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Welcome to the latest edition of Corporate Update, our fortnightly bulletin offering a five-minute read of the latest developments which we consider relevant to corporate counsel. Please get in touch with your usual contact if you want to explore any of the topics covered in more detail. If you would like to subscribe to this bulletin as a regular email, please click here.
In this issue:
News
FRC publishes its corporate governance annual review
On 16 November 2023, the Financial Reporting Council (FRC) published its annual Review of Corporate Governance Reporting. It analyses the FRC’s findings from a review of the UK Corporate Governance Code (the “Code”) reporting from a sample of FTSE 350 and small cap companies and provides examples of good practice.
While the review found that strides have been made in reporting quality this year, the FRC also expressed disappointment that it continues to find too many examples of unconvincing boilerplate reporting which fails to meet stakeholder expectations. Some of FRC’s key recommendations include:
- Code compliance generally: In relation to reporting on application of the Code’s principles, companies are encouraged to report clearly and concisely on how application of the principles has made a difference to actions taken by their board. In relation to reporting on compliance with the provisions, the “comply or explain” nature of the detailed provisions should allow companies to adjust their corporate governance models accordingly, but companies should clearly explain any departures from the provisions and ensure that they continue to apply the Code’s principles.
- Audit and risk: Companies should more fully disclose how audit committees have assessed the independence and effectiveness of the external audit process and report on the most significant risks and any changes to these during the year.
- Stakeholder engagement: The FRC recommends reflecting on company-specific feedback received from stakeholder engagement as well as reporting on how issues have been addressed, shareholders' key priorities and, in relation to workforce engagement, why it considers the chosen engagement method to be effective.
- Environment and TCFD disclosures: The FRC expects companies to improve their level of compliance across all recommended Task Force on Climate-Related Financial disclosures including through disclosure of governance structures, processes to manage and senior oversight of climate-related risks.
The FRC will also hold a webinar on Monday 27 November to discuss this year’s findings.
Glass Lewis publishes its 2024 voting policy guidelines
On 16 November 2023, Glass Lewis published its 2024 UK Proxy Voting Policy Guidelines (the “Guidelines”) which will apply for meetings from 1 January 2024. The Guidelines provide a detailed overview of key policies Glass Lewis will apply and its approach to topics including governance, compensation and ESG issues. Revisions and updates include:
- Director accountability for climate-related issues: Glass-Lewis’ policy on director accountability for climate-related issues is expanded from the largest, most significant emitters to most large-cap (i.e. FTSE 100) companies operating in industries where the Sustainability Accounting Standards Board determined that companies’ greenhouse gas emissions represent a financially material risk.
- Director attendance: With some exceptions, the Guidelines recommend voting against re-election of directors who fail to attend at least 75% of board meetings or an aggregate of 75% of board and applicable committee meetings.
- Cyber risk oversight: The policy on cyber risk oversight has been expanded to reflect that, where a company has been materially impacted by a cyber-attack, shareholders can expect updates on remedial progress. It may also recommend voting against certain directors if the board’s oversight, response or disclosures concerning cyber-security related issues are insufficient or not provided to shareholders.
- Executive shareholding requirements: The preference is for companies to adopt minimum executive share ownership requirements that apply for the duration of an executive's tenure and for a period post-employment.
- Interlocking directorships: Glass Lewis has specified that it considers both public and private companies in its policy on interlocking directorships.
Revised QCA Corporate Governance Code published
On 13 November 2023, the Quoted Companies Alliance (QCA) published a revised version of its QCA Corporate Governance Code (which is available to members (login required) or for purchase) which will apply for accounting periods beginning from 1 April 2024. The QCA’s Code is tailored for small and mid-sized UK quoted companies and adopted by a large majority of AIM companies.
Climate transition plans – Transition Plan Taskforce consultation on sector guidance
Following the launch of the Transition Plan Taskforce’s (TPT) sector-agnostic Disclosure Framework on 9 October 2023, the TPT has launched a consultation on seven sector-specific guidance providing “deep dive” guidance to those using and preparing climate transition plans in those sectors. The sectors covered are (i) asset managers, (ii) asset owners, (iii) banks, (iv) electric utilities and power generators, (v) food and beverage, (vi) metals, and (vii) mining and oil and gas. The consultation is open until 29 December 2023.
Call for evidence published on National Security and Investment Act
On 13 November 2023, the Cabinet Office published a Call for Evidence on the National Security and Investment Act 2021 regime (“NSIA regime”). The Cabinet Office would like to hear from as many different stakeholders and interested groups as possible who interact with the NSIA regime or take it into consideration. The call for evidence closes on 15 January 2024.
Legislation
Economic Crime and Corporate Transparency Act (Commencement No. 1) Regulations 2023 published
On 13 November, the Economic Crime and Corporate Transparency Act 2023 (Commencement No. 1) Regulations 2023 (SI 2023/1206) were made and published on 16 November 2023. It brings into force various provisions of the Economic Crime and Corporate Transparency Act 2023 (“ECCTA 2023”) from 15 January 2024, including provisions relating to national security-related exceptions for the upcoming identity verification requirements and company names regime and various amendments to the anti-money laundering regime (including provisions to enable better information sharing between businesses regulated under the Money Laundering Regulations). The provision widening the Serious Fraud Office’s pre-investigation powers for economic crimes will also come into force.
From 15 November 2023, the Regulations also bring into force section 214 which strengthens the power to impose monetary pensions for sanctions breaches, so far as it was not already in force.
Criminal Justice Bill proposes to apply expanded identification doctrine to all crimes
On 14 November 2023, the Criminal Justice Bill was introduced to Parliament and received its first reading. Under this Bill, provisions in the ECCTA 2023 which expand the common law identification doctrine to allow for the attribution of criminal liability to companies where ‘senior managers’ commit certain economic crimes (which will come into effect on 26 December 2023) are proposed to be expanded to apply to all crimes.
Market Insights
Practical Law publishes report on trends from 2023 reporting and AGM season
On 13 October 2023, Practical Law What’s Market published its yearly report on annual reporting and AGMs providing an analysis of key trends on certain aspects of narrative reporting, resolutions proposed from the 2023 reporting and AGM season. The report is based on a review of the notices of AGM and annual reports of premium-listed FTSE 350 commercial companies and certain AIM companies. Key findings include:
- Over 80% of companies reviewed holding physical meetings, signalling a strong return to in-person meetings post-COVID.
- Nearly 50% of the companies reviewed sought the additional headroom afforded by the 2022 PEG statement of principles when seeking authority to disapply pre-emption provisions.
- Nearly 50% of FTSE 100 companies disclosed full compliance with the UK Corporate Governance Code.
- 65 FTSE 100 companies had achieved 40% or more female representation on their boards. 40 FTSE 100 and 36 FTSE 250 companies met the Listing Rule target of 40% female representation on the board, at least one woman in a senior position and at least one director from an ethnically diverse background. Women make up 24% of the boards of AIM UK 50 companies, up from 20% in 2022.
- The number of climate-related resolutions tabled were down from 2022, with only eight FTSE 350 companies tabling such resolutions at their 2023 AGM (17 in 2022).
Case Law
DnaNudge Limited v Ventura Capital GP Limited [2023] EWCA Civ 1142
Court of Appeal agrees that conversion of preference shares was void since class consent was not obtained pursuant to articles
This case concerned an appeal against a High Court decision that the conversion of preference shares in a company (DnaNudge) into ordinary shares was void and of no effect because the conversion had not received the requisite consent of preference shareholders. The company’s articles of association contained two articles, one (Article 9.2(a)) which purported to provide for the automatic conversion of preference shares into ordinary shares on notice by the “Investor Majority” (defined as majority of all shareholders combined), and the other (Article 10.1) which provided that special rights attached to any such class may only be varied or abrogated with the consent in writing of the holders of more than 75% in nominal value of the issued shares of that class.
Various ordinary shareholders constituting an “Investor Majority” had purported to give notice requiring the preference shares to be converted pursuant to Article 9.2(a). The High Court had held that the conversion constituted a variation or abrogation of rights and despite the clear tension between Articles 9.2(a) Article 10.1, Article 9.2(a) must be read as subject to Article 10.1.
The Court of Appeal held that the word “automatic” in Article 9.2(a) did not necessarily exclude the possibility that other conditions might have to be satisfied for conversion to occur. The Court of Appeal therefore agreed with the High Court that Article 9.2(a) had to be read as subject to Article 10.1, or a term must be implied to that effect, such that compliance with Article 10.1 was a pre-condition to conversion.
As the decision was based on construction of the articles, the Court of Appeal did not need to consider an alternative argument on the basis of s.633 Companies Act 2006 (which applies where rights attached to a class of shares are varied under s.630 Companies Act 2006) which allows holders of a class of shares to apply to the court to cancel the variation on grounds that the variation is unfairly prejudicial to the shareholders of the class represented by the applicant.
Lendlease Construction (Europe) Ltd v Aecom Ltd [2023] EWHC 2620 (TCC)
Court held agreement was effective as a deed despite non-compliance with statutory formalities
The High Court ruled that a consultancy agreement was effective as a deed where the company was satisfied that the signatories, who were not statutory directors, as they purported to be, and who had signed the document in the wrong place, were authorised to enter into the agreement on behalf of the company. Although in this case, it was held that the agreement was effective as a deed, the Court maintained that the statutory formalities necessary for a document to operate against a company as a deed are not to be readily circumvented.
Publications
Briefings on the Economic Crime and Corporate Transparency Act 2023
Slaughter and May has published a briefing providing an overview of the key measures in the ECCTA 2023 relating to the changes to the role and powers of Companies House and the company administration regime which includes some steps that company secretary teams may wish to consider in light of these changes. The briefing also links to this table which sets out these key measures in more detail and provides further commentary on the implications for companies.
Separately, Slaughter and May has also published a briefing providing an overview of the measures under the ECCTA 2023 that will impact the limited partnership regime.