Corporate Law Update

• Various organisations publish their responses to the Government’s consultation on extending mandatory TCFD reporting
• The Financial Reporting Council announces a project to examine scenario analysis in corporate reporting
• A buyer was entitled to claim damages for its own commercial judgments as part of a fraudulent misrepresentation claim
• The Financial Reporting Council publishes a report on board remuneration practice reporting

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Industry associations respond to mandatory TCFD reporting consultation

Various industry associations have published their responses to the Government’s recent consultation on the first stage of its proposals to extend mandatory reporting against the disclosure framework published by the Taskforce on Climate-related Financial Disclosures (the TCFD Framework). For more information on that consultation, see our previous Corporate Law Update.

Currently, under the Listing Rules published by the Financial Conduct Authority (FCA), premium-listed companies are required to report against the TCFD Framework on a “comply or explain” basis.

Scope of the regime

So far, respondents have supported the Government’s proposal to extend mandatory reporting against the TCFD Framework to a broader range of entities. The Institute of Directors has said in its response that mandatory TCFD reporting is a “necessary step towards combatting the climate crisis”. The Investment Association notes in its response that mandatory reporting is “essential for investment managers to make their own disclosures on climate risks”.

The Government had originally proposed to extend the regime to (among other organisations) AIM companies with more than 500 employees. The Institute of Directors, the Investment Association and a joint working party of the Law Society of England and Wales and the City of London Law Society favour expanding this to companies on other multilateral trading facilities (MTFs), meaning, for example, that large issuers on AQSE Growth would also be included. The Law Societies also suggest applying the Government’s suggested threshold of £500 million turnover to companies admitted to an MTF to keep requirements proportionate for smaller companies.

Alignment with other reporting obligations

There is a strong desire to ensure that any extended reporting is consistent with other existing and proposed regimes for disclosing climate-related information. The Institutional Investors Group on Climate Change (IIGCC) has suggested that TCFD reporting should extend to companies with more than 250 employees to align it with the existing Streamlined Energy and Carbon Reporting (SECR) regime, as does the Institute of Directors. However, the Institute of Directors also notes that basing reporting on headcount and turnover may not reflect the level of climate risk posed by an organisation, and the IICGG recommends reducing the proposed turnover threshold to €40 million.

The Law Societies also believe that companies will regard any move to align TCFD reporting with the SECR regime and rationalise reporting as helpful.

Similarly, the Investment Association recommends using this opportunity, alongside the Government’s parallel consultation on restoring trust in audit and corporate governance, to “rationalise the differing reporting thresholds” for private companies, including under SECR, corporate governance reporting and reporting on directors’ duties. The British Private Equity and Venture Capital Association (BVCA) has also flagged the interaction of the two consultations, suggesting that companies might make their TCFD disclosures in the new “resilience statement” proposed by the audit and corporate governance consultation, and the IIGCC also notes the need to ensure that the outcome of the two consultations remains aligned.

The Investment Association also recommends aligning the mandatory climate reporting with existing reporting requirements under the Listing Rules and with forthcoming FCA requirements for disclosure by UK-authorised asset managers, life insurers and FCA-regulated pension schemes. Similarly, the BVCA, the Law Societies and the IIGCC all note potential inconsistency between the consultation proposals and the Listing Rules.

Scope of reporting

The original consultation proposed that organisations be required to report against the four recommendations in the TCFD Framework, but that there would not be mandatory reporting against the 11 specific recommendations that supplement those pillars. However, there is some appetite for stronger mandatory reporting.

The Institute of Directors believes organisations should be required to report against the 11 recommendations so as to promote more granular reporting. Likewise, the Investment Association supports mandatory reporting against all 11 recommendations to provide investment managers with “sufficient granularity to assess and manage climate risk” and ensure “regulatory alignment of requirements across the investment chain”.

The BVCA, by contrast, agrees that the Government’s proposals are proportionate and flexible enough to evolve in line with developing international standards. The International Capital Markets Association (ICMA) has suggested that mandatory reporting against the 11 recommendations would be “inconsistent with current legislative requirements” for a company’s strategic report, although this is in part predicated on the fact that most members of ICMA’s Corporate Issuer Forum will already be required to “comply or explain” against the recommendations.

The Law Societies and the IIGCC note that Listing Rules require companies to “comply or explain” against the four TCFD pillars and the eleven TCFD recommendations, whilst the consultation proposes mandatory reporting against the pillars but not against the recommendations. Both recommend a harmonised approach that applies both to premium-listed companies and to other organisations.

Scenario analysis and Scope 3 emissions reporting

One sensitive area of the consultation has been scenario analysis, which is effectively required by the fifth TCFD recommendation but can require significant resource. The Government suggested in its consultation that it would not be mandating scenario analysis disclosure.

However, the Institute of Directors has said it supports scenario analysis by the largest companies, and the Investment Association believes it is an “essential tool” for companies to assess, manage and explain the exposure of their business model to climate risk. ICMA notes that stress testing is more valuable than simply identifying risks and suggests strongly encouraging companies that can conduct scenario analysis to do so, with a view to equipping all companies to conduct mandatory scenario analysis. The IIGCC recommends requiring companies to undertake qualitative scenario analysis initially, before moving in time towards a more quantitative approach.

The BVCA, however, believes that requiring a degree of forward-looking information without mandating full scenario analysis is a proportionate approach, noting that scenario analysis can be costly and time consuming, particularly given the challenging economic environment expected over (at least) the short to medium term. The Law Societies also note that flexibility on scenario analysis is important for companies without the necessary skills or expertise and for whom analysis may be less material.

Separately, the Investment Association believes that reporting Scope 3 emissions data should also be made mandatory under the existing SECR regime. The BVCA believes that reporting on Scope 3 emissions should remain voluntary for now; however, it anticipates the potential need to introduce mandatory reporting in the future and notes that sufficient lead-in time will be essential in this scenario.

Group reporting

The original consultation proposed to allow groups of companies to report at a consolidated level in their group accounts. There is, however, clear support for additional reporting at the subsidiary level. The Institute of Directors notes that “subsidiary companies should not be able to bury their report in a parent company’s filings”, whilst the Investment Association notes that assessments of securities issued at the subsidiary level rely on disclosures by the subsidiary alongside group-level disclosures.

ICMA notes that data collection for reporting purposes can require a lot of work, particularly for large, global companies that might not have access to or the ability to co-ordinate all subsidiary operations data and disclosures on a global basis.

The BVCA has sounded a specific note of caution for private equity and venture capital-backed companies, stating that it is important that separate portfolio companies are not considered part of the same corporate group merely because they belong to the same fund portfolio or different fund portfolios managed by a single manager.

FRC to explore use of scenario analysis with FTSE companies

The Financial Reporting Council (FRC) has announced that it intends to commission a new project to explore the use of scenario analysis by FTSE 350 companies. The project will be carried out by the Alliance Manchester Business School (AMBS) at the University of Manchester.

The purpose of the project will be to learn more about the processes through which companies develop scenario analyses and how this influences companies’ strategic planning and decision-making.

Scenario analysis is seen to be an emerging part of corporate reporting. The question of scenario analysis testing has been brought into particular focus by new and proposed requirements in the UK to require companies and other organisations to report against the pillars and recommendations in the Taskforce on Climate-related Financial Disclosure’s Final Report (the TCFD Pillars and Recommendations).

In particular, the fifth TCFD Recommendation prompts organisations to describe the resilience of their strategy, taking into consideration “different climate-related scenarios, including a 2°C or lower scenario”.

Premium-listed companies are now required to “comply or explain” against the TCFD Pillars and Recommendations (see our previous Corporate Law Update), and the Government is proposing to mandate reporting against the TCFD Pillars for other large entities (see our previous Corporate Law Update and above).

However, the FRC’s project will investigate both climate-related and non-climate-related scenario analysis. The project team will initially survey FTSE 350 companies with a questionnaire in mid-May 2021, then follow up with in-depth interviews with relevant teams and individuals from a representative sample of companies in May, June and July. It will also analyse the extent of scenario reporting in 2020/21 annual reports.

At this stage, AMBS has invited expressions of interest from FTSE 350 companies that would like to participate, particularly teams with recent experience of conducting scenario analysis.

Damages for fraudulent misrepresentation on sale covered commercial misjudgements by the buyer

The Court of Appeal has held that, when calculating direct loss suffered due to fraudulent misrepresentation, it was necessary to deduct the price paid for the relevant assets from their actual value. It was irrelevant what, subjectively, the buyers had "factored in" when formulating the purchase price.

What happened?

Glossop Cartons and Print Ltd v Contact (Print & Packaging) Ltd [2021] EWCA Civ 639 was an appeal from a High Court decision assessing damages for fraudulent misrepresentation.

Several buyers had entered into three simultaneous transactions to acquire a printing business and leases of three commercial units. The buyers successfully established that the seller had made two fraudulent misrepresentations relating to the electricity supply to one of the units and a problem with drainage from that unit.

The High Court had to consider the measure of damages for fraudulent misrepresentation. In particular, it had to decide whether a buyer who has been induced to enter into an agreement due to a fraudulent misrepresentation can also claim for any losses that arise out of the buyer’s own commercial misjudgement, rather than out of the fraud itself.

The basic rule, which the High Court acknowledged, is that a fraudulent seller is required to make full reparation for all damage directly flowing from a transaction (Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] UKHL 3). This would include any losses that are not directly caused by the seller’s fraud. The rationale for this is the basic principle that a person who acts fraudulently is liable for all of the consequences of their fraud, however, foreseeable or remote.

However, the judge noted that this approach could over-compensate a buyer for the consequences of fraud and insulate them from losses directly arising from their own "commercial misjudgement or over-optimism". He said that a buyer should not be able to recover for “potential losses which it had fully appreciated and factored into the purchase price”.

In determining the market value of the assets, the judge therefore took into account what the buyers had, subjectively, "factored in" when calculating the purchase price, then deducted any expenses not factored in to that calculation (an approach the Court of Appeal later termed the “deduction method”). This had the effect of depressing the damages the buyers could claim.

In effect, the High Court’s decision would alter the law on the measure of damages for fraudulent misrepresentation.

The buyers appealed this decision, arguing that the deduction method was not the appropriate way to calculate damages for fraudulent misrepresentation on a sale.

What did the Court of Appeal say?

The Court of Appeal allowed the appeal.

The judges said the “deduction method” adopted by the High Court was “wrong in principle”. It was unduly complex and inappropriate to consider what, subjectively, the buyers had "factored in" when calculating the purchase price.

Instead, the decision in Smith New Court Securities was correct. When calculating direct loss for fraudulent misrepresentation, the court merely needs to ascertain the actual value of the assets purchased and deduct that figure from the price paid. A buyer is entitled to the difference between those amounts, whatever miscalculations they may have made when entering into the transaction and even if they ought to have known about the issues beforehand.

What does this mean for me?

From a legal perspective, this decision clarifies and re-establishes the position that, in a claim for misrepresentation, the injured party is entitled to compensation which puts them as nearly as possible in the position in which they would have been had the misrepresentation not occurred.

On a practical note, the case highlights how important it is for a seller to ensure that any statements it makes are accurate and, in particular, not to withhold details or provide misleading information in advance of a sale. If a buyer can establish that there has been a fraudulent misrepresentation, the seller will be liable, in principle, for all loss suffered, whether or not it is directly related to the fraudulent misrepresentation.

There are other reasons for a seller to take particular care when making representations or giving warranties on a sale:

• Making a deliberately misleading statement could also amount to a criminal offence, such as fraud by misrepresentation or misleading statements in connection with the sale of shares.
• Any contractual limitations on the seller’s liability in the sale agreement will not apply if the statement has been made fraudulently.

Also this week…

• FRC publishes research on remuneration practice reporting. The Financial Reporting council has published the results of research conducted alongside the University of Portsmouth into reporting on remuneration practices by FTSE 350 companies. The FRC notes that companies are better aligning their board remuneration policies and practices with long-term shareholder interests and that new UK Corporate Governance Code requirements on directors’ remuneration are having a positive impact. However, it also notes that many company reports lacked detail and outcomes and there is still a danger of boilerplate disclosures.