Corporate Law Update

This week we look at a report from the FRC on dividend disclosure practice in 2016 and new guidance from ICSA and the Investment Association on engaging with stakeholders. We also briefly cover new guidance on delaying the disclosure of inside information, and new checklists from the Takeover Panel.

Quick links:

ESMA publishes updated Q&A on MAR

The European Securities and Markets Authority (ESMA) has updated its Q&A document on the Market Abuse Regulation (MAR).

ESMA has added a new Q&A 5.2 covering the situation where an issuer delays the disclosure of inside information, but that information ceases to be price-sensitive (and, therefore, inside information) before it is published. ESMA has confirmed that, in these circumstances:

  • When the information ceases to be price-sensitive, it is no longer subject to MAR and the issuer does not need to disclose it.
  • Likewise, when the information is disclosed, the issuer is not obliged to inform its national competent authority (in the UK, the Financial Conduct Authority) that it delayed disclosure.
  • However, the issuer does need to comply with its obligations to draw up and maintain an insider list and maintain all relevant information in relation to delaying disclosure.

Takeover Panel publishes further checklists

The Takeover Panel has published three checklists that need to be completed and sent to the Panel by the financial adviser to an offeror or offeree company when certain announcements are made. These follow the four checklists and four supplementary forms published by the Panel in December last year.

The new checklists are:

  • Checklist when making a possible offer (Rule 2.4) announcement.
  • Checklist when distributing a possible offer (Rule 2.4) announcement under Rule 2.11.
  • Checklist when distributing a firm offer (Rule 2.7) announcement under Rule 2.11.

Links to the checklists can be found here. The Panel’s statement (2017/19) can be found here.

ICSA, IA publish joint guidance on stakeholder engagement

ICSA: The Governance Institute and the Investment Association (IA) have published new joint guidance on how boards can engage with their companies’ various stakeholders. The guidance has been endorsed by the Minister for Small Business, Consumers and Corporate Responsibility.

The guidance is divided into ten core principles and seven themes. We set out the key points below:

  • Identifying stakeholders. The guidance recommends that boards identify who they consider to be their key stakeholders and why, and with which stakeholders they need to engage directly.

    The guidance specifically notes that stakeholders include both people on whom a company’s business impacts and people whose actions affect the company’s business. It notes that some stakeholders, such as workers and customers, will be common to all companies, but, beyond this, each company’s key stakeholders will differ according to its size, industry and location.
  • Board composition. Boards should identify what stakeholder expertise they need in the form of directors with relevant experience and work this into their recruitment process.

    The guidance suggests companies consider two, complementary approaches: reserving a board position for a director drawn from a stakeholder group, and appointing a non-executive director with experience of a particular stakeholder group. The guidance focusses on employees, but suggests that boards consider other stakeholder groups as well.

    The guidance was drawn up in advance of the Government’s response to its own corporate governance green paper. These two approaches can now be supplemented by a third one, namely creating a formal representative committee for a stakeholder group (e.g. a works council).
  • Training. The company’s directors should all receive training on stakeholder-related matters, including on induction and particularly where they have no previous board experience. The guidance contains suggestions for possible training activities.
  • Engaging stakeholders. Boards should ensure appropriate engagement takes place, providing feedback to stakeholders with whom it engages and ensuring engagement mechanisms are effective and convenient for stakeholders (and not just the company itself). Again, the guidance contains suggested practical steps for boards to generate appropriate engagement.
  • Reporting. Boards should report to shareholders on how they have taken stakeholders into account when making decisions. (This will effectively be codified in 2018, when the Government intends to require companies to report on compliance with section 172, Companies Act 2006.)

    The guidance identifies the annual report and accounts as the most suitable conduit through which to report. However, it also suggests reporting via corporate social responsibility (CSR) reports and the company’s own website.

    In particular, the guidance states that reporting should identify the key stakeholders, explain how the board hears from them, and explain how engagement has impacted on the board’s decisions.

ICSA and the IA intend to update the guidance (if necessary) when the Government’s proposed corporate governance reforms come into effect in June 2018, and to review it in any event in 2019.

FRC publishes report on dividend disclosures

The Financial Reporting Council (FRC) Financial Reporting Lab (the “Lab”) has published its findings from a study on the policy and practice of dividend disclosures in 2016. A copy can be found here.

The report analyses FTSE 350 annual reports from 2016 to gauge the extent to which issuers are complying with the suggestions for enhanced disclosure set out in the Lab’s November 2015 report.

The Lab’s key findings are as follows:

  • 132 FTSE 350 issuers implemented some or all of the Lab’s 2015 recommendations.
  • 58% of FTSE 100 issuers now include a reference to “distributable profits” or “distributable reserves” (up from 40% in 2015). The equivalent proportion of FTSE 250 issuers was 30%.
  • 48% of FTSE 100 issuers disclosed either the specific level of distributable reserves or the elements of reserves that were non-distributable.
  • Some FTSE 350 issuers showed improved disclosure of risks to dividends, factors considered in setting dividend policy, and what the policy means in practice.

The report also provides specific examples of good practice by named issuers:

  • Various issuers gave precise figures for their distributable reserves in 2016. This seems to have made a particular impact on the Lab. One issuer also gave the equivalent figure for 2015 and its total dividend figure for 2016, which the Lab said provided context.
  • One issuer provided a table showing movements in distributable reserves over the year, which allowed investors to understand the impact of a pension scheme re-measurement that year.
  • One issuer linked its dividend cover to a multiple of adjusted earnings per share. Another noted that its reserves supported over four times its 2016 dividend.
  • One issuer set out five factors it considered when setting dividend policy, including the level of distributable reserves and dividend cover, future cash commitments and investment needs, strategic opportunities, a prudent buffer.
  • Two issuers explained that they review their distributable reserves bi-annually to ensure adequate cover for dividend payments.

Going forward, the Lab has identified four areas for enhanced disclosure:

  • Identifying explicit links between dividend, principal risks and viability.
  • Disclosing constraints on dividends, such as explaining dividend sustainability.
  • Explaining what the policy means in practice, such as how “pay-out ratios” are calculated.
  • Clarifying structure and process, including how profits flow to the holding company.


What we think