Corporate Law Update

• The Government is consulting on the first wave of extended mandatory TCFD reporting
• The Government launches a milestone consultation on audit and corporate governance
• The Government publishes its tax policies and consultations for Spring 2021
• The BVCA and Level 20 publish a report on diversity and inclusion in PE and VC
• The CMA publishes revised merger control guidelines
• The FCA’s new major shareholdings notification portal goes live

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 publishes roadmap for extended TCFD reporting

The Government has published a consultation on the first stage of its proposals to extend mandatory reporting against the disclosure framework published by the Taskforce on Climate-related Disclosures (the TCFD Framework).

The consultation follows the Government’s broader roadmap for mandatory climate disclosures, which was published in 13 November 2020 (see our previous Corporate Law Update), in which it proposed to extend mandatory TCFD reporting to large unlisted UK companies by 2022.

Premium-listed companies are required, for financial years beginning on or after 1 January 2021, to comply with the specific recommendations within the TCFD Framework (the TCFD Recommendations) and explain any divergence from them (see our previous Corporate Law Update). However, there is no equivalent requirement for other kinds of UK entity.

Below is a summary of the key points arising out of the consultation:

Which entities would be required to report?

The Government is proposing to extend mandatory TCFD reporting to the following types of entity.

• Public interest entities (or PIEs). This includes companies with securities admitted to a regulated market, as well as credit institutions and insurance undertakings. This must be read alongside the Government’s separate proposal to extend the range of PIEs (see below).
• All AIM companies, irrespective of their market capitalisation or balance sheet. The consultation seeks views on whether this should be expanded to cover companies on other multilateral trading facilities (such as the AQSE Growth Market).
• Other companies with turnover above £500 million. This would capture particularly large non-publicly traded companies.
• Limited liability partnerships (LLPs) with turnover above £500 million.

In each case, to be within the scope of mandatory reporting, the entity would need to have more than 500 employees. The consultation does not explicitly state whether this refers to UK employees or employees worldwide, although our assumption for the time being is that this test applies globally.

How would reporting work?

Companies would include disclosures in their non-financial information statement that forms part of their strategic report. LLPs that produce a strategic report would be required to include disclosures in their non-financial information statement. Otherwise, an LLP would report the information in its energy and carbon report prepared under the Streamlined Energy and Carbon Reporting (SECR) regime.

Currently, a company needs to disclose information in its strategic report only if it is material to the company. As a result, where a company does not make TCFD disclosures on the basis that they are not “material”, the Government is proposing to require the company to explain this decision.

Reporting would apply both at group level and at the level of an individual entity. Entities would be required to report against the “four pillars” of the TCFD Framework: Governance, Strategy, Risk Management, and Metrics and Targets. The consultation provides more detail on the specific disclosures to be required in each of these four areas.

Entities within scope would also be encouraged, but not required, to disclose scenario analysis. However, unlike premium-listed companies, entities within scope would not be required to report against the 11 more detailed TCFD Recommendations.

The Government also intends to publish non-binding Q&A to assist with reporting.

The consultation seeks views on how the new TCFD reporting framework would intersect with the existing SECR framework and whether there are ways to make SECR obligations more effective.

What happens next?

The consultation closes on 5 May 2021. Depending on responses, the Government is proposing to make the relevant regulations by the end of 2021, with the new reporting requirement to come into effect on 6 April 2022.

Government publishes major consultation on audit and corporate governance

The Government has published a milestone consultation on proposed reforms to audit and corporate governance in the United Kingdom with a view to restoring trust in the UK’s markets.

The consultation follows three recent high-profile reports commissioned in 2018: the Kingman Review of the Financial Reporting Council, the independent Brydon Review of the Quality and Effectiveness of Audit and the Market Study of Statutory Audit Services by the Competition and Markets Authority (CMA).

The report also takes in recommendations from the House of Commons Business, Energy and Industrial Strategy Select Committee’s 2019 report on The Future of Audit.

The consultation proposes deep and radical reforms to corporate governance and reporting. The consultation is extensive, and it is not possible to cover it in detail in this update. Below is a high-level summary of the Government’s key proposals.

1. Expanding the scope of “public interest entities” (or PIEs). PIEs are entities of systemic importance, such as public companies traded on a regulated market, banks and insurance companies. They are subject to greater regulation than other businesses. The concept of “PIE” is also relevant to several of the proposals in the consultation. The Government is proposing to extend this concept to very large private companies and to larger AIM companies. The paper seeks views on the size threshold that would trigger inclusion.
2. Directors would take greater responsibility for a company’s internal control systems. The paper sets out three possible ways to achieve this. These include requiring a company’s CEO, CFO or entire board to make a statement in the accounts explaining the company’s annual review of its risk management and internal control systems (Option A) and allowing a company’s auditor to publish their findings in relation to a company’s systems (Option B). The strongest proposal would be to require the auditor to provide a formal opinion, either annually or perhaps once every three years, on the company’s internal control systems (Option C).
3. Directors would face greater sanctions if they fail to meet their audit and reporting duties. The new Audit, Reporting and Governing Authority (ARGA) would be given the power to investigate breaches by PIE directors (both executive and non-executive) of their reporting and audit duties and bring direct action. Another proposal is to strengthen existing UK Corporate Governance Code provisions on malus and clawback to allow companies to withhold or claw back directors’ pay for breaches of audit and reporting requirements, including where there is a material misstatement of financial results or failure of risk management controls.
4. There would be a new “resilience statement” in place of the current going concern and viability statements. The new statement would address three time horizons. A short-term section would cover material uncertainties uncovered by the going-concern exercise. The medium-term section would largely replicate the viability statement, but over a mandatory period of five years and would include at least two reverse stress-testing scenarios. Finally, the long-term section would set out how the company is addressing the main long-term challenges to its business. Areas the statement would cover include threats to liquidity, supply chain resilience, digital security, business investment needs, the company’s distribution policy and climate change risk. This requirement would apply initially only to premium-listed companies but would be extended to all PIEs over a period of two years.
5. Companies would need to publish an “audit and assurance policy”. This would set out what independent assurance a company intends to obtain for its annual report, over and above a statutory audit, over a three-year period. It would also describe the company’s internal auditing and assurance processes and external audit tender policies. The policy would be published annually and be subject to an advisory shareholder vote (as is the case for a quoted company’s directors’ remuneration report). Again, this requirement would apply initially only to premium-listed companies but would be extended to all PIEs over a period of two years.
6. Companies would need to provide more narrative around dividends. Individual companies would be required to state the level of their “distributable profits” (the profits which they are permitted to pay to their shareholders) in their accounts. Parent companies would also be required to describe their group’s “dividend-paying capacity”. (To assist with this, the ARGA would be given power to clarify what amounts to “distributable profits”.) When recommending a dividend, directors would need to confirm that the dividend is within the company’s distributable profits and that they do not reasonably expect it to threaten the company’s solvency over the following two years.
7. Invoice payment reporting would be extended. Large PIEs would need to report on their performance of paying suppliers over the previous financial year. The paper asks for views on how best to marry this with the current payment practices reporting regime, under which large companies must disclose various metrics and information in relation to paying supplier invoices.
8. The scope of a company’s audit could be dramatically expanded. The paper endorses the new audit model proposed by the Brydon Review, under which an auditor would consider a much wider range of information, including non-financial information and directors’ conduct. Audit would extend beyond financial information to matters such as ESG, cyber risk, culture and technical areas, and directors of PIEs would need to report on steps they have taken to prevent and detect any material fraud. Alongside this, the ARGA’s power to review company reports would be extended to cover areas not currently overseen by the FRC, including the directors’ remuneration report, audit committee report and corporate governance statement.
9. Audit committees and auditors would need to engage formally with shareholders. The paper proposes requiring committees to establish a formal mechanism to gather shareholder views on the company’s audit plan, although those views would remain advisory only in nature. Committees would also be encouraged to solicit questions from shareholders at the company’s AGM. Auditors would be required to consider suggestions provided by shareholders and feed back to the audit committee on the extent to which those suggestions have been adopted.
10. Auditors would need to provide more detail around their departure. The Government agrees with the conclusion of the Brydon Report that auditors are currently providing too little detail around why they cease to hold office at a particular company. The paper seeks views on whether legislation should be expanded to require more narrative around an auditor’s departure.
11. There would be “shared audits” for the biggest companies. FTSE 350 companies (with some exceptions) would be able to appoint any audit firm to conduct their group audit, but a “meaningful proportion” of the audits of individual group entities would need to be conducted by a “Challenger audit firm”. This deliberately departs from the CMA’s recommendation in its 2018 report, which respondents on the whole did not favour. However, the Government reserves the right to introduce a temporary “market share cap” if mandatory shared audits are not effective. The paper provides details of how the Government provisionally sees this operating.
12. The audit regulator would gain sharper teeth. The ARGA would have powers to direct changes to annual reports and accounts and to publish correspondence and findings arising out of its corporate reporting reviews. It would also have the ability to impose requirements on FTSE 350 audit committees in relation to appointing and overseeing the external auditor and to enforce compliance, including by placing an observer on a company’s audit committee. In relation to PIEs, the ARGA would have the power to require “rapid explanations” where it has reasonable concerns about audit and corporate governance, and to require an expert review of any identified concerns.
13. There would be a new and separate “audit profession”. The paper proposes to create a new professional body for corporate auditors, separate from the existing accounting bodies. Corporate auditors would be recognised as a distinct profession in their own right. The paper seeks views on ways to achieve this and what qualifications professional auditors should require.

The paper also sets out various proposals in relation to competition within the audit market and the regulation and monitoring of the audit industry, which will be of interest to audit firms.

Finally, the paper contains proposals with regard to establishing the ARGA and to replace the Financial Reporting Council as the new regulator for audit, corporate governance and corporate reporting.

What happens next?

The consultation notes that the Government will introduce legislation when Parliamentary time allows, but that it is considering introducing measures in stages or after a transitional period, so as to manage the impact on business. This would begin with establishing the ARGA, followed (it would appear) by changes to the audit regime and, finally, changes that impact companies.

The Government has asked for responses by 8 July 2021.

Government publishes tax policies and consultations for Spring 2021

The Government has published a series of tax policies and consultations, comprising an overview Command Paper, eight consultation documents, two calls for evidence, two discussion documents and 13 other reports, reviews and pieces of guidance.

The various papers cover (among other things) uncertain tax positions, transfer pricing and VAT.

For more information, you can read this blog by our colleagues, Catherine Hill and Rhiannon Kinghall Were.

BVCA publishes survey on diversity and inclusion in PE/VC

The British Private Equity and Venture Capital Association (BVCA) and Level 20 have published its latest survey report on diversity and inclusion in the private equity and venture capital sectors.

The new report follows on from the two organisations’ previous 2018 report on the role of women in private equity and venture capital (see our previous Corporate Law Update for more information) and their previous 2019 report on women in limited partners, as well as Diversity VC’s 2019 report on diversity in venture capital.

This year, the BVCA and Level 20 has sought to enhance the conversation around underrepresentation of people from different ethnic groups. The report acknowledges that the sample size for the survey was smaller than for gender but provides a foundation from which to work.

Key points from the survey are set out below.

• The study covered a total of 186 firms and 8,746 employees.
• Women occupied 10% of the senior roles in all PE and VC firms. They also occupied 10% of the senior roles in firms with more than £100 million assets under management (AUM). This latter figure is a modest increase from 6% in 2018 (although the report warns against drawing comparisons between the 2021 and 2018 studies due to differing data sets).
• Only 7% of firms with more than £100 million AUM had an all-male investment team, a significant drop from 28% in 2018. However, 25% of firms with less than £100 million AUM had an all-male team, a less substantial drop from 37% in 2019.
• 20% of individuals working in PE and VC were Black, Asian or of another minority ethnicity, sliding slightly to 17% when looking only at senior individuals. Only 3% of senior women were Black, Asian or of another minority ethnicity.
• 54% of firms still had all-white investment teams.

The report makes four recommendations to PE and VC firms to improve diversity, including to:

• collect and analyse data on diversity regularly and participate in industry-wide surveys;
• review and enhance recruitment processes to attract more women and people from different backgrounds into the industry;
• develop people of all genders and backgrounds so that they stay within the industry; and
• encourage a culture that welcomes and promotes diversity of background, experience and thought.

Also this week…

• CMA publishes revised merger control guidelines. The Competition and Markets Authority (CMA) has published a revised version of its merger control guidelines. The CMA had previously consulted on the revised guidelines in November 2020. The CMA has also published a summary of the feedback to that consultation.
• New FCA major shareholdings notification portal goes live. The Financial Conduct Authority’s new portal for notifying major shareholdings under DTR 5 has now gone live. Investors are now required to submit changes in voteholdings by completing an electronic Form TR-1 within the FCA’s Electronic Submission System (ESS).