Corporate Law Update

• The Government launches its central modern slavery statement registry
• The PLSA publishes its 2021 voting guidelines
• The Parker Review publishes its latest report on ethnic diversity in the boardroom
• The court comments on who can give consent under Duomatic and when a sale is a distribution
• PIRC publishes its 2021 shareholder voting guidelines
• The FCA publishes formal technical guidance for listed companies on ESG reporting
• The FRC Lab confirms it intends to focus on climate disclosures in 2021
• The IFRS Foundation provides an update on its sustainability standards consultation

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.

Government opens modern slavery statement registry

The Government has launched its new central registry for modern slavery statements.

Under section 54 of the Modern Slavery Act 2015, any organisation that is established or does business in the UK and which derives a minimum level of turnover from supplying goods and services must publish an annual “slavery and human trafficking statement”, more commonly known as a “modern slavery statement”. The minimum level currently sits at £36 million of turnover worldwide.

The statement must set out the steps the organisation took in the previous year to eliminate slavery and human trafficking in its supply chains or in any part of its own business.

The Government first confirmed in July 2019 that it intended to create a central registry of modern slavery statements for both private and public sector organisations.

The new registry, which is free to use, allows an organisation to add their modern slavery statement online after creating an account. Organisations can submit statements that are required by section 54 or which they have chosen to publish on a voluntary basis.

It is also possible to search statements added to the registry. At the time the registry was opened, the only published statements are those prepared by various organs of the Government.

Although adding a statement to the registry is currently voluntary, the accompanying Government guidance notes that proposed changes to the Modern Slavery Act 2015 will, in due course, make it mandatory for an organisation that is required to publish a statement to submit to the registry.

The new registry replaces the previous Modern Slavery Registry, which acted as an independent repository of statements produced under the Modern Slavery Act. Statements filed historically at that registry remain available to the public.

PLSA publishes 2021 shareowner voting guidelines

The Pensions and Lifetime Savings Association (PLSA) has published its stewardship and voting guidelines for 2021.

The PLSA undertook a substantial review of the Voting Guidelines in February 2020 (see our previous Corporate Law Update for more information). As a result, this year it has focussed on “ensuring that the guidelines remain relevant… [in] a fast moving, and increasingly complex, world”.

The PLSA has made only a few changes to the Guidelines since the version published last year. They include the following:

• Virtual AGMs. The PLSA supports the temporary provisions introduced by the Government which enabled companies to hold electronic, or “virtual”, general meetings due to the Covid-19 pandemic. However, it will oppose a resolution by a company to make virtual AGMs permanent. It encourages investors to seek assurance from companies that they intend to use virtual AGMs not only to protect investor engagement opportunities, but to increase them.
• Workforce. The PLSA encourages companies to respond actively to challenges posed by Covid-19 on the workforce and to explain any steps taken to enable working from home and prioritise the safety of staff.
• Remuneration. The guidelines note that significant pay discrepancies between senior executives and the workforce, and between genders and ethnicities, have become particularly sensitive due to Covid-19 and “tough financial decisions” companies have made relating to their workforce. They state that pay-outs should take into account any taxpayer-funded support a company has received and the treatment of the wider workforce, and that companies should consider how that support and the effect of Covid-19 generally might impact the perception of remuneration among the company’s stakeholders.
• Diversity. The PLSA now recommends voting against the re-election of the company chair or the nomination committee chair where previously committed timescales for promoting diversity are not being met. This is in addition to its existing recommendation to vote against re-election where there is no clear evidence that the board is considering diversity.
• Climate change. Following the introduction of new requirements by the Financial Conduct Authority (see our previous Corporate Law Update), the PLSA expects listed companies to report against the Recommendations of the Taskforce on Climate-related Financial Disclosures (the TCFD Recommendations). It says that pension schemes should have access to as much information as possible regarding their investments, including climate-scenario testing. In particular, it expects smaller companies to be readying themselves for TCFD reporting.

Parker Review reports on progress on board ethnic diversity

The Parker Review Committee has published its latest report on ethnic diversity on FTSE 350 company boards. The report highlights some progress but notes that there remains more to be done.

What is the Parker Review?

The Committee was established in 2015 to conduct an official review into levels of ethnic diversity on UK company boards. The Committee published its first report, setting out its findings, in October 2017. The report found that the boardrooms of the UK’s leading public companies did not reflect the ethnic diversity of the UK. It made various recommendations, which included the following:

• There should be at least one director of colour on each FTSE 100 board by 2021 and on each FTSE 250 board by 2024 (the so-called “One by 2021” target).
• FTSE 100 and 250 nomination committees should ensure qualified people of colour are considered for board appointment when vacancies occur.
• Companies should develop mechanisms to identify, develop and promote people of colour within their organisations to ensure there is a pipeline of board-capable candidates.
• Companies should set objectives for pipeline development, track progress against those objectives and report to the board on a regular basis.
• The annual report should include a description of the board's policy on diversity.
• Companies that do not meet board composition recommendations by the relevant date should disclose the reasons why in their annual report.

What does the latest report show?

The latest report is based on a survey of FTSE 100 companies carried out jointly by the Parker Review Committee and the Department for Business, Energy and Industrial Strategy. The report notes that significant progress has been made, notwithstanding the impact of the Covid-19 pandemic.

Below is a summary of the key points coming out of the report.

• 74 FTSE 100 companies had ethnic representation on their boards as at November 2020, compared with 52 companies in January 2020 (a 42% increase).
• By March 2021, seven more FTSE 100 companies said they had appointed a director from a minority ethnic group, in line with the “One by 2021” target.
• Out of 998 board positions at the companies that responded to the survey, 124 positions were occupied by a total of 118 ethnic minority directors (12%), compared with 95 directors in 2020.
• Of those 118 directors, 54 (46%) were women, compared with 42% in 2020.

However, the report also makes the following observations, showing that there is still work to do.

• 21 FTSE 100 companies had no ethnic representation on their boards as at November 2020. (Three companies did not respond and two were unable to provide information.)
• Of companies that responded to the survey, only 5 had a CEO and only 4 had a CFO from a minority ethnic background, and all of those individuals were men. Two companies had an ethnic minority chair (one man and one woman).

The Committee will survey FTSE 250 companies by the end of 2021. As noted above, the Review has established a target of 2024 for FTSE 250 companies to appoint at least one ethnic minority director.

Court comments on Duomatic principle of unlawful distributions

Last week we reported on a case (Byers v Chen Ningning [2021] UKPC 4) in which the Privy Council held that the “ultimate beneficial owner” of a company was able to give consent for the purposes of the Duomatic principle in so far as it affected a decision of a British Virgin Islands company. For more information on that case and on the Duomatic principle itself, see our previous Corporate Law Update.

The Court of Appeal has now held that the consent of the beneficial owner of shares in an English company will also suffice for the purposes of the Duomatic principle under English law.

The court also provided some useful comments on when a transaction at an undervalue is likely to amount to an unlawful return of capital.

What happened?

Satyam Enterprises Ltd v Burton [2021] EWCA Civ 287 concerned a company (JVB5) set up to acquire some parcels of real estate. The sole director and shareholder of JVB5 was a Mr Burton. However, Mr Burton held his shares in JVB5 for a Mr Sharma.

JVB5 acquired the properties in May 2012 after Mr Sharma successfully bid for them in an auction. In October 2012, JVB5 transferred the properties to another company (JVB7) of which Mr Burton was, again, the sole director and shareholder.

Some time later, JVB5 (having by now changed its name) claimed that Mr Burton had caused it to sell the properties to JVB7 at a “gross undervalue”, causing JVB5 to suffer loss. This, it claimed, amounted to a breach by Mr Burton of his duties as a director of JVB5.

Both the Court of Appeal and the High Court before it had to consider several factual issues relating to the trial, which we will not cover in this update.

However, among other things, Mr Burton argued that, to the extent he had committed any breach of duty, JVB5 had either approved it in advance or ratified it after the event. This was because Mr Sharma, the sole beneficial owner of JVB5’s shares, had approved the sale to JVB7 and had been involved in every aspect of it. Under the Duomatic principle, his informal consent to the sale was as good as a resolution passed at a general meeting of JVB5 approving it and absolving Mr Burton of any liability for breach of duty.

JVB5 put forward various arguments in response, including that the sale at an undervalue amounted to an unlawful return of capital, as it was made from one company controlled by Mr Burton to another. (Under English case law – most notably, Aveling Barford Ltd v Perion Ltd [1989] BCLC 626 – a transfer of property by a company to another company under common control may be a “deemed distribution”.) An unlawful return of capital cannot be cured using the Duomatic principle.

What did the court say?

The court agreed that Mr Sharma could, in principle, as the beneficial owner of the shares in JVB5, give his consent for the purposes of the Duomatic principle. It cited the previous decision of the Privy Council in Ciban Management Corpn v Citco (BVI) Ltd [2020] UKPC 21, which the Council also relied on when delivering its judgment in Byers.

Unlike in last week’s case, here Mr Sharma was in fact the beneficial owner of the shares in question. The case is therefore more similar to previous cases, such as Shahar v Tsitsekkos [2004] EWHC 2659 (Ch) and Dickinson v NAL Realisations (Staffordshire) Ltd [2019] EWCA Civ 2146, which dealt with beneficial ownership under a nominee arrangement and a discretionary trust respectively. However, in both of those cases, the court’s comments were most likely obiter (i.e. non-binding).

This case would appear to settle the matter and establish for certain that, where a person has a direct beneficial interest in shares in an English company, they can give their consent for the purposes of the Duomatic principle.

Dealing with JVB5’s argument, the court clarified that a transaction at an undervalue between related companies is not automatically a distribution. The court referred to the case of Progress Property Co Ltd v Moore [2010] UKSC 55, in which the Supreme Court said that a transaction made at arm’s length but which, viewed with hindsight, was a “bad bargain” will not be a distribution merely because it was made at an undervalue, provided it was genuine and not an improper attempt to extract value.

Here, due to a lack of evidence, the court was not in a position to make a proper assessment. It has therefore sent the matter back to the High Court to re-evaluate this. However, importantly, it noted that not every transaction made below market value will automatically amount to a distribution.

What does this mean for me?

As we mentioned last week, any decision concerning Duomatic highlights the need to follow all proper procedures and document all transactions carefully to avoid the risk of future challenge. Duomatic is a rather unpredictable doctrine that can at times be a help and at others a hindrance.

The same point applies equally where a company is proposing to sell an asset to a shareholder or some entity controlled by a shareholder, or to a company within its own group. To avoid a risk of challenge that the sale is a disguised distribution, a company should:

• establish the market value of the asset in question, which may be the price agreed on the sale but might equally be some other, objectively ascertainable figure;
• formally document the sale, including the price to be paid and how it is to be satisfied (whether in cash or by issuing paper of some kind);
• if the asset is to be sold for less than market value, ensure that the company has distributable profits, as the sale may amount to a distribution;
• if the asset is to be sold for less than book value, ensure that it has distributable profits equal to the shortfall; and
• in any case, set out in the minutes of the board meeting approving the sale why the directors believe the sale is in the company’s best interests.

Also this week…

• PIRC publishes 2021 voting guidelines. Pensions & Investment Research Consultants Ltd (PIRC) has published its UK Shareholder Voting Guidelines for 2021. 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 £400.
• FCA publishes Technical Note on ESG reporting. The Financial Conduct Authority has formally published its new guidance on reporting on ESG matters, including climate change, in the form of Technical Note TN/801.1. The note was first published in draft in Policy Statement PS20/17. For more information, see our previous Corporate Law Update.
• FRC to focus on climate disclosures. The Financial Reporting Council’s Financial Reporting Lab has published its March 2021 newsletter. Among other things, the newsletter confirms that, following new rules introduced by the Financial Conduct Authority (see our previous Corporate Law Update), the Lab intends to examine best practice for disclosures by listed companies against the Recommendations of the Taskforce on Climate-related Financial Disclosures (the TCFD Recommendations) during the 2021 reporting season.
• IFRS Foundation reports back on sustainability consultation. The IFRS Foundation, the body responsible for promoting International Financial Reporting Standards (IFRS), has published a follow-up statement further to the consultation it carried out in September 2020 to assess demand for global sustainability standards. It notes that feedback confirmed an urgent need for global sustainability reporting standards. The Foundation will therefore continue its work on establishing an international sustainability reporting standards board within its existing governance structure. The Foundation intends to publish a more detailed feedback statement in due course.