Corporate Law Update: 3 - 9 December 2022

09 December 2022

In this week’s update:

Economic Crime Bill 2 continues to progress through Parliament

The Government’s Economic Crime and Corporate Transparency Bill continues to make its way through Parliament, having now completed its committee stage.

The Bill has been subjected to a number of amendments from both the Government and opposition parties. It is now due to enter “report stage”, during which Members of Parliament will debate the amendments that have been put forward.

We have summarised the key changes to the Bill in this separate in-depth piece.

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

An interim dividend did not become a debt until it was paid

The First-Tier Tribunal has held that an interim dividend became a debt when it was paid, even though it was paid to a company’s two shareholders at different times. As a result, the two shareholders were treated as receiving their dividend entitlements in different tax years.

Gould v HMRC [2022] UKFTT 00431 (TC) concerned a company with (for all practical intents and purposes) two shareholders (who were also brothers). One of those shareholders was resident in the UK. The other had settled in Jamaica, having previously resided for some time in the United States.

The company wished to return profits to the shareholders by way of dividend. It decided to do so by way of an interim dividend so that it could pay the shareholders at different times. That way, one shareholder would receive their dividend in the 2015/16 tax year and the other in the 2016/17 tax year.

HMRC challenged this approach, claiming that both shareholders received their dividends in the 2015/16 year when the first payment was made, on the basis that they both became entitled to enforce payment from that point.

The Tribunal disagreed and held that the treatment the shareholders had intended was effective.

You can read more about the case in our separate in-depth piece.

ISS updates UK and Ireland proxy voting guidelines

Institutional Shareholder Services (ISS) has updated its proxy voting guidelines for the UK and Ireland for the 2023 AGM season. Key changes include the following.

  • For listed companies, ISS will generally recommend voting against the chair of the nomination committee if the company has not met the board gender and ethnicity diversity targets set out in the Financial Conduct Authority’s Listing Rules. Lower targets will apply to AIM companies.
  • ISS has tightened its expectations on emissions reduction targets reporting. In particular, reduction targets should now cover the “vast majority” of the company’s operations.
  • It has introduced a new policy on audit committee meetings, requiring a minimum number of meetings per year for FTSE 350 companies and FTSE All Share companies.
  • ISS now expects annual executive salary increases to be lower proportionally than (rather than merely “in line” with) increases across the broader workforce.
  • The guidelines have been updated to reflect recent changes to the Pre-Emption Group’s Statement of Principles on disapplying statutory pre-emption rights. (See our previous Corporate Law Update for more information).

You can read more about the changes in our in-depth article.

EU adopts new corporate sustainability due diligence measures

The Council of the European Union has adopted its negotiation position on a new law to require large businesses to carry out due diligence to identify impacts on human rights and the environment.

Under the Corporate Sustainability Due Diligence Directive, companies would need to carry out targeted due diligence on their own operations and those of their subsidiaries and business partners.

This would need to include identifying actual or potential adverse impacts on human rights and the environment and taking measures to prevent and mitigate identified impacts. Companies would also need to report publicly on the measures they have taken (to the extent they are not already required to do so under EU non-financial reporting requirements).

If adopted, the Directive would apply initially to EU companies with more than 1000 employees and net worldwide turnover above €300m Those thresholds would lower to 500 employees and €150m turnover, with lower turnover thresholds for certain industries, after four years.

The Directive would also apply to non-EU companies that generate more than €300m net turnover in the EU (whether or not they have a branch or establishment in the EU). Again, this would step down to €150m, with lower turnover thresholds for certain industries, after four years.

Companies within scope could be liable to pay compensation if they fail to take mitigating action and, as a result, a person suffers damage.

The Council will now begin negotiations with the European Parliament to agree the text of the Directive, which could yet undergo changes. We will continue to monitor progress.

Chancery Lane Project updates climate glossary

The Chancery Lane Project (TCLP) has updated its glossary of climate-related terms. The glossary provides standard climate-related definitions for use when drafting climate-aligned contracts.

TCLP is best known for its climate clauses (previously known as its Climate Contract Playbook), a series of clauses and other pieces of drafting designed to be adapted and included in climate-aligned legal documentation. It also recently launched a Net Zero toolkit, designed to assist organisations with their transition to a Net Zero economy.

The updated glossary includes 20 new terms and has been redesigned for ease of navigation.

FCA consults on new permission regime for financial promotion approvers

The Financial Conduct Authority (FCA) is consulting on the new “gateway” for firms that wish to continue approving financial promotions for non-FCA-authorised persons.

In August 2022, the FCA confirmed (following a consultation in January 2022) that it would be implementing a new regime under which a firm will need specific permission from the FCA to approve financial promotions for unauthorised persons (see our previous Corporate Law Update).

The consultation seeks views on various aspects of the new gateway, including how the FCA should assess applicants and the basis on which it should grant or refuse applications.

The FCA also proposes to require permitted approvers to notify it within seven days each time they approve a new financial promotion or an amendment to a financial promotion, as well as when they withdraw approval for a financial promotion.

Finally, the FCA proposes to require permitted approvers to submit certain information to it on a half-yearly basis. This includes the number of promotions they have approved, the number of consumer complaints received, their revenue from approving promotions, and their total revenue for the period.

The FCA has asked for responses by 7 February 2023 and expects to publish a policy statement in the first half of 2023.

FRC publishes new audit quality indicators

The Financial Reporting Council (FRC) has announced new firm-level audit quality indicators (AQIs).

It follows a consultation in July 2022, in which the FRC proposed to require audit firms to publish firm-level AQIs. For more information on that consultation, see our previous Corporate Law Update.

The FRC has decided to proceed with all but one of its 11 original proposed AQIs (audit planning milestones), with slight modifications to one of the AQIs (staff-to-partner ratio). The final AQIs can be found in the FRC’s feedback statement.

The new measures will apply to audit firms within the scope of the FRC’s Audit Firm Governance Code. That Code applies to firms that audit 20 or more public interest entities (PIEs) or one or more FTSE 350 companies.

For some AQIs, the FRC has decided to segment data between PIE and non-PIE audits. Firms will be able to provide supporting narrative to their published AQIs. This can include links to FRC publications and webpages, but not to the firm’s own website.

The new requirements will apply on a “phased approach” from 1 April 2023, with private reporting to the FRC in Summer 2024 and public reporting from Summer 2025.