Corporate Law Update

This week we look at the new dividend procedure timetable published by the London Stock Exchange, new draft regulations to open up access to invoice receivables financing and the Government’s response to the recent Parliamentary inquiry on corporate governance.

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Upcoming dates

We would like to remind our readers of the following upcoming dates:

  • On 30 September 2017 the new corporate offence of failing to prevent the facilitation of tax evasion by an associated person comes into force.
  • From 1 October 2017 all Main Market issuers (and other issuers whose securities are admitted to a regulated market) must have a legal entity identifier (LEI) code. LEI codes are issued by the London Stock Exchange.

LSE publishes Dividend Procedure Timetable for 2018

The London Stock Exchange (the “Exchange”) has published its Dividend Procedure Timetable for 2018 (the “Timetable”). The Timetable provides a guide for Main Market and AIM companies when formulating their programmes for interim and final dividends.

The Timetable sets out a series of ex-dividend dates with their corresponding record dates and the dates on which the issuer is to announce the dividend. It also sets out certain content requirements for an issuer’s dividend announcement.

Companies that adhere to the Timetable do not need to notify the Exchange of their programme in advance. However, dividends that fall outside the parameters set out in the Timetable must be discussed and agreed in advance with the Exchange.

The 2018 Timetable is broadly the same as the timetable for 2017, with the following changes:

  • The Exchange expects dividend announcements in 2018 to state whether the dividend is wholly or partially a “Property Income Distribution (PID)” or has been designated an “Interest Distribution”.
  • If the dividend includes a scrip alternative, currency election, dividend reinvestment plan or scheme (DRIP/DRIS) or other alternative, the announcement must confirm not only the last day (as in 2017), but also the last time by which the election can be made.

Revised draft receivables regulations published

The Department for Business, Energy and Industrial Strategy (BEIS) has published a revised draft of the regulations to outlaw contractual clauses that stop a party from assigning its right to payment.

BEIS had originally published regulations to this effect back in December 2014. The purpose was to open up invoice finance to smaller businesses by removing contractual obstacles. However, the draft regulations published at that point were perceived as having various flaws.

Under the new draft regulations, a contract term is of no effect to the extent it prohibits a party from assigning a receivable (i.e. a right to payment) under that or another contract. The draft regulations also nullify clauses that attempt to achieve the same thing in practice by imposing restrictions on a person to whom a receivable is assigned.

The regulations would apply only to contracts for the supply of goods, services or intangible assets, but this is a wide description. There are specific exceptions for contracts for certain financial services, real estate contracts, consumer contracts, petroleum licences and contracts with a national security dimension. However, the breadth of the draft regulations means that they could, in theory, capture more bespoke agreements, such as share and business sale agreements.

The regulations would only apply to contracts governed by the law of England and Wales or by Northern Irish law, but there are deeming provisions to prevent parties from “contracting out” of the regulations by choosing Scottish or some other law.

Interestingly, the original draft regulations in 2014 contained a carve-out for clauses that impose a duty of confidence (i.e. confidentiality clauses). These kinds of clauses would not have been rendered ineffective to the extent they prohibited receivables assignments. At the time, this seemed like a loophole in the regulations, as businesses could simply use confidentiality clauses to prohibit assignments. However, this exception does not appear in the new draft regulations.

The draft regulations have been laid before Parliament but we await a date for them to be approved.

Government responds to corporate governance inquiry

The Government has published a formal response to the recent inquiry into corporate governance by the Business, Energy and Industrial Strategy Parliamentary Select Committee. The response deals with the recommendations raised by the Committee, which we reported on back in April this year.

This response is separate from the one published by the Government in response to its own November 2016 green paper on corporate governance (the “Green Paper Response”), which we reported on earlier this month. However, naturally the two responses cover similar ground.

We have set out the key points arising from the Government’s response below.

The Government has decided to follow the following recommendations of the Committee:

  • Requiring companies of a significant size to explain how their directors have fulfilled their duty under section 172 of the Companies Act 2006 to promote the success of their company.
  • Requiring large companies to publish their ratio of CEO to average workforce pay.
  • Aligning bonuses more closely with company objectives by asking the FRC to extend the minimum vesting and post-vesting holding period for share awards from three to five years.
  • Strengthening employee engagement. It proposes to do this by asking the Financial Reporting Council (FRC) to amend the UK Corporate Governance Code (the “Code”) to require issuers to adopt one of three models (designated non-executive director for employees; formal employee advisory council; or director picked from the workforce).
  • Inviting the FRC and industry bodies to develop a common corporate governance code for private companies. Although this code would be voluntary, the Government will legislate to require large private companies to report against either that code or another code of their choosing.
  • Requiring a person to serve for at least one year on a remuneration committee before taking the chair. However, the Government’s position appears to be that one year’s service on any remcom would suffice, rather than specifically the remcom for which the person is seeking the chair.

However, the Government has declined to follow the following recommendations of the Committee:

  • Giving the FRC powers to bring enforcement action against directors for breach of section 172.
  • Introducing annual ratings for FTSE 350 companies to monitor compliance with the Code. The Government about encouraging a tick-box culture, rather than “intelligent” application of the Code.
  • Requiring public and large private companies to disclose details of their advisers on transactions over a certain size. It believes the current regulatory framework is robust enough.
  • Introducing stronger requirements for asset managers to disclose their voting records. The Government says this is a matter for the FRC to decide and progress has already been made on this (with 72% of institutional investors now disclosing their voting record).
  • Replacing long-term incentive plans (LTIPs) with deferred stock options or restricted share awards. The Government believes companies should be able to choose which model they put to shareholders for approval.
  • Requiring a binding vote on executive pay if more than 25% of votes on the non-binding vote in the previous year were against. However, the Government will “consider further action at a future point” if changes to the Code do not address significant shareholder concerns.
  • Requiring the chair of a remuneration committee to resign if the committee’s proposals do not gain the approval of 75% of voting shareholders.
  • Setting a target that, by May 2020, at least half of all new listed company executive appointments are women. The Government prefers to focus on the existing target (set in November 2016) that 33% of FTSE 350 boards and 33% of FTSE 100 executive committees be women.
  • Requiring companies to publish workforce breakdowns by ethnicity and pay band. The Governments prefers a “non-legislative solution” but “stands ready to act if sufficient progress is not delivered”.