Corporate Matters – June 2018


Corporate governance reforms – an update on timescales
Secondary legislation has been published setting out new reporting requirements. We look at how the […]
Secondary legislation has been published setting out new reporting requirements. We look at how the changes to corporate governance will affect companies in 2019.
At the start of June the House of Commons Library published a briefing paper on corporate governance reform. The paper provides an overview of the existing corporate governance framework, including a history of the UK Corporate Governance Code and how it interacts with the directors’ duties codified in the Companies Act 2006. The briefing paper then goes on to explain the planned reforms announced by the Government in August 2017 and provides an update on timescales as to when these reforms will take effect.
As reported in our September Corporate Matters last year it was hoped that secondary legislation would be introduced in March of this year with the reforms taking effect by early summer. However, the Government has now indicated that the reforms will apply to financial years beginning on or after 1 January 2019 to coincide with the new UK Corporate Governance Code being introduced by the Financial Reporting Council.
To facilitate this new timescale draft secondary legislation was laid before Parliament on 11 June 2018. The draft Companies (Miscellaneous Reporting) Regulations 2018 (Regulations) introduce new company reporting requirements on executive pay, corporate governance arrangements, and how directors are having regard to the matters in section 172 of the Companies Act 2006. In the future, additional content will be required in the strategic report, directors’ report and directors’ remuneration report.
The Regulations will require quoted companies with more than 250 employees to:
- Report annually in their remuneration report on the ratio of CEO pay to the average pay of their UK workforce
- Provide a clearer explanation in remuneration policies of the range of outcomes from share based incentive schemes.
The Regulations also require:
- Companies to include in their strategic report a statement describing how the directors have had regard to section 172 of the Companies Act 2006 when performing their duties
- Companies with 250 or more UK employees to include in the directors’ report a statement on the extent of the company’s engagement with employees and other stakeholders and to provide further explanation on how the directors have complied with the duty under section 172 to have regard to these stakeholders
- Very large companies (more than 2,000 employees or a turnover of more than £200 million) to provide a statement of corporate governance arrangements in the directors’ report and also on the company’s website stating which corporate governance code, if any, they applied in the financial year in question.
WM comment
The Department for Business, Energy and Industrial Strategy has published a list of frequently asked questions (FAQs) to help companies and stakeholders understand how they will be affected by the new reporting requirements. The Regulations are due to come into force on 1 January 2019 which gives companies six months to prepare for the changes. The team at Walker Morris can help if you are unclear as to how these changes will affect your corporate governance arrangements.

Corporate governance for large private companies
As already reported in this issue of Corporate Matters, large private and unlisted public companies […]
As already reported in this issue of Corporate Matters, large private and unlisted public companies will be required in the future to include a statement in the directors’ report about their corporate governance arrangements. To help companies comply with these new requirements the FRC has published for consultation the ‘Wates Corporate Governance Principles for Large Private Companies’.
On 13 June 2018, the Financial Reporting Council (FRC) issued for consultation a draft of the Wates Corporate Governance Principles for Large Private Companies (Wates Principles). These principles are designed to help companies comply with the draft Companies (Miscellaneous Reporting) Regulations 2018 which are due to come into force on 1 January 2019.
The proposed Wates Principles are voluntary and companies can choose to adopt the most appropriate code for them, or none at all as long as they explain why this is the case and what other governance arrangements have been made. More broadly, the FRC hopes that the Wates Principles will help companies of all sizes understand good practice in corporate governance and not just those caught by the new legislation.
There are six principles and each principle is supported by non-exhaustive guidance. The principles are:
- Purpose: an effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
- Composition: effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.
- Responsibilities: a board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision-making and independent challenge.
- Opportunity and risk: a board should promote the long-term success of the company by identifying opportunities to create and preserve value and establish oversight for the identification and mitigation of risk.
- Remuneration: a board should promote executive remuneration structures aligned to sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.
- Stakeholders: a board has a responsibility to oversee meaningful engagement with material stakeholders, including the workforce, and have regard to that discussion when taking decisions. The board has a responsibility to foster good relationships based on the company’s purpose.
WM comment
Responses to the consultation are requested by 7 September 2018 and we understand that the final principles and guidance will be published in December 2018.

Changes on the horizon for the IPO process
New rules in the FCA’s Conduct of Business Sourcebook take effect next month and will […]
New rules in the FCA’s Conduct of Business Sourcebook take effect next month and will lead to significant changes in the timing, sequencing and documents required in the UK IPO process.
The Financial Conduct Authority (FCA) has introduced new rules in its Conduct of Business Sourcebook (COBS) which come into force on 1 July 2018. The aim of the new rules is to improve the range, quality and timeliness of the information that is made available to market participants during the initial public offering (IPO) process. The new rules apply to all IPOs where shares are admitted to trading on a regulated market in the UK but do not apply to IPOs on AIM or other multilateral trading facilities.
Under the new rules, unconnected analysts must be given the same access to, and information about, the IPO candidate as connected analysts and will have the opportunity to review an approved disclosure document containing key information on the IPO candidate to enable the unconnected analyst to produce pre-IPO research.
An unconnected analyst is an analyst in a firm that is not part of the syndicate of underwriting banks on the IPO whereas the connected analyst is one in the research division of the underwriting syndicate members. The FCA hopes that by providing this access and information to unconnected analysts, a wider range of views on the IPO candidate will be available to potential investors in addition to the views of the analysts at the syndicate banks.
The key changes to COBS are as follows:
- Before any connected analysts can receive information on the IPO candidate and publish any connected research:
- syndicate banks must select a range of unconnected analysts and give those analysts access to information on an IPO candidate and its management, either at the same time as the syndicate banks’ connected analysts (referred to as joint access) or in a manner that results in all analysts receiving access to the same information (referred to as separate access); and
- the IPO candidate must publish an approved prospectus or registration document before connected research can be shared (COBS 11A).
- New guidance on conflicts of interest which clarifies that participating in pitches for new business includes a syndicate bank’s analyst interacting with an IPO candidate’s management, shareholders or corporate finance advisers before the bank has accepted a mandate to carry out underwriting or placing services (COBS 12).
Options for access
As referred to above, IPO candidates will have two options for providing access to unconnected analysts. They can provide joint access which means that unconnected analysts are allowed access to information at the same time as the connected analysts and in which case connected research can be released one day after the approved disclosure document is published.
Alternatively separate access can be provided to unconnected analysts which means that information and access to the IPO candidate can be given after the connected analysts, provided that the unconnected analyst can access the information before connected research is published. If separate access is provided, connected research cannot be released until at least seven days after an approved disclosure document is published.
Responses to the FCA’s consultation in the rule changes indicated that most syndicate banks prefer the option of providing separate access despite the seven day delay between the publication of the disclosure document and the release of connected research. Clearly, whichever option is chosen there are implications on the IPO timetable. If separate access is chosen the due diligence and verification exercises will need to have been completed earlier than is typically the case at the moment.
Disclosure Document
The requirement to publish a disclosure document before connected research can be shared is the other major change to the rules. The disclosure document can either be a prospectus or a registration document. Since it is unlikely that an IPO candidate would be ready to publish a prospectus so early in the IPO process it is thought that a registration document will be used in most cases.
According to the FCA, it is envisaged that the UK will adopt the model of a tripartite prospectus with the registration document being published in advance of connected research, and the securities note and summary being published later in the process when marketing begins.
The Prospectus Regulation sets out the required minimum contents of the registration document. These include:
- a description of the business of the IPO candidate
- risk factors regarding the IPO candidate
- information about principal markets, properties, corporate governance and shareholders
- an operating and financial review
- audited financial information
- a statement on any significant changes to the IPO candidate’s financial and trading position since the last accounts date.
WM comment
Clearly these are significant changes to the IPO process which affect timing and the documents required. As well as the main changes outlined above, the new rules will also have an impact on other areas of the IPO process such as the pathfinder prospectus and pre-deal announcements. It will be interesting to see how market practice develops.

FCA consults on the disclosure of inside information under Market Abuse Regulation
The Financial Conduct Authority is consulting on a proposed change to its guidance covering the […]
The Financial Conduct Authority is consulting on a proposed change to its guidance covering the delay in the disclosure of inside information under the Market Abuse Regulation.
On 11 June 2018 the Financial Conduct Authority (FCA) published a consultation on a proposed update to its existing technical note on periodic financial information and inside information, including the delay in the disclosure of inside information under Article 17(4) of the Market Abuse Regulation (MAR).
In the proposed amended guidance, the FCA stresses that the requirement under MAR to disclose inside information applies even when issuers are in the process of preparing periodic financial reports and that issuers should not adopt a blanket approach regarding the assessment of the status of information they hold. Issuers are expected to exercise judgment and conduct assessments in good faith. The amended guidance also sets out an example of a legitimate interest of an issuer which may exist when an issuer is in the process of preparing a periodic financial report.
The proposals follow the publication of ESMA’s Guidelines on delay in the disclosure of inside information under MAR. These guidelines give non-exhaustive and indicative examples of legitimate interests of issuers that are likely to be prejudiced by immediate disclosure of inside information, and of situations in which delay of disclosure is likely to mislead the public.
WM comment
The closing date for the consultation is 23 July 2018 and we will keep you updated as to the outcome.

Changes to the listing rules regarding sovereign-controlled companies
Sovereign-controlled companies, companies that are controlled by a sovereign country will be given a new […]
Sovereign-controlled companies, companies that are controlled by a sovereign country will be given a new dedicated category of premium listing in the future and will not have to comply with certain parts of the Listing Rules.
The Financial Conduct Authority (FCA) issued a press release on 8 June 2018 announcing the creation of a new category within its premium listing regime to cater for companies that are controlled by a sovereign state. The aim of the new category is to encourage sovereign-controlled companies (SC Companies) to choose the higher standards of premium listing, rather than standard listing, thus providing investors with greater protections.
The following key changes to the existing premium listing rules have been made for the purposes of the new category:
- SC Companies will not have to put in place a relationship agreement. Experience has shown that these agreements can be impractical for sovereign states and the FCA believes disclosures in the prospectus are enough to support investor understanding of the relationship between the company and the sovereign. However there will be a requirement that the election of any independent directors be subject to separate approval by independent shareholders.
- With the exception of a share buyback from the sovereign state, SC Companies will not have to obtain shareholder approval or a sponsor’s fair and reasonable opinion for related party transactions. They will however still be bound by the requirement under Listing Rule 11 to announce transactions with their sovereign controlling shareholder.
Apart from the above changes, all other Listing Rules will apply to SC Companies in the same way as to other companies. Investors in a SC Company will therefore have the same protections as afforded to investors in other premium listing companies.
The rules for the new category will be set out in a new Chapter 21 of the Listing Rules.
The new rules will take effect on 1 July 2018. From that date, issuers will be able to seek an admission, or transfer, of securities to the new category of premium listing.

BEIS announces independent review of FRC
The Department for Business, Energy and Industrial Strategy (BEIS) has published an independent review of […]
The Department for Business, Energy and Industrial Strategy (BEIS) has published an independent review of the role and effectiveness of the Financial Reporting Council (FRC).
On 6 June 2018, BEIS published the ‘Independent Review of the Financial Reporting Council: Call for Evidence’. The review seeks to examine the FRC’s role and to understand stakeholder views on the FRC’s effectiveness.
The review seeks to gather opinion on:
- Purpose and function: whether the existing functions (which includes responsibility for the UK Corporate Governance Code) and structure of the FRC are appropriate.
- Impact and effectiveness: the strengths and weaknesses of the FRC in light of its role in audit regulation, accounting and financial reporting, corporate governance and stewardship, investigations, enforcement and compliance, as well as actuarial oversight.
- Role in reducing the risk of major corporate failure: whether the FRC addresses this risk appropriately, responds quickly and effectively to warning signs and whether the viability statement could be more effective.
- Powers and sanctions: whether there are gaps in the FRC’s powers and whether they should be extended regarding oversight and enforcement of non-accountant directors exerting influence over financial statements. The review also discusses whether the sanctions regime has the right deterrent effect.
In addition the review raises broad questions on the FRC’s statutory footing, the relationship between the FRC and Government and the internal governance of the FRC.
WM comment
Responses to the consultation are requested by 6 August 2018.