Corporate Law Update

A round-up of developments in corporate law for the week ending 27 July 2018.

This week:

Final corporate governance legislation published

The final legislation containing the Government’s corporate governance reforms has been published. The Companies (Miscellaneous Reporting) Regulations 2018 will come into force on 1 January 2019.

The final regulations are identical to the draft on which we reported in our recent Corporate Law Update. Broadly speaking, the Regulations make the following changes from next year:

  • Section 172(1) statement. Large companies will need to include a statement in their strategic report explaining how their directors have considered the factors set out in section 172(1) of the Companies Act 2006 when carrying out their duty to promote the company’s success.

    If the company is not a “quoted company”, it must also publish the statement on its website (or a group website). This will apply to non-traded companies and companies on AIM or NEX Growth.

  • Corporate governance statement. Very large companies will need to include a statement in their directors’ report identifying a “corporate governance code” and explaining how they have applied or departed from the code (a so-called “comply or explain” obligation).

    This requirement will not apply to companies admitted to an EEA regulated market (such as the London Stock Exchange Main Market, the NEX Exchange Main Board or Cboe Equities Europe), which are already required to produce a corporate governance statement.

    In addition, although this new requirement applies only to very large companies, AIM companies of all sizes will continue to be required to comply or explain against a “recognised corporate governance code” under Rule 26 of the AIM Rules for Companies.

    In essence, this requirement applies principally to the largest private companies. The Financial Reporting Council has published a proposed code of corporate governance for very large private companies, which is intended to form a basis for complying with this new obligation.

  • CEO pay ratio. Quoted companies will need to state the ratio of their CEO’s pay against average employee pay on the 25th, 50th and 75th percentiles using one of three methodologies. They will also need to explain any annual changes to the ratio and report on trends in the 50th percentile.

    The requirement will apply only to quoted companies with more than 250 employees. A quoted company is one whose securities are admitted to the Financial Conduct Authority’s Official List or admitted to dealing on the New York Stock Exchange or Nasdaq.

  • Awards to directors. When reporting on awards to directors, quoted companies will need to state how much of each award is attributable to "share price appreciation", and whether any discretion to make the award resulted from share price appreciation or depreciation.

    They will also need to set out any executive director performance measures applicable across multiple years and the maximum amount receivable under them on a 50% increase in share price.

  • Employee engagement. Companies with more than 250 employees (whether quoted or unquoted) will need to include more detail on how the directors have engaged with the company’s employees and had regard to their interests.

  • Other stakeholders. Finally, large companies (again, whether quoted or unquoted) will need to explain how the directors have had regard to the need to foster business relationships with suppliers, customers and others during the financial year.

Government publishes draft overseas entity beneficial owner bill

The Department for Business, Energy and Industrial Strategy has published draft legislation for its proposed new “overseas entity beneficial ownership” (or “OEBO”) regime.

In 2016, the Government announced that it was proposing to create a new regime, to be operative from 2021, to require non-UK legal entities to file details of their beneficial owners in a publicly available register if they intend to acquire or hold land, or participate in a public tender, in the UK.

In April 2017, it published a formal call for evidence on the proposed OEBO regime, and in March 2018 it published its formal response.

The draft Registration of Overseas Entities Bill published this week covers only the real estate elements of the OEBO regime. The Government has said that it intends to deal with the public procurement aspects of the OEBO regime in due course.

The purpose of the regime is, in short, to combat the use of UK real estate for money laundering.

The Bill applies differently in England and Wales, Northern Ireland and Scotland, due to the three jurisdictions’ differing regimes for registering ownership of land. The proposed regime is modelled substantially on the UK’s existing regime for registering details of persons with significant control over companies and other entities (the “PSC regime”).

In relation to England and Wales, the OEBO regime would work as follows:

  • The regime applies to ownership of freehold land, or a lease for more than seven years over land, in England and Wales (which the Bill calls a “qualifying estate”).
  • An overseas entity would not be able to acquire a qualifying estate unless it first registers details of its beneficial owners with Companies House.
  • If an overseas entity already holds a qualifying estate when the Bill becomes law, it will have 18 months to register or to dispose of the estate. Failure to do either will be a criminal offence.
  • In addition, an overseas entity would not be able to sell, grant a lease for more than seven years or grant security over a qualifying estate without first registering.
  • To register, an overseas entity would need to provide details about itself and each of its beneficial owners.
  • If the entity does not have any beneficial owners, or to the extent it cannot identify them or provide their details, it would instead need to provide details of its managing officers.
  • The details to be provided broadly mirror those for persons with significant control (PSCs) under the PSC regime. For an individual, these are the person’s name, date of birth, nationality, usual residential address and service address, and the nature of their beneficial ownership.
  • The information would need to be updated annually, although an entity would be able to update it more frequently if it wanted to. Failure to update the information would be a criminal offence.
  • The conditions for being a “beneficial owner” of an overseas entity mirror those for being a PSC under the PSC regime. They are:
    • Holding (directly or indirectly) more than 25% of the entity’s share capital
    • Holding (directly or indirectly) more than 25% of the entity’s voting rights
    • Holding (directly or indirectly) the right to appoint or remove a majority of the entity’s directors
    • Exercising, or having the right to exercise, significant influence or control over the entity
    • Broadly, having significant influence or control over a trust or unincorporated entity that satisfies one of those conditions
  • The Bill also contains the same “anti-avoidance provisions” as the PSC regime.
  • Entities would have powers similar to those under the PSC regime to send information notices to suspected beneficial owners, or people who may know the identity of beneficial owners.
  • The register would be available to the public, although certain details of individuals (their residential address and the “day element” of their date of birth) would not be disclosed.

The Government has requested comments on the draft legislation by 17 September 2018.

New carbon reporting regulations proposed

The Government has published draft regulations that would require quoted companies, large unquoted companies and large limited liability partnerships (LLPs) to make additional disclosures in relation to their energy consumption and efficiency.

The new regulations, if approved, will apply to financial years beginning on or after 1 April 2019.

Quoted companies

Quoted companies (see article above) are already required to state their annual greenhouse gas emissions (in carbon dioxide equivalent (CO2e)) in their directors’ report. That statement must cover emissions resulting from activities for which the company is responsible (including fuel combustion and operating facilities) and from buying electricity, heat, steam or cooling for the company’s own use.

Quoted companies must also state a suitable “emissions ratio”.

The new regulations would extend the regime to include the following additional information:

  • The annual quantity of energy consumed (in kilowatt hours (kWh)) from these activities.
  • The proportion of the emissions and consumption figures that relates to activities in the UK.
  • Any measures the company took to increase its energy efficiency.

The report would also need to disclose equivalent information for the previous financial year. If the company prepares a group directors’ report, it would include information for its entire group instead.

Large unquoted companies and large LLPs

The regulations would create a separate regime for large unquoted companies and large LLPs.

For this purpose, a company or LLP would be large unless it satisfies at least two conditions in a financial year. Those conditions are turnover of £36 million or less, balance sheet total of £18 million or less, or not more than 250 employees. Similar thresholds would apply to group reports.

The directors’ report would need to state the following items. (LLPs would state this information in a new and separate “energy and carbon report”.)

  • Emissions (in CO2e) from activities for which the company is responsible. Unlike for quoted companies, this would be limited to gas combustion and consumption of fuel for transport.
  • Emissions resulting from buying electricity for own use (including transport).
  • The annual quantity of energy consumed (in kWh) from those activities.
  • The methodology used to calculate these figures.
  • Any measures the company or LLP took to increase its energy efficiency.
  • A suitable emissions ratio.

Unlike for quoted companies, the report would state only figures relating to activities in the UK, and the company or LLP would need to provide the information only to the extent it is “practical” to obtain it.

However, as with quoted companies, the report would also state the equivalent figures for the previous year, and, if the company or LLP prepares a group report, would include group-wide figures instead.


A company (whether quoted or not) or LLP would not need to disclose the information above if:

  • its annual energy consumption was less than 40,000 kWh for the year in question;
  • disclosure would be “seriously prejudicial” to its interests; or
  • it is a subsidiary undertaking and the information is included in its parent undertaking’s directors’ report (although this is unlikely to apply to many quoted companies).

Practical implications

The proposed regulations covering wider reporting requirements, but the principal driver behind them is the abolition of the CRC Energy Efficiency Scheme. An order has been made to provide for the formal closure of the CRC Scheme at the end of the current compliance reporting phase on 31 March 2019.

The new reporting regime would be much simpler for businesses to process than the CRC Scheme. For businesses that currently fall within the CRC Scheme, therefore, the proposed regulations will potentially relieve an administrative burden.

By contrast, the lower threshold of 40,000 kWh means that many businesses that were not caught by CRC Scheme or other previous energy reporting regimes may well find themselves needing to report on emissions and energy usage for the first time.