Corporate Matters – July 2019


New Prospectus Regulation soon to take effect in full
The prospectus regime has been given a significant overhaul by the new Prospectus Regulation which […]
The prospectus regime has been given a significant overhaul by the new Prospectus Regulation which applies in full from 21 July 2019. The regulation makes a number of important changes to a regime that has not changed much since its introduction in 2005.
The overall framework of whether an issuer is required to publish a prospectus for shares and, if so, what must be contained within it, has not significantly changed since the regime’s introduction in 2005 by the Prospectus Directive (2003/71/EC) (the Directive) and the former Prospectus Regulation (809/2004/EC).
The prospectus regime has been given a significant overhaul by the new Prospectus Regulation (2017/1129/EU) (the Regulation) which applies in full from 21 July 2019 (a handful of provisions came into effect in July 2017 and July 2018), replacing the Directive in its entirety. The Regulation makes a number of important changes and incremental improvements to the previous regime. Two key themes run through many of the changes: (i) reducing the length and improving the transparency of a prospectus; and (ii) protecting retail investors. The Regulation will result in a number of practical changes to the process of conducting and documenting offerings and admissions.
The key changes that are introduced by the Regulation can be grouped into the following categories.
General disclosure standard
There is new materiality wording in the disclosure test which recognises that the “necessary information which is material to an investor” in a prospectus may differ depending on the nature of the issuer, the type of securities and the circumstances of the issuer. The scope of necessary information is widened to include the reasons for the issuance and its impact on the issuer. There is also a new requirement for the disclosure to be written and presented in a form which is concise to encourage more focused disclosure.
Prospectus summary
A more prescriptive regime is introduced in an attempt to reduce the length of the summary. A new page limit of seven sides of A4 paper is introduced. The summary must be written in a concise manner and should be read as an introduction to the prospectus. The familiar tabular format is replaced by a requirement that the summary is organised under new question-style subheadings.
Risk factors
The Regulation introduces detailed requirements for the risk factor section of the prospectus. Risks must be material for the purposes of making an informed investment decision and be specific to the issuer. Risk factors will also need to be presented in no more than ten categories, depending on their nature, with the most material risks included first in each category. Risk factors must be corroborated by the content of the prospectus. This means that a risk factor cannot be included that relates to matters not disclosed elsewhere in the prospectus. The European Securities and Markets Authority (ESMA), has published guidance to assist competent authorities in reviewing risk factors in prospectuses and achieve consistency of approach.
Advertisements
The key content requirements for an advertisement are consistency with the prospectus and the inclusion of specific legends regarding the availability of the prospectus. Under the Regulation, these will include providing a hyperlink to the prospectus for electronic communications and providing details of the website on which it can be found on all other communications. Additional requirements apply to advertisements to retail investors. These will need to contain additional specified warnings and, in the case of an oral advertisement, identify the purpose of the advertisement at its start. The scope of things that may constitute advertisements has been broadened from “announcements” under the Directive to “communications” under the Regulation.
Profit forecasts
It will no longer be mandatory to include an auditor’s report on a profit forecast in a prospectus. While an auditor’s report is no longer required, the prospectus will be required to include a statement that the forecast has been compiled and prepared on a basis that is: (i) comparable with the historical financial information; and (ii) consistent with the issuer’s accounting policies. In other words, the issuer will be required to state itself what an auditor currently states in its opinion.
Secondary offerings and simplified disclosure
The Regulation will permit issuers that have been listed for at least 18 months to list and offer new securities, such as under a rights issue or open offer, using a short-form simplified prospectus which will be required to include only one year of accounts.
Universal registration document
The Regulation introduces the concept of a universal registration document. This enables issuers to publish a registration document on an annual basis which it can use to launch offerings by publishing a securities note (that is, the offering sections of a prospectus) on an accelerated basis during the year. This is similar to a US shelf registration programme. The concept is not expected to have a wide take-up except in countries such as France that already follow a similar practice.
WM Comment
The changes brought about by the Prospectus Regulation to the risk factors section of a prospectus are probably the most significant to issuers. The impact is likely to be twofold. Firstly, there may be a greater focus on this section by the issuer in order to ensure compliance with the ESMA requirements, which has the knock-on effect of increasing the time and costs involved in preparing a prospectus. Secondly, competent authorities are likely to raise more comments on the section, especially in the initial period following 21 July 2019, which could also have an impact on the timing of transactions.

Remuneration committee: employee representation will not be mandatory
Government has responded to the recommendations of the BEIS Committee in relation to executive pay. […]
Government has responded to the recommendations of the BEIS Committee in relation to executive pay.
On 13 June 2019, the Business, Energy and Industrial Strategy Committee (the BEIS Committee) published Government’s response to the recommendations contained in its report entitled “Executive Rewards: paying for success”.
In general, Government describes the BEIS Committee’s recommendations as a useful contribution to the continuing public debate on high levels of executive reward. It points to a series of recent and ongoing reforms, including the introduction of pay ratio reporting requirements, amendments to the UK Corporate Governance Code (the Code) and the replacement of the Financial Reporting Council with a new regulator called the Audit, Reporting and Governance Authority (ARGA), and states that its priority is to focus on the effective implementation of these reforms before considering significant further changes.
In relation to section 172 of the Companies Act 2006 and the Code respectively:
- the BEIS Committee recommended that ARGA should monitor how remuneration reports and reporting against section 172 meet the aims of increased transparency and alignment of pay with objectives. Government confirms that this is its expectation also, as part of the new regulator’s expanded and strengthened corporate reporting review function; and
- the BEIS Committee recommended that ARGA should monitor companies’ compliance with the Code with a view to making an assessment of which method of engagement with employees proves most effective and recommend changes. In its response, Government stresses that the effectiveness of individual engagement techniques is a matter for companies and their shareholders to assess.
Of particular note, Government rejected the BEIS Committee’s recommendations that:
- employees should sit on remuneration committees – while Government is aware that several companies are already considering inviting an employee representative to attend at least one meeting of the remuneration committee each year, the huge variety of UK companies and group structures mean one method will not suit all;
- pay ratio reporting should be expanded to include all employers with over 250 employees – Government notes that the introduction of a pay ratio reporting for quoted companies was a significant reform and it intends to monitor the impact of this new requirement when reporting first begins next year before considering any potential extension; and
- remuneration committees should set, publish and explain an absolute cap on total remuneration for executives in any year – Government believes that it is for those committees and shareholders to decide whether executive pay policies should set an absolute cap on total remuneration with the shareholders having a say through the binding vote on executive pay policies which is required at least every three years.
WM Comment
The BEIS Committee has called Government’s response a missed opportunity. However many directors may be relieved that another level of control over the remuneration committee and aspects of pay reporting are unlikely to be taken forward.

New related party rules for Main Market issuers
New rules governing related party transactions for companies listed on the UK’s Main Market came […]
New rules governing related party transactions for companies listed on the UK’s Main Market came into force on 10 June 2019.
The Financial Conduct Authority (FCA) has published changes to the rules in its Handbook on related party transactions which were needed in order to comply with the revised EU Shareholder Rights Directive. The new rules can be found in the Disclosure Guidance and Transparency Rules (DTRs), specifically DTR 1B.1 and DTR 7.3. Affected companies must publicly announce relevant transactions and, in the case of UK companies, obtain prior independent board approval for them.
The main impact of the changes will be felt by companies with a standard listing on the Main Market which will have to comply with announcement obligations for the first time. However, the changes are significant for premium listed companies as well. Although companies with a premium listing are familiar with the related party transaction requirements contained in Listing Rule 11, they will now have to comply with two sets of similar, but slightly different, related party rules. Companies listed on AIM are not affected.
The new rules require UK companies listed on the main market to:
- make an announcement regarding the related party transaction via a Regulatory Information Service (RIS) no later than the time when the related party transaction is agreed. The RIS must include any information necessary to assess whether the transaction is fair and reasonable to the company and independent shareholders;
- obtain board approval for the related party transaction before it is entered into;
- ensure any director connected with the transaction does not participate in the approval process or vote on the relevant board resolution;
- establish and maintain adequate procedures, systems and controls to enable an assessment of whether the related party transaction is in the ordinary course of business and on normal market terms; and
- ensure that the related party is not involved in the above assessment.
The new rules apply to transactions with related parties equal to 5 per cent. or more in size by reference to the issuer’s: (i) assets; (ii) profits; (iii) market capitalisation; or (iv) gross capital. These are similar to the existing class tests for related party transactions with premium listed companies however ‘related party’ has the meaning given to it in international accounting standards (IAS 24) which is wider than the corresponding definition in the Listing Rules. Therefore premium listed companies should bear in mind that the new rules may capture some related party transactions that currently do not need to be announced.
Related party transactions with the same related party (and any of its associates) in any 12 month period must be aggregated and, once the 5 per cent. materiality threshold is reached, both the board approval and disclosure requirements apply to all of the aggregated transactions and not just the one that triggers the rules. This is different to the position under Listing Rule 11 which requires approval and disclosure only of the transaction that triggers the threshold.
WM Comment
The FCA’s new rules apply to financial years beginning on or after 10 June 2019 and so companies within scope will have to comply with the new requirements from the start of the first financial year following 10 June 2019. For example, for companies with a 31 December year end, the rules will need to be complied with from 1 January 2020 onwards.

New proposals to make disclosure of distributable reserves mandatory
Concerns are mounting that the capital maintenance regime is being undermined and that the time […]
Concerns are mounting that the capital maintenance regime is being undermined and that the time has come for the disclosure of distributable and non-distributable reserves to be mandatory within a company’s audited accounts.
Over the last few months there have been numerous reviews and consultations into various aspects of the statutory audit, largely as a result of some high profile company failures. One area where attention has been focussed in several of the reviews is that of distributable reserves and the payment of dividends.
In March 2019, the Business, Energy and Industrial Strategy Committee (the BEIS Committee) produced a report entitled ‘The Future of Audit’ (the BEIS Report) in which it examined one of the core reporting and audit failures that led to the demise of Carillion plc, that of “the impudent payment of dividends out of optimistically booked, and in hindsight unrealised, profits.”
One of the central purposes of producing accounts is to determine a company’s profits, which in turn allows a decision to be made on what proportion of these profits are distributable in the form of dividends to shareholders. Companies can only pay dividends out of past, realised profits which are available for distribution in the company’s distributable reserves.
The law that governs the payment of dividends and protects a company’s share capital is called the ‘capital maintenance regime’ and concern was expressed in the BEIS Report that audit firms and investors have lost sight of capital maintenance as a central purpose of accounts and audit and furthermore that there is little compliance with the regime. Four examples in the BEIS Report illustrate the current poor practice in relation to capital maintenance and the payment of dividends:
- Domino’s Pizza Group plc – £85 million of unlawful distributions over a period of 16 years from 2000;
- Carillion plc – £333 million paid out in dividends between January 2012 and June 2017 which was more than the company generated in cash from its operations in the same period;
- Capita plc – £211 million paid out in dividends in 2017 followed in January 2018 by a request for a £700 million rescue from shareholders;
- AssetCo plc – paid large dividends in 2009 and 2010 despite there being no distributable reserves available.
In its study into the audit market, the Competition & Markets Authority (CMA) stated that the current audit framework and accounting standards fail to deliver a key purpose of audit which is to assess whether a company’s capital is properly protected. The CMA’s view is that because accounts are prepared in accordance with accounting standards, and auditors review the accounts against these standards, the Companies Act 2006 requirements are not necessarily met, a case of company law following the standards rather than the other way around. This was highlighted in the BEIS Report as totally unsatisfactory and an argument put forward that reserves should be broken down in the accounts into distributable and non-distributable and profits between realised and unrealised. Furthermore, realised profits should be those that are realised in cash or near cash (i.e. assets that can readily be converted into cash) and should not include accrued income. The concern of the BEIS Committee is that if directors are permitted to distribute income that they expect to receive, then there are significant risks that in the event that the expected income never materialises, dividends could be paid out of capital, thereby contravening company law.
This idea of identifying distributable and non-distributable reserves in the audited financial statements has also been proposed by the Investment Association (IA). In its response to the ‘Call for Views’ following the review into the quality and effectiveness of audit carried out by Sir Donald Brydon, the IA stated that companies should be required to disclose distributable and non-distributable reserves in their audited accounts. In the IA’s view this disclosure would enhance investors’ confidence in management’s stewardship by demonstrating that dividends are not being proposed out of capital and clarify the headroom between the level of reserves and the proposed dividend. If this information is included in the audited financial statements then it will be subject to the audit. In this context, the IA’s recent report on dividend payments also calls for companies to improve their transparency and publish a ‘distribution policy’ setting out their approach to paying dividends to shareholders.
WM Comment
Although these proposals are some way from becoming law it’s clear that the capital maintenance regime and payment of dividends is a hot topic at the moment. We would not be surprised if the rules were tightened so that distributable and non-distributable reserves have to be identified in the financial statements together with a more restrictive definition of realised profits. This is an important area for all members of the board, not just the FD, as it impacts directly on directors’ duties. Directors need to consider both the immediate cash flow implications of a distribution and the continuing ability of the company to pay its debts in order to discharge their duties. Directors may also be in breach of their fiduciary duties in authorising or permitting the company to pay an unlawful dividend and can be made to personally repay the amount of the unlawful distribution. The Corporate team at Walker Morris are well placed to help you understand the capital maintenance regime and would be happy to help prepare your board for the likely changes. The question of whether reserves are distributable or non-distributable will take on more importance and directors need to understand the difference.

Consultation launched into corporate transparency and reform of the Companies Register
On 5 May 2019 the Department for Business, Energy and Industrial Strategy published a consultation […]
On 5 May 2019 the Department for Business, Energy and Industrial Strategy published a consultation on proposals to increase the transparency of UK corporate entities and to enhance the role of Companies House. The potential reforms would amount to the biggest changes to the UK system for setting up and operating companies since the UK Company Register was created in 1844.
On 5 May 2019 the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation on proposals to increase the transparency of UK corporate entities and to enhance the role of Companies House. The proposed reforms aim to improve the accuracy of information on the Companies Register and to strengthen the UK’s ability to combat economic crime. The consultation explores whether more information should be required about the people registering, running and owning companies and other limited liability entities, as well as the entities themselves. The consultation also puts forward ideas for improved checks on that information, including reform of the statutory powers of the Registrar of Companies.
The proposals fall into five parts:
- Part A: Knowing who is setting up, managing and controlling corporate entities. Government proposes that individuals who have a key role in companies should have their identity verified. This would apply to company officers, people with significant control (PSCs) and those filing information. Government also considers whether more information should be disclosed about shareholders, including possible identity verification.
- Part B: Improving the accuracy and usability of data on the Companies Register. This part of the consultation sets out a series of proposed reforms that would deliver better quality information on the register. These include extending the powers of Companies House to query and seek corroboration on information before it is entered on the register and to make it easier to remove inaccurate information from the register. In addition, Government is proposing improvements to the process and delivery of annual accounts to Companies House.
- Part C:Protecting personal information. In this part Government outlines how Companies House will store and control access to information if its proposals are adopted. It outlines how personal information will be stored and accessed, the circumstances under which it may be disclosed and to whom. Under the identity verification proposals, BEIS stress that access to the register will be carefully managed, allowing only identified or authorised persons to file information. New processes will be implemented for sensitive information to be protected.
- Part D: Ensuring compliance, sharing intelligence, other measures to deter abuse of corporate entities. Government proposes various measures, including routine cross-checking of information on the register against data held by other Governmental and private sector bodies, requiring companies to provide details of their bank account, and limiting the number of concurrent directorships that an individual can hold.
- Part E:Implementation. The final part addresses implementation issues. The proposals in the consultation, if implemented in full, would go to the core of the Companies Act and take several years to complete. There are significant implications for the Companies House operating model and approach and Companies House charges are likely to increase. BEIS states that all of the services that Companies House provides will be modernised and transformed to provide a better service to customers.
WM Comment
The consultation closes on 5 August 2019 and we will keep you updated as to which proposals are adopted.

Directors’ remuneration: new regulations are in force
The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 have come into force. […]
The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 have come into force. The regulations introduce new requirements in relation to a company’s remuneration policy and remuneration report.
The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 (2019 Regulations) came into force on 10 June 2019 and any remuneration policies and reports approved after this date will need to comply with these new regulations. The 2019 Regulations implement Article 9a (the right to vote on the remuneration policy) and Article 9b (information to be provided in and right to vote on the remuneration report) of the 2017 Shareholder Rights Directive to the extent that were not previously given effect under UK law. Implementation takes effect by way of amendments to the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410).
The 2019 Regulations widen the scope of the existing framework for directors’ remuneration reporting to include unquoted traded companies (which means the small number of UK companies with shares traded on a UK regulated market but not on the Official List and so cover, for example, Special Fund Segment and High Growth Segment companies). They also require for the first time that the remuneration of the CEO and any Deputy CEO is reported even if they are not statutory directors sitting on the board of the company. Other key changes are listed below.
Directors’ remuneration policy
Under the 2019 Regulations remuneration policies must:
- provide details on vesting and holding periods of share-based remuneration;
- give an indication of the duration of a director’s service agreement; and
- set out the decision-making process for the determination, review and implementation of the remuneration policy, explaining any significant changes from previous policies.
In addition:
- the date and result of a shareholder vote on the remuneration policy must be included on the company’s website as soon as reasonably practicable and remain there for the life of the policy;
- where a company proposes a remuneration policy to shareholders and loses the vote, it must bring a new policy to a shareholder vote at the next accounts or general meeting; and
- where payments to directors for loss of office are inconsistent with the approved remuneration policy, shareholder approval will need to be obtained by way of an amendment to the remuneration policy rather than a vote on the specific payment.
Directors’ remuneration report
Under the 2019 Regulations remuneration reports must:
- be available free of charge on the company’s website for ten years;
- show the split of fixed and variable remuneration rewarded to each director in each year;
- specify changes to the exercise price of directors’ shares or share options;
- compare the annual change of director remuneration against annual change of employee remuneration; and
- compare the annual change of director remuneration against the company’s performance.
WM Comment
The Department for Business, Energy and Industrial Strategy (BEIS) has published a Q&A document to assist companies in understanding the reporting requirements introduced by the 2019 Regulations which summarises the new requirements. The document can be accessed here.

A new energy and carbon reporting framework is in force
A new energy and carbon reporting framework applies from 1 April 2019, following abolition of […]
A new energy and carbon reporting framework applies from 1 April 2019, following abolition of the CRC Energy Efficiency Scheme and the introduction of corresponding increases in rates of climate change levy.
The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (2018 Regulations), have been in force since 1 April 2019 and implemented Government’s policy on Streamlined Energy and Carbon Reporting (SECR). The 2018 Regulations bring in additional disclosure requirements for quoted companies and also introduce requirements for large unquoted companies and limited liability partnerships to disclose their annual energy use and greenhouse gas emissions, and related information. The definition of ‘large’ is the same as applies in the existing framework for annual reports and accounts. The SECR requirements mean that there will be an almost seven-fold increase in the number of companies required to comply with energy and carbon reporting legislation.
The 2018 Regulations apply to:
- quoted companies (those whose equity share capital is officially listed on the Main Market of the London Stock Exchange or is officially listed in an European Economic Area State or is admitted to dealing on either the New York Stock Exchange or NASDAQ);
- large unquoted companies (whether registered or unregistered) which are required to prepare company accounts and reports;
- large LLPs.
The 2018 Regulations are designed to:
- increase awareness of energy costs within large and quoted organisations, including enhanced visibility to key decision makers;
- create more of a level playing field among large organisations, in terms of energy and emissions reporting;
- ensure administrative burdens associated with energy and emissions reporting are proportionate and broadly aligned to existing energy reporting requirements and the business reporting framework;
- provide organisations with the right data to inform adoption of energy efficiency measures and opportunities to reduce their impact on climate change; and
- provide greater transparency for investors, and other stakeholders, on business energy efficiency and low carbon readiness.
WM Comment
The new mandatory reporting requirements imposed by the 2018 Regulations apply to financial years beginning on or after 1 April 2019.