Corporate Law Update

In this week’s update: the FRC’s new stewardship code, Brexit regulations for proxy advisors and guidance on the impact of a no-deal Brexit on company law.

FRC publishes new UK Stewardship Code

The Financial Reporting Council (FRC) has launched its new and revised UK Stewardship Code, following the consultation it launched in January 2019. (See our previous Corporate Law Update for more information on that consultation.)

The new Code contains 12 “principles” for asset owners and asset managers and six principles for service providers.

The FRC has decided to depart from its approach of supporting the principles with “provisions” (the framework adopted by its UK Corporate Governance Code). Instead, each principle is accompanied by “reporting expectations” containing recommended reporting activity, a desired outcome and (in some cases) a context. However, in all cases the expectations set out the standard of disclosure expected of signatories to the Code.

Many of the changes proposed in the FRC’s consultation have, however been carried through into the new Code. For example:

  • the Code has been extended to asset managers and service providers. The former category includes (for example) pension funds;
  • the Code now applies to investors in all kinds of capital (including bonds, infrastructure and private equity holdings), although, in keeping with its evolution, it imposes higher standards on investors in listed securities;
  • signatories will be required to explain their organisational purpose, culture, values, business model, strategy and investment beliefs;
  • the Code now places greater emphasis on material environmental, social and governance (ESG) factors, including climate change;
  • signatories are expected to provide examples of successful and unsuccessful outcomes when applying the Code’s principles; and
  • asset owners and managers are expected to disclose the proportion of shares voted in the past year and give their reasons.

The new Code takes effect from 1 January 2020.

New Brexit regulations for proxy advisors

The Cross-Border Distribution of Funds, Proxy Advisors, Prospectus and Gibraltar (Amendment) (EU Exit) Regulations 2019 have been published, along with an explanatory memorandum.

The Regulations set out the position in various areas should the UK leave the European Union without a deal (a “no-deal Brexit”), including the new regime for proxy advisors that came into force in June this year. That regime requires proxy advisors to explain their voting recommendation methodologies and disclose which code of conduct they apply.

Following Brexit, these requirements will apply only to proxy advisors that are registered or established in the UK, or which provide services to shareholders in companies that are both registered in the UK or Gibraltar and admitted to a UK or Gibraltarian regulated market.

The changes come into effect on “exit day”, which is currently scheduled for 11pm on 31 January 2020 at the latest, or 11pm on the last day of any preceding month in which the UK and the EU complete their respective ratification procedures for the withdrawal agreement and notify the depositary of the completion of those procedures.

BEIS publishes guidance on the impact of no-deal Brexit on company law

The Department for Business, Energy and Industrial Strategy (“BEIS”) has published guidance on changes to UK company law in the event of a no-deal Brexit.

The guidance generally expands on the previous BEIS guidance notes on this topic. It is designed to be a helpful resource for companies preparing for a no-deal Brexit, and it collates links to each of the previous notes (with a suggestion that these should all also be read in full), as well as links to relevant Companies House guidance, which will be updated after exit day. In the event of a no-deal Brexit, “exit day” will be the day on which the UK leaves the EU.

The new guidance covers the following:

  • General company law requirements after Brexit. Including filing and disclosure changes, cross-border mergers, SEs and EEIGs, removal of benefits for certain UK companies only listed on an EEA market, shareholder approval of political donations and other matters.

    The majority of these changes will only be relevant for companies in specific situations, such as UK companies which employ an EEA director or secretary, UK companies listed only on an EEA regulated market and investment companies listed on an EEA regulated market (and not on a UK regulated market) that currently make use of relaxations on controls on their distribution of profits, amongst others.

    Of more general application are the changes to shareholder approval of political donations. If a company is planning to donate to a non-UK based political party, organisation or candidate for electoral office, it will need to check the requirements and rules in the relevant jurisdiction, rather than obtaining shareholder authorisation in accordance with the Companies Act 2006.

    The guidance also explains that UK companies will no longer be able to use the EU cross-border merger regime. We have reported on this in a previous update.
  • Accounting requirements after Brexit for UK incorporated companies and EEA companies.

    The guidance notes that the UK’s accounting framework will remain largely unchanged after exit day. UK private companies which use UK Generally Accepted Accounting Practice (GAAP) will not need to make any changes to their accounting requirements. However, UK companies which currently use EU adopted international accounting standards (IAS) will need to instead use UK-adopted IAS for financial years beginning on or after exit day.

    The guidance also sets out certain exemptions which will no longer apply for some companies, and updated requirements for listing purposes. It also provides information about how the UK plans to adopt future or amended IAS.
  • Requirements for auditors and firms after Brexit for both UK and EEA auditors and firms.

    The guidance notes that the UK’s audit framework will remain unchanged, but it sets out some key actions that auditors and audit firms will need to take on exit day.

Other items

  • Corporate stewardship. The Financial Conduct Authority (FCA) has published Feedback Statement FS19/7 in response to its January consultation with the FRC on building a more effective stewardship framework. (For more information on that consultation, see our previous Corporate Law Update.) In short, the FCA has decided to hold off on taking action until it can evaluate the impact of its new rules implementing the Second EU Shareholder Rights Directive (SRD II) and the FRC’s new UK Stewardship Code. However, it does intend to take some specific non-regulatory steps (set out in paragraph 4.6 to the Feedback Statement) to address identified barriers to effective stewardship.
  • Capital markets. The London Stock Exchange has published AIM Notice 57, in which it has announced updated changes to the AIM Rules for Companies and the AIM Rules for Nominated Advisers that will come into effect on exit day if the UK leaves the EU without a transitional agreement.