Corporate Law Update

A round-up of developments in corporate law for the week ending 26 October 2018.

This week:

GC100 publishes new guidance on directors’ duties

The GC100, an association of the general counsel and company secretaries of FTSE 100 companies, has published new guidance on directors’ duties. The guidance focusses in particular on the duty of a company’s directors under section 172 of the Companies Act 2006 to promote the company's success.

The guidance includes suggestions of matters directors should consider when discharging their duties, and practical steps they can take to that end.

Some key points arising from the guidance are as follows:

  • Big decisions, such as shutting a factory down, are likely to warrant more time and consideration than less significant and more “day-to-day” decisions.
  • A director’s job is not to balance the interests of the company and those of stakeholders. Rather, it is to weigh up all relevant factors and consider which course of action best leads to the success of the company, having regard to the long term.
  • Directors should reflect on the duty in section 172 when setting and updating their company’s strategy.
  • Companies should establish training on the section 172 duty for directors, both on induction and on an on-going basis.
  • Directors should arrange to receive the information they need to help them carry out their role and satisfy their duty under section 172.
  • Companies should put policies and procedures in place to support a company’s operating strategy and goals in light of section 172.
  • Directors should consider the company’s strategy for engaging with employees and other stakeholders, whether through board engagement or wider corporate engagement.
  • The guidance also places an overarching emphasis on culture. It encourages companies to embed a culture of considering stakeholders in the “habits and behaviours of board, management and employees”.

Financial Reporting Council publishes reporting on business model, risk and viability reporting

The Financial Reporting Council’s Financial Reporting Lab has published a report on business model and risk and viability reporting by companies.

Listed companies are required to include a “longer term viability statement” in their annual report, setting out the company’s prospects over a chosen period. Companies can choose in which part of their report to include their viability statement, although the majority of FTSE 350 companies appear to include it in their strategic report.

Separately, large and medium-sized companies are required by statute to include details of their business model and principal risks in their strategic report.

The report explores how reporting has progressed since the Lab’s previous reports on business model reporting in October 2016 and risk and viability reporting in November 2017.

The report states that there have been good developments in reporting, but that investors are still looking for more consistent and clearly linked reporting in companies’ annual reports. The Lab has made the following comments in particular:

  • Investors feel that business model disclosures act as a guide for the content of the rest of the annual report, but many reports sampled by the Lab added neither a broad understanding nor company-specific detail, and they lacked connections to the wider annual report.
  • A number of companies have taken up the FRC’s recommendations on risk reporting, but there is still a lack of detail in certain areas. The FRC highlights mitigating actions and links to the business model and key performance indicators as examples of areas for improvement.
  • Companies have begun to separate their longer-term viability statement into two separate sections dealing with prospects and viability. However, investors would like more disclosure on the sensitivity analyses that underpin the statement, and the reason for the period selected. In particular, the lack of consistency suggests that investors do not currently find a company’s longer-term viability statement useful.

Takeover Panel consults on changes to Code asset valuation provisions

The Takeover Panel has published a consultation on changes to the provisions of the Takeover Code (the Code) that regulate valuations of assets in the context of an offer, principally Rule 29.

The Panel has said that the purpose of the changes is to bring the relevant Code provisions in line with the way the Panel applies the Code in practice. The Panel is not proposing to alter materially the way in which the Panel Executive currently applies Rules 29.

Broadly speaking, Rule 29 applies when a party to a takeover offer publishes a valuation of its own or another party’s assets in connection with the offer. In those circumstances, the valuation must be supported by the opinion of an independent valuer and (if it is no longer current) updated.

The purpose of Rule 29 is to ensure that shareholders using an asset valuation to decide whether to accept a takeover offer have the benefit of an independent, expert opinion.

The key points to note from the consultation are as follows:

  • As at present, the independent valuation regime would apply where a party publishes a valuation of another party’s assets, or where an offeree company or a securities exchange offeror publishes a valuation of its own assets.
  • The regime would apply to any asset valuation published either during an offer period or during the 12 months before the offer period.
  • It would also apply to a valuation published before then if a party draws attention to it in the context of the offer (unless, in the meantime, it has been superseded by a more recent valuation).
  • The requirement would apply to valuations of land, buildings, plant and equipment; mineral, oil and gas reserves; and unquoted investments above a certain threshold. However, the Panel would be able to apply the regime to valuations of other assets if it sees fit. A party to an offer would need to consult the Panel before including a valuation so that the Panel can make a decision.
  • If a party publishes a valuation during an offer period, the valuation would need to be in the form of, or accompanied by, a valuation report by a suitably qualified, independent valuer.
  • However, if the valuation was published before the offer period began, the party would need to include a compliant valuation report in the first announcement or document published during the offer period that refers to the valuation. If no announcement or document is published that refers to the valuation, the party would need to include the report in the offer document or offeree board circular (as appropriate).
  • The valuer would need to be appropriately qualified, have sufficient knowledge of each relevant market, and possess the necessary skills and understanding to prepare the report.
  • Rule 29 currently contemplates that a valuer can be assisted by an expert if she or he lacks current knowledge in a particular area. This might happen, for example, if the valuer is being asked to value more than one asset class. Under the Panel’s proposals, this would no longer be possible. Instead, a party would need to instruct separate valuers to conduct separate valuations.
  • The report would need to state the date as at which the assets were valued and provide a separate valuation for each category of asset. It may be possible in some circumstances (such as large asset portfolios), to provide a valuation of a “representative sample” of assets.
  • The valuation report would need to state the basis of the valuation. This should normally be market value.
  • If the report is not published on the date as at which the assets are valued, the party in question would need to obtain confirmation from the valuer that an updated valuation would not be materially different.
  • As at present, the report would need to include a statement of any potential tax liability that would arise if the valued assets were sold. The Panel is proposing to clarify that this should be an estimate of the tax liability, and not merely a statement of the tax consequences.
  • The valuation report would need to be published on a website.

The Panel has asked for comments by 7 December 2018.


Other items

  • The Home Office has announced that it is writing to 17,000 businesses to tell them to publish statements on their efforts to eliminate slavery and human trafficking from their supply chains or risk being publicly named. Under the Modern Slavery Act 2015, certain businesses (including non-UK companies) with a turnover of more than £36 million are required to publish a “slavery and human trafficking statement” on their website. The Home Office estimates that only 60 per cent of organisations that are subject to this requirement have in fact published a statement. At the same time, the Home Office has published its 2018 annual report on modern slavery.
  • Institutional Shareholder Services (ISS) is seeking views from stakeholders globally on its proposed voting policies for 2019. The consultation closes at 9:00p.m. on 1 November 2018. In relation to the UK and Ireland, ISS is proposing to implement a new “auditor ratification policy”, under which it will track “significant audit quality issues”. Specifically, ISS is proposing to note any lead audit partners who have been linked with “significant auditing controversies” and highlight this where they are engaged in the audit of a public company.