Covid-19 – latest developments for corporate practitioners

The following guidance and materials may be of interest to companies in light of the Covid-19 pandemic.

Corporate reporting

  • FRC thematic review – The Financial Reporting Council (FRC) has published a thematic review on the financial reporting effects of Covid-19. The report seeks to provide guidance for companies when preparing their annual and interim financial reports by identifying areas where disclosures affected by Covid-19 can be improved, as well as providing examples to show the level of detail in some of the better disclosures. Areas discussed in the report include going concern and viability; cash, liquidity and covenant compliance; dividends and capital management; the strategic report; alternative performance measures; significant judgements and estimates; and impairment issues.

Other materials

  • Recapitalisation of UK companies– The CityUK Recapitalisation Group (RCG) has published a report Supporting economic recovery: recapitalising businesses post Covid-19. The report, to which we contributed, sets out a series of options for converting, restructuring and repaying the projected £35 billion in unsustainable debt that could result from Covid-19 loans.
  • Consolidated Covid-19 corporate update – We have published a consolidated Covid-19 update briefing which summarises the major pieces of legislation and guidance that have been published in relation to UK corporate law over the last few months in light of the pandemic.
  • Disputes risks – The pandemic has led to unprecedented disruption to economic activity on a global scale. Inevitably, this will lead to disputes. We have published a new Disputes Risk guide which looks at a number of areas in which we anticipate that disputes may arise as a result of the pandemic or associated disruption. These include contractual disputes; class actions, such as shareholder, employee, competition or data breach claims; insolvency litigation, including claims brought by creditors and officeholders; and judicial review of governmental decisions or actions.

For 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

Gavin Williams
Gavin Williams
+44 20 7466 2153

EU Taxonomy Regulation on criteria for assessing environmental sustainability

An EU Regulation on the establishment of a framework to facilitate sustainable investment entered into force on 12 July 2020. The Regulation sets out an EU-wide taxonomy, or set of criteria, for determining whether an economic activity qualifies as environmentally sustainable, and therefore the degree to which an investment is environmentally sustainable.

The Regulation forms part of the EU’s Action Plan on Sustainable Finance. If it is implemented in the UK following Brexit, it will, among other things, require UK listed companies to significantly enhance their disclosures in relation to the environmental sustainability of their activities. Companies will need to disclose: (i) the proportion of turnover derived from products/services associated with economic activities that qualify as environmentally sustainable; and (ii) the proportions of capital expenditure and operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable.

The Regulation is due to be implemented in stages. As businesses and financial market participants begin preparing for its implementation, we have published a detailed briefing on its scope and operation.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Greg Mulley
Greg Mulley
+44 20 7466 2771

Covid-19 – latest developments for corporate practitioners

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

Corporate reporting

  • FRC Lab reports – The Financial Reporting Council’s (FRC) Financial Reporting Lab has published two reports which seek to give companies practical guidance on corporate reporting, and investor expectations, in light of the Covid-19 pandemic.
    • Covid-19 – Resources, action, the future covers: resources, including the availability of cash; actions to manage short-term expenditure and ensure viability; and the future and how the decisions taken now ensure the sustainability of the company and impact customers, suppliers and employees. These three areas reflect the Five current questions investors seek information on, published by the FRC Lab in March 2020.
    • Covid-19 – Going concern, risk and viability notes that going concern is not binary, or a pass/fail concept. A company can be a going concern even when one or more material uncertainties exist. However, in those circumstances, those uncertainties should be disclosed, together with management’s consideration of them. In relation to risk reporting, the FRC Lab says investors want to understand how the risks have changed, the specific impact on the company and how management have responded.

Contract

  • Execution of documents – The Law Society has updated its guidance on virtual execution and the use of e-signatures to include tips on how to operate in practice.
  • Covid-19 contract disputes – The economic disruption caused by the Covid-19 pandemic inevitably exposes businesses to heightened legal risk. In particular, counterparties may seek to delay, or avoid, performance and/or terminate agreements. We have published a guide which provides a general overview of the common bases for avoiding contractual obligations in commercial contracts, including a comparison of the key rights and remedies.

Companies House

  • Filings at Companies House – Companies House has developed a temporary service to enable companies to file certain documents online that would usually have to be submitted in a paper format. A list of the documents that can be filed in this way, which is currently quite limited, is available here. Companies House is planning to expand this service before the end of July to enable the upload of resolutions and articles of association.

Other relevant materials

  • Company meetings and insolvency regime – The new Corporate Insolvency and Governance Act 2020, which will both reform the insolvency regime in the UK and introduce relaxations for companies holding meetings while Covid-19 restrictions remain in force, received Royal Asset last night. We will be publishing further commentary in due course. Further information on the then draft Bill and its impact on financial institutions, landlords and supply chains is available here.
  • Insurance – The Financial Conduct Authority (FCA) has published guidance on its expectations for insurers and insurance intermediaries when handling claims and complaints for business interruption policies during the test case brought by the FCA (see our corporate update 2020/10 for brief details on the case).
  • Repairing the balance sheet – As businesses emerge from the immediate shocks of the humanitarian and economic effects of Covid-19 and the public health responses to it, we have published a new guide in which we look at how businesses can begin to rebuild their balance sheets and adapt their funding in order to ensure their long-term ability to thrive.

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

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Gavin Williams
Gavin Williams
+44 20 7466 2153

ESMA report on use of alternative performance measures

The European Securities and Markets Authority (ESMA) has published a report on the use of alternative performance measures (APMs) by EU issuers and on the level of compliance with its APM Guidelines.

The Guidelines, which came into effect in July 2016, define an APM as being a financial measure that is not required as part of an issuer’s financial reporting obligations but which is presented voluntarily by an issuer as an aid to understanding the performance of its business. Examples include net debt, operating earnings and EBITDA. The purpose of the Guidelines is to promote the transparency and usefulness of APMs contained in certain announcements and documents issued by listed companies.

The report highlights that, whilst APMs are widely used, only a minority of issuers comply with all principles of the Guidelines. In light of its findings, ESMA encourages issuers to improve the transparency of disclosures provided in relation to APMs and sets out a number of recommendations (for example in relation to definitions and labels) to assist with compliance. It expects issuers to consider the findings and recommendations of the report when preparing their future communications to the market containing APMs, including in ad-hoc disclosures, financial reports and prospectuses.

Issuers are required to make every effort to comply with the Guidelines and ESMA says that it expects enforcers (the Financial Conduct Authority and Financial Reporting Council in the UK) to take action where appropriate.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Charles Howarth
Charles Howarth
+44 20 7466 2439

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Amy Waddington
Amy Waddington
+44 20 7466 7635

Ben Ward
Ben Ward
+44 20 7466 2093

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038

FRC annual review of the UK Corporate Governance Code

The Financial Reporting Council (FRC) has published its Annual Review of the UK Corporate Governance Code.

The report discusses the quality of reporting against the 2016 edition of the UK Corporate Governance Code in 2019, and the FRC’s expectations for companies reporting against the 2018 edition of the Code this year.

Key messages from the report include:

  • Compliance with the Code – The Report notes that a significant majority of companies claimed full compliance, or near full compliance, with the provisions of the 2016 Code last year. The FRC says that it appears that many companies simply concentrated on achieving strict compliance with the provisions of the Code, and that this approach gave little insight into governance practices. It encourages more thoughtful reporting on the application of the Principles in the 2018 Code.
  • Purpose and culture – Principle B of the 2018 Code states that the board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. The FRC notes that those companies which discussed purpose in their annual report last year tended to conflate mission and vision with purpose. It also notes that some companies substituted what appeared to be a slogan or marketing line for their purpose, which the FRC says is not acceptable. In relation to culture, the FRC notes that a number of companies discussed culture in their annual reports, but there was limited discussion of monitoring and assessing of culture.
  • Workforce engagement – The 2018 Code places greater emphasis on workforce engagement by the board. The FRC says that 2020 reports should include details or real examples of what a company has done to consider, and if appropriate, take forward matters raised by the workforce.
  • Section 172 reporting – The FRC says that many companies had identified their key stakeholders in the annual report in 2019 and had reported on their engagement activities. However, the FRC says that there was limited discussion of the issues that were important to or raised by stakeholders, and consequently to what extent boards had considered these and the impact they had made to strategy.
  • Succession planning and director re-election – The FRC says that many reports lacked detail on succession planning. It also notes that there was varying compliance with provision 18 of the 2018 Code, which requires the Notice of AGM to include the specific reasons why a director’s contribution is, and continues to be, important to the company’s long-term sustainable success.
  • Significant votes against resolutions at shareholder meetings – The FRC expects companies to view all types of votes (including abstentions) when considering whether there has been any significant minority dissent to a resolution, thereby allowing them to engage with shareholders appropriately.

The Report also notes that the FRC will update its Guidance on Risk Management, Internal Controls and Related Financial and Business reporting in due course.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Alex Kay
Alex Kay
+44 20 7466 2447

Caroline Rae
Caroline Rae
+44 20 7466 2916

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038

Minor changes to the Listing and Transparency Rules

The Financial Conduct Authority (FCA) has published minor changes to the FCA Handbook, including the Listing and Transparency Rules.

The FCA consulted on the changes in September 2019.

The changes are:

  • Governance Code – References in the Listing Rules and Transparency Rules to the UK Corporate Governance Code have been updated to reflect the 2018 edition of the Code. The changes apply to financial years beginning on or after 1 January 2019.
  • European Single Electronic Format for annual reports – Under the amended EU Transparency Directive, annual financial reports of companies which have securities listed on an EU regulated market must be published in the European Single Electronic Format (ESEF) for financial years beginning on or after 1 January 2020 (see our corporate update 2019/1). The FCA has added a provision into the Transparency Rules to require issuers to comply with this.

The rule changes took effect on 13 December 2019.

Mike Flockhart
Mike Flockhart
+44 20 7466 2918

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038

European Single Electronic Format

In December 2019, the Financial Conduct Authority (FCA) published its Handbook Notice 72 which set out changes to the FCA Handbook to reflect the implementation requirements for annual corporate reporting in the European single electronic format (ESEF) under the Transparency Directive (2004/109/EU). The changes correspond with the ones proposed in the FCA’s September 2019 consultation paper (CP19/27).

Under the amended EU Transparency Directive, all annual financial reports of companies which have securities listed on an EU regulated market must be published in the ESEF for financial years on or after 1 January 2020.

Mike Flockhart
Mike Flockhart
+44 20 7466 2918

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038