Corporate Law Update

In this week’s update: sanctions on Russian entities, next steps on reforms to the company register regime, an FCA note on TCFD reporting, the IA’s approach to shareholder voting in 2022, intended steps for the overhaul of the UK’s prospectus regime, legislation on the disclosure of non-UK real estate owners and a few other items.

UK publishes extended sanctions over trading in Russian entities

The Government has published details of new sanctions introduced in connection with the ongoing conflict in Ukraine.

These new sanctions extend existing import and export restrictions and restrictions on financing, correspondent banking relationships and certain asset management services.

They also extend restrictions on dealing with transferable securities issued by a Russian entity or by any entity owned by, or acting on behalf of, a person connected with Russia.

“Transferable securities” includes shares, depositary receipts, bonds, options, warrants and futures that are negotiable on the capital markets. This extends to unlisted securities.

It is a criminal offence to deal in breach of the restrictions if the person doing so knows or has reasonable cause to suspect that the securities fall within one of the restricted categories.

It continues to be unlawful to deal with securities issued by an entity listed in Schedule 2 to the Russian (Sanctions) (EU Exit) Regulations 2019 or a non-UK entity owned by any of those entities on or after the relevant date in 2014.

There are some exceptions in specific circumstances for entities domiciled outside Russia and for some short-term securities. The Treasury has also published a time-limited relaxation of the restrictions under General Licence INT/2022/1277777, provided certain conditions are met.

For more information on the extended sanctions, see our separate explainer.

The situation regarding sanctions is evolving rapidly. If you are currently involved in a transaction or potential transaction that may involve a Russian entity, we recommend you seek legal advice to understand your position.

Government sets out next steps for corporate transparency reforms

The Government has published a white paper setting out its intended next steps to improve corporate transparency in the UK and to reform the UK’s company register to combat economic crime.

The white paper comes in response to three separate previous consultations on:

For more information on those consultations, see our previous Corporate Law Update.

The white paper contains numerous detailed proposals. It is a challenge to summarise them succinctly, but we have attempted to set out below the key points arising from the paper.

Reforming the register

  • Companies House’s technological systems will be updated. Directors will be given their own account from which they can manage all of their individual company appointments.
  • Companies House will gain new powers to query information sent to it and to remove information affecting the integrity of the register. This is a welcome step: it is currently difficult or impossible to expunge some types of information from public view, whether a filing is fraudulent or a simple mistake.
  • Regulated professionals (such as banks) will need to report discrepancies between information they hold on a company’s directors and registered office and the equivalent data at Companies House. (This requirement already exists in relation to persons with significant control (PSCs).)
  • Companies House will also be able to reject a proposed company name, or order a change in existing name, in certain circumstances (e.g. where the name is part of a targeted campaign or belongs to another organisation and is being used without permission).
  • Companies House will have the power to impose sanctions on entities that fail to respond adequately to any queries it raises.

Identity verification

  • Certain individuals will need to verify their identity with Companies House before they can make filings. This includes new and existing company directors, LLP members, general partners of limited partnerships, PSCs and anyone else who intends to file documents at Companies House.
  • A company will not be able to register the appointment of a director at Companies House unless the director has set up an account and verified their identity.
  • Existing directors (and similar officers) will have a fixed period within which to verify their identity. If they fail to do so, they and any company they direct will both commit a criminal offence.
  • Existing PSCs will also have a fixed period within which to verify their identity. If they fail to do so, this will be noted on the company’s file and the PSC will commit a criminal offence.
  • Identity verification will take the form of a photograph of a person’s face alongside an authorised identity document. The Government expects verification to take a matter of minutes.
  • Formation agents (such as company service providers and legal or accounting firms) will be able to verify the identity of directors and other persons themselves, provided they first register with Companies House and provide evidence they are supervised for money-laundering purposes.
  • Non-UK formation agents will need to either register in the UK or prove they are subject to an equivalent supervisory regime.

Corporate directors

  • Corporate entities will no longer be permitted to serve as directors of UK companies unless the exception applies.
  • The exception applies where all of the corporate director’s own directors are natural persons and their identities are appropriately verified before the corporate director is appointed.
  • Furthermore, only UK entities with legal personality will be permitted to serve as corporate directors. This includes (for example) companies, LLPs and Scottish partnerships. Overseas entities will not be allowed to serve as corporate directors of UK companies.
  • The restriction will not apply to corporate members of LLPs or corporate general partners of limited partnerships. Rather, these entities will need to supply details of their director(s) or a managing officer, who must in turn undergo identity verification.

Protecting personal information

  • It will become easier for individuals to protect their safety by applying to suppress personal information. This includes certain information that currently cannot be hidden from public view.
  • If an individual is at serious risk of harm, it will be possible to obscure their name, or potentially all of their details, from public view.
  • It will also be possible to suppress individuals’ signatures from view. (Signatures typically appear on documents such as annual accounts, solvency statements and filing copies of resolutions.)
  • Directors will no longer be required to supply their “business occupation”. Existing directors will be able to suppress this information.

Improving the quality of company accounts

  • Entities will be able to file a single set of accounts in digital format with both Companies House and HM Revenue & Customs (HMRC), simplifying the overall filing process.
  • All accounts submitted to Companies House will need to be tagged using iXBRL. iXBRL tagging is currently mandatory for companies with securities admitted to a UK regulated market (such as the Main Market of the London Stock Exchange) and for accounts submitted to HMRC.
  • Small companies and micro-entities will no longer be able to file “abridged” or “filleted” accounts (which omit some traditional elements of accounts). They will need to file a full balance sheet and profit and loss account, although micro-entities will be able to opt out of filing a directors’ report.
  • Small companies and micro-entities will also be required to file sufficient information to check that they qualify for the accounting category they claim to fall within.
  • Companies House will validate accounts and reject any that do not meet statutory requirements.
  • Finally, the Government will explore options to allow companies to file their accounts just once a year in one place, rather than with different Government departments at different times.

What next?

The Government’s proposals for reform have been a long time in the making, and most of the intended next steps are not surprising.

On the whole, the proposals balance steps the Government perceives to be necessary to tackle economic crime and promote transparency with considered deregulation and reform.

Although the simplification of the company accounts regime will result in some additional burden for smaller companies, it will create a more coherent and navigable framework for businesses. The ability to file a single set of accounts for all relevant Government departments will no doubt be welcome.

The current framework for removing information from the UK companies register is haphazard and often ineffective. Any reforms in this area will only serve to improve accuracy and benefit businesses.

We now await draft legislation to implement the changes.

FCA publishes technical note on TCFD reporting

The Financial Conduct Authority (FCA) has published a new Technical Note on the requirement for listed companies to report against the Recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (the TCFD Recommendations).

The FCA consulted on the Technical Note in November 2021 in its Primary Market Bulletin 36. The final note is unchanged from the consultation draft.

The new Technical Note provides the following guidance.

  • When giving reasons for not including TCFD disclosures in its annual report, a listed company should provide a full, clear and meaningful explanation, written in plain language, that is easy to understand and leaves no room for ambiguity.
  • If a listed company gives details of steps it is taking (or plans to take) to make disclosures in the future, it should provide enough detail to allow investors to fully understand the nature of the proposed action.
  • If a company states that it has made disclosures consistent with the TCFD Recommendations, those disclosures should (in line with the TCFD’s Fundamental Principles for Effective Disclosure) include sufficient, company-specific information to support investors’ decision-making.
  • Companies can seek views from third parties (including external auditors and other advisers) when formulating disclosures. However, it is ultimately for the company itself to ensure compliance, using its knowledge of its actual and expected activities, operating environment and exposure to physical and transition risks.

Investment Association publishes shareholder priorities for 2022

The Investment Association (IA) has published its shareholder priorities for 2022, including the approach its research and monitoring arm, IVIS, will take to colour-topping issuers.

The key points are set out below.

Climate change

  • The IA is encouraging companies to publish their plans for transitioning to a net zero economy before this becomes mandatory. (For more information on the Government’s proposal to require listed companies to publish transition plans, see our previous Corporate Law Update.)
  • It also expects companies to set “robust” targets to achieve net zero, preferably aligned with methodologies, such as the Science-Based Target Initiative.
  • IVIS will amber-top any companies that do not make disclosures against all four pillars of the Recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
  • Directors should state in the annual report that they have considered the relevance of climate change risks and transition risks when preparing and signing off their company’s accounts.
  • Auditors should consider climate change risks when assessing a company’s accounts. IVIS will monitor whether auditors highlight these risks in their key audit matters.

Audit quality

  • IVIS will continue to monitor whether audit committees demonstrate how they have assessed audit quality and challenged management’s judgements.

Diversity

  • The IA supports the new gender and ethnicity reporting framework proposed by the Financial Conduct Authority (FCA) (see our previous Corporate Law Update) and the new board gender targets set by the FTSE Women Leaders Review (see our previous Corporate Law Update).
  • It is encouraging all companies to disclose against the FCA’s new reporting template and to set out how they expect to meet the FCA and FTSE Women Leaders Review targets over time.
  • IVIS will red-top FTSE 100 companies that do not meet the Parker Review target of one director from an ethic minority background.
  • IVIS will amber-top FTSE 250 companies that do not disclose the ethnic diversity of their board or a credible action plan to achieve the Parker Review targets by 2024.
  • IVIS will red-top FTSE 350 companies where women represent 33% or less of the board or 28% or less of the executive committee and its direct reports.
  • IVIS will red-top FTSE Small Cap companies where women represent 25% or less of the board or the executive committee.

Stakeholder engagement

  • The IA continues to expect companies and boards to identify material stakeholders and explain how they engage with them and take their views into account when making decisions.
  • These disclosures should include the impact of increases to the cost of living and inflationary pressures in the economy on consumers and suppliers.
  • Companies should make quality disclosures of how they have engaged and supported stakeholders during disruption caused by the Covid-19 pandemic.

Treasury sets out future reforms to the UK’s prospectus regime

HM Treasury has published a review outcome following its consultation in July 2021 on wholesale reforms to the UK’s prospectus regime.

For more information on the Treasury’s proposals, see our previous Corporate Law Update.

The key points from the review outcome are set out below.

  • The Government will delegate responsibility to the Financial Conduct Authority (FCA) for deciding when a prospectus is required to admit securities to a UK regulated market (such as the Main Market of the London Stock Exchange), what such a prospectus should contain and when a prospectus requires review and approval by the FCA before publication.
  • It will no longer be a criminal offence to admit securities to a regulated market without first publishing a prospectus.
  • A prospectus will no longer be a feature of public offers of securities. Instead, public offers will simply be prohibited unless an exemption applies. Generally, current exemptions in the Prospectus Regulation (including offers to qualified investors, 150 or fewer persons and/or existing directors/employees) will continue to apply. There will be new exemptions for admissions to regulated markets and designated “junior markets”, offers to existing shareholders and specific types of offer. However, it appears that the exemption for offers below €8m will disappear.
  • To support the growing crowdfunding sector, private companies will be able to offer securities to the public through specifically designated platforms. The FCA will set out requirements with which those platforms will need to comply.
  • The Government will proceed with its proposal to replace the “negligence standard” with the “dishonesty standard” for forward-looking information in a prospectus. (See our previous Corporate Law Update for more information on this proposal.)
  • Finally, there will be a new equivalence regime for overseas issuers with securities admitted to designated overseas exchanges. These issuers will not need to have any offering documentation reviewed or approved by the FCA before offering securities in the UK.

The paper is light on the detail of next steps. However, it suggests that the FCA will in due course publish a consultation on its expanded responsibilities under the new regime and that any changes will follow the outcome of that consultation. We await that consultation and will report on it in due course.

Legislation published to require overseas landowners to identify their beneficial owners

The Government has introduced the Economic Crime (Transparency and Enforcement) Bill into Parliament.

The principal purpose of the Bill is to introduce a new regime requiring overseas entities that hold real estate in the UK to file details of their beneficial owners in a public registry at Companies House.

The Bill would also make certain amendments and extensions to the UK’s framework for making unexplained wealth orders.

The Government first announced the proposed new regime in 2016, referring to it as the “Overseas Entities Beneficial Ownership”, or OEBO, regime. The Government last consulted on proposed legislation for the regime in July 2018. (See our previous Corporate Law Update for more information.)

The proposed regime is modelled substantially on the UK’s existing regime for registering details of persons with significant control over companies and other entities (the PSC regime).

The Bill would apply differently in England and Wales, Northern Ireland and Scotland due to the three jurisdictions’ differing regimes for registering ownership of land.

What will the Bill do?

In relation to England and Wales, the OEBO regime would work as follows.

  • The regime applies to ownership of freehold land, or a lease for more than seven years over land, in England and Wales (a qualifying estate).
  • An overseas entity would not be able to acquire a qualifying estate unless it first registers details of its beneficial owners with Companies House.
  • If an overseas entity already holds a qualifying estate when the Bill becomes law, it would have 18 months to register or to dispose of the estate. Failure to do so will be a criminal offence. (This would not apply to real estate acquired by an overseas entity before 1 January 1999.)
  • The Government would also be able to require an overseas entity that holds a qualifying estate to register its details within six months or to dispose of the estate. Failure to do so will be an offence.
  • In addition, an overseas entity would not be able to sell, grant a lease for more than seven years or grant a legal charge over a qualifying estate without first registering. (This would not apply to real estate acquired by an overseas entity before 1 January 1999.)
  • To register, an overseas entity would need to provide details about itself and each of its beneficial owners.
  • If the entity does not have any beneficial owners, or to the extent it cannot identify them or provide their details, it would instead need to provide details of its managing officers.
  • In line with the Government’s proposals for identity verification generally (see above), the identity of the entity’s beneficial owners and managing officers would need to be verified.
  • A company would need to update its beneficial owner information at least annually. Failure to do so would be a criminal offence.
  • The conditions for being a “beneficial owner” of an overseas entity mirror those for being a PSC under the PSC regime. They are:
    • Holding (directly or indirectly) more than 25% of the entity’s share capital.
    • Holding (directly or indirectly) more than 25% of the entity’s voting rights.
    • Holding (directly or indirectly) the right to appoint or remove a majority of the entity’s directors.
    • Exercising, or having the right to exercise, significant influence or control over the entity.
    • Broadly, having significant influence or control over a trust or unincorporated entity that satisfies one or more of the four conditions above.
  • The details to be provided for beneficial owners broadly mirror those for persons registrable under the PSC regime. For an individual, these are the person’s name, date of birth, nationality, usual residential address and service address, and the nature of their beneficial ownership.
  • As under the PSC regime, entities would have powers to send information notices to suspected beneficial owners, or people who may know the identity of beneficial owners. Failure to comply with an information notice would be a criminal offence.
  • The register would be available to the public, although certain details of individuals (their residential address and the “day element” of their date of birth) would not be disclosed.

What next?

The Bill is at a very early stage and will now need to complete its passage through Parliament before becoming law.

However, according to the record in Hansard, the Government’s intention is that the Bill complete all of its stages in the House of Commons on Monday, 7 March 2022. This would pave the way for the Bill to be debated by the House of Lords on 8 and 9 March 2022 and possibly receive Royal Assent and become law as early as 9 or 10 March 2022.

It remains to be seen how feasible this is. We understand that around 27 pages of amendments to the Bill have been submitted, including a proposal to reduce the initial 18-month period for registration to 28 days.

Once the Bill does become law, the Government will need to make regulations to bring its operative provisions into force.

It is not yet clear how soon it would be able to do this. The new regime cannot be implemented until Companies House has the new register of beneficial owners up and running. It is possible this could be done fairly rapidly, but any changes to the registers at Companies House may need to tie in with the Government’s broader agenda of register reform, as detailed in the previous item above.

We will continue to provide updates on the new regime as they happen.

Other items

  • Dormant assets scheme expansion confirmed. The legislation setting out the proposed expansion to the UK’s dormant assets scheme has received Royal Assent. The scheme currently allows participating banks and building societies to apply monies in long-dormant bank accounts towards charitable purposes. The Dormant Assets Act 2022 expands the scheme to other classes of investment, including listed securities. The extended aspects of the scheme will come into effect on a day to be decided by the Government. For more information on the expanded scheme, see our previous Corporate Law Update. Macfarlanes is proud to have assisted the Government on the expansion of the scheme.
  • Government reports back following Wholesale Markets Review. HM Treasury has published a response to its July 2021 consultation that formed part of its Wholesale Markets Review. In that consultation, the Government proposed (among other things) to create a new class of trading venue for smaller SMEs. (See our previous Corporate Law Update for more information.) Their response notes that there was no support for a new venue designed solely for smaller SMEs. The Government will continue to explore the potential for a new SME venue that could be expanded selectively to other types of issuer.
  • Companies House now offering same-day service for certified documents. Companies House has confirmed that it is now able to provide certificates of incorporation with certified facts and certified copies of documents held on the register on a same-day basis. Orders attract a fee of £50 and must be placed through the Companies House telephone contact centre before 11:00 a.m.
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