Corporate Law Update

• The Government is to explore allowing company shares to be held in electronic form
• The FRC publishes a review of viability and going concern disclosures
• The Government reaffirms its intention to form an industry group on electronic execution of documents
• The Government is consulting on reforms to UK data protection law

Government to explore dematerialising company shares

The Government has published a policy paper outlining reforms it intends to make following the UK’s withdrawal from the European Union.

Among other things, the paper states that the Government intends to work with industry, regulators and shareholders in the medium term to determine the best mechanism for converting “paper shares” into electronic form, while preserving the rights of existing shareholders.

By way of background, shares in a UK company take one of two forms.

• Certificated form. Title to shares is represented by a “share certificate” (although actual title is conferred by the shareholder’s name appearing in the company’s register of members). Traditionally, both the share certificate and the register of members have taken paper form. However, it is now common for registers of members to be compiled electronically, and we are increasingly seeing electronic share certificates (although it is important to consider when electronic certificates might not be appropriate). Certificated shares are more common for private, non-publicly traded companies.
• Uncertificated form. There is no share certificate (paper or electronic) representing the shares. Instead, shares are held purely electronically through the CREST electronic settlement system. Title to the shares is conferred by the shareholder’s name appearing in a register of members kept by Euroclear, the operator of the CREST system (although the company will usually keep a “mirror” or “issuer” register for its own records). Uncertificated shares are more common for publicly traded companies, although share certificates are sometimes still issued for shares in publicly traded companies.

Given that certificated shares can (in theory) already exist in electronic form, it may be that the objective of the Government’s policy is rather to allow all shares to exist in uncertificated form. Although dematerialisation through CREST is available to purely private companies, the conditions that must be satisfied to be entered into CREST mean that many private company shares are not eligible.

We await further details from the Government and will report on any further developments.

FRC publishes report on viability and going concern disclosures

The Financial Reporting Council (FRC) has published a thematic review into viability and going concern disclosures by companies admitted to the London Stock Exchange’s Main Market and AIM.

The review considered the full-year accounts of 20 entities across a range of industries with accounting periods ending between December 2020 and March 2021.

The key points arising out of the review are set out below.

• The FRC encourages companies to focus on providing better, more informative, company-specific disclosure that is clear and concise and avoids unnecessary clutter. This could include better cross-referencing between viability and going concern statements.
• Disclosures lacked detail on inputs and assumptions used in the scenarios prepared to aid the assessment of viability and going concern. The information provided should be proportionate. A company facing greater uncertainty and with less financial headroom should provide more detail than one without such challenges.
• The FRC identified several instances of significant judgement being applied in determining whether the company was a going concern without the report disclosing those judgements. Reports should disclose any specific exercise of significant judgement.
• All viability statements considered the principal risks and uncertainties identified in the strategic report. However, it was not always clear how those risks and uncertainties had been modelled. The best disclosures clearly mapped principal risks identified to viability scenarios.
• For the most part, companies did not disclose how they were resilient to risks that could threaten either their going concern status or longer-term viability. The FRC encourages clear disclosures of these risks and how their impact could be mitigated if they were to crystalise.
• Most companies chose a three-year period for their viability statement but often failed to consider all relevant factors in reaching this decision. The FRC cites debt repayment profiles, the nature and stage of development of the business, planning and investment periods, strategy and business model and capital investment as useful factors to consider in this regard.
• The FRC encourages companies to extend their viability assessment period where possible. The period should not be shorter than that covered by detailed budgets or forecasts approved by management and used in other forward-looking areas, such as impairment testing.
• In many cases, disclosures lacked the detail needed for readers to assess whether assumptions used were consistent with those applied in other areas of the financial statements. Information in viability and going concern disclosures should be internally consistent and consistent with other parts of the report and accounts.

Other items

• Government to push ahead with electronic execution working group. The Government has restated its intention to form an independent, judicially-chaired industry working group to look at best practice for electronic signatures and other electronic ways of executing documents. The group was recommended in the Law Commission’s 2019 report on electronic execution of documents.
• Government consults on reforms to UK data protection law. The Government is consulting on significant and wide-reaching changes to the UK’s data protection laws with a view to reducing barriers and driving innovation and growth. The proposals touch all areas of data protection, from clarifying the circumstances in which data can be shared and used beyond initial purposes, to data sharing in connection with artificial intelligence, machine-learning and scientific research. The consultation is open for responses until 19 November 2021.