Terms of reference for risk committees

ICSA: The Chartered Governance Institute has published a guidance note and terms of reference for risk committees.

The guidance note and terms of reference reflect the risk management requirements of the 2018 edition of the UK Corporate Governance Code and the 2014 FRC Guidance on Risk Management, Internal Controls and Related Financial and Business Reporting. ICSA says that the terms of reference will be of particular relevance to regulated companies such as banks and insurance companies, but will also be relevant where a board considers that a risk committee, separate from the audit committee, is necessary or desirable.

The document discusses the essential elements of a risk committee, including membership, duties, risk appetite, strategy and narrative reporting requirements.

The guidance is intended to complement the updated Audit, Nomination and Remuneration guidance notes and terms of reference published earlier this year.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Roddy Martin
Roddy Martin
+44 20 7466 2255

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

COVID-19 – latest developments for corporate practitioners

Further guidance for companies has been published in light of the COVID-19 pandemic.

Company meetings and other corporate actions

  • Shareholder meetings – The Government has published the Corporate Insolvency and Governance Bill (together with Explanatory Notes) which contains relaxations to the company meeting requirements contained in the Companies Act 2006 (as well as the meeting requirements for certain other entities).

The Bill would allow shareholder meetings to take place by electronic or any other means notwithstanding the provisions contained in the Companies Act 2006 and the company’s articles of association. The participants would not need to be in the same place and shareholders would not have a right to attend in person. The Bill would apply to company meetings held between 26 March and 30 September 2020 and if the deadline for a company to hold a shareholder meeting falls within this period, that deadline is extended to 30 September 2020. The Bill would also give the Secretary of State power to make secondary legislation in relation to notices and other documents relating to shareholder meetings. The second reading of the Bill is scheduled for 3 June 2020.

The provisions in the Bill largely reflect the guidance published by ICSA: The Chartered Governance Institute pursuant to which companies have been holding meetings with only the quorum physically present and other shareholders unable to attend. The main impact of the Bill would be to allow the quorum to meet virtually (for example, by a telephone call) rather than physically at a prescribed venue.

The Bill also contains major reforms to UK insolvency law (see below) and would give the Secretary of State the power to extend the periods for filing certain documents at Companies House.

Separately, the Financial Conduct Authority (FCA) has published a Primary Market Bulletin (PMB No. 28). The focus of PMB No. 28 is half-yearly financial reports (see below) but it also contains commentary on shareholder engagement and company meetings. The FCA encourages issuers to look at ways to allow shareholders to ask questions of management and exercise their voting rights effectively when making alternative arrangements to physical general meetings. The FCA also says that it is supportive of virtual general meetings.

  • Government support – The Government has announced that companies accessing the Bank of England’s Coronavirus Corporate Financing Fund (CCFF) and companies borrowing more than £50 million through the Coronavirus Large Business Interruption Loan Scheme (CLBILS) will be subject to restrictions on distributions to shareholders and executive pay. In relation to distributions, companies will be unable to make dividend payments or undertake share buybacks. In relation to executive pay, companies will be unable to pay any cash bonuses, or award any pay rises to senior management. For companies accessing the CCFF, these restrictions will apply to participants that wish to borrow beyond 19 May 2021 and for companies borrowing under the CLBILS, they apply until the facility has been repaid in full.

Corporate reporting and company announcements

  • FCA statement on half-yearly financial reports – The FCA has published a Primary Market Bulletin (PMB No. 28) pursuant to which the period for listed companies to publish their half-yearly reports is effectively extended by one month such that the half-yearly report must be published within four months after the end of the half-year. The FCA also discusses going concern statements. It acknowledges the difficulties that companies may face in relation to the going concern assessment in light of the current circumstances and notes that auditors may need to include remarks in their audit opinion in relation to the going concern assessment. The FCA says that it is vital that investors are properly informed of the impact of COVID-19 and encourages users of financial statements to take into account the current circumstances when assessing their response to going concern disclosures. There is also discussion of shareholder engagement by listed companies (see above) and a statement that issuers could consider participation by smaller shareholders in capital raisings.
  • ESMA statement on half-yearly financial reports – The European Securities and Markets Authority (ESMA) has issued a public statement on the implications of COVID-19 on half-yearly financial reports. The statement discusses issues including the contents of the interim management report, risks and uncertainties linked to COVID-19 and impairment of non-financial assets.
  • Inside information – The FCA has published Market Watch No. 63 which focuses on inside information issues in light of COVID-19, particularly in the context of capital raisings. The FCA reminds issuers that they should continue to assess carefully what information constitutes inside information as COVID-19 and public policy responses to it may alter the nature of information that is material to a business’s prospects. Issuers should carefully monitor whether any new information is materially different from previous forecasts, guidance, or signals which they have announced publicly and which would now be likely to be misleading to investors. The FCA also reminds issuers that delaying the disclosure of inside information is only permissible when all three of the conditions to delay set out in Article 17(4) of the Market Abuse Regulation are met. Those conditions are that immediate disclosure is likely to prejudice the legitimate interests of the issuer; delay of disclosure is not likely to mislead the public; and the confidentiality of that information can be maintained.
  • Updated FRC guidance – The Financial Reporting Council (FRC) has updated its guidance for companies on corporate reporting during the COVID-19 pandemic by adding new sections on the reporting of exceptional items and alternative performance measures (APMs).

Contract issues

  • Force majeure – Many contracting parties have already been affected by force majeure events arising out of the COVID-19 pandemic and the associated restrictions. As the focus starts to shift toward the gradual easing of lockdown measures, those parties who have claimed force majeure relief will be preparing to resume performance as soon as the impact of the force majeure event comes to an end. However, it is also important for contracting parties to prepare for any second wave force majeure situation.

The force majeure implications of a potential second wave of COVID-19 infections and the resulting re-imposition or tightening of lockdown measures are discussed in a recent blog post and in a new episode of our Navigating COVID-19 podcast series. Our podcasts are available on iTunes, Spotify and SoundCloud and can be accessed on all devices.

  • Practical issues around signing and completion of contracts – Given the current restrictions on interaction which have been imposed by the UK Government and with a large number of people working from home, it is not always possible to adopt the usual methods for signing and completing transactions. In this briefing we summarise some practical points to ensure compliance with the necessary legal formalities whilst these measures remain in place.

Insolvency law

  • Major reforms to insolvency law – The Government has published the Corporate Insolvency and Governance Bill which contains the most far-reaching reforms to UK insolvency law in over 30 years. The Bill has been introduced on an emergency basis in an attempt to ensure that otherwise financially viable companies survive during a period of unprecedented interruption and turmoil. The Bill would introduce new company moratoriums and restructuring plans and would amend the current winding up and wrongful trading regimes. Our Restructuring, Turnaround and Insolvency team has published a briefing on the Bill which is available here.

Other relevant materials

For further COVID-19 related publications, see our COVID-19 Hub.

Caroline Rae
Caroline Rae
+44 20 7466 2916

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093

COVID-19 – latest developments for corporate practitioners

Further guidance for companies has been published in light of the COVID-19 pandemic.

Corporate reporting

  • Interim reports – The Financial Reporting Council (FRC) has updated its guidance for companies on corporate reporting during the COVID-19 pandemic by adding a section on interim results. It says that directors will need to exercise judgment about the nature and extent of the procedures that they apply to assess the going concern assumption at the half-yearly date. If going concern has become a significant issue, the FRC recommends that directors undertake procedures similar to those for annual financial statements and consider whether to engage their auditors to perform an interim review (although there is no legal requirement to do so).

Company meetings

  • AGMs and other general meetings – The Department for Business, Energy and Industrial Strategy (BEIS) and the FRC have published an updated Q&A on the legislation that will be introduced to assist companies where COVID-19 restrictions make it difficult to hold meetings. The Q&A confirms that the legislation will apply retrospectively from 26 March 2020 until 30 September 2020, and that it will apply to general meetings as well as annual general meetings. There is no indication of when the legislation will be published.

Contract issues

  • Execution of documents – The Law Society has published guidance on virtual execution and e-signatures during the COVID-19 pandemic. It draws attention to its existing practice notes on Executing documents by virtual means (referred to as the Mercury Note) and Executing documents using an electronic signature. It also provides an update on recent relevant advances in the use and acceptability of electronic execution. The Land Registry has confirmed that it will, until further notice, accept email PDFs of deeds signed in accordance with “Option 1” in the Mercury Note.
  • Force majeure – The COVID-19 pandemic has led many commercial parties to review their contractual arrangements and consider whether there are any grounds on which they may seek to delay or avoid performance (or liability for non-performance), or suspend or terminate their contracts. Our new publication, COVID-19: Force majeure: A global perspective, provides a high-level overview of the approach taken to force majeure clauses in key jurisdictions including Australia, China, France, England & Wales, Germany, Japan and the United States.
  • Insurance – The Financial Conduct Authority (FCA) has announced that it intends to obtain a court declaration to resolve contractual uncertainty in business interruption insurance cover. It says that it is not intended to encompass all possible disputes, but to resolve some key contractual uncertainties, in order to assist both insurers and insureds.

Other relevant materials

We have published a guide on Governance of companies in the current environment. Business-as-usual decision making, disclosures and corporate reporting have all been, and are likely to continue to be, disrupted at least in the short term. Companies will need to ensure that robust and effective decision-making processes remain in place and that they fulfil their legal and regulatory obligations to investors and other stakeholders. In the guide, we suggest practical steps that companies should consider, both in the short term and in the months ahead.

For our other guides (on Managing Liquidity, People and Supply Chains) and further COVID-19 related publications, see our COVID-19 Hub.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Caroline Rae
Caroline Rae
+44 20 7466 2916

Corporate crime – the “directing mind and will” of a company

Two recently released judgments consider the “directing mind and will” of a company. The cases concern charges against Barclays plc and Barclays Bank plc relating to events flowing from the 2008 global financial crisis. The courts found that senior executives, including the CEO and CFO, did not represent the required “directing mind and will” of Barclays in the circumstances.

A company may be capable of committing a criminal offence by the acts of its officers or employees under the “identification” principle. For many offences – including fraud – the route to criminal culpability is for a prosecutor to identify an individual(s) whose conduct and state of mind can be attributed to the company, so that he/she represents the company’s “directing mind and will”.

The judgments examine the doctrine of “identification” and who constitutes the “directing mind and will” of a company, and provide practical lessons on corporate governance in the criminal context.

Our corporate crime team considers the judgments in this post on our FSR and corporate crime blog.

COVID-19 – latest developments for corporate practitioners

In light of the widespread impact of COVID-19, various pieces of guidance have been published which companies should be aware of.

FCA statement on share issuances

The Financial Conduct Authority (FCA) has issued a Statement of Policy to assist companies looking to raise new share capital in response to the COVID-19 crisis.

  • Smaller share issues (<20%) – The FCA confirms that it supports the Pre-Emption Group (PEG) recommendation that investors support issuances by companies of up to 20% of their issued share capital (see our corporate update 2020/7). It also reminds companies to carefully consider the PEG guidance on what companies who are seeking to use this additional flexibility should do.
  • Prospectuses – The FCA highlights the benefits of the simplified prospectus regime under the EU Prospectus Regulation for secondary issuances (though it notes that this option may not be suitable for an offering that has a non-EU component). It also outlines a temporary revision to its approach to unqualified working capital statements. It proposes to permit disclosure of key assumptions underpinning an issuer’s reasonable worst-case scenario in relation to business disruption as a result of the COVID-19 crisis. Further detail can be found in this Technical Supplement published by the FCA.
  • General meetings required under the Listing Rules – The FCA is also temporarily modifying the requirements for approval of class 1 transactions and related party transactions under LR 10 and LR 11. A company will be able to get a dispensation from the FCA from the requirement to hold a general meeting to approve a class 1 or related party transaction, if it obtains written undertakings from shareholders eligible to vote on the transaction that they approve it and would vote in favour of it. A circular will still be required. Further detail is set out in this Technical Supplement.
  • Market Abuse Regulation – The FCA reiterates its previous guidance that the Market Abuse Regulation continues to apply to issuers, and that companies and advisers should carefully assess what constitutes inside information at this time.

Institutional investor views

The Investment Association (IA) has sent a letter to FTSE 350 chairs setting out its views on various issues affecting listed companies in light of COVID-19.

Topics covered in the letter include:

  • Filing accounts – The IA recommends that companies use the additional two months allowed by the FCA to finalise their annual report and accounts if needed;
  • AGMs and share issuances – The IA endorses the recent guidance from ICSA: The Chartered Governance Institute in relation to AGMs and the recent Pre-Emption Group statement on new share issuances; and
  • Dividends and executive remuneration – The IA says that shareholders agree that companies should be considering the suitability and sustainability of dividend payments in light of the current uncertainties and that, if changes to dividend payments are proposed, companies should also consider their approach to executive pay.

The letter also discusses shareholder engagement and communication generally.

Guide to managing liquidity

The consequences of the pandemic, and the associated public health measures aimed at slowing the transmission and spread of the disease, pose serious threats to the supply and demand sides of many businesses. In turn, this is putting cash flows under pressure, meaning that companies are having to consider available options to avoid a liquidity crisis. We have launched a new Guide in which we explore different means of managing liquidity and, for each option, suggest practical steps to consider, both immediately and further ahead, as well as giving regional insights.

COVID-19 Hub and webinar series

For further information on these and other COVID-19 related issues, see our COVID-19 Hub and sign up for our Global Webinar Series.

Mike Flockhart
Mike Flockhart
+44 20 7466 2507

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

COVID-19 – latest developments for corporate practitioners

In light of the widespread impact of COVID-19, various pieces of guidance have been published which companies should be aware of.

Company meetings and other corporate actions

  • Dividends – The London Stock Exchange (LSE) has published guidance in Market Notice N07/20 on payment dates under the 2020 Dividend Procedure Timetable. The Dividend Procedure Timetable says that issuers should pay cash dividends within 30 business days of the record date. However, from 25 March 2020, the LSE will permit a deferral period of up to 30 business days for payment of a dividend, but to no more than 60 business days after the record date. An issuer must notify the LSE of any deferral of a dividend payment without delay. After the deferral period has expired, the dividend must either be paid or cancelled. Issues to consider around the payment of dividends are also discussed in the FRC guidance referred to in the corporate reporting section below.
  • Company meetings – The Government has announced that it will introduce legislation to ensure that companies required by law to hold annual general meetings (AGMs) will be able to do so in light of the restrictions on movement and gatherings. It says that companies will be given greater flexibility to hold AGMs online or to postpone the meetings but the detailed provisions are not yet available. ICSA: The Chartered Governance Institute has published an updated version of its guidance on holding AGMs and guidance on virtual board meetings.
  • Proposed changes to insolvency law – The Government has announced that it will introduce a number of proposed changes to UK insolvency law in response to COVID-19. Whilst the detail of the changes is not yet available, the announcement indicates that they will enable companies undergoing a rescue or restructure process to continue trading, giving them breathing space that could help them avoid insolvency. They will also enable companies to continue buying supplies and will temporarily suspend wrongful trading provisions retrospectively from 1 March 2020. Our restructuring, turnaround and insolvency team has published a briefing on what form the changes may take.
  • Share issues – The Pre-Emption Group has published a statement recommending that investors consider supporting, on a case by case basis, issuances by companies of up to 20% of their issued share capital (rather than the usual 5% for general corporate purposes, plus an additional 5% for acquisitions, that it usually recommends). The statement indicates that this is only a temporary relaxation and sets out steps for companies seeking to take advantage of this flexibility. For further information, see this briefing published by our ECM team.
  • Stock transfer forms – HM Revenue & Customs (HMRC) has published details of a new process for stock transfer forms and payment of stamp duty, in light of COVID-19. Stock transfer forms should no longer be posted to HMRC but instead an electronic copy (e.g. a scanned PDF) of the stock transfer form, or in the case of purchase of own shares of Form SH03, should be emailed to HMRC. HMRC also says that it will accept e-signatures while COVID-19 measures are in place and that stamp duty must be paid before HMRC can process the form.

Corporate reporting

  • Listed company annual report and accounts – The Financial Conduct Authority (FCA) has published a statement which, in effect, gives listed companies an additional two months to finalise their annual report and accounts as the FCA says that it will not suspend the listing of companies if they publish financial statements within six months of their year-end. The Q&A to accompany the FCA statement confirms that the FCA statement does not currently extend to half yearly financial reports. The FCA has published an updated version of its Primary Market Bulletin No. 27 to reflect this (see our blog post for more information on PMB No. 27).
  • AIM company accounts – The LSE has said that AIM companies can apply for a three-month extension to the deadline for publication of their annual accounts.
  • Filing accounts at Companies House – Companies House has said that it will grant a three month extension for companies to file their accounts. Companies must apply for the extension but those citing issues around COVID-19 will be automatically and immediately granted an extension.
  • FRC guidance for companies preparing financial statements – The Financial Reporting Council (FRC) has published guidance for companies preparing financial statements. It highlights some key areas for boards in maintaining strong corporate governance as well as providing high-level guidance on preparation of annual reports and other corporate reporting matters.
  • Gender pay gap reporting – The Government has suspended enforcement of the gender pay gap deadlines for this reporting year (2019/20) and there will be no expectation on employers to report their data.
  • Preliminary results announcements – The FCA has asked listed companies to delay announcement of their preliminary results for a period of two weeks. Further details on the moratorium, which is voluntary, can be found in a Q&A published alongside the FCA statement.

For further information, see this post on our Corporate Notes blog.

Other relevant developments

  • Managing liquidity – As both economic production and consumption contract rapidly, many businesses are facing cash flow difficulties. We have published a briefing in which we consider options open to companies to help manage liquidity.
  • Job retention scheme – HMRC has published more details on the Coronavirus Job Retention Scheme. Our employment team has published a briefing on the new guidance.

For further information on these and other COVID-19 related issues, see our COVID-19 Hub and sign up for our Global Webinar Series.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gavin Williams
Gavin Williams
+44 20 7466 2153

Climate change – FCA consultation on climate change-related financial disclosures, ISS Guidelines and EU report on corporate reporting

The Financial Conduct Authority (FCA) has issued a consultation paper (CP20/3) on proposals to improve climate change related financial disclosures by listed issuers. Institutional Shareholder Services (ISS) has published Climate Proxy Voting Guidelines and the European Financial Reporting Advisory Group (EFRAG) has published a report on climate change reporting by EU companies.

FCA consultation

The FCA is proposing to introduce a new disclosure requirement based on the Task Force on Climate-related Financial Disclosures (TCFD) June 2017 recommendations.

The requirement (new LR 9.8.(8)R), which would sit with the other annual financial report content requirements in the Listing Rules, would require premium listed companies to include in their annual report a statement setting out:

  • whether the company has included “disclosures consistent with the four recommendations and the eleven recommended disclosures set out in Section C of the TCFD Final Report” and, if so, where those disclosures can be found; or
  • where it has not done so, the reasons for not including such disclosures.

A new draft guidance note will accompany the rule changes.

The consultation paper says that the new requirements will come into force for financial years beginning on or after 1 January 2021. However the FCA has since announced that the closing date for the consultation has been delayed until 1 October 2020 (due to COVID-19) and so the date on which the changes take effect may also be delayed.

ISS Guidelines

The Climate Proxy Voting Guidelines published by ISS are based on principles developed from international frameworks such as the TCFD’s disclosure requirements. The ISS uses a scorecard approach to reflect various climate-related risk factors and may recommend votes against the re-election of board members responsible for climate-related risk oversight or for failures to sufficiently oversee, manage, or guard against material climate change related risks.

Climate change reporting by EU companies

The EFRAG report on climate change reporting by EU companies concludes that, despite a general improvement in the quality of climate change disclosures since 2017, there is a major gap between companies’ reporting practices and users’ expectations.

The report examines corporate reporting against both the mandatory requirements of the Non-Financial Reporting Directive, and the voluntary requirements of the TCFD recommendations. In particular it found that:

  • there are varying levels of awareness and engagement amongst companies. Reporting is better in larger companies, and those in carbon-intensive and financial sectors; and
  • whilst reporting on climate-related policies is generally good, there is more limited reporting on the monitoring of policies and performance against them.

The report recommends that companies avoid disclosure of generic information, and reporting without a materiality assessment. It also notes that there are few examples of companies that describe their board’s role in overseeing climate-related risks and opportunities.

Mike Flockhart
Mike Flockhart
+44 20 7466 2507

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

PIRC Voting Guidelines 2020 published

PIRC (the consultancy that provides corporate governance advisory services to certain institutional investors) has published the 2020 edition of its UK Shareholder Voting Guidelines. The guidelines set out PIRC’s views on good corporate governance practice for listed companies and cover a wide range of topics such as board structure, remuneration policies and management of social and environmental issues.

The guidelines have been updated to reflect a number of developments in practice, including in relation to audit and auditors and practice in relation to the UK Corporate Governance Code. It also includes an enhanced section on the the reporting of environmental and social issues.

The guidelines are not available on the PIRC website, but copies can be ordered for a fee via the website.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Caroline Rae
Caroline Rae
+44 20 7466 2916

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

PLSA Stewardship Guide and Voting Guidelines 2020

The Pensions and Lifetime Savings Association (PLSA) has issued its Stewardship Guide and Voting Guidelines for 2020. The document sets out the PLSA’s views on current market best practice and its voting recommendations for AGMs in 2020.

The document has been substantially rewritten to reflect the 2018 edition of the UK Corporate Governance Code, the 2019 edition of the UK Stewardship Code and the stewardship requirements introduced as part of the implementation of the EU Shareholder Rights Amending Directive (SRD II).

It also contains a new section on climate change and sustainability, which sets out the PLSA’s expectations in relation to corporate behaviour in this area. It notes that climate change is a systemic issue affecting nearly every industry and firm, which means that there is a heightened focus on this and other environmental, social and governance (ESG) issues.

The PLSA has also published a Voting Recommendations Summary chart which sets out its voting recommendations on certain issues, including executive remuneration, audit, company leadership and dividends.

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093

 

Investment Association review of 2019 AGM season

The Investment Association (IA) has published a summary of voting trends during the 2019 AGM season.

According to the IA’s public register of significant votes against resolutions, which tracks when there is a vote of over 20% against a resolution at a FTSE company’s shareholder meeting:

  • 158 companies and 298 resolutions were added to the register for 2019 (up slightly from 151 companies and 294 resolutions in 2018);
  • executive pay and director re-election continued to top the list of concerns in 2019, with 62 companies appearing on the register for pay-related resolutions and 103 individual director re-election resolutions appearing on the register;
  • 39 companies appeared on the register for the same resolution in both 2018 and 2019; and
  • over 80% of companies made a public statement acknowledging shareholder concerns and outlining how they plan to engage with shareholders following the significant vote against, in accordance with provision 4 of the Corporate Governance Code.
Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038