Corporate Law Update

Parliament seeks views on the National Security and Investment Bill, the CMA consults on changes to its Merger Assessment Guidelines, the GC100 publishes findings how AGMs were conducted in 2020, the Treasury seeks views on the future of the UK’s listing regime, the Government extends the flexibility for companies to hold electronic meetings, Companies House is urging companies to file their accounts electronically, the FCA is consulting on changes to its fees and upgrading the NSM, the Pre-emption Group’s relaxation of its principles is coming to an end and BEIS and the FRC publish further updates on accounting, corporate reporting and audit after the transition period ends.

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.

Parliament seeks views on National Security and Investment Bill

Parliament is asking for views on the Government’s proposed National Security and Investment Bill.

The Bill, if enacted, will allow the Government to screen and potentially block or unwind acquisitions of entities or assets that pose a risk to national security. For more information, see our previous Corporate Law Update.

The House of Commons Public Bill Committee, which is considering the Bill and will scrutinise it “line by line”, is now asking for written evidence on the Bill.

There is no fixed deadline for submitting evidence to the Committee, but the Committee will not be able to consider evidence received once it concludes its report. It currently expects to conclude its report by 5pm on 15 December 2020 but notes that it might do so earlier. It is therefore encouraging any who wishes to submit evidence to do so as soon as possible.

CMA consults on changes to its merger assessment guidelines

The Competition and Markets Authority (CMA) is consulting on proposed changes to its merger assessment guidelines (the “Guidelines”).

The Guidelines set out guidance on the CMA’s approach to its analysis when it is investigating a merger. They apply both to “Phase 1 investigations” (where the CMA decides whether to refer a merger for in-depth investigation) and more detailed “Phase 2 inquiries”. The Guidelines are aimed primarily at organisations proposing to carry out a merger, and their legal and financial advisers.

The current Guidelines date back to September 2010, when they were adopted by the CMA’s predecessors, the Competition Commission and the Office of Fair Trading. However, since then, the CMA notes that there has been a number of changes to the CMA’s approach to merger control.

The CMA has also drawn on recommendations from various reports into digital markets, including the 2019 Furman and Lear Reports. Whilst changes in digital technologies have not introduced new economic principles in the field of merger control, it is clear that the CMA considers new technologies require it to re-consider its approach to assessing mergers in digital markets so that it can continue to deliver on its statutory duties.

Of most interest to parties who are contemplating a merger is the proposed inclusion of a new list of scenarios which may be considered a “substantial lessening of competition” (and so may give rise to a more detailed merger control assessment). These include the following scenarios:

  • Where a merger involves a market leader and the number of significant suppliers in a market would be reduced from four to three.
  • Where the merging firms are close competitors in a differentiated market.
  • If, had the merger not taken place, one of the merging firms would have entered or expanded in a market and could have been expected to become a strong competitor of the other firm or threatened the other firm.
  • Where innovation is a key aspect of competition and the level or pace of future innovation or product development would be threatened by a merger.
  • Where there is some evidence of pre-existing coordination between merging firms, or firms attempt to co-ordinate before a merger, and the merger would materially improve at least one of the conditions for coordination.
  • Where a merger between firms at different levels of a supply chain, or between firms in otherwise related markets, is expected to lead to the foreclosure of one important rival.

The proposed new Guidelines also include the following new content:

  • Guidance on when the CMA will take “non-price competition” into account. This includes factors that arise not out of rising prices, but rather out of stifled innovation or reduced product quality or range. The Guidelines would clarify that the fact that customers do not pay a monetary price for a good or service does not preclude competitive effects from arising.
  • More guidance on how the CMA assesses evidence in connection with its investigations, including how much weight the CMA will ascribe to evidence.
  • New guidance on how the CMA will compare competition following the merger against the competitive situation were the merger not to take place (the so-called “counterfactual test”).
  • How the CMA will assess the loss of potential competition in dynamic markets.
  • Further guidance on the CMA’s approach to market definition as an analytical tool in its merger assessments.

The deadline for responding to the consultation is 8 January 2021.

The consultation is being run in tandem with the CMA’s consultation on its jurisdictional and procedural guidance, which was launched earlier this month. In that consultation, the CMA is proposing changes to further explain its merger control procedures, the situations in which it considers it will have jurisdiction to review mergers, and its proposed approach to the increasing number of multi-jurisdictional mergers it is likely to investigate (in particular, alongside the European Commission) following the end of the UK/EU transition period.

Taken together, these consultations reflect the CMA’s recent, more aggressive approach to merger control in the run-up to the end of the transition period.

GC100 publishes poll on AGMs during Covid-19

The GC100 has published the results of a poll of its members on how companies have been conducting their annual general meetings (AGMs) in 2020 in light of the on-going Covid-19 pandemic.

The GC100 represents general counsel and company secretaries of the FTSE 100. It currently comprises 83 FTSE 100 companies and 42 former FTSE 100 companies.

To limit the spread of Covid-19, the Government has, since March 2020, implemented a series of regulations which have, at various times and in various places, required certain businesses to close or reduce operations, and limited the number of people who can gather together in one place and the purposes for which individuals can leave their homes.

These restrictions have naturally caused companies and other corporate entities to re-examine how they can hold general meetings of their members during the pandemic.

To address these issues, the Corporate Insolvency and Governance Act 2020 (“CIGA”) was passed on 25 June 2020. CIGA gives companies and other corporate entities greater flexibility when holding general meetings, including by allowing companies to bar people from attending a meeting and to hold meetings “virtually” by purely electronic means. This flexibility applies retrospectively from 26 March 2020 is due to expire on 31 March 2021.

The GC100 conducted a poll in September 2020 to see how FTSE 100 companies and a select number of FTSE 250 companies had decided to conduct their AGMs during the pandemic. This follows an earlier poll which the GC100 conducted in April 2020 to understand how companies were planning to conduct their AGMs (see our previous Corporate Law Update).

What did the poll reveal?

55 GC100 companies and 12 FTSE 250 companies responded to the latest poll. The key points arising from the poll are set out below.

  • Date of AGM. 26 GC100 companies (47%) held their AGM before CIGA came into force and so will have been conducting their AGM based on an assessment of whether the changes in CIGA were likely to come into effect. This will naturally have influenced the approach they adopted.
  • Change of venue. Having given notice of their AGM, several companies subsequently moved the meeting venue to their registered office. Some companies that did this were prompted by the introduction of the Government’s “stay at home” measures, others by CIGA coming into force.
  • Meeting format. When asked about future intentions, 30% of companies said they would prefer to hold a virtual AGM and 23% would prefer a “hybrid” meeting. But notwithstanding this, only 2 companies held a hybrid AGM in 2020, and only 2 held a fully virtual AGM. 8 companies said they intend to seek shareholder authority to permit hybrid and/or virtual meetings at their 2021 AGMs.
  • Closed meetings. 70% of companies held “closed” AGMs with no electronic or physical shareholder participation. In 76% of cases, the quorum for the meeting was formed in person behind closed doors, even where companies were able to take advantage of the flexibility in CIGA (which allows a meeting to take place even if the quorum does not meet in a single place).
  • Communicating the AGM. 10 FTSE 100 companies (53%) either live-streamed their AGM proceedings or posted a recording of the AGM on their website. 9 FTSE 100 companies (47%) simply posted a transcript of statements by the meeting chair and the CEO.
  • Electronic voting. Only 6 FTSE 100 companies allowed shareholders to vote electronically in real time. This represents 25% of companies that responded to this question. (One of those companies held a fully virtual AGM, at which real-time electronic voting is perhaps to be expected.) Take-up of electronic voting appears to have been popular, with three companies noting that levels of votes delivered by electronic means hit 75%, 81% and 87% respectively.
  • Q&A. 19 FTSE 100 and 7 FTSE 250 companies provided a facility for shareholders to ask questions in advance, with most then posting responses on their website, either individually by question (3 FTSE 100 and 3 FTSE 250 companies) or grouped together (9 FTSE 100 companies). 5 FTSE 100 and 1 FTSE 250 company permitted questions during the AGM using an electronic platform.

Virtual and hybrid AGMs

As noted above, 53% of companies expressed a preference going forward for hybrid or virtual meetings. This is a lower percentage than when the GC100 polled its members back in 2018. 47% of companies said they would prefer to continue to hold a physical AGM.

The GC100 attributes part of this drop potentially to on-going legal uncertainties, investor sentiment and technological constraints. The recent poll showed that key concerns companies harbour in relation to hybrid and virtual meetings include cost (particularly for hybrid meetings), lack of face-to-face engagement, and the added risk and complexity inherent in these kinds of meeting. Companies are also influenced by institutional investors’ and proxy advisors’ reticence to accede to virtual meetings.

What does seem apparent from the poll is that hybrid meetings are particularly unpopular and, to the extent they are being held, are proceeding more as a matter of necessity than desire. According to the GC100, member feedback indicated that, by combining a physical meeting with electronic participation, hybrid meetings represent “the worst of both worlds”.

The future of general meetings

When asked whether the current format of AGMs is still valuable for companies, 50% of respondents say that it no longer meets the needs of shareholders. This view seems primarily to have been driven by historic low attendance at physical AGMs, with benefit outweighed by cost. The other half of respondents noted that physical meetings are valuable for companies to engage with retail investors.

The GC100 is recommending that companies have the choice of how to hold an AGM, which will be informed by their shareholder profile. To that end, it recommends legislative reform to clarify that virtual meetings will continue to be permitted. It notes that, ultimately, over the medium term, meetings will evolve towards virtual meetings, and so participation by electronic means should be encouraged.

The report also notes that stakeholder engagement is “increasingly important for the modern board” and suggests that companies take a “more holistic approach” to this. One suggestion is to hold a hybrid or virtual event two weeks before the AGM to allow shareholders to ask questions and decide how to vote. This may make a subsequent closed meeting more palatable.

A key message is that the transition to virtual AGMs should not take the form of merely replicating a physical AGM online, but rather use technology to improve on the existing process, including making pre-recorded speeches available and hosting separate Q&A sessions.

What we think

Anyone who was expecting CIGA to result in a surge of virtual AGMs will be disappointed. A convincing majority of companies elected to hold small, physical meetings behind closed doors at which only a quorum attended.

It is not clear whether English common law permits fully virtual general meetings. This legal uncertainty surrounding the validity of virtual meetings will no doubt play a part. But it cannot be the only (or even the predominant) factor, given that many companies continued to hold closed, physical meetings even after the facility to hold virtual meetings under CIGA had come into effect.

We think there are four main reasons why virtual general meetings have yet to take off. These are common to all general meetings and not just AGMs.

  • Cost. For some companies, investing in the technological infrastructure to host a virtual AGM is disproportionate, particularly where traditionally attendance at the meeting is low.
  • Technical risk. There is an inherent legal risk that, if the technology breaks down during the meeting (preventing participants from attending), the chair may need to adjourn the meeting, causing disruption and delay.
  • Investor sentiment. Institutional investors and proxy advisors continue to place significant value in the ability to conduct face-to-face interaction. As long as investor bodies such as the Investment Association continue to recommend against virtual meetings, companies are likely to feel nervous about taking action they feel might rankle stakeholders.
  • Familiarity. Embarking on a virtual AGM requires a new line of thinking, including in terms of participation, conduct of the meeting, information flow and communications, and voting. For many companies, familiarity with the existing model, coupled with the flexibility under CIGA to hold closed meetings, may have led to many companies simply defaulting to minimalist, physical AGMs.

Instead, we have seen a new model emerge, under which investors are provided with information outside of the AGM framework and given the opportunity to voice their concerns. The AGM has been largely reduced to a formality.

This approach has brought some advantages. By providing information and taking questions in advance, companies give shareholders more time to consider the company’s position, formulate and make enquiries and carefully consider their voting decisions. Given that the Government has extended the flexibilities under CIGA into the new year, we may see more closed meetings.

This model will not be sustainable in the longer term. There is a clear desire among institutional investors for a return to interactive meetings and the opportunity to interrogate management on key issues. Equally, the ability for the board and shareholders to “sense the mood” of the meeting, which may be lost or impaired in a virtual world, is unlikely to be given up readily. However, the technological cat now seems to be out of the bag, and investors will be equally reluctant to let go of the new benefits they have been given.

The geographical spread of institutional investors, as well as the fact that the UK is among a continually diminishing number of jurisdictions where virtual meetings are not commonplace, make a greater degree of electronic participation in meetings seem almost inevitable.

Much will depend on whether legal uncertainty surrounding virtual general meetings can be resolved (which, given the current legislative bandwidth of Government does not seem likely, at least in the short term). If it can, we foresee a more nuanced approach to AGMs in the future, with different companies opting for different models depending on the complexion of their shareholder base. In some cases, companies will prefer to go wholly electronic; in others, a physical meeting will remain more appropriate. But investors of all sizes will now expect greater opportunities to interact with boards, both before and during an AGM.

Government calls for views on the UK’s listing regime

The Treasury has published a call for views on the UK’s listing regime. The review is prompted in part by the expiry of the UK/EU transition period at 11pm UK time on 31 December 2020. Its primary purpose is to ensure that UK markets remain world-leading and fit for the future.

The consultation seeks views on the following matters:

  • Free float requirement. Is the current requirement that at least 25% of a listed company’s shares must be available to the public calibrated at the right level? The consultation notes that, for certain types of issuers, 25% may represent a high proportion of equity to have to sell when coming to the market and may deter some shareholders from seeking a listing.
  • Dual-class share structures. Should companies be permitted to list shares of different classes carrying different rights (such as zero or weighted voting rights)? (Currently, dual-class listings are not permitted for premium-listed commercial companies.) Is there demand for this and how could high standards of corporate governance be preserved if dual-class listings are permitted?
  • Track record. Does the requirement for applicants for listings to demonstrate a “track record” constitute a barrier for certain types of company? (Currently, an applicant must have a track record of earning revenue, be underpinned by a business model that is profitable and sustainable, and have three years of accounts covering at least 75% of its business.)
  • Prospectuses. Are the circumstances in which a company must publish a prospectus to offer shares to the public or admit its shares to trading still appropriate? Should any of the financial thresholds be adjusted? Are the content requirements proportionate?
  • Dual and secondary listings. Are existing UK requirements around dual and secondary listings a barrier to dual listing in the UK?
  • Other issues. Are there any other immediate issues the review should consider? Are there any non-regulatory, non-legislative actions the UK could take to promote the use of equity markets?

The Treasury has asked for responses by 5 January 2021.

Also this week…

  • Government further extends ability to hold electronic meetings. New regulations have been published which extend the ability for companies and other corporate bodies to hold general and other shareholder meetings by purely electronic means. The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 (SI 2020/1349) now allow meetings to be held electronically until 30 March 2021. The Regulations also re-introduce the so-called “suspension” of liability for wrongful trading until 30 April 2020. For more information, read our colleague Tim Bromley-White’s blog.
  • Companies House urges early online accounts filing. Due to the disruption caused by Covid-19 and resulting reduced staffing, Companies House is urging companies to file their accounts in electronic form using its online filing service. It notes that accounts filed on paper are six times more likely to be rejected than those submitted electronically and so companies which file paper accounts too close to the 31 December 2020 deadline risk not having enough time to correct and re-submit them if they are rejected. 
  • FCA launches annual fees consultation. The Financial Conduct Authority (FCA) has launched its annual consultation and policy proposals relating to its regulatory fees and levies. It is proposing to increase application fee rates by around 103% to allow it to achieve better cost recovery and, in particular, to introduce a new fee of £500 for applying to the FCA to approve a proposed change of control of an FCA-authorised person. The FCA has asked for comments by 22 January 2021. 
  • Pre-emption Group relaxations to come to an end. The Financial Reporting Council (FRC) has reminded issuers that the temporary relaxation to the Pre-emption Group’s Statement of Principles for non-pre-emptive share issues, introduced as a result of the Covid-19 pandemic, are due to come to an end on 30 November 2020. The relaxation will not be extended again. 
  • FCA to update National Storage Mechanism for ESEF. The Financial Conduct Authority (FCA) has confirmed that it is expecting to upgrade its National Storage Mechanism (NSM) on 25 January 2021 to allow issuers to file their accounts using the European Single Electronic Format (ESEF). Filing using ESEF will be mandatory from January 2022, but issuers are permitted to use the new standard on a voluntary basis before then. 
  • BEIS and FRC update accounting sector on reporting after transition period ends. The Department of Business, Energy and Industrial Strategy (BEIS) and the Financial Reporting Council (FR) have published a letter to the accounting sector about accounting and corporate reporting, and a letter to the audit sector regarding corporate audits, after the UK/EU transition period ends at 11pm UK time on 31 December 2020. The letters are designed to serve as updates to the joint letters published in February this year (see our previous Corporate Law Update for more information).