Corporate Law Update

In this week’s update: a new FRC report on corporate culture, a consultation on changes to exemptions under the UK’s financial promotion regime, an FCA primary market bulletin on ESEF, RISs and sponsor conflicts of interests, UKBAA best practice guidance on angel investment in diversity, an update on the new power to block corporate listings on national security grounds, Spencer Stuart’s 26th annual UK Board Index, supplementary legislation to the EU’s sustainability taxonomy and a new tool to report PSC discrepancies online.

The FRC publishes a new report on corporate culture
The Government is consulting on changes to certain exemptions under the UK’s financial promotions regime
FCA publishes Primary Market Bulletin 37, covering ESEF, RISs and sponsor conflicts of interest
The UKBAA publishes best practice guidance on angel investment in diversity
The Government provides an update on the new power to block corporate listings on national security grounds
Spencer Stuart publishes its 26th annual UK Board Index
New legislation is published to supplement the EU’s sustainability taxonomy
Companies House launches a new online tool to report PSC discrepancies

FRC publishes report on corporate culture

The Financial Reporting Council (FRC) has published a new report on corporate culture. The report explores how companies frame, assess, monitor, embed and assure culture, and what enablers and barriers they encounter, with a view to promoting good practice and a positive working culture.

Key points arising out of the report are set out below:

Leadership should come from the top, through actions and attitudes, but the workforce must feel engaged and able to contribute.
The board should ensure that is aligned with the company’s purpose, values and strategy. The CEO plays an essential role in driving and embedding culture throughout a company.
Companies are now collecting a vast amount of culture-related data and information but, in many cases, are not effectively joining up across different functions. Greater cooperation between HR, internal audit, ethics, compliance and risk functions may help to monitor and embed culture.
Trust, empathy and psychological safety are crucial to foster positive culture and, in turn, improve performance. Everyone should be encouraged to speak up and share their concerns.
The key challenge for companies is to acknowledge that culture requires patience, openness and commitment to continuous development through any future changes to senior personnel.
One way to assess how companies are changing their culture is to look at reporting. The FRC intends to continue monitoring corporate disclosures in this area and publish additional information and guidance for companies.

Treasury consults on reforms to financial promotion exemptions

HM Treasury has published a consultation setting out proposed reforms to some of the exemptions that apply under the UK’s financial promotions regime.

Under UK law, it is a criminal offence to communicate a financial promotion unless either:

the person doing so has been authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority; or
the contents of the promotion have been approved by an FCA-authorised person.

Financial promotions occur in various forms, including where a company (or someone on its behalf) wishes to offer its shares to investors (whether to existing shareholders or prospective investors).

There are, however, numerous exemptions to the prohibition. If an exemption applies, it can be communicated by an unauthorised person without the need for approval. Moreover, certain standards (such as the requirement to be “clear, fair and not misleading”) do not apply to the promotion.

In October 2021, the FCA drew attention to exemptions for sophisticated investors and high net worth (HNW) investors, which it believes have now become too easy to satisfy (in part, as a result of inflation) and may be open to misuse. See our previous Corporate Law Update for more information.

The Treasury has put forward five proposals to reform these exemptions. The proposals are all independent of each other, but the Treasury is proposing to implement all five.

Increasing the thresholds to qualify for the HNW investor exemption. The current thresholds are annual income of £100,000 or more, or net assets (excluding main home and pension assets) of £250,000 or more. The consultation floats suggestions for higher thresholds and asks for views.
Amending the criteria for self-certifying oneself as a sophisticated investor. The Treasury proposes to remove the ability to self-certify by virtue of investing in more than one unlisted company in the previous two years, and to raise the turnover threshold for company directors.
Requiring a firm that communicates a financial promotion to form a reasonable belief that the person to whom they ate communicating it meets the criteria for the HNW investor or a sophisticated investor exemption. (Currently, a firm need only reasonably believe a recipient is a HNW or sophisticated investor, not that they meet the formal criteria for self-certification.)
Updating the pre-investment statements given to HNW and sophisticated investors. The Treasury wishes to make these statements simpler and more prominent and to require investors to confirm which criteria they meet for the relevant exemption.
Changing the name of the HNW investor exemption to remove the word “certified”.

The Treasury has asked for responses to its consultation by 9 February 2022.

The proposals are in addition to the Treasury’s previous consultation on creating a new “regulatory gateway”, including a suitability test, for authorising firms to approve financial promotions. That consultation closed on 25 October 2020 and the Treasury has set out its proposals going forward.

FCA publishes Primary Market Bulletin 37

The Financial Conduct Authority (FCA) has published Primary Market Bulletin 37. This issue covers three main topics.

Structured reporting under ESEF. The FCA has reminded issuers of the new European Single Electronic Reporting Format (ESEF). ESEF applies to issuers with securities admitted to a regulated market (such as the London Stock Exchange’s Main Market or the AQSE Main Market).

For financial years beginning on or after 1 January 2021, issuers must publish their annual financial report in XHTML format. Issuers that prepare consolidated financial statements using IFRS must also tag their financial information using the EU’s ESEF taxonomy. The FCA has previously consulted on what other taxonomies should be permitted for the UK implementation of ESEF. We await the outcome. See our previous Corporate Law Update for information.
Primary Information Providers. The FCA reminds issuers that they must use a Primary Information Provider (PIP), more commonly known as a Regulatory Information Service (RIS), to disseminate certain information, such as announcements under the Market Abuse Regulation, the Listing Rules, and the Disclosure Guidance and Transparency Rules (DTR).

The FCA notes that, although PIPs are reliable and are required to put in place back-up arrangements in the case of a systems outage, severe disruption may at times mean that they cannot disseminate regulated information. It therefore advises issuers to consider maintaining an account with a second PIP in case their first-choice PIP is unavailable.
Sponsor conflicts of interest. Premium-listed companies must appoint a sponsor to help them comply with the FCA’s Listing Rules. Sponsors must take all reasonable steps to identify and manage conflicts of interest that could adversely affect their ability to perform this role. The FCA has provided guidance on sponsor conflicts of interest in the form of Technical Note 701.3.

The Bulletin sets out the results of a survey the FCA conducted into sponsor conflict of interest submissions since it introduced the Technical Note. It notes that the FCA often sees no or limited details in conflict submissions, with the sponsor in some cases not identifying the conflict.

The FCA asks sponsors to provide their own analysis of the potential conflict (using the Technical Note as guidance), and to contact the FCA before deciding whether it can provide sponsor services or if there are any unusual, novel or complex features to a transaction or the sponsor’s involvement. In particular, a sponsor should contact the FCA before providing a “fair and reasonable opinion” if it is also providing sponsor services to the other party to the transaction.

UKBAA publishes diversity guidance for angel investors

The UK Business Angels Association (UKBAA) has published new best practice guidance designed to assist founders from underrepresented groups to access finance from angel investors.

The UKBAA notes that the proportion of women investors in angel groups remains at only 16-18%, and that investors from Black, Asian and Ethnic Minorities account for only 11% of angel investors. It has therefore drawn on the combined expertise of members of the investment community to see what can be done to support investment in diversity and to identify examples of good practice.

The report is divided into three sections.

Section one focuses on process-related changes that might address issues from pipeline and deal origination, evaluation and due diligence, through to investment decision-making.
Section two deals with embedding an organisational commitment and strategies to integrate diversity across organisational practices.
Section three sets out actions to increase diversity among angel investor groups and syndicates, from recruitment through to education, support and integration.

The report makes ten “best practice recommendations” for angel syndicates. These include expanding networks and processes for referrals, adjusting thresholds and core requirements to create a more open channel for diverse founders, continually measuring progress by developing baseline statistics, developing a focused marketing campaign, and providing access to investor education on diversity.

Treasury outlines next steps for power to block listings on national security grounds

HM Treasury has published a response to its previous consultation on introducing a new power to block a corporate listing in the UK if it perceives there to be a risk to the UK’s national security.

The Treasury consulted on the proposed new power in June 2021. For more information on the ambit of the proposed new power, see our previous Corporate Law Update.

The response paper notes that there was general support for limiting the new power to listings of equity securities (so that debt listings would not be within scope) and not to apply it to secondary issuances (such as rights issues and open offers).

The Treasury has not provided any detail on the form the new power will take. Rather, it states that the Treasury will consider carefully the responses it has received and will continue to develop its proposed policy in this area. We will continue to monitor developments in this area.

Spencer Stuart publishes 26th annual UK Board Index

Consulting firm Spencer Stuart has published the 26th edition of its annual UK Board Index. The Index is designed to act as a comprehensive review of board composition and governance practice in the largest 150 companies in the FTSE rankings as of 30 April 2021.

Key points from the report are set out below.

61% of FTSE 100 companies met the Parker Review target of one director from a minority ethnic background by December 2021, but 39% of companies had no ethnic minority directors.
67% of the 150 companies sampled met the Hampton-Alexander Review target of 33% women on their board. Women occupied 36% of board roles (up from 34% in 2019/2020), including 51% of all non-executive director roles, but only 14% of executive director roles and 9% of chair roles.
The average board size was 9.9 directors, with boards ranging from 6 to 17 directors.
Boards met more frequently – 11.6 times on average during 2020/2021, up from 7.7 times in 2019/2020. The report attributes this to the unique circumstances of the Covid-19 pandemic.
98% of companies conducted a board evaluation in 2020. 44% of companies ran an externally facilitated review, down from 46% in the previous year.
55% of companies had at least one additional board committee beyond the usual three (audit, remuneration and nomination). 6 boards had a dedicated ESG committee (all of which were set up in 2020). 26 had a separate risk committee. Other areas delegated to “thematic” committees included health and safety, corporate social responsibility, compliance and sustainability.

The report also contains detailed analysis of workforce engagement and director remuneration.

Other items

EU publishes legislation supplementing sustainability taxonomy. New EU legislation has been published to supplement the EU’s environmental and sustainability taxonomy. The legislation contains technical screening criteria to be used to determine whether activities contribute to climate change mitigation or adaptation for the purposes of the taxonomy. The taxonomy forms the basis for asset managers who market investments within the EU to classify their products according to environmental and sustainability criteria, as well as for EU-incorporated issuers to report environmental and sustainability information. The legislation does not apply in the UK, but asset managers marketing products within the EU will need to comply with it. For more information, see this roadmap we have produced.
Companies House launches online PSC reporting service. Companies House has announced that it has launched a new online tool to report discrepancies between an entity’s register of persons with significant control (its PSC register) and the PSC information it has filed at Companies House. Certain organisations are required by regulations to report any PSC discrepancies they discover to Companies House. These include financial institutions, auditors, accountants, tax advisers, legal advisers, trust and company service providers and estate agents.