Included in the February edition of Corporate News: Home Office publishes report on the Modern Slavery Act 2015; FCA publishes Primary Market Bulletin 20; Tougher powers for Pensions Regulator announced and more.

Company Law

Home Office publishes report on the Modern Slavery Act 2015

The Home Office has published the Second Interim Report from the independent review of the Modern Slavery Act 2015 (2015 Act). The review considers the legal application of the 2015 Act and transparency in supply chains. In particular, it looks at the question of how to ensure compliance with the 2015 Act and improve the quality of statements made in accordance with it.

The report's recommendations include:

• The removal of the ability for companies to report that they have taken no steps to address modern slavery in their supply chains.
• Requiring companies to report on each of the six areas specified in section 54(4) of the 2015 Act – currently there is only an expectation that they will do so.
• The Companies Act 2006 should include a requirement for companies to refer to their modern slavery statement in their annual reports.
• There should be a government-run repository to which companies are required to upload their statements and which should be easily accessible to the public, free of charge. Statements should state clearly the period in relation to which they are being made.
• Businesses should be required to have a named, designated board member who is personally accountable for the production of the company's statement. Failure to fulfil reporting requirements or to act when instances of slavery are found should be an offence under the Company Directors Disqualification Act 1986.
• The government should strengthen its approach to tackling non-compliance, adopting a gradual approach to the necessary legislative changes: initial warnings, fines (as a percentage of turnover), court summons and directors disqualification should all be considered.

Equity Capital Markets

FCA publishes Primary Market Bulletin 20

The Financial Conduct Authority (FCA) has published the 20th edition of its Primary Market Bulletin. This edition covers a number of matters including:

• the use of the name "UKLA" or "UK Listing Authority", which is being 'retired' on the basis that use of the term sometimes creates confusion amongst commentators and members of the public (particularly concerning whether the UKLA is a separate body from the FCA). The FCA will instead refer to its 'primary market' functions when referring to the UKLA;
• a reminder from the FCA (since the FCA sees the issue reasonably frequently) that rectification resolutions put to shareholders to ratify the situation of a company paying a dividend when it has not published interim accounts, and its previous published annual accounts do not show sufficient distributable reserves to cover the dividend, could constitute a related party transaction for the purposes of Chapter 11 of the Listing Rules (given that significant shareholders, directors and, in some cases, former directors will be related parties for the purposes of LR 11). The FCA reminds issuers that there is a Technical Note (UKLA/TN/204.2) which covers the point; and
• the publication of a number of new and amended Technical Notes in the UKLA Knowledge Base, and the issue of a number of consultations in relation to several other Technical Notes.

FCA moves to implement the Shareholders Rights Directive

The FCA has published a consultation (CP19/7) which, among other issues, seeks to implement the provisions of the amended EU Shareholder Rights Directive (SRD II). The changes proposed include certain changes regarding the transparency of related party transactions, in addition to changes intended to increase transparency of engagement policies and investment strategies of FCA-regulated life insurers and asset managers. The substantive new requirements will be set out in new Chapters 1B and 7.3 of the Disclosure Guidance and Transparency Rules (DGTR), and will apply to all companies with a registered office in the UK which have shares admitted to trading on a regulated market in the UK or elsewhere in the EU.

These changes should not have a significant impact on premium-listed issuers as they already need to comply with the related party transaction disclosure and approval requirements set out in LR 11.1.7R, which are generally more stringent than those contained in new DTR 7.3.  The proposed new rules makes it clear that, to the extent a premium listed issuer has complied with LR 11.1.7R, no further action will need to be taken as a result of the requirements to be set out in DTR 7.3. The one difference is that SRD II uses the definition of "related party" set out in IAS 24, which is wider than the definition contained in the Listing Rules, meaning that a wider range of transactions could be caught. The changes will however, if implemented, have a particular impact on issuers whose securities are admitted to trading on other regulated markets (particularly the Specialist Fund Segment and the High Growth Segment). The related party transaction provisions of LR11 will also be amended to apply to companies with a standard listing of equity shares.

The proposed new rules will require issuers to, among other things:

• seek board approval (rather than shareholder approval) for 'material related party transactions'. The threshold for materiality is proposed to be set quite high (at 25 per cent. in any one of the relevant class tests, which largely replicate the class tests set out in LR 11); and
• publicly announce the terms of a material related party transaction when they are agreed – it being noted that the disclosure requirement under the EU Market Abuse Regulation may apply earlier than the disclosure requirement under new DTR 7.3.

There is no requirement for a 'fair and reasonable' opinion letter from a third party as to the terms of the transaction (as premium listed companies are required to obtain from their sponsor in the context of a 'smaller related party transaction' under LR 11.1.10R).

If implemented as anticipated, the new rules will need to be complied with by affected issuers from the start of their first financial year which begins on or after 10 June 2019 (that being the date upon which, if a transitional period for the UK's withdrawal from the EU is agreed, the changes brought about by SRD II must be implemented). The FCA's consultation is open for comments until 27 March 2019.

Corporate Governance

FRC publishes consultation on a revised Stewardship Code

The Financial Reporting Council (FRC) has published its long awaited consultation on a revised Stewardship Code for Institutional Investors. For more detail, please read our Governance & Compliance update. Comments on the consultation are requested by 29 March 2019.

The FRC and the FCA have also published a discussion paper 'Building a regulatory framework for effective stewardship' to advance the discussion about what effective stewardship should look like, the expectations for financial services firms, and how this can best be supported by the UK's regulatory framework. The discussion paper requests input on various matters including:

• the proposed definition of stewardship;
• what effective stewardship looks like;
• the key challenges in delivering an effective regulatory framework for stewardship in the UK; and
• how to strike the right balance between regulatory rules and voluntary codes of best practice.

Responses are requested by 30 April 2019.

PLSA publishes Corporate Governance Policy and Voting Guidelines, and 2018 AGM Review

The Pensions and Lifetime Savings Association (PLSA) has published the 2019 version of its Corporate Governance Policy and Voting Guidelines. These now mirror the 2018 UK Corporate Governance Code and highlight some of the key developments in UK corporate governance policy and practice. The guidelines build on the PLSAs 2018 AGM Review. For more detail, please read our Governance & Compliance update.

Blackrock publishes annual letter to CEOs

Blackrock CEO, Larry Fink, has published his annual letter to CEOs of the companies in which Blackrock invests. In the letter he states that Blackrock will be focusing on the following issues:

• governance, including companies approach to board diversity where, if there is no progress within a reasonable time frame, nominating and/or governance committees may be held accountable;
• corporate strategy and capital allocation;
• compensation that promotes long-termism;
• environmental risks and opportunities; and  
• human capital management, including in connection with preparing employees for retirement.

IOSCO issues good practices report to assist audit committees

The Board of the International Organisation of Securities Commissions (IOSCO) has published the IOSCO Report on Good Practices for Audit Committees in Supporting Audit Quality.

The report sets out good practices audit committees might consider when:

• recommending the appointment of an auditor;
• assessing potential and continuing auditors;
• setting audit fees;
• facilitating the audit process;
• assessing auditor independence;
• communicating with auditors; and
• assessing audit quality.

Investment Association publishes analysis of voting trends during 2018

The Investment Association (IA) has published its analysis of voting trends during the 2018 AGM season revealing that shareholder rebellions rose by over 25 per cent. The analysis is based on data from the IA's public register of shareholder dissent.

The IA's analysis shows that: 

• 120 FTSE All-Share companies were added to the public register up to the end of July 2018, compared with 110 companies over the same period in 2017;
• 29 companies appeared on the register as regards dissent on the same resolution as in 2017;
• opposition to individual director re-election was a key theme, with the number of resolutions added to the register more than doubling from 38 in 2017 to 80 in 2018. The rise was particularly stark in the FTSE 250, with 37 resolutions added in 2018 compared to just 18 in 2017. Of the companies added to the register in 2018 for dissent in relation to director re-election, 43 per cent. of Chairs faced a rebellion greater than 20 per cent. pointing to growing disquiet over individual accountability for decisions made; and
• dissent as regards executive pay declined in the FTSE All-Share, with the total number of remuneration resolutions added dropping from 68 in 2017 to 61 in 2018. That said, there was a sharp rise in objections to FTSE 100 pay in 2018, with 18 pay resolutions attracting over 20 per cent. shareholder dissent among FTSE 100 companies compared to 9 in 2017.

Investment Association sets out guidelines relating to irredeemable preference shares

The IA has published guidelines relating to the redemption or cancellation of irredeemable preference shares. The guidelines are intended as a guide to shareholder expectations and good practice and, if followed, are meant to enable engagement on issues concerning the redemption or cancellation of irredeemable preference shares to be 'efficient and effective'.

The IA believe that following the guidelines will promote market confidence in irredeemable preference shares as an asset class, and avoid reputational risk for issuers. They should be read as being of general application to all listed companies, notwithstanding the recent focus on the issue in light of expected changes to the treatment of regulatory capital for insurers.

The central principle of the guidelines is that issuers must follow a 'fair process' and have regard to 'the fair market price' when looking to redeem or cancel irredeemable preference shares. As part of ensuring a fair process, consultation by an issuer should be designed such that the irredeemable preference shareholders have sufficient time and information to enable them to reach a properly informed decision on any proposed redemptions or cancellations.

Investment Association publishes statement on gender diversity and executive pensions

The IA has announced that it will use its Institutional Voting Information Service (IVIS) in the 2019 AGM season to highlight companies 'who are lagging behind on diversity, or pay contributions to executives at rates above the majority of the workforce'. Under the new policy, IVIS will 'red-top' companies which:

• have no women or only one woman on their board; and / or
• pay newly-appointed directors pension contributions which are not in line with the majority of their employees.

By way of reminder, a 'red-top' represents the highest level of warning that IVIS issues and is reserved for companies where, in its opinion, shareholders should have the 'most significant and serious concerns'. IVIS will also issue an 'amber-top' (the second highest warning) to companies not on course to meet the requirements of the Hampton-Alexander review, for 33 per cent. of women on their board by 2020. IVIS will also highlight any board with women representing 25 per cent. or less.

Narrative Financial Reporting

Government publishes revised Environmental Reporting Guidelines updated for SECR regime

The government has published revised Environmental Reporting Guidelines designed to help companies comply with their obligations under the new Streamlined Energy Carbon Reporting Regulations 2018 (SECR Regulations) regime. As previously reported, the SECR Regulations will apply in respect of financial years beginning on or after 1 April 2019. For more detail on the Guidelines and a reminder of the entities in scope, please read our Governance & Compliance update.

Financial Reporting Lab publishes report on AI and corporate reporting

The FRC's Financial Reporting Lab has published a report on artificial intelligence (AI) and its role in the future of corporate reporting. The report considers a range of uses of AI, including in corporate finance functions and its use by investors to find investment relevant information. The report also highlights key decisions and considerations that boards and others need to think about when using such technology.

FRC seeks views on improving reporting of intangible assets

The FRC has published a consultation paper inviting comments on how the reporting of intangible assets could be improved. The FRC argues that intangible assets are increasingly important in a knowledge-based economy and yet financial statements often fail to recognise important intangibles, such as intellectual capital. Comments are requested by 30 April 2019.

BP links carbon targets to remuneration

BP has announced that it will support a shareholder resolution at its 2019 AGM which calls for it to describe how company strategy is consistent with the 2015 Paris goals to reduce carbon emissions. BP states that it has also incorporated emissions targets as a factor in employee reward. 

Pensions

Tougher powers for Pensions Regulator announced

The government has published a response to its consultation proposing tougher powers for the Pensions Regulator (TPR), confirming its intention to press ahead with many of the changes proposed. For a review of the June 2018 consultation, please read the bulletin our Pensions team published at the time.

The planned changes broaden the duties of those involved in transactions which could potentially impact a defined benefit pension scheme, and also significantly increase the sanctions available to TPR when duties are not complied with.  Although the government has not committed to a timescale for implementing the changes, it has signalled a clear direction of travel towards more severe sanctions for those involved in corporate activity which adversely affects a pension scheme, even where there is no deliberate wrongdoing.  That raises the possibility of TPRs current powers being applied using this principle even before these changes come into force. 

For more detail on the government's response, please read our Pensions team's latest bulletin.

Top 10 pensions issues in 2019

Our Pensions team have also published their view of the ten key pensions issue for employers in the coming year – including TPRs focus on companies that pay out substantial dividends. 

Brexit

Guidance issued on company registration process and Companies House forms in the event of a 'no deal' Brexit

Companies House has published two guidance notes in preparation for the potential of a 'no deal' Brexit:

• Changing your company registration if the UK leaves the EU without a deal. This highlights that businesses may need to change their company registrations in the event of a 'no deal' Brexit.
• Changes to Companies House forms in the event of a 'no deal' Brexit. This covers proposed changes to a range of Companies House forms (under regulations which are subject to Parliamentary approval). Some forms will also be discontinued. 

The guidance is of particular relevance to:

• European entities formed under EU law;
• UK companies with an EEA corporate officer;
• UK companies involved in cross-border mergers; and
• EEA companies.

As noted above, some of the changes precipitating the guidance are subject to Parliamentary approval and thus the guidance itself may change depending on the terms upon which the UK leaves the EU.

Letters to the sectors on accounting and audit in a 'no deal' Brexit

The government and the FRC have published letters to the accounting and audit sectors setting out the implications for them if the UK leaves the EU without a deal. The letters explain (among other things) that, while the UK's corporate reporting regime will remain largely unchanged after UK exits, there are some changes that impact a small number of companies.

High Court ruling over whether company could break its tenancy agreement early and relocate due to Brexit

In Canary Wharf (BP4) T1 Ltd & Ors v European Medicines Agency [2019] EWHC 335 (Ch), Canary Wharf Group won its claim in the High Court against The European Medicines Agency, which had argued that the UK's forthcoming exit from the EU was an unexpected event that frustrated its 25-year lease on a building in Canary Wharf. For more detail, please read our Real Estate team's update.