Corporate Law Update

This week:

• The Investment Association publishes a revised version of its Principles of Remuneration for listed companies
• The Government publishes its proposals for on-shoring the EU prospectus, transparency and market abuse regimes in the event of a “no-deal Brexit”
• The Financial Conduct Authority is consulting on further proposed changes to its Handbook in light of Brexit
• A few other items of interest

Investment Association publishes updated remuneration principles

The Investment Association (IA) has published its revised Principles of Remuneration for the forthcoming year, as well as its accompanying letter to remuneration committee chairs.

The IA has reviewed the Principles in light of changes to the remuneration provisions of the UK Corporate Governance Code (the Code) and an AGM season that saw increasing dissent on remuneration resolutions in the FTSE 100.

In particular, it has made the following revisions:

• Director shareholdings. The Principles continue to encourage executive directors and other senior executives to build up a significant holding in their company’s shares. However, they now clarify the extent to which unvested shares, and shares which are vested but either deferred or subject to a holding period and clawback, can count towards the requirement.
• Post-employment holdings – level and duration. The IA now encourages directors to hold their shares for at least two years after leaving a company, in line with Code guidance (which recommends two to three years). However, the Principles now go further than the Code by specifying a minimum level of post-employment holding: the lower of the minimum requirement immediately before the executive leaves and the executive’s actual holding on departure.
• Post-employment holdings – implementation. The Principles now encourage a company’s remuneration committee to state how it proposes to implement post-employment shareholding requirements, such as through employee ownership trusts or nominee account arrangements. They also state that companies should implement these new measures at the earliest opportunity and by no later than the company’s next policy vote.
• Malus and clawback. The IA notes that the current market standard triggers for malus and clawback are gross misconduct and misstatement of results, but that these triggers will rarely occur. It is encouraging companies to impose a “more substantial” list of trigger circumstances, which should be tailored to the business and fully disclosed to shareholders. It also recommends that companies require their directors to sign up to malus and clawback provisions in writing at the time any incentive awards are granted. This is already common practice for financial services firms and may now become more common among listed companies generally.
• Directors’ pension contributions. In line with the Code, these should be made at the rate given to the majority of the company’s workforce to ensure alignment. New executive directors, and directors changing role, should be appointed on this level of contribution. Rates for existing executive directors should be reduced over time, without compensation, to bring them in line.
• Long-term incentive schemes. The IA has reinforced its view that incentive schemes should be equity-based by including an express statement that cash or cash-equivalent awards under schemes should be granted only where needed to settle tax liabilities.
• Restricted share plans. The Principles now contain more detailed guidance on RSPs, including that, whilst investors will assess plans on an individual basis, RSPs may be appropriate in certain sectors (such as those involving commodity pricing or cyclical business models) and in turnaround situations. However, to get shareholder support, RSPs should have some kind of performance underpin (with discretion ultimately lying with the remuneration committee) and a vesting period of at least five years. Companies moving from an LTIP to an RSP structure would be expected to apply a reduction in grant levels of at least 50%, reflecting a more certain outcome for directors.

Overall, the IA has said that its members are concerned that some companies are “still not understanding or responding to the views of their shareholders on remuneration” and feel they have “no option but to vote against a company’s remuneration proposals”.

It will be interesting to see whether the revised Principles have an impact on the structure of listed company remuneration packages. In particular, at the time of writing, we are aware of very few restricted share plans that have managed to win shareholder approval, and those plans were proposed in very specific circumstances. We will see whether the new guidance on RSPs opens the door a little wider.

Government sets out position on prospectuses and market abuse on a no-deal Brexit

The Government has published two technical notices outlining the likely position on two areas – prospectuses and transparency and market abuse – if the UK leaves the European Union (EU) without securing a withdrawal agreement (a so-called “no-deal Brexit”).

HM Treasury is planning to publish draft regulations setting the precise changes out in due course. For the time being, here are the key points arising from the technical notices.

Prospectus passporting

An issuer looking to offer securities to the public, or to admit securities to a regulated market in the European Economic Area (EEA), must issue an approved prospectus. At the moment, if a prospectus is approved by an authority in one EEA state, it can be used in all other EEA states through a process known as “passporting”.

On a no-deal Brexit, passporting would end. An issuer offering or admitting securities in the UK would need to obtain approval for its prospectus from the Financial Conduct Authority (FCA) in addition to any approval required by an EEA authority.

Helpfully, prospectuses that have already been approved in an EEA state at the point of exit would still be usable in the UK until their validity expires. However, neither the Treasury nor the FCA has given any indication that the UK will be introducing any kind of prospective “equivalence regime” to allow a prospectus approved in an EEA state after exit day to be used or “fast-tracked” for approval in the UK.

For issuers looking to offer or admit securities in both the UK and one or more EEA states after exit day, this would represent an increased administrative burden. It could also result in a similar situation to that on merger control (on which we reported earlier this month), where an issuer that is in the very advanced stages of an approval process on exit day but has not yet obtained approval may need to start the entire process again with the FCA.

Financial information and statements

The position on the contents of a prospectus is somewhat brighter. The Government intends to retain existing equivalence decisions granted by the European Commission for historical financial information included in a prospectus. Issuers would therefore continue to be able to present historical financials under Canadian, Chinese, Japanese, South Korean or US accounting principles.

Likewise the Treasury also proposes to grant equivalence for EU-adopted International Financial Reporting Standards (EU-IFRS) in time for exit day, allowing issuers to continue to present historical financial information in prospectuses and to prepare their financial statements under EU-IFRS.

Separately, the Department for Business, Energy and Industrial Strategy (BEIS) is planning to issue draft legislation in the new year dealing with the future adoption of “UK-adopted International Accounting Standards”, which will hopefully allow for the smooth implementation of IFRS here once the UK leaves the EU-IFRS regime.

These proposals are welcome confirmations for current and prospective issuers and will contribute greatly to minimising accounting disruption in a no-deal scenario.

Market abuse

The position on market abuse and transaction reporting is thankfully simpler. The current regime under the EU Market Abuse Regulation (MAR) will continue largely unchanged under a new “UK Market Abuse Regulation” (or UK MAR).

In particular, persons discharging managerial responsibilities (PDMRs) and their closely associated persons would continue to have to report transactions in their issuer’s securities. Issuers would also continue to keep insider lists and provide them to the FCA on request, and notify the FCA of any decision to delay the public disclosure of inside information.

Perhaps the most interesting point is that, according to the technical notice, UK MAR would continue to apply to instruments traded or admitted to trading on a UK or an EU trading venue, in theory allowing the FCA to investigate the full range of transactions that currently fall within MAR.

FCA consults on Brexit-related changes to its Handbook

The Financial Conduct Authority (FCA) has published a second consultation on changes to its Handbook to reflect the UK’s pending withdrawal from the European Union (EU). The consultation follows a first consultation on which we reported in October).

The FCA is proposing to make changes throughout its Handbook. We have set the key changes out below. As with the FCA’s first consultation, the changes would come into effect if the UK leaves the EU without agreeing a withdrawal (or implementation) agreement, or when that agreement expires:

• “Free float”. At the moment, the FCA’s Listing Rules require a listed company to ensure that at least 25% of its shares are in public hands within the European Economic Area (EEA). From exit day, this would be expanded to shares in public hands anywhere in the world, making satisfying the requirement easier for some companies.
• Transparency requirements and vote-holder notifications. Chapters 4 and 6 of the FCA’s Disclosure and Transparency Rules (DTR) require publicly traded companies (issuers) to disclose certain information to the market. This includes periodic financial information and information in connection with company meetings. Chapter 5 of the DTR requires issuers and other persons to publicly notify any major changes in the holdings of their voting rights.
  
  Currently, DTR 4 to 6 apply to issuers admitted to an EU regulated market but whose “home competent authority” is the FCA. DTR 5 also applies to issuers admitted to a UK “prescribed market” (such as AIM or NEX Exchange Growth).
  
  Following exit day, DTR 4 to 6 would apply to issuers on a UK regulated market (such as the London Stock Exchange Main Market), wherever its home authority is located. So, an issuer on a UK regulated market whose home authority is not the FCA would become subject to DTR 4 to 6. Conversely, an issuer on a non-UK regulated market would no longer be subject to DTR 4, 5 or 6.
  
  DTR 5 would continue to apply to issuers on UK prescribed markets.
• Financial statements. Currently, issuers on a UK regulated market must prepare their financial statements under EU-adopted International Financial Reporting Standards (EU-IFRS). Following exit day, these companies would need to prepare their accounts under UK-adopted IFRS or an equivalent regime. The Government is preparing to issue an “equivalence decision” in time for exit day so that issuers can continue to prepare financial statements accounts using EU-IFRS.
• Audit committees. At the moment, a regulated market issuer must have an audit committee, unless it is a subsidiary undertaking and its parent undertaking is required to have an audit committee under the DTR or equivalent rules in another EEA member state. From exit day, the reference to equivalent rules will disappear. This may mean that some issuers on a UK regulated market may need to form a new audit committee, although this situation is likely to be rare.

The FCA has asked for comments by 21 December 2018.

Other items

• Prospectuses. A draft of the Financial Services (Implementation of Legislation) Bill has been published. The Bill would allow the Government, by way of secondary legislation, to implement certain EU legislation that has been passed but is not yet in effect at the point the UK leaves the EU (so-called “in flight” legislation). This includes the provisions of the Prospectus Regulation that are due to come into force on 21 July 2019.
• Electronic signing. The Law Society has published its response to the Law Commission’s August consultation on electronic execution, on which we recently reported. Broadly, the Society agrees with the Commission’s view that electronic execution is valid, but it recommends that any doubts could be removed through legislation.
• Electronic signing. The City of London Law Society’s Financial and Company Law Committees have also published their response to the Law Commission’s consultation. The Committees agree with the Commission’s view that electronic execution is valid and that there is no need for new legislation to enable the use of electronic signatures.
• Marketing. In June we reported that the Government was proposing to impose personal liability on directors and other senior officers of companies that make unsolicited marketing communications (such as cold calls), including personal financial penalties of up to £500,000. The Government has now published draft regulations to achieve this. The proposals would also apply to members of limited liability partnerships (LLPs).