Corporate Matters – April 2017
Print newsletter
The duty to report on payment practices – April 2017
We have reported previously on new regulations which oblige large companies (or LLPs) to publish […]
We have reported previously on new regulations which oblige large companies (or LLPs) to publish a report on their payment practices, policies and performance. A “large” company for these purposes is one that satisfies two of the following criteria:
- an annual turnover over £36 million
- a balance sheet total over £18 million
- on average, more than 250.
The new rules come into force on 6 April 2017 and apply to financial years starting on or after that date.
From that date, qualifying large companies (and LLPs) will have to publish and update, every six months, information relating to their payment practices and policies for business-to-business contracts under which they are supplied with goods, services or intangible assets and explain how they have performed in relation to those practices and policies. Non-compliance can result in unlimited fines.
WM comment
If you are caught by these regulations and need help with how to comply, please do not hesitate to contact the writer.

FCA announces consultation on changes to the Prospectus Rules
The new Prospectus Regulation (Regulation) which replaces the Prospectus Directive is due to come into […]
The new Prospectus Regulation (Regulation) which replaces the Prospectus Directive is due to come into force in May or June this year. The Regulation is directly applicable and so will not require UK legislation to implement it in this country. Most aspects of the Regulation will only apply 24 months after it comes into force. There are certain provisions, however, that will apply immediately and it is in relation to those measures that the FCA has launched its consultation.
The measures relate to the exemptions available to issuers in relation to the obligation to publish a prospectus when their securities are to be admitted to trading on a regulated market, commonly known as the ‘10% exemption’ and the ‘conversion or exchange exemption’.
10% exemption
Under the current Prospectus Directive, an issuer does not need to publish a prospectus for an admission of shares to a regulated market if the shares represent, over a period of 12 months, less than 10% of the number of shares of the same class already admitted to trading on the same regulated market. This provision is implemented in the UK by PR1.2.3R(1). Under the Regulation, the 10% threshold is increased to 20% and the exemption applies not just to shares but to all securities.
Conversion or exchange exemption
Currently, an issuer does not need to publish a prospectus for an admission of shares to a regulated market for shares resulting from conversion or exchange of other transferable securities if the shares are of the same class as the shares already admitted to trading on the same regulated market. This provision of the Prospectus Directive is implemented in the UK by PR1.2.3R(7).
Under the Regulation, this exemption is limited to an increase of less than 20% of the number of shares of the same class already admitted to trading on the same regulated market over a period of 12 months. This measure is more restrictive than is currently in place but will not apply in the following situations:
- a prospectus has already been drawn up for the securities ‘giving access to’ the shares to be admitted to trading
- the securities ‘giving access to’ the shares to be admitted to trading were in issue before the Regulation comes into force.
FCA Proposals
The FCA is proposing to amend the existing Prospectus Rules by removing the existing exemptions and to refer instead to the exemptions contained in the Regulation. Although described as a consultation paper, issuers should expect these proposed changes to take effect as soon as the Regulation comes into force.
WM comment
We will provide an update when the implementation date of the Regulation is announced. Since it may only be a couple of months away, if you would like to discuss any aspect of the Regulation, please do not hesitate to contact the writer.

When is a parent company liable for the acts of its subsidiary?
In His Royal Highness Emere Godwin Bebe Okpabi v Royal Dutch Shell plc [1] the High Court […]
In His Royal Highness Emere Godwin Bebe Okpabi v Royal Dutch Shell plc [1] the High Court was asked to establish whether a duty of care was owed by a parent company with regard to operations carried out by its subsidiary and therefore whether, in this instance, the English courts had jurisdiction to hear the claim.
The case concerned two sets of proceedings brought by around 42,500 Nigerian citizens against Royal Dutch Shell plc (RDS) and Shell Petroleum Development Company of Nigeria (SPDC). The Nigerians claimed that they had suffered damage as a result of oil spills from the defendants’ pipelines in the Niger Delta.
RDS is the ultimate parent company of the whole Shell group including SPDC and is incorporated in England, where it has its registered office and is listed on the London Stock Exchange. SPDC is registered in Nigeria and is incorporated under the laws of Nigeria.
The claimants’ case was that RDS was responsible for the acts and omissions of SPDC. They alleged that the exploration for oil carried out by SPDC led to environmental damage in the Niger Delta caused by oil pollution and that both companies were legally responsible.
The defendants argued that RDS did not owe a duty of care to the Nigerian citizens. RDS alleged that SPDC was responsible for all operational decisions in Nigeria and that RDS simply acted as a holding company.
Judgment
The court ruled that RDS did not owe a duty of care to the claimants and that there was no real issue to be tried between the claimants and RDS. Therefore it followed that any action for damages against SPDC had to take place in the Nigerian courts and not in the UK.
The court confirmed that RDS and SPDC were two separate legal entities forming part of a group of companies. The court commented that “membership of the same group does not of itself clothe RDS, the ultimate holding company, with responsibility for acts or omissions on the part of subsidiary companies within the group. This is a fundamental principle of the law of England concerning the separate legal personality of subsidiary companies.”
The claimants further argued that public statements regarding the Shell Group’s commitment to environmental issues established a duty of care on behalf of RDS in its own right. However, the judge did not consider that statements made to fulfil RDS’s stock exchange listing obligations were sufficient to establish a duty of care on its part, commenting:
“It is highly unlikely in my judgment that compliance with such disclosure standards could, of itself, be characterised as an assumption of a duty of care by a parent company over the subsidiary companies referred to in those statements. There is certainly no authority to this effect and in the absence of any, I would hold that such compliance cannot in itself be a sufficient factor to [find] a duty of care on the part of a parent holding company.”
Duty of care
In determining whether RDS owed a duty of care to the claimants, the court examined the threefold test applied by Caparo v Dickman [2]:
- the damage should be foreseeable
- there should exist a relationship of proximity and
- it should be fair, just and reasonable to impose a duty of care.
The court held that the second and third limbs of the test would be problematic in this case. With regard to the second limb of the test, the court noted that:
- RDS did not hold shares in SPDC
- RDS did not conduct any oil operations itself
- although two officers of RDS sat on the executive committee of the Shell Group of companies, those two constituted a minority of that membership
- RDS was prohibited by Nigerian law from conducting operations in Nigeria
- a joint venture was in place that was engaged in oil operations in Nigeria, of which RDS was not a member and
- imposing a duty of care on RDS would potentially impose “liability in an indeterminate amount, for an indeterminate time, to an indeterminate class”.
With regard to the third limb of the test, the court noted that:
- Nigeria has established a statutory framework which imposes obligations on companies engaged in the oil business to provide compensation for damages. SPDC had a strict liability for oil spills and therefore concepts of fairness, justice and reasonableness did not require the imposition of a duty of care on RDS
- there was evidence that the claimants were entitled to claim compensation only from SPDC under Nigerian law
- RDS was prohibited by Nigerian law from performing operations and had no oil pipelines or associated infrastructure in Nigeria
- RDS simply held shares in its subsidiaries as if it were an investment holding company and
- the activities in question were carried out by SPDC as part of the joint venture with the Nigerian state.
Summary
The fact that two companies form part of the same group does not in itself impose responsibility on the parent for the acts of its subsidiary. The level of involvement of the parent in the operations of the subsidiary will be important in establishing whether a duty of care exists.
WM comment
The case is a welcome confirmation that companies, even when part of the same group, have separate legal identities. However, it would be interesting to see whether the case could have been decided differently if it had been shown that the parent company actually had knowledge of the actions and a high level of involvement in the business of the subsidiary.
_______________
[1] [2017] EWHC 89 (TCC)
[2] ([1990] 2 AC 605)

Corporate Governance – a review on race in the workplace
On 28 March 2017, the McGregor-Smith review on race in the workplace and Government’s response […]
On 28 March 2017, the McGregor-Smith review on race in the workplace and Government’s response were published. The review makes a number of recommendations to improve diversity within companies and organisations. These include:
- all listed companies and businesses with more than 50 employees should publish a breakdown of employees by race, ideally by pay band, on their website and in their annual report
- Government should legislate to ensure that workforce data broken down by race and pay band is published
- businesses with more than 50 employees should identify a person at board-level to be responsible for all diversity issues, including race, who should be held to account for the overall delivery of policy. To ensure this happens, Chairs, CEOs and CFOs should state what steps they are taking to improve diversity in their statement within the annual report.
In its response, Government states that it believes that a non-legislative solution is the way forward but that it will monitor progress and be ready to legislate if sufficient progress towards race diversity is not made. It notes that companies are already required to use the strategic report to document information about their employees and social and community issues and that businesses can choose to report information such as diversity of their employees as part of this.
The Business Minister has written to the CEOs of all the FTSE 350 companies calling on them to take up the following key recommendations:
- to publish a breakdown of their workforce by race and pay
- to set ‘aspirational targets’ in relation to race diversity
- to nominate a board member to deliver on those targets.
WM comment
It is interesting to note that Government believes that legislation is not necessary to implement the findings of the review. We shall have to wait and see whether that continues to be the view or whether legislation is proposed in the future.

Market abuse – the FCA issue a final notice to Tesco
On 28 March 2017, the Financial Conduct Authority (FCA) announced that Tesco plc and Tesco […]
On 28 March 2017, the Financial Conduct Authority (FCA) announced that Tesco plc and Tesco Stores Limited (Tesco) had agreed that they had committed market abuse in relation to a trading update published on 29 August 2014 which gave a false or misleading impression about the value of publicly traded Tesco shares and bonds.
The trading update in August stated that Tesco expected the trading profit for the first half of the year to be in the region of £1.1 billion. Tesco then published a further trading update on 22 September 2014 in which it announced that it had identified an overstatement of its expected profit for the half year.
The FCA held that as a result of the false or misleading information within the August announcement, the market price for Tesco shares and bonds was inflated. This continued until Tesco issued the corrective statement in September. Purchasers of shares and bonds between these two dates paid a higher price than they would have paid had the false impression not been created.
This is the first time the FCA has used its powers under section 384 of the Financial Services and Markets Act to require a listed company to pay compensation for market abuse. Tesco have agreed to pay compensation to all those investors who purchased Tesco shares and bonds on or after 29 August 2014 and who still held those securities when the statement was corrected on 22 September 2014.
WM comment
As we have commented previously, compliance with MAR is a substantial undertaking both for companies and Nomads/sponsors. It is clear that the FCA intends to enforce its powers under the Financial Services and Markets Act to ensure that market abuse doesn’t occur. The message to take from Tesco’s experience is to make sure that if any corrective statements are required, they are issued as soon as possible to limit the amount of damage that is caused.

FRC to review the UK Corporate Governance Code
The Financial Reporting Council (FRC) has announced it is to undertake a fundamental review of […]
The Financial Reporting Council (FRC) has announced it is to undertake a fundamental review of the UK Corporate Governance Code (Code). The review will take account of the findings of the FRC’s corporate culture project and the issues raised in the government’s recent green paper on corporate governance reform.
The FRC will seek input from a wide range of stakeholders including its recently established ‘Stakeholder Advisory Panel’ of high profile representatives from a wide variety of sectors.
Speaking at the launch of the review, Sir Win Bischoff, Chairman of the FRC said, “The Prime Minister has a vision of an economy that, in her words, ‘works for everyone’. This needs UK businesses to thrive so that all stakeholders including workers, customers, suppliers and society itself benefit through jobs growth and prosperity. With all this in mind, we will conduct a review of the current UK Corporate Governance Code. This will consider the appropriate balance between the Code’s principles and provisions. In pursuing any changes, the current strengths of UK governance: the unitary board, strong shareholder rights, the role of stewardship and the ‘comply or explain’ approach, must be preserved. Any changes to the regulatory frameworks and to the Code will be done carefully and through full consultation with a wide range of stakeholders.”
The outcome of the review is expected in late 2017.
WM comment
We will provide an update when the outcome of the review is published.

When is a loan to a Director a benefit in kind and subject to a tax charge?
Loans to directors and employees are frequently used by companies as part of their staff […]
Loans to directors and employees are frequently used by companies as part of their staff remuneration packages. Common examples include loans to buy shares, season ticket loans and loans to pay income tax or NICs on the exercise of share options.
A benefit in kind tax charge will arise on a loan that meets each of the following conditions:
- the loan is an ’employment related loan’
- it is interest free or the interest rate is below the official interest rate
- the loan does not fall within any of the prescribed exceptions, the most notable of which is the £10,000 de minimis exception.
On 8 March 2017 regulations were made to reduce the official rate of interest on employment related loans from 3 per cent to 2.5 per cent with effect from 6 April 2017. Therefore if you do not want your directors to face a tax charge, the company should charge interest at a rate greater than 2.5 per cent.
WM comment
We will provide another update if the interest rate changes again in the future.

ICSA issues revised guidance on terms of reference for audit committees
Companies are required to go through a formal process of considering their internal audit and […]
Companies are required to go through a formal process of considering their internal audit and control procedures, assessing the effectiveness of the external audit process, and overseeing the relationship with their external auditor. As part of this process, it is essential that the audit committee is properly constituted with a clear remit and identified authority, and that it has processes in place to enable directors serving on audit committees to perform their role.
ICSA has published a revised guidance note which has been revised primarily to reflect the updated editions of the UK Corporate Governance Code and Financial Reporting Council (FRC) Guidance on Audit Committees both published in April 2016.
Changes to the model terms of reference for audit committees are numerous but include:
- deletion of the provision limiting the extension of appointments to two further periods of three years (following an initial period of appointment of up to three years), provided that the members of the committee continue to be independent
- a new recommendation that one member of the remuneration committee and, where relevant, one member of the risk committee should also sit on the audit committee
- a recommendation that all members of the committee should be independent, non-executive directors
- a provision that notices, agendas and supporting papers can be sent in electronic form where the recipient has agreed to receive documents in such a way
- an expansion of the duties of the committee to include:
- in relation to financial reporting, that the committee reviews any other statements requiring board approval which contain financial information first, where to carry out a review prior to board approval would be practicable and consistent with any prompt reporting requirements under any law or regulation including the Listing Rules or Disclosure Guidance and Transparency Rules sourcebook
- in relation to narrative reporting, where the committee is requested by the board to advise it on whether the content of the annual report and accounts is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy, the committee should also advise the board on whether the annual report and accounts informs the board’s statement in the annual report on these matters
- that the internal audit charter must be approved annually by the committee to ensure it is appropriate for the company’s current needs. The committee must ensure that the internal audit has unrestricted scope and there must be open communication between different functions. The committee should consider whether an independent, third party review of internal audit processes is appropriate
- in relation to the external audit, the terms of reference have been amended to refer to the revised FRC Ethical Standard published in June 2016
- in relation to the committee’s duty to develop and recommend to the board the company’s formal policy on the provision of non-audit services by the auditor, the policy should consider the nature of the non-audit services, whether the external audit firm is the most suitable supplier, the fees for non-audit services and the criteria governing compensation
- when the audit committee works and liaises with all other board committees, it should take particular account of the impact of risk management and internal controls being delegated to different committees.
WM Comment
The provisions of the UK Corporate Governance Code ensure that companies are required not only to go through a formal process of considering their internal audit and control procedures and evaluating their relationship with their external auditor, but to be seen to do so in a fair and thorough manner. The guidance provided by ICSA is useful as it draws on the experience of company secretaries and is based on best practice carried out in some of the UK’s largest listed companies.