Preparing your annual report and AGM notice in 2023

A key focus for many UK listed companies at this time of year is finalising their annual report and preparing for their annual general meeting. This snapshot considers developments and issues arising in practice over the last 12 months which impact on the 2022 annual report and the AGM in 2023.

The most significant development for companies to consider is the revised Statement of Principles published in November 2022 by the Pre-Emption Group, which permit companies to disapply pre-emption rights over a higher proportion of shares. There are no major new requirements which need to be incorporated into the 2022 annual report, though there are some developments on climate and structured electronic reporting to be addressed.

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

James Palmer
James Palmer
+44 20 7466 2327

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

 

FCA consultation on streamlining the rules for structured electronic reporting

The FCA has published a consultation paper (CP23/2) on streamlining the rules relating to structured electronic reporting.

Under DTR 4.1.14, listed companies are required to publish their annual report in the single electronic format specified in the UK Transparency Directive European Single Electronic Format Regulation (the ESEF Regulation), the UK version of EU Regulation 2019/815 on the technical standards for reporting in electronic format, which is part of UK law post-Brexit – see our snapshot on reporting in structured electronic format for further details.

To simplify the structure of the UK’s rules, and in keeping with the government’s post-Brexit drive to replace retained EU laws and regulations, the FCA is proposing to remove the cross reference to the ESEF Regulation and to set out the requirements directly in the Transparency Rules.

Under the consultation, new provisions would be added to DTR 4, along with a new Annex to DTR 4, which broadly reflect the ESEF Regulation, though the FCA is taking the opportunity to make some minor clarifications and changes. The FCA is also proposing that the taxonomies approved for use when tagging information in financial statements and notes to financial statements, which are currently set out in the ESEF Regulation, should instead be contained in a new Technical Note. This would make it easier to amend the approved taxonomies to ensure that practice in the UK stays aligned with any changes to generally accepted taxonomies.

The consultation closes on 24 February 2023. As the changes are not intended to change the existing requirements or to disrupt the approach companies take when reporting in electronic format, the FCA is proposing that the new provisions will apply immediately once they are finalised, without any transitional period.

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Roddy Martin
Roddy Martin
+44 20 7466 2255

Greg Mulley
Greg Mulley
+44 20 7466 2771

Impact of the EU Corporate Sustainability Reporting Directive on UK companies

The EU Corporate Sustainability Reporting Directive (EU) 2022/2464 (CSRD) has been published in the Official Journal of the European Union. It will enter into force on 5 January 2023. Notwithstanding the UK’s withdrawal from the EU, the CSRD may impact UK companies because of its extra-territorial application.

Companies within scope of the CSRD will be required to include detailed sustainability disclosures in their narrative reports. These disclosures build on, and significantly expand, the disclosures required under the EU Non-Financial Reporting Directive 2014/95/EU (NFRD), which have been implemented in the UK through sections 414CA and 414CB of the Companies Act 2006 (Contents of strategic report).

Broadly, the disclosures obligations in the CSRD may apply to UK-incorporated companies in two situations:

  1. where the company has securities listed on an EU regulated market; or
  2. where the company has a net turnover in the EU of over €150 million for each of the last two consecutive financial years and has either:
    1. an EU subsidiary which has securities listed on an EU regulated market, or is classed as a large undertaking (that is, it meets two of the following criteria: (i) total assets of €20 million; (ii) net turnover of €40 million; and (iii) an average of 250 employees over the financial year); or
    2. an EU branch which has generated a net turnover of more than €40 million in the previous financial year.

The application of the CSRD is being phased in for financial years beginning on or after:

  • 1 January 2024 for listed undertakings with over 500 employees which are already within scope for reporting under the NFRD;
  • 1 January 2025 for other large undertakings not currently required to report under the NFRD;
  • 1 January 2026 for listed small and medium-sized entities; and
  • 1 January 2028 for groups with a non-EU parent and either an EU subsidiary or EU branch meeting the requirements set out above.

As these reporting requirements are being introduced by a directive, they will need to be implemented by each EU Member State within 18 months of the CSRD coming into force.

Julie Farley
Julie Farley
+44 20 7466 2109

Rebecca Perlman
Rebecca Perlman
+44 20 7466 2075

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

FRC publishes guidance on annual report and accounts

The Financial Reporting Council (FRC) has published guidance for companies preparing their annual report and accounts (ARA) as part of its “What Makes a Good” publication series.

The FRC focuses on two core themes which it believes underpin a good ARA:

  • Corporate reporting principles – These are the principles that the FRC says that issuers should follow when producing an ARA. They include accuracy, completeness, transparency and timeliness; and
  • Effective communication principles – In order to help investors identify relevant information and understand the linkages between the different parts of the ARA, the FRC says that disclosures should be company-specific, clear and concise, clutter-free and comparable.

The guidance also considers the overarching concept of materiality, which the FRC describes as the “bedrock of corporate reporting“.

The FRC intends that the principles should be applicable whatever a company’s size or listing status, and regardless of which GAAP are applied.

Heidi Gallagher
Heidi Gallagher
+44 20 7466 2367

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Ben Ward
Ben Ward
+44 20 7466 2093

Primary Market Bulletin 42 and Market Watch 71

The Financial Conduct Authority (FCA) has published market guidance for issuers, on a range of topics, in Primary Market Bulletin 42 and for firms, on insider lists, in Market Watch 71.

Primary Market Bulletin No. 42

Topics covered in Primary Market Bulletin 42 include:

  • Unlawful disclosure of inside information – The FCA describes the situations and types of behaviour that crop up repeatedly in enquiries by the FCA’s Primary Market Oversight department into suspected unlawful disclosures of inside information by issuers, directors, advisers and other parties. It flags in particular social and mainstream media, the leak of information around fundraisings and analyst briefings.
  • TCFD reporting – The FCA reminds both standard and premium listed companies of the guidance published by the FCA and the Task Force on Climate-Related Financial Disclosures (TCFD) on TCFD reporting (see our briefing here on the reporting requirements). In particular, the FCA refers companies to the TCFD’s Guidance for All Sectors and, where relevant, the Supplemental Guidance for the Financial Sector and Non-Financial Groups (as cross-referred to in LR 9.8.6BG and LR 14.3.28G). The FCA also comments on areas for improvement from its review of the first year of premium listed companies’ TCFD reports, particularly around net zero commitments and transition planning.
  • Structured electronic reporting – Companies are reminded of the September 2022 FRC Lab report “Structured Digital Reporting – Improving Quality and Usability” and the lessons to be learned from the first year of mandatory structured digital reporting.
  • NS&I Act – When acquisitions are subject to review or assessment, or where interim or final orders are made, under the National Security and Investment Act 2021, companies should consider their obligation to disclose inside information under the UK Market Abuse Regulation (see our briefing here on the NS&I Act).

Market Watch 71

In Market Watch 71 the FCA makes a number of observations about changes in advisory firms’ insider lists since the publication of Market Watch 60 (which was published in August 2019 and focused on controlling access to inside information in advisory firms). It notes that the number of individuals on firms’ permanent insider lists has on average reduced. The FCA also reminds firms they must follow the mandatory template for insider lists and, in particular, include all relevant personal information for the individuals on the list.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Alex Kay
Alex Kay
+44 20 7466 2447

Alan Montgomery
Alan Montgomery
+44 20 7466 2618

FRC publishes reviews of reporting in 2021/22

The Financial Reporting Council (FRC) has published its annual review of corporate reporting for 2021/22 and its annual review of corporate governance reporting for 2022.

Review of corporate governance reporting

The FRC’s annual review of corporate governance reporting discusses the quality of reporting against the UK Corporate Governance Code in 2022 and its expectations for companies reporting in 2023.

The FRC reviewed the corporate governance reports of 100 FTSE 350 and Small Cap companies. Of these, only 27 claimed full compliance with the Code, compared with 58 in 2020 and 36 in 2021. The FRC is pleased that more companies are using the flexibility of the ‘comply or explain’ nature of the Code, and are offering greater detail when reporting departures from the Code. It says companies should be transparent in their reports by naming the specific Code provision(s) that have not been complied with.

Other key messages from the report include:

  • Risk management and internal controls – Over half of the companies provided a statement to confirm that their risk management and internal control systems are effective or that no weaknesses or inefficiencies have been identified. However, many of those companies do not explain the steps taken to assess these systems.
  • Workforce engagement – The FRC notes that disclosures on outcomes of workforce engagement are almost exclusively in relation to flexible working matters. The most common engagement mechanism was having a designated non-executive director. The FRC says that companies should explain why they have chosen their engagement mechanism and how they monitor it to ensure that it is effective.
  • Shareholder and wider stakeholder engagement – Wider stakeholder engagement is generally of a good standard but there is minimal disclosure of specific board members’ engagement with major shareholders. The FRC states that good reporting should include details of how the board engaged with the shareholders and stakeholders (methods of engagement, those involved, the frequency of engagement and topics discussed), what the feedback was and the impact it had on board discussions and decision-making.

Other areas covered by the report include modern slavery and climate change reporting, chair independence and tenure, board diversity and remuneration.

The FRC says that it will consult on amendments to the Code next year – to reflect the FRC’s transition to ARGA – but that it doesn’t intend to effect a wholesale revision of the Code. It plans to focus on those areas identified in its July 2022 position paper (see our blog post here).

Annual review of corporate reporting

The broader review of corporate reporting provides an overview of the work of the FRC’s corporate reporting review (CRR) team and sets out the FRC’s view on the current state of corporate reporting in the UK.

Despite the challenging environment caused by economic and geopolitical uncertainty, the FRC notes that the quality of corporate reporting by FTSE 350 companies has not declined. Improvements have been seen in the reporting of areas such as judgement and estimation uncertainty, revenue and alternative performance measures (APMs).

The FRC’s review discloses that:

  • around 250 companies were reviewed by the CRR team during this review cycle, resulting in just over 100 companies being contacted for further information or explanation. These numbers are similar to those seen in the 2020/21 review cycle;
  • the number of companies required to refer to these CRR enquiries in their next annual report (Required References) almost doubled compared to during the previous review cycle, with the majority of these Required References relating to cash flow statements; and
  • other topics frequently raised with companies include income taxes, APMs, financial instruments, impairment of assets and strategic report and other Companies Act 2006 matters.

The review also highlights the thematic reviews carried out by the FRC Lab and the CRR team on various issues, including business combinations, earnings per share and TCFD disclosures in financial statements (see our corporate updates 2022/15 and 2022/17 for more details on these reviews).

Mike Flockhart
Mike Flockhart
+44 20 7466 2507

Heidi Gallagher
Heidi Gallagher
+44 20 7466 2367

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

TCFD report on climate-related financial disclosures

The Task Force on Climate-Related Financial Disclosures has published its fifth annual status report on the implementation of its recommendations on climate-related financial disclosures (the TCFD Recommendations).

The Task Force published its TCFD Recommendations in June 2017 to help companies produce disclosures that show how they measure and respond to climate change risks. Under the Listing Rules, premium listed companies are required to report climate-related information in line with the TCFD Recommendations on a comply or explain basis for financial years starting on or after 1 January 2021. This disclosure requirement was extended to standard listed companies for financial years beginning on or after 1 January 2022 (see our briefing on the requirements for listed companies here) and to all large UK-incorporated companies for financial years beginning on or after 6 April 2022 (see our briefing here).

The findings in the report include that:

  • whilst 80% of the companies reviewed made disclosures in line with at least one of the 11 recommended disclosures of the TCFD (the TCFD Recommended Disclosures), only around 40% disclosed in line with at least five and just 4% disclosed against all 11; and
  • the lowest level of disclosures across the TCFD Recommended Disclosures were made in relation to the resilience of companies’ strategies under different climate-related scenarios (TCFD Recommended Disclosure C under Strategy), with disclosures made on climate-related risks and opportunities remaining the most common (TCFD Recommended Disclosure A under Strategy).

The report also contains examples of best practice disclosures made against each of the 11 TCFD Recommended Disclosures.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Alex Kay
Alex Kay
+44 20 7466 2447

Rebecca Perlman
Rebecca Perlman
+44 20 7466 2075

Climate reporting – FCA and FRC reviews

The Financial Conduct Authority (FCA) and Financial Reporting Council (FRC) have published two reports on the quality of climate-related reporting by listed companies.

For financial years beginning on or after 1 January 2021, premium listed commercial companies are required to include a statement in their annual financial report setting out whether they have made disclosures consistent with the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations (see our briefing here for further details).

The FCA reviewed 170 companies at a high level and 30 companies in more detail, and found an increase in the quantity and quality of companies’ climate-related disclosures in comparison with previous years. However, it also found instances where companies said that they had made disclosures consistent with the TCFD Recommended Disclosures when it appeared they had not – the FCA is considering these cases in more detail and may take action as appropriate.

The FRC reviewed 25 larger companies more impacted by climate change and found that companies were able to provide many of the TCFD disclosures expected by the FCA’s Listing Rules, also noting an improvement compared with previous years. However, the FRC identified several areas where companies will need to raise the quality of their disclosures in the future, including explaining more clearly how the effects of their own net zero commitments may affect the valuation of their assets and liabilities.

Silke Goldberg
Silke Goldberg
+44 20 7466 2612

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Directors found liable for misleading statements and misrepresentations in annual and quarterly reports

Two former directors of Autonomy plc have been found liable for misleading statements and misrepresentations in Autonomy’s annual and quarterly reports. This case (ACL Netherlands BV and others v Michael Richard Lynch and another [2022] EWHC 1178 (Ch)) is the first on the liability of issuers in connection with published information under Schedule 10A of the Financial Services and Markets Act (FSMA) to go to trial.

Hewlett Packard acquired Autonomy, a software company, in 2012 for $11.1 billion. It subsequently claimed that the defendants, Mike Lynch (the former CEO of Autonomy) and Susovan Tareque Hussain (the former chief financial officer of Autonomy), dishonestly and deliberately mispresented Autonomy’s financial performance and that as a result it was deceived into paying more for the company than it was worth. They are claiming US$5 billion in damages.

The claimants alleged that information was published to the market which was known by the defendants to be false, including:

  • the description of Autonomy as being a “pure software company” when in fact it undertook and had become accustomed to inflating its apparent revenues by undertaking substantial hardware sales; and
  • details of its financial performance, which did not disclose and instead disguised improper practices which Autonomy adopted to boost and accelerate revenue.

The fraud claims in respect of the acquisition were brought (by different entities within the HP group) under the following legal heads:

  • FSMA – By far the largest of the claims was a claim under Schedule 10A of FSMA. Schedule 10A imposes liability on an issuer of securities for misleading statements or omissions in published information, but only if a person discharging managerial responsibilities at the issuer (a PDMR) knew that, or was reckless as to whether, the statement was untrue or misleading, or knew the omission to be a dishonest concealment of a material fact.An issuer is liable to pay compensation to anyone who has acquired securities in reliance on the information contained in the publication for any losses suffered as a result of the untrue or misleading statement or omission, but only where the reliance was reasonable.In this case, HP alleged Autonomy was liable in respect of statements or omissions in its published information on which the investor, here the bid vehicle incorporated by HP to acquire Autonomy (Bidco), relied when making an investment decision.
  • Deceit / fraudulent misrepresentation – These claims were based on the personal liability of the defendants (rather than of Autonomy). The representations relied upon include confirmations of the accuracy of statements in Autonomy’s published information which were made in the course of negotiations of the takeover.

The specific allegations related to six areas within Autonomy’s business and accounting. On all but one of those six areas, the judge concluded that the claimants had made out (to the extent that they were alleged in respect of that area) the FSMA claim and the common law / Misrepresentation Act claims.

Hewlett Packard wanted to claim against the directors rather than Autonomy itself (as Autonomy is now wholly owned by HP). The FSMA claim therefore required HP to satisfy two limbs in respect of each alleged wrongdoing: first, that Autonomy was liable (as issuer) to Bidco, and second, that the defendants were liable to Autonomy as PDMRs. Whilst it was Bidco that acquired the shares, it was HP that had conducted the due diligence, and so it was argued that Bidco could not have relied on the information in question. The judge concluded that HP was the controlling mind of Bidco and therefore its reliance on the information was to be attributed to Bidco.

This judgment is limited to the issue of liability. A separate judgment on the quantum of damages will be delivered at a later date. However, the judge has indicated that he anticipates that, although substantial, it will be considerably less than the $5 billion claimed.

It has been reported that Mr Lynch intends to seek permission to appeal.

For guidance for corporate issuers defending Section 90A/Schedule 10A FSMA shareholder claims, click here to read more on our banking litigation notes blog.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Siddhartha Shukla
Siddhartha Shukla
+44 20 7466 7474

Gavin Williams
Gavin Williams
+44 20 7466 2153