Corporate Matters – September 2018


Corporate governance reforms – reporting regulations update
Secondary legislation setting out new reporting requirements come into force on 1 January 2019. As […]
Secondary legislation setting out new reporting requirements come into force on 1 January 2019.
As reported in our June addition of Corporate Matters the draft Companies (Miscellaneous Reporting) Regulations 2018 (Regulations) were laid before Parliament in June introducing 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. The Regulations are now made and come into force on 1 January 2019 applying to financial years beginning on or after that date.
The Regulations require:
- additional reporting on a company’s engagement with its employees, suppliers and customers to provide further explanation on how the directors have complied with their duties under section 172 of the Companies Act 2006
- large private companies to provide a statement of corporate governance arrangements
- the annual statement of the remuneration committee to include a summary of any discretion exercised by the committee in relation to the award of directors’ remuneration
- companies quoted on the official list to report how much of a director’s pay is attributable to share growth
- companies quoted on the official list to report pay ratio information.
WM comment
There are only a few months left before the first of the government reforms to corporate governance come into force. The team at Walker Morris can help if you are unclear as to how these changes will affect your corporate governance arrangements.

BEIS publishes response to consultation on corporate governance and insolvency
On 26 August 2018 the Department for Business, Energy & Industrial Strategy (BEIS) published the […]
On 26 August 2018 the Department for Business, Energy & Industrial Strategy (BEIS) published the government’s response to its consultation seeking views on proposals to improve the corporate governance of companies that are in or are approaching insolvency.
In March 2018 the government launched a consultation which looked at ways to reduce the risk of major company failures occurring through shortcomings of governance or stewardship, and to strengthen the responsibilities of directors of companies which are in or are approaching insolvency. The consultation also explored options to improve the government’s investigatory powers when things go wrong.
The government plans to take forward the following specific actions:
- Strengthen transparency requirements around group structures. It wishes to ensure that adequate and effective controls are in place to ensure that directors are fully aware of any risks posed by subsidiaries to the overall group. Options could include working with industry to improve guidance, or introducing a requirement for corporate groups of a significant size to provide an organogram of their corporate structures along with an explanation of how corporate governance is maintained through the group.
- Strengthen shareholder stewardship. In conjunction with the investment community, the Financial Reporting Council and others, the government plans to identify means to incorporate stewardship within the mandates of asset managers and to establish channels for institutional investors to escalate concerns about the management of a company by its directors.
- Strengthen the framework on dividend payments. It has asked the Investment Association to report on the prevalence of the practice of companies avoiding an annual shareholder vote on dividends by only declaring interim dividends. The government confirmed it will take steps to ensure shareholders have an annual say on dividends if the practice is widespread. It also plans to explore whether a comprehensive review of the dividend regime is required. The government agreed with respondents’ views that there should be no automatic bar on companies paying dividends in circumstances where a company’s pension scheme is in significant deficit.
- Bring forward proposals to improve board effectiveness and strengthen directors’ training and guidance. The Institute of Chartered Secretaries and Administrators (ISCA) will be invited to convene a group of representatives of the investment community and companies to identify ways of improving the quality and effectiveness of board evaluations, including developing a code of practice for external board evaluations.
- Sales of businesses in distress. Take forward measures to ensure greater accountability of directors in group companies when selling subsidiaries in distress. The government will work with industry to develop guidance on the steps that a director should take when considering the sale of an insolvent subsidiary.
- Value extraction schemes. Legislate to enhance existing recovery powers of insolvency practitioners in relation to value extraction schemes designed to remove value from a firm at the expense of creditors when a company is in financial distress.
- Dissolved companies. Amendments will be made to the Company Director Disqualification Act 1986 to extend the Insolvency Service’s powers to investigate former directors of dissolved companies where they are suspected of acting in breach of their legal obligations.
WM comment
BEIS stated that these measures will be set out in further detail in the autumn. We will keep you up to date with any developments.

The new UK Corporate Governance Code has arrived
On 16 July 2018 the Financial Reporting Council (FRC) published the 2018 UK Corporate Governance […]
On 16 July 2018 the Financial Reporting Council (FRC) published the 2018 UK Corporate Governance Code. It will apply to financial years starting on or after 1 January 2019.
As previously reported, the FRC has been busy for the last year or so drafting and consulting on a revised UK Corporate Governance Code and Guide on Board Effectiveness (2018 Code).
The 2018 Code was finally published during the summer and will come into effect for accounting periods starting on or after 1 January 2019. The FRC states that the 2018 Code “puts the relationship between companies, shareholders and stakeholders at the heart of long-term sustainable growth in the UK economy.” To read the full 2018 Code click here.
The 2018 Code is shorter and more succinct than the previous code and emphasises the importance of applying the Principles effectively. The final version of the 2018 Code has changed little following the consultation and takes the same form as we described in our previous publication.
WM comment
If you need help navigating around the 2018 Code or need advice regarding practical application of the code, please contact the Corporate team and we will be happy to help.

AIM – are you ready for the changes in corporate governance?
New corporate governance requirements for AIM companies come into effect on 28 September 2018. From […]
New corporate governance requirements for AIM companies come into effect on 28 September 2018. From that date, AIM companies will be required to disclose on their website details of the corporate governance code that they have decided to apply, explain how they comply with such code or provide an explanation for why they don’t.
As reported in our March edition of Corporate Matters, AIM Notice 50 was issued by the London Stock Exchange (LSE) on 8 March 2018 confirming, amongst other things, changes to the AIM Rules for Companies in relation to corporate governance (Rule 26). The Notice stated that, although all new applicants to AIM needed to state which corporate governance code they intended to follow from 30 March 2018, all existing AIM companies had until 28 September 2018 to comply fully with the new requirements under Rule 26.
The changes require all AIM companies to report against a recognised corporate governance code chosen by the board of directors. AIM companies currently have the choice of either noting on their website which corporate governance code they follow, or stating they do not follow a code and setting out their own arrangements. From the end of September, the second option is no longer allowed.
An AIM company will need to disclose on its website which code it is applying, how it complies with its chosen corporate governance code or, where it departs from the code, explain the reasons for doing so. This information should be reviewed annually and the website should include the date it was last reviewed.
The LSE does not prescribe a list of recognised corporate governance codes that companies should follow as it believes that it is preferable for AIM companies to have a range of options to suit their specific stage of development, sector and size. Examples of existing codes are the Quoted Companies Alliance Corporate Governance Code and the UK Corporate Governance Code issued by the Financial Reporting Council, both of which have been updated in recent months.
To help companies and nominated advisors get ready for the changes, the LSE has published an Inside AIM update entitled ‘Preparation for Corporate Governance Changes’ which contains guidance for companies and answers some of the more common questions that it has received from nominated advisors.
In relation to timing of disclosure, the guidance states that:
- An AIM company will be required to review its corporate governance disclosure annually. The LSE expects that in most cases this review will take place at the same time as the company prepares its annual report and accounts.
- The company’s website should include the date when the company last reviewed its compliance with its chosen code and update its AIM Rule 26 disclosures to remain accurate.
In relation to where disclosures should be made:
- AIM Rule 26 requires an AIM company’s corporate governance statement to be published on its website. The disclosure should be clearly presented and easily accessible from the AIM Rule 26 landing page on its website.
- The guidance states that it is acceptable for the statement to incorporate by reference (for example disclosures that are made in a clearly delineated corporate governance section of an annual report) provided that the material is freely available and the statement clearly indicates where interested parties can read or obtain a copy of the material.
- If an AIM company has not yet made disclosure against a recognised code in its annual report, the corporate governance statement must be disclosed on its website by 28 September 2018.
WM Comment
The guidance makes it clear that good corporate governance is not simply about codes and rules. Instead it involves strong leadership, a positive culture, robust systems and risk management. The new corporate governance requirements are intended to provide information to investors to enhance the engagement between investors and the boards of AIM companies. If you need advice in relation to choosing the most suitable corporate governance code and how to comply with the new rules please get in touch.

Companies fined and censured for breach of AIM Rules
The London Stock Exchange has privately censured and fined two AIM companies and publicly censured […]
The London Stock Exchange has privately censured and fined two AIM companies and publicly censured and fined MBL Group plc for breaches of the AIM Rules in relation to disclosure and compliance.
The London Stock Exchange (LSE) has recently fined and privately censured two AIM companies and publicly censured and fined MBL Group plc £125,000 for breaches of the AIM Rules. The rules that were breached were Rule 10 (Principles of disclosure), Rule 11 (General disclosure of price sensitive information) and Rule 31 (AIM company and directors’ responsibility for compliance).
AIM Rule 10 (Principles of disclosure)
Where a company is required to make an announcement under the AIM Rules, AIM Rule 10 requires the announcement to be made via an RIS no later than it is published elsewhere.
In one of the companies that was privately censured, the company gave an update regarding the progress of its business via social media. Some of the information that was disclosed was information which should have been notified to the market via an RIS before it was disclosed through social media and therefore the company was in breach of AIM Rule 10. In addition, by failing to have sufficient procedures, resources and controls in place to monitor its social media output, the LSE found that the company had also breached AIM Rule 31. This rule provides that an AIM company must have in place sufficient procedures, resources and controls to enable it to comply with the AIM Rules.
AIM Rule 31 (AIM company and directors’ responsibility for compliance)
In addition to providing that an AIM company must have in place sufficient procedures, resources and controls, AIM Rule 31 also requires an AIM company to provide its nominated advisor (Nomad) with any information it reasonably requests or requires in order for that Nomad to carry out its responsibilities under the rules. The purpose of the rule is to ensure that the Nomad is fully aware of developments within the company so that it can fulfil its regulatory role.
In the case of the second privately censured company, the LSE concluded that the company had breached AIM Rule 31 by not keeping its existing Nomad informed as to its progress in appointing a successor Nomad, despite frequent requests to do so within the notice period. The requirement to keep a Nomad fully aware of developments within the company still applies even during the period in which a Nomad is serving notice.
AIM Rule 11 (General disclosure of price sensitive information)
An AIM company must issue notification without delay of any new developments which are not public knowledge which, if made public, would be likely to lead to a significant movement in the price of its securities.
MBL Group plc was found to be in breach of this rule because the company failed to notify, without delay, information of which it became aware in relation to the significant deterioration in the financial performance of the subsidiaries it was preparing to sell. The information was price sensitive and also at odds with information that had previously been disclosed to the market.
WM comment
These cases highlight how important it is to ensure that the continuing obligations under the AIM Rules are complied with. AIM companies must ensure that they consider properly the disclosure implications of relevant financial information available to them. In addition, when notifying information, they must take care to ensure that the information does not, by omission, create an incomplete understanding. AIM companies must also ensure that they have sufficient procedures, resources and controls in place to meet their obligations under the rules at all times. It is clear that where there is actionable evidence, the LSE will bring to account companies that fail to meet the required standards of disclosure.

Guidance published explaining the revised IPO process
New rules in the Conduct of Business Sourcebook took effect in July leading to significant […]
New rules in the Conduct of Business Sourcebook took effect in July leading to significant changes in the timing, sequencing and documents required in the UK IPO process. Guidance has now been published outlining how syndicate banks can facilitate access to prospective issuers for unconnected analysts.
As reported in our June edition of Corporate Matters, the Financial Conduct Authority (FCA) has introduced new rules in its Conduct of Business Sourcebook (COBS). 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 (and therefore 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.
On 20 August 2018, the Association for Financial Markets in Europe (AFME) and the European Association for Independent Research Providers (Euro IRP) published guidance on how unconnected analysts can access issuer information in UK IPOs under the new COBS rules. The guidance seeks to assist market participants and Andrew Brooke, director of AFME’s Equity Capital Markets Division, said that “the guidance should facilitate the efficient and coordinated execution of UK IPOs”.
WM comment
These are significant changes to the IPO process which affect timing and the documents required. The full text of the guidance can be read here.

Drag along provisions enforced by the High Court
A drag-along provision in a shareholders’ agreement has been enforced by a recent High Court […]
A drag-along provision in a shareholders’ agreement has been enforced by a recent High Court decision and the shareholder in question ordered to transfer his shares.
Where there are several shareholders in a company, a shareholders’ agreement is commonly used to regulate the relationship between the shareholders and to govern how the company is to be run.
Most shareholders’ agreements contain a drag along provision. A drag along is a mechanism by which the majority of the shareholders can force the minority to transfer their shares if a buyer is found for the company. Typically, the agreement will set out that if a certain proportion of shareholders agree to the sale, then the remaining shareholders have to transfer their shares as well. The figure can be anything but is usually between 51 per cent. and 90 per cent.
Although a drag along is a common clause in a shareholders’ agreement, the effectiveness of the provision has rarely been tested in court. In Cunningham v Resourceful Land Limited and others [2018]EWHC the court had to decide whether a minority shareholder could refuse to comply with the drag along provision.
A group of five individuals became shareholders in Resourceful Land Ltd (RLL) and entered into a shareholders’ agreement. The drag along clause stated that if the original three shareholders wanted to transfer their shares in good faith to an arm’s length buyer, they could require the remaining two shareholders to sell their shares too. The agreement also contained the wording which allowed the stock transfer forms to be signed on their behalf if they refused to do so.
Funding for the business was obtained from Privilege Project Finance Limited (Privilege). When further finance was required, Privilege agreed to provide it in return for an equity stake in RLL. In order to achieve this, it was agreed that Privilege would incorporate a new subsidiary to buy the shares in RLL from its shareholders and, in exchange, issue those individuals new shares in the subsidiary.
The three original shareholders of RLL agreed to this plan but the other two didn’t and so a drag along notice was served on the minority shareholders requiring them to sell their shares. When they still refused the transfer was completed under the provisions of the drag along. One of the dragged shareholders then challenged the drag along in court and applied to be reinstated on the register of members. His application was based on three arguments:
- the word ‘sale’ in the shareholders’ agreement meant a sale for cash. It didn’t include a share for share exchange and so the drag along couldn’t be used
- the sale was not in good faith
- the sale was not on arm’s length because the RLL shareholders were obtaining shares in the buyer.
The High Court however disagreed and upheld the use of the drag along.
The court found that the word ‘sale’ could include a non-cash sale because elsewhere in the clause the words ‘or any other consideration’ were used and therefore the wording was deliberately wide. It also found that the sale was carried out in good faith. Crucially the court found that it was the mental state of Privilege that was important not whether or not the sale itself was in good faith. The fact that Privilege had agreed to treat all the shareholders equally was evidence of good faith. Finally, the judge held that the sale was on arm’s length because there was no connection between the buyer and the sellers at the point that the sale was agreed. It was irrelevant that they were connected after completion.
WM comment
This decision should be welcomed by institutional investors who often rely on drag along provisions as a means of exiting from an investment. The High Court has confirmed that the provision, as long as it is drafted correctly, can be used to force a sale.