Corporate Law Update
This week, in coronavirus-related news:
- The FCA, FRC and PRA publish guidance on corporate reporting, including delaying financial statements
- AIM Regulation publishes temporary measures during the coronavirus outbreak
- Gender pay gap reporting has been suspended during the on-going outbreak
- The London Stock Exchange amends its dividend timetable during the coronavirus outbreak
- Companies House is suspending paper applications
- Companies House is granting an automatic three-month extension to filing deadlines
- The Stamp Office is now accepting electronically signed documents by email
- Practical Law publishes a video discussing the impact of coronavirus on AGMs
Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.
In other news:
- New regulations are published which will allow companies to adopt UK IFRS early
- A document was not executed properly by attaching signatures from a previous draft
- PIRC publishes its Shareowner Voting Guidelines for 2020
- Parliament is seeking follow-up views on audit reform
In a joint initiative, the Financial Conduct Authority (FCA), the Financial Reporting Council (FRC) and the Prudential Regulation Authority (PRA) have issued an announcement asking issuers to delay publishing their financial statements in the light of the on-going coronavirus outbreak.
They recognise that companies and auditors currently face unprecedented challenges in preparing and auditing financial information. They are therefore announcing a series of actions to ensure the continued flow of financial information and support the functioning of the UK’s capital markets.
Publishing financial statements
The FCA has announced the following interim policy measures:
- Listed companies will have an additional two months to publish annual financial statements. This is not a legislative change – the FCA will simply refrain from taking action if annual accounts are published within six months of financial year-end. It recognises that some companies may want to adhere to their original timing, but it urges all companies to take advantage of the extension. Issuers that take advantage of the extension will not be required to request a suspension of their listing under the DTR.
It has also published a Q&A page on this policy change. Among other things, it has confirmed that issuers whose Home State is not the UK will not be able to take advantage of this extension, nor will AIM or AQSE Growth (previously NEX Growth) companies. However, the extension does apply to issuers on the Professional Securities Market (PSM) and Specialist Fund Segment (SFS).
- Listed companies are asked to delay publishing preliminary financial statements until 5 April 2020. The FCA had previously announced that it was writing to listed companies to ask them to delay publishing preliminaries and published a copy of its template letter. Companies listed in the UK are not required to publish preliminary financial results, although it is common to do so.
- It strongly recommends that listed companies review all elements of their timetables for publishing financial information so as to make appropriate use of the time available within regulatory deadlines to ensure accurate and carefully prepared disclosures.
- In the circumstances, audit work is likely to change. This includes auditors issuing modified audit opinions where auditors cannot gather all audit evidence needed to complete an audit in full, and more audited financials including disclosures that management is aware of material uncertainties that may cast doubt on an entity’s ability to continue as a going concern.
- Companies are encouraged to delay planned audit tenders (even if mandatory rotation is due) and postpone audit partner rotation.
The FCA notes that, due to the unprecedented events of the last two weeks, the basis on which companies are reporting is changing rapidly. Companies that observe timetables set before the outbreak may not be able to give due consideration to these events when preparing their disclosures.
Separately, the FRC has endorsed the FCA’s approach in relation to delaying preliminary financial statements. It is also encouraging listed companies and their auditors to consider delaying other corporate reports, for the two weeks beginning 23 March 2020, including interim financial statements and final audited financials, except where necessary to meet a legal or regulatory requirement.
Corporate reporting more generally
The FRC has published a guidance update for companies on reporting during the outbreak. The key points coming out of the FRC’s announcement are as follows:
- Companies should develop and implement mitigating actions and processes to ensure they continue to operate an effective control environment. They should address key reporting and other controls on which they have placed reliance historically but which may not prove effective in the current circumstances and consider how to secure reliable and relevant information, on a continuing basis, to manage the future operations.
- Companies should pay attention to capital maintenance, ensuring that sufficient reserves are available when the dividend is paid, not just proposed, and that sufficient resources remain to continue to meet their needs.
- The FRC believes giving forward-looking assessments and estimates is particularly difficult currently. It has provided guidance to help boards focus on areas of reporting of most interest to investors and to encourage them to provide clarity on the use of key forward-looking judgements.
- Companies that are proposing to make, but have not yet paid, a dividend should assess their position not only when the dividend was proposed but also when it is paid. If the company is no longer able to pay the dividend, directors should halt it and communicate to the market.
- Boards cannot predict the extent and duration of the outbreak or its consequences for the global economy. But it is reasonable for investors to expect companies to articulate their expectations of the possible impacts on their specific business in different scenarios.
- When setting out its principal risks and uncertainties in its strategic report, a company should consider the specific resources, assets and relationships that are most under threat and the steps being taken to protect them. The FRC places particular emphasis on workforce protection.
- The FRC recognises that many boards will be less confident when making their longer-term viability statement. But it reminds companies that boards must have a “reasonable expectation” of the company’s viability, and that, during the current unprecedented pace of change, any reasonable level of expectation naturally carries a much lower level of confidence.
- The FRC has also provided detailed guidance on reporting under IAS1 and IAS10.
Finally, the FCA has reminded companies that the Market Abuse Regulation remains in full force and that listed companies are still required to announce inside information as soon as possible unless a valid reason to delay disclosure under the regulation exists.
The London Stock Exchange’s AIM Regulation team has published two Inside AIM articles on temporary measures it is applying during the on-going coronavirus outbreak.
Annual audited accounts
The AIM Rules for Companies require an AIM company to publish its annual audited accounts within six months of its financial year-end (in line with the Companies Act 2006).
Following the decision by Companies House to allow companies to apply for a three-month extension to their reporting deadline (see below), AIM companies can now apply to AIM Regulation for a three-month extension to the deadline for publishing annual audited accounts under AIM Rule 19. The extension is available to AIM companies with financial year-ends between 30 September 2019 and 30 June 2020.
Any request for an extension must be made by the company’s nominated adviser before the company’s current reporting deadline under the AIM Rules.
Disapplication of certain rules
AIM Regulation will be applying discretion to certain AIM Rules for Companies and AIM Rules for Nominated Advisers as follows:
- Where an AIM company requires more time than usual to make a fully compliant notification of material new developments, its nominated adviser should approach AIM Regulation to discuss whether a temporary suspension is required. The request will need to explain fully why a suspension is appropriate. Any suspension will be for a limited period to enable the company to make a fully compliant notification.
- Normally, an AIM company’s securities will be cancelled if the company has been suspended for more than six months. AIM Regulation is extending this period to 12 months for companies that have been suspended between 30 September 2019 and 1 July 2020.
- Nominated advisers will, for the time being, not be required to undertake a site visit to new clients, provided they use “alternative measures that are reasonably available (such as virtual meetings)”. Once travel restrictions and social distancing measures in the UK have been lifted, the adviser should arrange a physical site visit.
- Likewise, nominated advisers may use telephone or virtual meetings to undertake their duty to educate AIM company directors of their obligations under the AIM Rules for Companies.
The Government Equalities Office (GEO) and the Equality and Human Rights Commission (EHRC) have jointly announced that, during the on-going coronavirus outbreak, they have suspended enforcement of the gender pay gap reporting regime.
The pay gap regime requires organisations with 250 or more employees on the final day of a reporting year (the “snapshot date”) to publish information on the average gap between their male and female employees’ pay. Under normal circumstances, the EHRC can investigate employers that fail to publish data and take enforcement action (which can result in an unlimited fine).
The decision applies to the 2019/2020 reporting year, which ends on 5 April 2020. The GEO and EHRC have not yet made any announcement in relation to the 2020/2021 reporting year, which will begin on 6 April 2020.
Although employers will not be required to report data for 2019/2020, they remain able to do so. The GEO has said it will continue to support employers who wish to publish pay gap information.
New legislation has been published that will allow companies to adopt UK-adopted international accounting standards (IAS) before the UK-EU implementation (or transition) period ends.
UK companies are currently required to draw their accounts up either under UK generally accepted accounting principles (UK GAAP) or EU-adopted International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS).
During the implementation period, which is currently scheduled to end on 31 December 2020, EU law continues to apply in the UK. The last day of the implementation period is referred to in legislation as “IP completion day”. After this date, UK companies will need to draw their accounts up under either UK GAAP or under UK-adopted versions of IAS/IFRS.
The new regulations will allow a company to adopt UK IAS/IFRS where:
- its financial year begins before but ends after IP completion day; or
- its financial year ends before IP completion day, but the deadline for filing its accounts falls after IP completion day.
Deed was not executed properly simply by initialling a new draft or attaching signature page from previous draft
The High Court has held that an individual had not executed a revised draft of a deed merely by initialling some of its pages, and that a company had not executed that deed by detaching a signature page from a previous draft and attaching it to the revised draft.
Bioconstruct GmbH v Winspear  EWHC 7 (QB) related to the construction of a biogas energy plant. Bioconstruct (a company that provides financial support for renewable energy projects) agreed to provide a loan in connection with that project.
In connection with the loan, the parties were to enter into a deed of security and indemnity. That deed was to be executed by (among other people):
- an individual (SW), who would guarantee repayment of the loan; and
- a company (SRL), which owned the land on which the biogas plant would be built and which would provide a legal mortgage over that land as security for repayment of the loan.
On the morning of 18 July 2016, SW emailed round a copy of the signature page for the version of the deed at that time (the “Original Version”). The page was not signed by SW in his personal capacity, but it was signed by his father, as the sole director of SRL, in the presence of a witness.
That email also contained a copy of a written resolution of his father, again as SRL’s sole director, approving the transaction.
That evening, SW travelled to a meeting in London to complete the transaction and sign further documentation. He brought an amended version of the deed to the meeting. This generated further negotiations, which ultimately resulted in a new draft of the deed (the “New Version”).
The following then happened:
- SW initialled the pages of the New Version that contained the amendments. He did not sign the New Version on the signature page, and his initials were not witnessed.
- The page in the Original Version which SRL had executed was removed and attached to the New Version in an attempt to execute the New Version.
Bioconstruct later attempted to enforce the deed. SW and SRL claimed that neither of them had executed the deed and so it was not enforceable. In particular:
- SW claimed that he had not signed the New Version, but rather had merely initialled some of the pages. Alternatively, if he had signed the New Version, his signature had not been witnessed, as required by section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989.
- SRL argued that, following the decision in Mercury Tax Group, it is not possible to execute a document by detaching the signature page from a previous version and re-attaching it.
In Mercury, parties to a tax mitigation scheme had executed one version of a deed, then later detached their signature pages and attached them to an amended version. The High Court said that this did not amount to valid execution.
What did the court say?
The judge said that neither SW nor SRL had validly executed the deed.
In relation to SW, she said the following:
- SW’s initials on the New Version were capable of amounting to a signature, because they were able to indicate his intention to authenticate the deed. But, on the facts, he had no such intention. He was aware of the specific signature boxes in the deed, and he had initialled some, but not all, of the pages. These factors (among others) showed that SW had intended merely to endorse the amendments and not to sign the deed as a whole.
- What is more, even if SW had signed the deed by initialling some of the pages, his initials had not been witnessed. He had therefore not satisfied the statutory requirements for executing a deed.
In relation to SRL, the judge said that the same principles applied as in Mercury. She did not agree with Bioconstruct’s argument that the principles in Mercury applied only to a tax avoidance scheme or was limited to its particular facts. No matter what the subject matter, recycling signature pages from one version of a document into another is not effective.
As we mentioned a few weeks ago, signing documents can often be a tedious part of a transaction. Moreover, ensuring documents are properly executed has become increasingly difficult given the restrictions being imposed worldwide as a result of the on-going coronavirus outbreak.
However, as this case shows, the courts cannot sanction any shortcuts. It is critical to ensure documents are executed property. In particular, where parties are executing deeds remotely, they should follow the Law Society’s guidance on executing documents by virtual means (the so-called “Mercury guidance”) or by electronic means (normally, by using an electronic document signing platform).
- London Stock Exchange amends dividend timetable. The London Stock Exchange has published Market Notice N07/20, making changes to its Dividend Procedure Timetable in light of the on-going coronavirus outbreak. The Exchange is allowing issuers to defer dividend payments for up to 30 business days, but for no more than 60 business days after the dividend record date. Issuers that take advantage of this relaxation must inform the Exchange’s Stock Situations Team without delay.
- Companies House suspends certain paper applications. Companies House has suspended paper applications under sections 243, 790ZF and 790ZG of the Companies Act 2006, which allow directors and persons with significant control (PSCs) to apply to hide their residential address and (in some cases) other details from the pubic register. Applicants should instead use the online filing service. Likewise, Companies House has suspended paper applications under section 1088 of the Act (Form SR01) to remove a home address from the public register. These applications should be sent as a digital attachment to DSR@companieshouse.gov.uk.
- Companies House grants automatic accounts deadline extensions. Companies House has announced that, as a result of the on-going coronavirus outbreak, from 25 March 2020, businesses can apply for a three-month extension to their accounts filing deadline. Although businesses still need to make a formal application for an extension, those citing issues around Covid-19 will be granted the three-month extension automatically.
- Stamp Office now accepting electronic stock transfer forms. HM Revenue and Customs has confirmed that, during the on-going coronavirus outbreak, it will accept stock transfer forms and other documents for stamping that have been signed electronically. Documents should be emailed to the Stamp Office at email@example.com, rather than posted.
- PIRC publishes 2020 UK guidelines. Pensions & Investment Research Consultants Ltd (PIRC) has published its UK Shareowner Voting Guidelines for 2020. The guidelines set out PIRC’s views on best practice in relation to matters such as board structure, remuneration policy and environmental and social issues, and how PIRC is likely to recommend that investors vote. The guidelines are available directly from PIRC for a fee of £375.
- Practical Law video on AGMs during coronavirus outbreak. Following on from the FCA’s announcement and ICSA’s new guidance last week, Practical Law has published a new video discussing the impact of the on-going coronavirus outbreak on public company AGMs.
- Parliament launches follow-up inquiry on audit reform. The Business, Energy and Industry Strategy (BEIS) Committee, a committee of the UK Parliament, has launched a new follow-up inquiry on audit reform following the recent Brydon and Kingman reviews. The Committee is asking for views on various matters, including what reforms can be delivered without legislation and how audit reform fits in with wider corporate governance reform. Responses should be submitted online. The current deadline is 4 May 2020, but the Committee is keeping this under review and will accept evidence after this date.