Corporate Law Update

This week

• The Government has announced proposed changes to the UK’s pensions regulation regime that will affect employers looking to sell assets or a business
• The Department for Business, Energy and Industrial Strategy publishes terms of reference for an independent review into audit quality and effectiveness
• Companies House has issued guidance on changes that will come into effect if the UK leaves the EU without a deal
• The Investment Association publishes its analysis of voting trends in 2018

Proposed changes to pensions regulation will affect business sales

The UK Government has announced proposed changes to the regime for regulating UK pension schemes. Some of the changes will affect organisations looking to dispose of assets or businesses.

The proposals follow a consultation published by the Government in June 2018 on how to protect defined benefit (DB) pension schemes and create a stronger Pensions Regulator.

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

• The Government will consider making certain business and asset sales “notifiable”. Where the disposal includes an employer under a DB scheme that has funding responsibility for at least 20% of the scheme’s liabilities or a sale of a “material proportion” of its business and assets, the transaction would need to be notified to the Pensions Regulator.
• The grant of security on a debt taking priority over a pension scheme will also need to be notified to the Pensions Regulator.
• Under a new “early warning system”, scheme employers, parent companies and possibly others would need to make a declaration of intent to a pension scheme’s trustees in advance of a sale of a “controlling interest” in a sponsoring employer or entering into one of the two new notifiable transactions described above. The declaration would need to explain the transaction and any detriment to the pension scheme.
• Existing civil penalties for non-compliance will be increased. Civil penalties will be proportionate to the seriousness of the breach, but capped at £1m. There will be a new criminal offence of “wilful or reckless behaviour in relation to a pension scheme”, punishable by up to seven years’ imprisonment and/or an unlimited fine.
• The Pensions Regulator’s powers to impose financial support directions will be extended to individuals who are controlling shareholders of a sponsoring employer. However, they will not be extended to directors of connected entities, as had previously been proposed.

Our colleagues Camilla Barry and Stacey Yon provide more detail and their thoughts on the Government’s proposed changes in their article here.

BEIS publishes terms of reference for an independent review into audit quality and effectiveness

As mentioned in our previous update, Donald Brydon is heading a Government initiated independent review into audit standards. The report is expected to be completed by the end of 2019.

The review was commissioned to consider and address the “audit expectations gap” (the difference between what users expect from an audit and the reality of what an audit is and what auditors’ responsibilities entail).

The Department for Business, Energy and Industrial Strategy (BEIS) has now published terms of reference, setting out key objectives for the review. These include:

• Understanding the needs and expectations of stakeholders who make use of company audits, identifying the origins and perceptions of the audit expectations gap, and options for increasing stakeholder engagement and understanding.
• Considering the scope of audit: what information investors and users of corporate information are likely to require a company to produce, what assurance will be required and how that might be achieved at a proportionate cost to corporates.
• How assurance is provided and how assurance can be made more effective for investors, including considering how technology can be utilised to improve audit assurance and effectiveness.
• The extent to which auditors can and should assess the reliability of underlying information and the impact of uncertain future events.
• How communication of audit findings to users can be improved.

The review will engage with a wide range of stakeholder groups. The independent reviewer will be supported by a number of advisory groups, likely to comprise a user group, an audit profession group and a technology group.

Companies House publishes no-deal Brexit guidance

Companies House has published two guidance notes on changes that will take place if the UK leaves the European Union (EU) without a deal. (The notes also assume that the UK will not join the European Economic Area (EEA).) The notes relate to changing a company registration and Companies House forms.

The key points arising from the notes are as follows:

• UK companies which have a corporate officer incorporated in another EEA country will need to provide additional information on that officer to Companies House. The same change affects UK limited liability partnerships (LLPs) which have a corporate member.
• Any cross-border merger involving a UK company or UK LLP must be registered before exit day.
• Overseas companies established within the EEA will need to start reporting the same information to Companies House as those outside the EEA. Companies House will provide more information nearer the time.
• Any European companies (SEs) and European Economic Interest Groupings (EEIGs) registered in the UK on “exit day” will automatically be re-registered as new forms of UK corporate entity. This will effectively leave these entities “locked into” the UK and unable to migrate. An SE or EEIG that wishes to preserve its ability to migrate across the EU will need to move its seat of registration out of the UK to another EU state before exit day.

The changes will come into effect at 11:00 p.m. on 29 March 2019 if the UK leaves the EU without a deal.

The Investment Association publishes its analysis of voting trends in 2018

The Investment Association (the IA) has issued a press release summarising the findings of an analysis of voting trends during the 2018 AGM season (1 January 2018 to 31 July 2018). The analysis is based on entries in the IA’s public register of shareholder votes (the Public Register), which tracks significant (over 20%) shareholder dissent. For background to the Public Register, see our previous commentary on BEIS’ response to proposed reforms to UK corporate governance, which considered shareholder opposition, and the subsequent launch of the Public Register.

Shareholder rebellions rose by over a quarter in 2018, resulting in 120 companies being added to the Public Register. Most notably, the analysis found:

• Opposition to individual director re-election resolutions more than doubled from 38 in 2017 to 80 in 2018.
• Opposition to executive pay resolutions declined slightly overall in the FTSE All-Share (68 in 2017, 61 in 2018), but substantially increased in the FTSE 100 (9 in 2017, 18 in 2018). This resulted in near double the number of FTSE 100 companies on the Public Register because of pay, up from 8 in 2017 to 15 in 2018.
• 29 companies appeared in the Public Register in 2018 for the same resolution as in 2017.

The IA suggests this indicates that shareholders “are using their votes to hold individual directors to account” and “clearly remain unimpressed with the approach to pay, and are frustrated the message is not getting through to some boardrooms.”

Nearly two thirds of companies on the Public Register in 2018 made a public statement acknowledging the significant shareholder dissent and outlining how they plan to engage with shareholders.