. The FCA reminds market participants that in December 2019 it imposed a fine of £45,000 on a former managing director of Braemar Shipping Services plc for a failure to notify his trades in the issuer's shares pursuant to article 19 of the Market Abuse Regulation (MAR). This was the first enforcement action against a person discharging managerial responsibilities (PDMR) for failing to make MAR-compliant notifications since MAR came into force.

The FCA stresses that the public sanction sent a strong message to issuers and PDMRs on the importance of the regime. The FCA reminds (i) PDMRs and persons closely associated with them (PCAs) of their obligations to notify issuers and the FCA of relevant transactions pursuant to article 19 of MAR and (ii) issuers of their obligations to make public, via regulatory announcements, all notifications received from PDMRs and PCAs.

FCA Market Watch 65

In September 2020, the FCA published Market Watch 65 covering: (i) the handling of FCA information requirements; (ii) legally privileged documents; and (iii) transaction reporting.

ESMA MAR Report

In September 2020, ESMA published its Final Report on MAR which contains technical advice to the European Commission on a number of MAR provisions and which follows a consultation paper published in October 2019.

ESMA's conclusion is that, overall, MAR has worked well and is fit for purpose. However, ESMA recommends some targeted amendments to MAR and also provides suggestions for additional guidance, including those in the table below: 

AIM Disciplinary Notice Breaches of Rules 10 and 31

In August 2020, the London Stock Exchange (LSE) announced that Yü Group plc had been publicly censured and fined £300,000 for breaches of Rules 10 (principles of disclosure) and 31 (AIM company and directors' responsibility for compliance) of the AIM Rules for Companies. The LSE waived the fine in light of the COVID-19 related uncertainties and potential financial challenges facing Yü Group.

Yü Group made a number of forecasts during the first half of its financial year to 31 December 2018 that its full year profits before tax would exceed market expectations. However, having identified material errors in its previous management information, Yu Group found that rather than meeting market expectations of predicted profit before tax, it was likely to make a significant loss.

The LSE found that:

• Yü Group breached AIM Rule 31 as it failed to ensure that it had in place sufficient procedures, resources and controls to comply with the AIM Rules.
• The failure to have in place effective financial reporting systems and controls meant that Yü Group could not rely on the integrity of its internal financial data; its disclosure was therefore inaccurate, causing a breach of AIM Rule 10.

The LSE highlighted that, as well as ensuring documented procedures and protocols are in place, companies should ensure that they are appropriately reviewed and developed so that they are effective and are adapted to address adequately changes to the business, planned growth or other operational needs.

FCA Final Notice for Market Abuse: Worldspreads

In September 2020, the FCA published a final notice in respect of Conor Foley, the former CEO of Worldspreads Limited (WSL) and its holding company, Worldspreads Group plc (WSG), publicly censuring him for market abuse and banning him from performing any roles related to regulated activity. The FCA imposed a public censure in lieu of the financial penalty proposed in the decision notice for reasons of financial hardship. 

Mr Foley was involved in drafting WSL's admission documentation ahead of its flotation on AIM in 2007. The FCA considered that the documentation contained misleading information and omitted key information that investors would have needed to make an informed decision about WSL. In particular, the documentation did not mention that some WSG executives had made significant loans to WSG and its subsidiaries. The documentation also omitted an internal hedging strategy via which certain of WSG's subsidiaries hedged considerable trading exposures internally with company executives.  In addition to others, large spread bets were carried out on two client accounts by Mr Foley himself without the clients' knowledge, which resulted in giving the appearance of greater demand for WSG shares than existed.

Mr Foley is the third and final executive of WSL against whom the FCA has taken action further to its collapse in 2012.

Miscellaneous Reporting Developments and Publications

Section 172 reporting guidance. In August 2020, ICSA updated its guidance on directors' general duties under the Companies Act 2006. It has, amongst other things, added guidance on the section 172 reporting requirement which is set out in section 414CZA of the Act and which came into force for relevant companies with financial years beginning on or after 1 January 2019. 

Mirroring the FRC 2018 Guidance on the Strategic Report, the guidance notes that the section 172 statement is likely to include issues, factors and stakeholders that the directors consider relevant under section 172(1)(a) to (f) and how they formed their opinion, along with the main methods for stakeholder engagement, and the effect of having regard to these issues, factors and stakeholders on company decisions and strategies. The section 172 statement should focus on matters of strategic importance to the company and will depend on the circumstances, size and complexity of the business. The guidance goes on to list some specifics that the statement is likely to include.

FRC Lab project on reporting on risks, uncertainties and scenarios. In September 2020, the FRC's Financial Reporting Lab (the Lab) invited investors and companies to participate in a new project on corporate disclosures on risks, uncertainties and scenarios. The FRC notes that investors and other stakeholders are increasingly looking for information from companies about how they will evolve, adapt and respond to changes in the external business environment over the short, medium and longer term, meaning that risk, uncertainty and scenario reporting is likely to become even more important. The Lab expects to publish a range of outputs in 2021.

FRC Lab project on reporting on stakeholders and section 172. In July 2020, the Lab invited investors and companies to participate in a new project on corporate disclosures about stakeholders, including Section 172 statements. The project will seek to identify how information about stakeholders can be reported most effectively by examining existing best practice and understanding investors' needs. The Lab expects to publish a range of outputs in 2020 and the first half of 2021.

FCA consults on deferring the introduction of electronic tagging of accounts. In July 2020, the FCA issued CP20/12: Consultation on delay to the implementation of the European Single Electronic Format (ESEF). This concerns the requirement for listed companies to publish their annual financial reports in XHTML web browser format, replacing the current PDF format. ESEF was due to be mandated for implementation for financial years starting on or after 1 January 2021. The consultation, which closed on 28 August 2020, proposes pushing back the deadline to apply to financial years starting on or after 1 January 2022 instead.

FRC Financial Reporting Lab Report on Video in Corporate Reporting. In October 2020, the Lab issued a report on – Video in Corporate Reporting. It looks at the variety of uses for video, noting, for example, that video is not being used to its full potential in AGMs. It looks at how companies currently use video, considers how it might be used in the future and notes some interesting examples.

Ashurst publications in the third quarter of 2020

Ashurst has published a number of client updates in the third quarter of 2020, a selection of which are set out below.

Corporate, Finance and Restructuring

FRC Review: AGMs – an opportunity for change

Global Guide to Public M&A

Private M&A and COVID-19: key issues for buyers and sellers

Extending COVID-19 temporary measures: winding up petitions, forfeiture and CRAR

Far-reaching changes to the Modern Slavery Act are on the horizon

Competition

JD Sports and Amazon fined for breach of UK merger control procedural rules

UK real estate director banned for seven years after court grants CMA order

CMA seeks new regulatory regime for digital markets following market study

Enforcement action against four housing developers and advice on leasehold properties

Employment, Incentives and Pensions

Top five home working issues for employers

Latest Government views on executive pay

Pensions legal update

Dispute Resolution

Is your sanctions screening up-to-scratch

FCA decision notice on market abuse by ex-CEO and Upper Tribunal refusal of privacy applications

No FCA Penalty for AIM company volunteering investor compensation

Does Government advice and guidance have the force of law?

Tax

VAT on liquidated damages and compensation payments