Corporate Law Update
- The European Securities and Markets Authority (ESMA) has clarified that the prohibition on trading during closed periods does not apply to transactions by issuers in their own securities
- The Hampton-Alexander Review has published its latest report into female representation on boards, showing mixed results
- The Government updates its Q&A on the new company reporting requirements that will come into effect next year
- Final regulations have been published that will extend the existing carbon reporting regime for quoted companies and introduce a new regime for unquoted companies and LLPs
- A few other items of interest
The European Securities and Markets Authority (ESMA) has updated its Q&A on the EU Market Abuse Regulation (MAR).
A new question 7.10 in the Q&A covers whether transactions by an issuer in its own financial instruments are prohibited by article 19(11) of MAR.
Article 19(11) prohibits persons discharging managerial responsibilities of an issuer (PDMRs) and their closely associated persons from transacting in their issuer’s securities during a closed period (except in very limited circumstances), including where they transact “for the account of a third party”.
There are various ways an issuer may transact in its own securities, including buying back its own equity securities to improve its earnings per share, or buying back its debt securities to deleverage.
ESMA has confirmed that these transactions are not within the prohibition in article 19(11).
However, issuers should still take care when transacting in their own securities during a closed period. The issuer may well be in possession of inside information relating to its own financial instruments. Any transaction by it will therefore constitute “insider dealing” under article 14 of MAR, unless the issuer has adequate internal arrangements and procedures in place to ensure that none of the PDMRs involved in the decision to transact is in possession of the inside information.
The Government has published the latest report by the Hampton-Alexander Review, showing the status of women on the boards of FTSE 350 companies.
The report shows improvement in some areas. However, it notes a lack of progress in others and calls on companies to do more if the target of 33% female representation on FTSE 350 boards by 2020 is to be met.
The key points arising out of the report are as follows:
- For the first time, the proportion of women on FTSE 100 boards has risen above 30 per cent. Across the FTSE 350, the proportion has risen from 24.5 per cent in 2017 to 26.7 per cent in 2018.
- The number of female chairs and female senior independent directors has also risen (from 17 to 22 and from 57 to 71 respectively).
- The number of companies that have now met the 33 per cent target has risen both among FTSE 100 companies (from 28 to 38) and FTSE 250 companies (from 54 to 65).
- There are now only five all-male boards (down modestly from eight in 2017).
- However, the number of female CEOs has fallen from 15 to 12, and the overall number of female executive directors has fallen from 63 to 55.
The Government has published an updated Q&A document on the new company reporting regime due to come into force on 1 January 2019.
By way of reminder, the Companies (Miscellaneous Reporting) Regulations 2018 introduce new reporting requirements for financial years beginning on or after 1 January 2019. These include the following:
- Large companies will need to produce a section 172(1) statement setting out how their directors have promoted the company’s success.
- Very large unlisted companies (including AIM companies) will need to report against a corporate governance code.
- Quoted companies will need to provide CEO to workforce pay ratio information in their remuneration report, and they will need to explain the impact of share price increases on executive pay outcomes in their remuneration policies.
- Some companies will need to provide enhanced reporting on engagement with employees, customers and suppliers.
The updated Q&A confirm the following:
- As the new regime applies to financial years beginning on or after 1 January 2019, actual reporting will start in 2020. The only requirement that will come into effect earlier is the duty for quoted companies to explain the impact of share price increases in their remuneration policies.
- The Government’s preference is for very large private companies to adopt the code currently being developed by James Wates CBE and the Coalition Group. However, companies will be able to refer to other corporate governance codes, including “foreign” codes.
- To be clear, the requirement to report against a corporate governance code will apply to very large private subsidiaries of publicly traded companies. (This is in addition to a listed company’s obligation to report against the UK Corporate Governance Code, or an AIM company’s duty to report against a “recognised corporate governance code” of its choosing.)
- When deciding whether a private company needs to report against a corporate governance code, companies should assess whether they hit the number of employees threshold at an individual company level, and not aggregate employees across a group.
New regulations have been published which will extend the existing carbon reporting and energy efficiency reporting regime for companies and limited liability partnerships (LLPs).
The regulations are identical to the draft regulations on which we reported back in July. They will apply to financial years beginning on or after 1 April 2019, when the CRC Energy Efficiency Scheme closes, and will make the following changes:
- In addition to reporting on annual greenhouse gas emissions from certain activities (as they do currently), quoted companies will also need to report on the amount of energy (in kWh) consumed from those activities.
- Quoted companies will also need to state the proportion of their activities attributable to the UK and any measures they took to increase energy efficiency.
- Large unquoted companies and large LLPs will need to begin reporting on greenhouse gas emissions and energy consumption. However, the range of activities to be reported on is narrower, and they will need to report only on activities in the UK.
- For all kinds of entity, the report would need to provide equivalent information for the previous financial year. If the entity produces a group report, it will need to provide group-wide figures.
The requirements will not apply to a financial year of a company or LLP in which it consumed less than 40,000 kWh of energy. Companies and LLPs will also be able to refrain from disclosing information if disclosure would be seriously prejudicial to their interests.
As we noted in July, the new regime should be much simpler for businesses that are currently subject to the CRC Scheme. However, the lower annual threshold of 40,000 kWh means that, from 2020, many businesses are likely to find themselves reporting on emissions for the first time.
- The Financial Reporting Council’s Financial Reporting Lab has published new guidance for companies on how to present performance metrics in their annual reports. The report follows calls from investors for more clarity in this area. It contains examples of how companies can apply the principles set out in the Lab’s previous performance metrics report published in June 2018.
- The Quoted Companies Alliance (QCA) and the Non-Executive Directors Association (NEDA) have published a new paper on boardroom behaviour. The paper is designed to supplement the ten principles set out in the revised QCA Code of Corporate Governance published in April this year. It focusses on four of those principles and uses data gathered from the QCA/YouGov Small and Mid-Cap Sentiment Index to examine them from the viewpoint of the non-executive director.
- The Business, Energy and Industrial Strategy Parliamentary Select Committee has launched an inquiry into the future of audit. The inquiry will focus on the likely impact of the Competition and Markets Authority (CMA) market study of the audit sector and review of the Financial Reporting Council in improving quality and competition in the audit market and reducing conflicts of interest.