Corporate Law Update: 23 - 29 April 2022

29 April 2022

In this week’s update: An update on establishing the new register of overseas entities, changes to the UK’s merger control regime, IPEV reiterates its guidance on valuing investee companies, the FRC publishes research on the quality of companies’ modern slavery reporting and the ICAEW publishes an updated technical note on disclosing auditor remuneration.

Government provides update on register of overseas entities

The Government has given a written statement in Parliament providing an update on its progress towards establishing the new register of overseas entities that own or intend to acquire land in the UK.

The new regime, which is being referred to variously as the “register of overseas entities” (ROE) regime or “overseas entities beneficial ownership” (OEBO) regime, was created by the recent Economic Crime (Transparency and Enforcement) Act 2022.

Based heavily on the UK’s existing “persons with significant control” (PSC) regime, it will require overseas entities that own or intend to acquire land in the UK to disclose publicly details of their beneficial owners and (in some cases) managing officers.

For more information on the regime generally, see our previous Corporate Law Update.

In its written statement, the Government has confirmed the following.

  • The Government has been working “at pace” to put the register in place as soon as reasonably practicable. It has established an Implementation Group comprising officials from the Department for Business, Energy and Industrial Strategy, Companies House and the UK’s three land registries.
  • Some aspects of the register must be defined through secondary legislation before it can go live. These include technical details of verification requirements, as well as a regime for beneficial owners and managing officers to protect their details from public disclosure where they may be at risk of serious harm or violence.
  • The Government is engaging with expert stakeholders, including the UK’s law societies, on technical aspects of the register and supporting legislation to ensure the register will work as intended across the UK.
  • The Government intends to lay regulations for Parliamentary scrutiny as soon as possible.

Government sets out changes to UK’s merger control regime

The Government has set out changes it intends to make to the UK’s merger control regime.

The proposed changes follow the Government’s broader consultation, published in July 2021, on reform to competition and consumer policy. For more information on that consultation insofar as it related to the UK’s merger control regime, see our previous Corporate Law Update.

The Government has confirmed the following.

  • Raising the “turnover test” threshold. As proposed in its consultation, the Government will raise the threshold for the “turnover test” from £70m to £100m (to account for inflation). Broadly speaking, acquisitions of target businesses with turnover above this threshold will be subject to potential scrutiny by the Competition and Mergers Authority (CMA).
  • New “combined test”. The Government will also take forward its proposal for a new test to capture significant mergers that do not fall within the existing “turnover” and “share of supply” tests. However, it has decided to raise the thresholds proposed in the original consultation so that the new test targets acquisitions by larger businesses.

    The new test will therefore apply where an acquirer has both:
    • a share of supply of at least 33% of a particular category of goods or services supplied or acquired in the UK or a substantial part of the UK (not 25%, as originally proposed); and
    • a UK turnover of more than £350m (not £100m, as originally proposed).

The Government is also proposing to incorporate an additional “UK nexus” criterion into the new “combined test” to give greater clarity in relation to merger activities that are less likely adversely to impact competition in the UK.

  • De minimis exemption. The Government will also introduce a new exemption where the turnover of each merging party is less than £10m. However, the threshold will refer to merging parties’ UK turnover (rather than their worldwide turnover, as originally proposed), effectively expanding the scope of the exemption. Where the exemption applies, a merger will fall completely outside the CMA’s jurisdiction and would not be subject to merger control.
  • Fast-track merger process. Finally, the Government will proceed with its proposal to formalise the existing informal fast-track process. This will allow merger parties to request an automatic reference to a Phase 2 investigation without needing to wait on the result of a Phase 1 investigation.

The changes will require new legislation. We will continue to monitor developments and report on any legislative developments as they arise.

IPEV reiterates fair value estimation principles for 2022

The International Private Equity and Venture Capital Valuation (IPEV) Board has reiterated the special guidance it published in March 2020 when applying the IPEV Valuation guidelines to estimate “fair value” at 31 March 2022.

The Board again reinforces certain considerations for valuing alternative investments, given what it calls the unprecedented nature of the current macro environment. Factors which will merit particular consideration when valuing an investee company include the following:

  • Reduction in future profits due to the withdrawal from a specific region.
  • The direct and indirect impact of sanctions.
  • The impact of the significant increases in commodity, raw material and energy prices and of potential supply chain shortages.
  • The impact of inflation and the ability to maintain historic level of margins.
  • Liquidity position.
  • Counterparty risk, including the ability for insurance claims to be paid out.
  • Alternative markets or methodologies for listed securities where trading has been suspended, potentially indefinitely.

The Board notes that this list is not exhaustive but merely intended to reinforce the need to exercise informed judgment.

FRC reports boards must do more to eradicate modern slavery

The Financial Reporting Council (FRC), together with the UK Anti-Slavery Commission and Lancaster University, has published new research on the quality of modern slavery reporting by companies.

What is modern slavery reporting?

Under section 54 of the Modern Slavery Act 2015, certain commercial organisations must publish an annual slavery and human trafficking statement.

The statement – referred to more commonly as a “modern slavery statement” – must set out the steps the organisation has taken during the previous financial year to ensure that slavery and human trafficking are not taking place in its supply chains or any part of its own business.

If an organisation has not taken any such steps, the statement must say so.

The requirement applies to commercial organisations based anywhere in the world if they supply goods or services within the United Kingdom and have a worldwide turnover of £36m or more.

What does the research show?

The research follows the review of corporate governance which the FRC published in November last year and utilises the same sample set of 100 FTSE 100, 250 and SmallCap companies. For more information on that review, see our previous Corporate Law Update.

The key points according to the research are set out below.

  • Reporting on modern slavery in both modern slavery statements and annual reports lacked the information needed for stakeholders to make informed decisions.
  • Around one in ten companies did not provide a modern slavery statement at all and so “failed to comply with section 54”.
  • Where companies did comply, only one third of modern slavery statements were considered “clear and easy to read”.
  • The majority of statements were “fragmented, lacking a clear focus and narrative, or were unduly complicated”.
  • Longer disclosures did not always convey more information. Often they contained boilerplate reporting or were a sign of a poorly structured statement.
  • There was “particularly poor” disclosure of key performance indicators (KPIs) measuring the effectiveness of the steps taken to minimise modern slavery risks. Only a quarter of companies disclosed against KPIs and only 12% made informed decisions based on those KPIs.
  • Less than half of companies provided a clear and comprehensive discussion of modern slavery concerns in the context of their organisational structure, operating and supply chains.
  • 46% of companies described their policies on slavery and human trafficking in an informative manner, but often failed to provide information on how policies operated in practice.
  • The vast majority of statements were wholly backward-looking. Only a minority clearly identified emerging issues or a long-term strategy. Only 28% of companies disclosed an action plan based on the risks they had identified.
  • Modern slavery reporting in annual reports was “minimal”, suggesting few companies regarded human rights issues in their workforce or supply chains as a principal source of risk.
  • Companies therefore relied primarily on their modern slavery statements for reporting in this area. However, despite this, only 14% of annual reports provided a link to a modern slavery statement.

What does this mean for me?

The findings of the research suggest there is significant room for improvement in modern slavery reporting.

The finding that around one in ten companies did not provide a statement is concerning, although this needs to be seen in context. The report notes that “all sample companies [were] caught by [section 54]” but does not explicitly disclose the approach taken to determine this.

It is, however, worth noting that section 54 applies on an individual entity, rather than a group basis, and it does not apply to organisations that do not supply goods or services. Mere holding companies may not, therefore, be required to publish a statement, although they may do so voluntarily and they may have subsidiaries that are required to publish one.

The finding that the vast majority of statements were “backward-looking” is also not surprising, given that section 54 requires an organisation to set out the steps it took in the preceding financial year.

However, a modern slavery statement is also a useful vehicle for an organisation to convey its intentions and aspirations in this regard, particularly where it has (for whatever reason) no significant steps from its previous financial year on which to report.

Section 54 specifically states that an organisation may include information on its policies, due diligence processes and training in relation to slavery and human trafficking. Organisations compiling their modern slavery statement should consider including this information on a forward-looking basis.

Organisations should also bear in mind that the Government has published guidance on putting together a modern slavery statement and take that guidance into account when doing so.

ICAEW publishes revised guidance on audit remuneration disclosures

The Institute of Chartered Accountants in England and Wales (ICAEW) has published a revised version of its technical note on the disclosure of auditor remuneration (TECH 01/22 FRF).

Under the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008, large and medium-sized companies must disclose (in a note to their accounts) any remuneration receivable by their auditor for auditing their accounts.

Large companies must also disclose any remuneration receivable by their auditor (or their auditor’s associates) for non-audit services supplied to the company (or the company’s associates).

The technical note contains frequently asked questions on disclosure, including on how to obtain the required information for disclosures, who qualifies as an “associate”, how disclosures interact with pension schemes, and how to make disclosures for group audits and on a change of auditor.

The guidance also contains numerous questions and answers for large companies on disclosing remuneration for non-audit services.

TECH 01/22 FRF replaces the ICAEW’s previous technical note on the subject (TECH 14/13 FRF). The changes since the previous technical note principally address developments in company law and corporate governance since that note was published, including the fact that, since January 2016, small companies have not been required to disclose their auditor’s remuneration.