Corporate Matters – October 2020


Is now a good time to modernise AGMs?
The COVID-19 pandemic has challenged UK quoted companies to change their approach to holding physical […]
The COVID-19 pandemic has challenged UK quoted companies to change their approach to holding physical annual general meetings (AGMs). At a time when social distancing rules mean that the traditional approach to an AGM is no longer permitted, many companies have been forced to embrace holding AGMs on electronic platforms. Such meetings have been either entirely virtual or a mixture of virtual and physical, so called ‘hybrid’ meetings.
In recent weeks, two reports have been published looking at what lessons can be learned from the 2020 AGM season and providing insight and guidance on what AGMs and other shareholder meetings might look like in future.
At the start of October, the Financial Reporting Council (FRC) issued a review entitled ‘AGMs – An Opportunity For Change’. The review considered the different ways companies held AGMs during the first half of 2020 and analysed whether the approaches taken by the companies best served the interests of shareholders. The review found that many companies held meetings with only one or two members present (usually the company secretary and the chair), while others embraced technology to ensure that shareholders were able to participate effectively. It notes that the differing approaches taken by companies drew both support and criticism from investors and other stakeholders.
As part of the FRC’s review, a sample of 202 FTSE 350 AGMs were analysed with the following results:
- 80.7% of FTSE 350 companies held closed meetings, requiring voting in advance via proxy;
- Of the companies that held closed meetings, 81.6% made some arrangements to allow for shareholder Q&As with the board;
- Of the companies that held open meetings, 60% were facilitated through webinar or audiocast with live voting capabilities; and
- 30 companies appear to have not made any arrangements for shareholders to ask questions to the board prior to or during the AGM.
Since the AGM is an essential governance event allowing shareholders to hold the board to account through Q&A and discussion, it is crucial that shareholders are given the opportunity to take part. The review found that the best organised and executed virtual and hybrid meetings enabled increased participation from shareholders. Companies that held closed meetings with retail shareholders unable to participate or vote on the day of the AGM disenfranchised those shareholders.
According to the International Corporate Governance Network (ICGN), the appetite for virtual or hybrid shareholder meetings had been growing among some issuers and institutional investors even prior to COVID-19 pandemic. This was mainly driven by the fact that institutional investors vote at hundreds, and often thousands, of shareholder meetings every year, and may have to vote at multiple meetings every day during the peak shareholder meeting season of April to June. As a result, AGMs are generally attended by retail shareholders, with institutional investors typically voting electronically/by proxy and turning up at AGMs only when they have a large shareholding, if there is a particularly contentious issue on the agenda, or if they intend to use the meeting to deliver a message to the company’s board and other shareholders.
Virtual and hybrid AGMs, enabled by new technologies, offer the potential for making shareholder meetings more accessible for both retail and institutional investors alike by removing the geographical barriers, travel requirements and reducing other attendance costs. According to ICGN, when it comes to creating positive shareholder experience in the virtual format, the key to success is to replicate, as best as possible, an in-person shareholder meeting.
The FRC review concludes by stating that it wishes to see a significant increase in the use of technology “that facilitates robust virtual interaction during an AGM providing greater access for all shareholders and ensuring there is an opportunity to hold the board to account”. If you add to this the ICGN’s view that companies have a significant opportunity for much broader shareholder participation in the shareholder meeting process through the virtual, or hybrid, option it could be that 2021 will be the year for a seismic shift away from physical meetings.
WM Comment
The FRC urges companies to consider, sooner rather than later, what changes might need to be made for next year’s AGM. If companies wish to use more technology, they should be talking to providers now and not leave it until notices are being prepared. Companies should also consider whether articles of association need updating to allow for hybrid meetings.

Company law reform – changes planned to improve corporate transparency
Towards the end of September 2020, the Department for Business, Energy and Industrial Strategy (BEIS) […]
Towards the end of September 2020, the Department for Business, Energy and Industrial Strategy (BEIS) published its findings in relation to the consultation on corporate transparency and Companies House reform which it launched in May 2019. The response document contains an overview of Government’s proposed reforms to be introduced over the coming months. The reforms fall into four separate categories.
Knowing who is setting up, managing and controlling corporate entities
The plan is to introduce compulsory identity verification for all directors and people with significant control (PSCs) of UK registered companies, general partners in limited partnerships, designated members in LLPs, and all individuals who file information on behalf of a company. All company directors and PSCs will need to have a verified account at Companies House, which can be set up directly or through an agent. Where the application to incorporate and subsequent filings are provided through an agent, that agent will also need to have its own account. Only bodies that are covered by appropriate UK anti-money laundering regulations and are deemed to be properly supervised, will be eligible to obtain Companies House accounts.
Improving the accuracy and usability of data on the companies register
Under the reforms, the registrar of companies will be given a statutory discretion to query and check information that is submitted to Companies House before it is placed on the register. Government will consult further on the specifics of these reforms and provide further details of the circumstances under which these new powers might be triggered. We will keep track of developments in this area.
The registrar will also be given extended powers to amend information that is already on the register. Current administrative procedures that require an application to Companies House or a court order will be simplified.
Finally in this category, Government is considering reforms to the filing of accounts which it will consult further on. The proposals are to introduce full iXBRL tagging for the submission of accounts to Companies House to mirror the formatting requirements for online tax returns; tightening regulation regarding amendments to accounting reference periods to reduce the potential for abuse; and reviewing certain aspects of accounts filing, including the exemptions that allow companies to submit micro or dormant accounts.
Protecting personal information
To protect personal information, directors will no longer be required to list their occupation on the register and a process will be set up for individuals to suppress this information where it is currently displayed on the register. A process will also be introduced to enable individuals to have signatures, the day of date of birth and residential addresses suppressed from the register.
Ensuring compliance, sharing intelligence, other measures to deter abuse of corporate entities
BEIS proposes to put in place ‘legislative gateways’ to permit the cross-referencing of Companies House data against other data sets, for example the passport office. Companies House will be empowered to work with other agencies to create the systems required to achieve this. There will also be an obligation placed on bodies that fall under the remit of the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 to report to the companies’ registrar discrepancies between information held on the public register and the information that they hold. It is hoped that this will lead to better information sharing in the prevention of economic crime.
WM Comment
The proposals represent a significant reform of the UK’s company registration framework. As such, BEIS intends to publish a comprehensive and detailed set of proposals that will set out precisely how Government believes that the reforms should be implemented. We will keep you updated with developments.

Reform to Modern Slavery laws
Government has published its response to the recent consultation on transparency in supply chains. The […]
Government has published its response to the recent consultation on transparency in supply chains. The consultation, which was launched last summer, sought views on proposed measures to strengthen the transparency in supply chain reporting provisions in section 54 of the Modern Slavery Act 2015 (Section 54).
The intention is to make reporting against each of the six areas listed in Section 54 mandatory. If organisations have taken no steps within an area, they must state this clearly. They may also provide a reason why they have not done so if they wish.
Companies that are in scope will therefore be required to report on the following:
- the organisation’s structure, its business and its supply chains;
- its policies in relation to slavery and human trafficking;
- its due diligence processes in relation to slavery and human trafficking in its business and supply chains;
- the parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk;
- its effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate; and
- the training about slavery and human trafficking that is available to its staff.
This requirement for mandatory reporting will need changes to the legislation and while organisations will not be mandated to report against the new areas until the necessary changes have been made, the Home Office will publish updated guidance to help organisations prepare for the changes.
In addition to the new mandatory reporting, organisations covered by Section 54 (i.e those entities that supply goods or services and have a consolidated global turnover of £36 million per annum) will be required to publish their modern slavery statements on a new government-run online reporting service as well as their websites. The Home Office is currently developing an online registry for modern slavery statements and organisations will be encouraged to publish their modern slavery statements onto this platform once it is launched, even if the necessary amendments to the legislation are still to be made.
Furthermore, Government will make legislative changes to introduce a single reporting deadline on which all organisations must publish their statement each year. Organisations will report on the same 12-month period (April to March) and will then have six months to prepare their statement in time for a single reporting deadline of 30 September.
Government will also clarify in legislation that organisations must demonstrate compliance by stating the date of board approval and director sign off, and by providing the names of entities covered in group modern slavery statements.
WM Comment
The proposals represent a significant step towards increased corporate transparency and accountability in relation to transparency in supply chains. However it remains to be seen whether the increased legal obligations will be backed up by effective enforcement mechanisms.

Debt for equity swaps – a possible solution to rising levels of debt?
The Financial Times recently reported that UK business faces a potential debt burden of up […]
The Financial Times recently reported that UK business faces a potential debt burden of up to £105 billion with small and medium sized companies under most pressure. Such levels of corporate debt are likely to be unsustainable and create obvious issues for both borrowers and lenders. From a borrower’s point of view, a weak balance sheet imposes restrictions on the ability to raise funds and lenders will need to be pragmatic in amending and/or waiving existing facilities, which may also include security packages.
For a company that is in financial difficulty, but which is still ultimately a viable going concern, a debt for equity swap can be an effective way to restructure its capital and borrowings and, in doing so, strengthen its balance sheet and deal with issues such as over gearing. In times of financial crisis, debt for equity swaps become an increasingly popular alternative to other forms of refinancing.
A debt for equity swap involves a creditor converting debt owed to it by a company into shares in that company. The effect of the swap is the issue of the equity to the creditor in satisfaction of the debt, such that the debt is discharged, released or extinguished. Although clearly beneficial to the company, the transaction can also be advantageous for a creditor as a debt for equity swap can be a way of avoiding the costs associated with commencing proceedings to recover the debt (which may not be fully recoverable in the current environment). It can also provide an avenue by which a creditor can participate in any future growth of the company.
Debt for equity swaps provide an opportunity for a company to deal proactively with creditors before creditors take steps to recover debts and, in the case of secured creditors, enforce its security and/or appoint an administrator. There is no prescribed structure for a debt for equity swap and each one will be driven by the specific circumstances but key terms to be decided will be: (i) the value of the company and whether equity is to be issued at a discount to that value; (ii) the amount of debt to be substituted for equity and the extent to which existing shareholders will be diluted; (iii) the type of shares which will be issued; (iv) the rights which will attach to the shares; and (v) the restrictions which will be imposed on the shares.
Once the above fundamental terms have been considered and the tax treatment of the debt-to-equity has been established, early and constructive engagement with shareholders and participating creditors is crucial for the transaction to be successful.
WM Comment
After the banking crisis in 2008, debt for equity swaps became popular as lenders came under pressure to ease the debt burden on struggling borrowers. We could be in a similar situation as we move out of the coronavirus pandemic as companies and creditors search for creative solutions to provide additional liquidity and restructure the company’s borrowings.

FCA issue final notice to CEO for market manipulation
The Financial Conduct Authority (FCA) has published a final notice issued to the former CEO […]
The Financial Conduct Authority (FCA) has published a final notice issued to the former CEO of Worldspreads Limited and its holding company, Worldspreads Group plc, for behaviour contrary to sections 118(5) (manipulating transactions), (6) (manipulating devices) and (7) (dissemination) of the Financial Services and Markets Act 2000 (FSMA). These provisions governed market abuse at the time the offences to place, prior to the introduction of the Market Abuse Regulation in 2016.
Mr Conor Foley, the ex-CEO of WorldSpreads Limited (WSL), and its holding company WorldSpreads Group plc (WSG), was involved in drafting admission documentation ahead of WSG’s flotation on AIM in August 2007. The documents contained misleading information and omitted key information that investors would have needed to make an informed decision about the company. In particular, the documentation did not mention that some WSG executives had made significant loans to WSG and its subsidiaries. This was also never disclosed in the annual company accounts. The documents also did not mention an internal hedging strategy by which certain of WSG’s subsidiaries hedged considerable trading exposures internally with company executives.
The FCA found that Mr Foley engaged in market abuse contrary to sections 118(5)(a) and (6) of FSMA because:
- The purpose of the spread-bets was to create artificial liquidity in WSG shares that would not otherwise have existed.
- The transactions purported to be effected by clients trading independently and at arm’s-length from WSG. In fact, they were effected by Mr Foley.
- Under the AIM Rules for Companies, WSG was required to notify when a director (or significant shareholder) dealt in its shares. By using the client accounts to effect the transactions, Mr Foley sought to avoid his obligations to disclose his dealings to WSG. This prevented WSG’s compliance with its notification requirements. Investors (or potential investors) who would reasonably have expected to have proper and full information about such trading were left uninformed.
Following this finding of market abuse, the FCA originally imposed a financial penalty of £658,900. However, because the former CEO provided verifiable evidence that the imposition of a financial penalty of any amount would cause him serious financial hardship, the FCA imposed a public censure pursuant to section 123(3) of FSMA in lieu of the fine together with the prohibition order, under section 56 of FSMA.

Public censure and fine for breaching AIM Rules 10 and 31
On 10 August 2020, the London Stock Exchange (LSE) announced that Yü Group plc (Yü) […]
On 10 August 2020, the London Stock Exchange (LSE) announced that Yü Group plc (Yü) had been publicly censured and fined £300,000 for breaches of Rules 10 (principles of disclosure) and 31 (AIM company and directors’ responsibility for compliance) of the AIM Rules for Companies (AIM Rules).
During the first half of its financial year to 31 December 2018, Yü made a number of forecasts that its full year profits before tax would exceed market expectations. It later identified material errors in its previous management information and that, rather than meeting market expectations of predicted profit before tax, it was likely to make a significant loss. It released a trading statement to confirm the position. Following an internal and commissioned accounting review, it was identified that there were a number of weaknesses in Yü’s financial control environment. The company immediately implemented a remediation programme.
The LSE determined that AIM Rules 10 and 31 had been breached for the following reasons.
Yü breached AIM Rule 31 as it failed to ensure that it had in place sufficient procedures, resources and controls to comply with the AIM Rules.
The failure to have in place effective financial reporting systems and controls meant that during the relevant period Yü could not place sufficient reliance on the integrity of internal financial data, for the purposes of assessing its profitability against forecasts or disclosing a fully accurate half year balance sheet. Yü’s disclosure was therefore inaccurate, resulting in a breach of its AIM Rule 10 obligations during the relevant period.
The LSE stated that, as well as ensuring documented procedures and protocols are in place, companies must ensure that they are appropriately reviewed and developed so that they are effective and are adapted to adequately address changes to the business, planned growth or other operational needs. Boards should be appropriately engaged in evaluating the effectiveness of the financial control environment and the framework for assuring the integrity of internal management information. Failure to maintain appropriate governance over the operational effectiveness of procedures and controls creates an unacceptable risk to an AIM company’s ability to monitor changes to expected financial performance and meet any consequential AIM Rules disclosure obligations.
WM Comment
Although the LSE waived the fine (citing the uncertainties and potential financial challenges for Yü arising from the COVID-19 pandemic), it is clear that the LSE will actively enforce the AIM Rules and issue public censures where necessary.