Corporate Law Update
- The Government is consulting on new obligations to notify The Pensions Regulator of proposed corporate transactions
- The FRC’s Financial Report Lab publishes the results of a survey on electronic financial reporting under the new ESEF regime
- The FCA is consulting on the range of permitted taxonomies for reporting under the ESEF regime
- A company did not need to formally execute a contract to enter into it
The Government is consulting on the circumstances in which a participating employer in a pension scheme will be required to notify The Pensions Regulator of a proposed transaction.
Notifying a “decision in principle”
Under section 69 of the Pensions Act 2004, an employer that participates in (broadly speaking) a defined benefit (DB) pension scheme must notify The Pensions Regulator of certain events.
Currently, these include (if the employer is a company) a decision by the employer’s controlling company to “relinquish control” of the employer company. This effectively captures a sale of the shares in an employer company by its shareholder.
To this, the Government is proposing to add two new trigger events.
- A sale of a material proportion of the employer’s business or assets. Broadly speaking, this is likely to capture most business and asset sales by an employer. (Originally, the Government proposed to limit this to employers who are responsible for funding a significant percentage of scheme liabilities, but this qualification has now been dropped.)
- The grant or extension of security over the employer’s business or assets, if that security would have priority over the pension scheme. This would capture security granted by either the employer itself, or one or more subsidiaries that account for more than 25% of the employer’s consolidated revenue or gross assets. This will affect a great number of secured financings.
Moreover, the Government is proposing to set the trigger for notification (under all three events) not when a “decision” is made (as is currently the case for the existing trigger), but when a decision in principle is made.
The consultation defines this as “a decision prior to any negotiations or agreements being entered into with another party”. It explains that this is intended to be the point at which the employer has made a decision to go ahead, before it starts to negotiate specific terms or draw up a contract.
This would be a significant change. In effect, it would bring the point of notification forward to a much earlier stage, before an employer or its controlling company has even initiated discussions with a potential buyer or lender. Employers would need to ensure they consider the impact of a proposed or contemplated transaction on any DB schemes from the very outset.
In practice, this is likely to be tricky. Often, an employer will not be in a position to decide whether it really wants to carry out a sale until it has engaged with potential buyers to gauge the market. The regulations seem intended to bite at an earlier point than this, where an employer has simply formed the idea of a sale or borrowing money. This point will not always be easy to identify.
Notifying an “intended” transaction
Section 69A of the Pensions Act 2004 (which has yet to be brought into force) also requires notice of certain events to be given to The Pensions Regulator. However, there are some key differences between section 69A and section 69.
- Under section 69A, the requirement to notify The Pensions Regulator falls not just on the employer or its controlling company, but also on the employer’s associates and persons connected with the employer.
- Under section 69A, a person must make a notification not only when the relevant event occurs, but also if there is a “material change” to the event or its expected effects, or if the relevant event will no longer take place.
- The notification must be accompanied by a statement containing specific information. This includes a description of any adverse effects on the DB scheme, any steps taken to mitigate those adverse effects, and any communications with the scheme trustees or managers. The person making the notification must also send a copy of the statement to the trustees or managers.
Until now, the triggers for a section 69A notification had not been specified. The consultation, however, is now proposing to apply these requirements to the same three events as described above, namely:
- A relinquishing of control in an employer company.
- A sale of a material proportion of an employer’s business or assets.
- A grant or extension of security over an employer’s business or assets.
However, a notification under section 69A would initially be triggered only when the main terms of the relevant trigger event have been proposed. This is obviously a later stage in the negotiations than a “decision in principle”, although it will still involve a matter of careful judgment in deciding precisely when the “main terms” have been “proposed”.
The Government has asked for responses by 27 October 2021. Persons wishing to respond to the consultation should contact the Department for Work and Pensions using the details provided in the consultation.
The Financial Reporting Council’s Financial Reporting Lab has published the results of a survey it conducted asking companies and service providers about their preparations for structured electronic reporting for annual financial reports.
For financial years beginning on or after 1 January 2021, issuers with securities admitted to a regulated market (such as the London Stock Exchange’s Main Market or the AQSE Main Market) must:
- file their annual financial reports in XHTML format (rather than in PDF format as at present); and
- if they prepare consolidated financial statements using International Financial Reporting Standards (IFRS), include XHTML tagging for basic financial information.
For financial years beginning on or after 1 January 2022, the requirement to include basic tagging will be extended to the notes to the accounts.
The new regime arises out of the UK’s implementation of the European Single Electronic Format (ESEF), a European Union initiative designed to harmonise financial reporting across EU Member States. The UK has implemented ESEF (notwithstanding Brexit) in rule 4.1.14R of the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR 4.1.14R).
46 organisations (both companies and other organisations) responded to the survey, with companies roughly evenly split between FTSE 100, FTSE 250 and other issuers. The key points arising out of the survey, along with our thoughts, are set out below.
- Preparedness. Only 14% of companies that responded felt they were “fully prepared” for the new reporting requirements. The Lab explicitly acknowledges that readiness might in fact be even lower than this, as issuers who are not aware of the new requirement most likely did not respond to the survey. This clearly indicates that there remains an important element of education for market companies with securities admitted to a regulated market.
- Action to date. Where issuers have taken action to get themselves ready, this has primarily consisted of analysing requirements and identifying service providers to assist with compliance. The Lab notes that running tests to assess readiness is critical to successful implementation, although only around 25% of issuers who responded to the survey say they have done this.
- Format. Most issuers who responded to the survey said they intend to continue to publish their annual reports in PDF format alongside the new XHTML format. Very few respondents intend to send the new XHTML version to shareholders, suggesting that issuers may regard PDF as continuing to be the primary format of the report, with XHTML effectively serving the sole purpose of complying with the ESEF regime.
- Taxonomy. There seems to be a desire for guidance on taxonomy. Just under half of issuers who responded intend to use the ESEF EU taxonomy or the UKSEF taxonomy (which is identical to the EU taxonomy but with additional tags). But just over half of issuers are awaiting further guidance, particularly in light of the FCA’s consultation on permitted taxonomies (see below).
- Extending taxonomy. The survey also asked what further areas of corporate reporting could benefit from a defined taxonomy. Popular areas including TCFD climate reporting, strategic report disclosures, streamlined energy and carbon reporting (SECR), gender pay-gap reporting and corporate governance reporting.
The Financial Conduct Authority (FCA) is consulting on the possible taxonomies that issuers will be permitted to use when submitting electronic annual financial reports under the new ESEF regime.
As noted above, for financial years beginning on or after 1 January 2021, issuers with securities admitted to a regulated market are required to file their annual financial reports in XHTML format, and those preparing consolidated financial statements using IFRS will need to include XHTML tagging for basic financial information.
Tagging must be applied using a recognised taxonomy. Currently, the only taxonomy recognised by the FCA is the core ESEF taxonomy set out in EU legislation. The Financial Reporting Council (FRC) has developed a separate UK version of this taxonomy – termed “UKSEF” – but this has not yet been recognised by the FCA.
The FCA notes that differing requirements between UK authorities and other regimes may require issuers to produce multiple versions of IFRS financial statements tagged using different taxonomies, adding to cost and administration without enhancing transparency. It is therefore proposing to permit a wider range of taxonomies for the 2021 and 2022 financial years.
In particular, for financial years beginning between 1 January 2021 and 31 December 2021 (inclusive), the FCA is proposing to permit issuers to use any of the following taxonomies:
- The original EU ESEF taxonomy
- The 2020 update of the EU ESEF taxonomy published by the IFRS Foundation (ESEF 2020)
- The 2021 update of the EU ESEF taxonomy published by the IFRS Foundation (ESEF 2021)
- The UKSEF taxonomy published by the FRC this year (UKSEF 2021)
- The updated UKSEF taxonomy to be published by the FRC later this year (UKSEF 2022)
For financial years beginning on or after 1 January 2022, the FCA is proposing to strip this list back so that issuers would need to tag using either ESEF 2021 or UKSEF 2022.
The FCA is also planning to consult in 2022 on a longer-term approach under which issuers can adopt and use annual updates to IFRS taxonomy.
The FCA has requested responses to the consultation by 11 October 2021.
The High Court has confirmed that a contract for the sale or disposition of an interest in land can be signed by a single signatory on behalf of a company and does not need to be formally “executed”.
Mars Capital Finance Ltd v Hussain  EWHC 2416 (Ch) concerned the sale by a bank to Mars Capital Finance of a series of loans made to, and related security granted by, a group of individuals.
The security included a series of charges by way of legal mortgage over registered land. The agreement to transfer these mortgages amounted to a “contract for the sale or disposition of an interest in land” under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. Under section 2(3) of that Act, this kind of contract must be “signed by or on behalf of each party” to it.
One of Mars Financial’s directors signed the agreement on behalf of Mars. This is expressly contemplated by section 43 of the Companies Act 2006, which states that a company enters into a contract either by executing it in accordance with section 44 of the Companies Act 2006, or if someone with authority signs the contract on behalf of the company.
Section 44 provides several methods for executing a document. These include if two directors, or one director and the company’s secretary, sign the document, if a director signs the document in the presence of a witness, or if the company’s seal is applied (although sealing is now rare).
The individuals argued that, based on an earlier case (Williams v Redcard Ltd  EWHC 1078 (Ch)), a contract which needs to satisfy section 2(3) cannot be signed on behalf of a company under section 43. Rather, it must be executed by a company under section 44 of the Companies Act 2006, which had not happened here.
What did the court say?
The court disagreed. It said that the wording of section 2(3) was very clear and allowed the document to be signed by or on behalf of the parties to it. This meant that it was perfectly open to Mars to enter into the agreement by the signature of a single director or other agent.
What does this mean for me?
In giving his comments (which, strictly speaking, are not binding in future decisions), the judge highlighted the distinction between:
- a document that must be signed by a company; and
- one that can be signed by or on behalf of a company.
The distinction was first highlighted in relation to a provision of another Act of Parliament (the Leasehold Reform, Housing and Urban Development Act 1993) that has since been amended, but in theory applies to other statutory provisions. It is not clear whether it applies to requirements set out in contracts or other documents.
If a document needs to be signed by a company, it must be executed using one of the methods in section 44, and it cannot be signed or executed on behalf of a company by an agent or an attorney.
By contrast, if a contract can be signed by or on behalf of a company, then all that is required is the signature of someone who is authorised to sign on behalf of the company (although the methods under section 44 remain available if there a particular reason to use them).
A similar position applies to limited liability partnerships (LLPs) and other corporate entities. For individuals, the main distinction is whether the individual’s agent can sign the document or not.
The distinction is technical but nonetheless important. Previous judgments have produced strikingly harsh results, declaring that documents were null and void where the signatory signed through an agent and not personally. The consequences of getting execution wrong can therefore be severe.
A party to a contract or other document should check whether it needs to be signed “by” the party under the relevant statute or other governing framework, or whether it can alternatively be signed “on behalf of” the party. If the former, the party themselves should sign the document (not their agent) and, if the party is a body corporate, it should observe any formal execution requirements.
If unsure, a party should always take legal advice on how to execute a document.