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Corporate Matters – November 2013

Corporate Matters – November 2013

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01/11/2013

Alternative Investment Fund Managers Directive takes effect

The Alternative Investment Fund Managers Directive (the Directive) was transposed into national law through the […]

The Alternative Investment Fund Managers Directive (the Directive) was transposed into national law through the Alternative Investment Fund Managers Regulations 2013 (the Regulations), and the Financial Conduct Authority’s associated rules, and took effect on 22 July 2013. The Directive aims to introduce a harmonised regulatory framework across the EU for EU-established managers of alternative investment funds. In particular, the Directive requires alternative investment fund managers to be authorised, and contains provisions about how they should conduct their business, transparency and marketing. The Directive will impact private equity fund managers who manage funds or have investors in the EU, or if they are identified as the Alternative Investment Fund Manager of a particular fund or funds.

Changes under the Directive
The Regulations allow EU managers of alternative investment funds located in the EU to market to professional investors across Europe on a ‘passported’ basis, but it also subjects EU fund managers to much more rigorous reporting and disclosure requirements (for example, as to remuneration and leverage), capital requirements, the requirement to appoint a depositary and restrictions on the delegation and use of service providers.

As the national regulator, the FCA is responsible for implementing the remaining parts of the Directive which involve changes to the FCA Handbook rules and associated guidance and the authorisation process for fund managers. Fund managers that performed activities before 22 July 2013 within the scope of the Directive have until 22 July 2014 to submit an application for authorisation. The main substance of the FCA changes will be found in a new investment funds sourcebook within the FCA Handbook, referred to as ‘FUND’. This replaces the current rules and guidance contained in the Collective Investment Schemes sourcebook (COLL).

The FCA issued a Policy Statement in July, which, although it does not aim to tell firms everything they need to know about how to comply with the Directive, does cover the bulk of the main provisions (certain aspects, such as the process for obtaining an authorisation or variation to manage alternative investment funds, are dealt with on the FCA website).

Notable provisions of the Policy Statement include:

the perimeter guidance has been amended to clarify capital raising processes and how delegates of a non-EEA fund manager will be treated
the rules have been amended to make them more flexible for UK firms carrying out depository services for non-EEA alternative investment funds
proposed guidance on marketing has been adjusted to take account of comments on own-initiative approaches from investors and whether listing and trading on a secondary market constitute marketing
the FCA has set lower fee tariffs for small registered fund managers
firms already managing alternative investment funds, or providing services as a depository, custodian or valuer may take advantage of the transitional provisions set out in the Regulations, until 21 July 2014.

WM Comment
There will be a transitional grace period until 21 July 2014 giving existing fund managers time to adjust to the Regulations and the new rules. Notwithstanding this lengthy process, the implementation of the Directive will bring a fundamental change in the UK regulatory environment. Many of the provisions will be familiar to fund managers already authorised and operating in the UK, but it is important that those who seek to manage and/or market alternative investment funds in the EU start planning now as the costs of complying with the more extensive requirements in relation to governance, capital requirements, delegation, depositary functions and EU passport regime will be significant.

It is important to note that the Regulations and the FCA rules are both extensive documents and the above is merely a summary of the main changes. For a full copy of the Regulations, see here, and for a copy of the FCA Policy Statement which sets out the rules for implementing the Directive, see here.

BIS guidance on employee shareholder status

We have previously described the Government’s new “shares for rights” scheme and the opportunities the […]

We have previously described the Government’s new “shares for rights” scheme and the opportunities the new scheme may present for the private equity community. Some aspects of the scheme were still a little unclear as at 1 September 2013; hence, the Government’s attempt at clarification through its guidance.

In reality, the guidance does not tell us much that we did not already know. One point, however, is worth noting.

It is clear from the legislation that the company issuing shares may not receive any other form of consideration from the employee other than the renunciation of certain of his or her statutory employment rights identified in the legislation. The BIS guidance states that the requirement that the shares be issued fully paid means that companies will, in the majority of cases, have to issue those shares by way of capitalisation of distributable profits.

A capitalisation of distributable profits brings with it the following considerations for the issuing company:

the articles of association must permit the appropriation of capitalised sums to non-members. Article 36(1)(b) of the Model Articles for private companies permits the appropriation of capitalised sums “to the persons who would have been entitled to it if it were distributed by way of dividend” – i.e. members, not non-members
the company will only be able to allot and issue fully paid shares from capitalised profits and distributable reserves to the extent that there are adequate sums standing to those profits or reserves at the relevant time
the value of shares held by existing members is likely to be diluted by a bonus issue to the employee shareholders.

The guidance confirms that individuals are not obliged to apply for, or to accept, an employee shareholder contract and existing employees that are asked to change their contracts to those of employee shareholders are entitled to refuse to do so, and can complain to an employment tribunal if they suffer any detriment as a result of such refusal. Employers that wish to offer employee shareholder contracts to existing employees must follow the same procedures as when offering contracts to new starters.

The guidance sets out the conditions that must be satisfied before an individual can become an employee shareholder. These are:

mutual agreement
receipt of fully paid-up shares in the company worth at least £2,000 for which the employee has not paid in any way (other than by renunciation of certain of their statutory employment rights)
the issue of a “written statement of particulars” of the status of employee shareholder from the employer to the individual
independent advice on the terms and effect of that status, paid for by the employer
a seven-day cooling off period.

Responsibility for satisfying these conditions is shared between the employer and the individual.

The guidance also confirms that the employee retains their status as an “employee shareholder” even after they have disposed of their shares. The only way that they can lose the status is if the employment contract is varied.

Separately, HMRC have announced that they will provide a facility for agreeing the market value of the shares for employee shareholder agreements in the same way that they agree market values for share plans such as Enterprise Management Incentive (EMI) options. This will not be compulsory, but is likely to be used by both the employing company and the employee shareholder as it provides certainty. As such, it is a welcome development. Note that neither the BIS guidance nor the HMRC guidance tackle the question of the price that companies must pay when the shares are forfeited, nor do they stipulate that a reasonable consideration should be paid when shares are bought back by the company.

WM comment
So far the response from business to the new scheme has been muted. However, for dynamic management teams in companies with significant potential for rapid capital growth, the benefits highlighted in our earlier article, particularly the CGT exemption, may be a real attraction and deserve careful consideration.

The BIS guidance can be accessed here.

Carbon Reduction Commitment Energy Efficiency Scheme – changes to the disaggregation rules

The CRC Energy Efficiency Scheme Order 2013 recently came into force with the intention of […]

The CRC Energy Efficiency Scheme Order 2013 recently came into force with the intention of simplifying the Carbon Reduction Commitment Energy Efficiency Scheme (CRC). Among the changes is one that is particularly likely to be of interest to the private equity community, namely a relaxation of the rules regarding the participation of private sector groups of undertakings in the next phase of CRC, which begins in April 2014.

The Order made a number of changes simplifying CRC, most of which are beyond the scope of this article. For private equity, the key change to the scheme is the introduction of a new ability for participants to disaggregate portfolio groups to allow them to participate in the scheme in their own right.

Groups of undertakings will continue to be treated as a single entity to determine whether they meet the qualification criteria. This usually results in private equity funds being grouped with their portfolio companies for CRC purposes. However, under the new regime, any subsidiary (or group of subsidiaries) will be able to apply for disaggregation. The existing requirement for a minimum threshold will cease to apply.

It will also be possible to disaggregate even though the remainder of the group will fall below the qualification criteria as a result, although the remainder of the group will still be required to participate in the scheme for the rest of the relevant phase.

Walker Morris comment
The relaxation of the scheme rules is welcome. The only downside would seem to take the form of increased registration and (annual) subsistence fees being paid across the group. The benefits are that portfolio groups will now be responsible for their own compliance with the scheme and entities in the remaining group will no longer be jointly and severally liable for compliance by the disaggregated entities.

Changes to the reporting regime

Narrative reporting The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, which came […]

Narrative reporting
The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, which came into effect on 1 October 2013, change the current narrative reporting framework under the Companies Act 2006. Under the new framework companies will prepare a “strategic report”, which will be a separate part of the annual report, and not simply a section of the directors’ report.

For all companies, the strategic report must contain a fair review of the company’s business, and a description of the principal risks and uncertainties facing the company. The review must be a balanced and comprehensive analysis of both the development and performance of the company’s business during the financial year, and the position of the company’s business at the end of that year, consistent with the size and complexity of the business.

Some disclosures that were required under the previous “business review” regime are no longer required – the requirements to disclose the principal activities of the group, the policy and practice on payment of creditors, charitable donations over £2,000 and the difference between the market value and balance sheet value of land.

There are enhanced reporting requirements for Main Market companies. To the extent necessary for an understanding of the development, performance or position of the company’s business, the report must include:

the main trends and factors likely to affect the future development, performance and position of the company’s business
information about:
- environmental matters (including the impact of the company’s business on the environment)
- the company’s employees
- social, community and human rights issues,

including information about any policies of the company in relation to those matters and the effectiveness of those policies.

If the report does not contain information on environmental matters, the company’s employees and social, community and human rights issues, it must state which of those kinds of information it does not contain.

For Main Market companies, the strategic report must also contain:

a description of the company’s strategy
a description of the company’s business model
a breakdown showing at the end of the financial year, the number of persons of each sex who were:
- directors of the company
- senior managers of the company (other than directors) (a senior manager being an employee of the company with responsibility for planning, directing or controlling the activities of the company, or a strategically significant part of the company)
- employees of the company

Executive pay
Changes to the reporting, disclosure and corporate governance regime concerning executive pay also came into effect from 1 October 2013. The reforms, which apply to Main Market companies only, will require the directors’ remuneration report to be split into two parts: a policy report setting out the company’s forward-looking policy on remuneration, which will be subject to a binding shareholder vote every three years, and an implementation report detailing the actual payments made to directors in the last financial year and which will be subject to an annual advisory shareholder vote. The legislation applies to financial years ending on or after 30 September 2013.

Mandatory reporting of greenhouse gas emissions
Main Market companies must now include details of the company’s greenhouse gas emissions for financial years ending on or after 30 September 2013. We considered this in more detail in our last newsletter.

WM comment
For companies other than Main Market companies the changes to the reporting regime should not present any difficulties. However, for Main Market companies the changes are a significant departure from the previous regime. Directors and company secretaries should familiarise themselves with the new reporting obligations at the earliest opportunity.

Changes to the Takeover Code 2013

The Takeover Code (the Code) applies to all offers for companies registered in the UK, […]

The Takeover Code (the Code) applies to all offers for companies registered in the UK, the Channel Islands or the Isle of Man whose securities are traded on a regulated market in the UK or on any stock exchange in the Channel Islands or the Isle of Man. Consequently, for example, all companies registered in the UK, the Channel Islands or the Isle of Man whose securities are listed on the Official List of the UK Listing Authority are subject to the Code. However, until 30 September 2013, a residency test applied to companies whose securities were admitted to trading on a multilateral facility (e.g. AIM) in order for the Code to apply to them.

From 30 September, a company whose registered office is in the UK, the Channel Islands or the Isle of Man and whose securities in the UK are admitted to trading on a multilateral facility will no longer be required to have its place of central management and control in the UK, the Channel Islands or the Isle of Man in order for the Code to apply to that company. This will have the effect of bringing a number of companies (in particular AIM companies) within the ambit of the Code that had previously not been subject to the Code because their place of central management and control was outside the UK, the Channel Islands or the Isle of Man. This amendment does not apply to certain categories of company, notably open-ended investment companies.

WM comment

AIM companies which are registered in the UK, the Channel Islands or the Isle of Man and which have their place of central management and control outside those territories should consider whether any action needs to be taken as a result of them coming within the ambit of the Code from 30 September. For example, it would be sensible to review the articles of association to ensure there is no inconsistency with provisions of the Code. Significant shareholders (and persons acting in concert with them), especially those close to the 30 per cent threshold, should also consider the implications of the recent extension to the Code’s scope.

Making more than 20 employees redundant? – an update

The Walker Morris Employment team has written separately on the important case of USDAW v […]

The Walker Morris Employment team has written separately on the important case of USDAW v WW Realisation 1 Ltd (the ‘Woolworths case’). In essence, following the EAT ruling, the law now is that employers must collectively consult with employee representatives as soon as more than 20 redundancies are proposed by one employer, regardless of the employees’ locations – the employees may be located in different establishments (or the same establishment, it is irrelevant). This means that the threshold of 20 can be reached very quickly.

However, the BIS was granted permission to appeal in September. The BIS maintains, in its own words, that the EAT “got the law wrong”.

WM comment
This is a very important case. If the BIS’s appeal is dismissed the burden on employers carrying out large-scale redundancies will be significantly increased. It will clearly need to be something that potential purchasers will factor into their considerations in an acquisition process and due diligence. We will keep you updated.

New ICSA guidance on terms of reference for board committees

The guidance has been updated to reflect the revised version of the UK Corporate Governance […]

The guidance has been updated to reflect the revised version of the UK Corporate Governance Code and the FRC Guidance on Audit Committees, which apply to Main Market companies for reporting periods beginning on or after 1 October 2012. The guidance includes model terms of reference outlining the roles and responsibilities of each committee. The guidance on matters reserved to the board is intended to help directors and company secretaries to draw up a schedule of matters reserved for determination by the board as a whole.

Some of the principal points to note are:

Audit committees
Changes to the model terms of reference include:

a recommendation that ideally, at least one member of the committee should hold a professional qualification from one of the professional accountancy bodies, in addition to the requirement for recent and relevant financial experience
a requirement that the finance director be invited to attend meetings of the committee on a regular basis
limiting the extension of appointments to the committee to two further periods of three years (following an initial period of appointment of up to three years), provided that the members continue to be independent
an obligation on the company secretary to ensure that the committee receives information and papers in a timely manner to enable proper consideration of the relevant issues
a requirement for the committee chairman to maintain a dialogue with key individuals involved in the company’s governance
clarifying that the decision as to whether it is appropriate to circulate copies of the minutes of committee meetings to all members of the board lies with the committee chairman
expanding the duties of the committee to include:
- advising the board if it is not satisfied with any aspect of the company’s proposed financial reporting
- reviewing and advising the board as to the content of the annual report and accounts, in particular, whether it is fair and balanced and provides the information necessary for shareholders to assess the company’s performance, business model and strategy
- ensuring the internal auditor has direct access to the board and committee chairmen
- ensuring that at least once every ten years the audit service is put out to tender
an obligation to evaluate the risks to the quality and effectiveness of the financial reporting process
expanding the reporting responsibilities of the committee, including a formal report to the board on how it has discharged its responsibilities, and a requirement to cover certain issues in the report on its activities prepared for the purposes of the company’s annual report

Remuneration committees
Changes to the model terms of reference include:

limiting the extension of appointments to the committee to two further periods of three years (following an initial period of appointment of up to three years), provided that the members continue to be independent
an obligation on the company secretary to ensure that the committee receives information and papers in a timely manner to enable proper consideration to be given to issues
amending the duties of the committee to include:
- responsibility for setting the remuneration policy for all executive directors and the company’s chairman, including pension rights and any compensation payments
- recommending and monitoring the level and structure of remuneration for senior management
- clarifying specific objectives of remuneration policies
expanding the reporting responsibilities of the committee to include:
- ensuring that the provisions regarding disclosure of information, including pensions, as set out in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and the Code, are fulfilled
- producing a report of the company’s remuneration policy and practices for inclusion in the annual report and ensuring that it is put to shareholders for approval at the AGM
- ensuring that the company maintains contact as required with its principal shareholders about remuneration
a requirement to consider guidelines published by the ABI and NAPF

Nomination committees
New requirements to:

identify any external search agency and explain whether it has any connection with the company
a statement of the board’s policy on diversity

Risk committees
Changes to the model terms of reference include:

a recommendation that the committee should refer to and take note of the recommendations in the final report of the Kay Review of UK Equity Markets and Long-Term Decision Making published in July 2012, in particular those relating to wider shareholder consultation
a recommendation that the committee give due and careful consideration to the findings and recommendations of the Financial Stability Board in its Periodic Peer Review Report on Risk Governance published in February 2013
the company’s chief risk officer (CRO) be required at all meetings of the committee
a requirement to retain copies of the minutes of the committee’s meetings
where there is an overlap in duties that could be undertaken by either the audit committee or the risk committee, a recommendation that the board should err on the side of overlapping duties on critical questions
expanding the duties of the committee to include ensuring that the CRO is given the right of unfettered direct access to both the chairmen of the board and the committee
a requirement that the directors’ report in the annual report and accounts should set out risk management objectives and policies including in relation to financial instruments
an obligation for the committee to arrange periodic reviews of its own performance, review its constitution and terms of reference at least annually and to recommend any changes it considers necessary to the board

Executive committees

an obligation to arrange periodic review of its own performance

Matters reserved for the board

approving unbudgeted capital or operating expenditure (beyond pre-determined tolerances)
approving risk appetite statements
approving procedures for the detection of fraud and prevention of bribery
overseeing the execution and delivery of major capital projects
ensuring a satisfactory dialogue with shareholders based on a mutual understanding of objectives
establishing board committees and approving/varying their terms of reference
authorising conflicts of interest, where permitted to do so by the articles of association
approving policies on bribery prevention, whistleblowing and human resources
any decision likely to have a material impact on the company/group from any perspective (financial, operational, strategic, reputational, etc).

WM comment
The recommendations and terms of reference are not publicly available on the ICSA website (they are only available to subscribers). Nonetheless they are likely quickly to become best practice.

What’s in a name? – An update

A reminder of the current law Business and company names are regulated to make sure […]

A reminder of the current law
Business and company names are regulated to make sure that misleading names, which may imply unwarranted status or authority, cannot be used. The legislation also places restrictions on the registration of “sensitive” words and names which are the “same as” existing names. These mechanisms are felt by many to be lacking in transparency and it has been suggested that the restrictions place a disproportionate burden on the commercial freedom of many businesses.

The questions
The consultation asked three questions:

Do you think all regulations relating to names should be repealed? Alternatively, do you think regulations relating to names should be retained but reduced and simplified?
Do you think the list of “sensitive” words should be reduced? If so, which words would you recommend for removal and why?
Do you think the list of words on the “same as” list should be reduced? If so, which words would you recommend for removal?

Having taken soundings, the Government published its responses to the consultation on 4 October. These are to:

move forward with proposals to merge the company and business names regulations with the trading disclosures regulations
clarify the trading disclosures regulations so that they are easier to follow
reduce the list of “sensitive” words and expressions by approximately one-third. Words that will no longer be “sensitive” include “European”, “Holding”, “International”, “National”, “Registered” and “United Kingdom”. Words that will continue to be “sensitive” include “Accredited”, “Charity”, “Co-operation”, “Licensing”, “Mutual” and “Society”
retain “national” words (e.g.”English”, “Cymru”) in the list of sensitive words
retain the number of words on the “same as” list.

WM Comment
The reforms, while modest, are to be welcomed. Whilst there is clearly a need for regulation in this area, some simplification was overdue. The Government anticipates publishing draft regulations in the next few months.

Contacts

Richard Naish
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