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11 November 2022

Corporate Law Update

In this week’s update: the Pre-emption Group publishes an updated Statement of Principles, an FRC consultation on draft minimum standards for FTSE 350 audit committees, the FRC publishes its annual report on corporate governance reporting by listed companies, an unsuccessful use of a force majeure clause, ISS’ 2023 policy benchmark consultation and the Transition Plan Taskforce is consulting on net zero transition plan frameworks.

Pre-emption Group publishes updated Statement of Principles

The Pre-emption Group (PEG) has published an updated version of its Statement of Principles, which set out the expected limits within which listed companies will disapply statutory pre-emption rights on new share issues. PEG has also updated its template resolutions.

The updated Principles follow the report of the UK Secondary Capital Raising Review (the SCRR), which recommended (among other things) that the allowance for non-pre-emptive issues set out in the Principles be increased from 10% to 20% (as was the case during the Covid-19 pandemic). For more information on the SCRR, see our previous Corporate Law Update.

The main changes to the Principles are as follows.

  • The recommended limit on non-pre-emptive issues has been raised from 10% to 20%. Of this, 10% (previously 5%) may be used for any purpose and a further 10% (previously a further 5%) may be used for an acquisition or specified capital investment.
  • PEG now allows a further 2% disapplication in each case for the purposes of a “follow-on offer”. This would be an offer, announced at the same time as or soon after the placing, of shares equal to no more than 20% of those issued in the placing, made only to existing shareholders, entitling them to subscribe for up to £30,000 per beneficial owner at the same price as, or a higher price than, the placing price. This is designed to facilitate participation by retail investors in secondary issuances.
  • Companies needing to raise more capital more frequently (“capital-hungry companies”) may seek additional disapplication authority and for longer if they explain the reason doing so when they request the disapplication. If such a company is applying to the Financial Conduct Authority for a listing, it should disclose that it is a “capital-hungry company” in its IPO prospectus.
  • The Principles now set out a range of things an issuer should take into account before conducting a non-pre-emptive issue. These include consulting major shareholders in advance, considering how to involve retail investors (such as through an investment platform) and existing investors, conducting the offer on a “soft pre-emptive basis” and publishing a post-transaction report.

The updated Principles apply to any resolutions a listed company is planning to seek at its next annual general meeting. In the meantime, PEG recommends that issuers follow the transition arrangements in the SCRR’s report (which PEG has set out separately).

Finally, PEG has confirmed it is working to establish the governance and membership arrangements proposed by the SCRR.

FRC consults on draft minimum audit committee standards

The Financial Reporting Council (FRC) is consulting on a new set of draft minimum standards for audit committees of FTSE 350 companies.

The consultation follows the Government’s recent response to its consultation on restoring trust in audit and corporate governance, in which the Government proposed to give the new Audit, Governance and Reporting Authority (ARGA) the power to set minimum audit committee standards. See our previous Corporate Law Update for more information on that response.

The purpose of the standards is to increase performance across FTSE 350 audit committees, ensure a consistent approach and support a functioning audit market. The standards would apply to FTSE 350 companies, but those aspiring to join the FTSE 350 would be encouraged to adopt them voluntarily.

The draft minimum standards cover three principal areas.

  • tendering the audit (including negotiating audit fee and scope). The draft standards state that this should be led by the audit committee, rather than executive management and should not preclude participation by “challenger” audit firms without good reason.
  • overseeing the auditors and audit. This should include obtaining evidence of the effectiveness of the audit (the draft standards give examples of approaches the committee might adopt) ensuring regular communication with the auditor.
  • reporting. The committee should describe its work in the company’s annual report (the standards set out specific items that report should include), explain the criteria for the audit tender process and report on how the committee has met the requirements of the minimum standards.

The FRC has asked for responses by 8 February 2023.

FRC publishes annual report on corporate governance reporting

The Financial Reporting Council (FRC) has published its annual review of corporate governance reporting. The review examines the annual reports of 100 FTSE 350 and FTSE Small Cap companies to gauge levels of compliance with the FRC’s UK Corporate Governance Code (the Code).

Companies with a premium listing in the UK are required (by the Financial Conduct Authority’s Listing Rules) to comply with the Code and explain any respects in which they have failed to do so.

The review notes that more companies are now offering greater transparency when reporting departures from the Code, particularly where the chair’s tenure extends beyond nine years. However, few companies made disclosures that met the highest standards throughout their annual report.

The FRC notes that workforce engagement continues to be high on companies’ agendas and reporting on wider stakeholder engagement was of a good standard. However, in both cases, there was insufficient narrative on the outcome of engagement, and there was “minimal disclosure” of specific board members’ engagement with major shareholders.

Finally, the review notes that the FRC intends to consult next year on revisions to the Code as part of its transition to the new Audit, Reporting and Governance Authority (ARGA).

Contract party could not refuse payment in alternative currency and invoke force majeure

The Court of Appeal has held that a party to a contract could not invoke a force majeure clause on the basis that payments could not be made in the contract currency, because the other party had offered to make payments in a different currency and to reimburse any costs.

MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406 concerned a contract under which a charterer would pay a shipowner for using a ship to transport ore. The contract required payment in US dollars.

As a result of the imposition of sanctions, payment in US dollars because either impossible or, at least, significantly more difficult. The shipowner attempted to invoke a force majeure clause to excuse it from performing the contract.

The contract stated that a force majeure, for these purposes, was any of certain specified events that was beyond the parties’ control and could not be “overcome” by reasonable endeavours.

The charterer offered to pay the shipowner in euros instead and to reimburse the shipowner from the any fees and exchange rate losses involved in converting from euros into USD.

The Court of Appeal (in a split decision) found that paying in euros was a reasonable measure that overcame the force majeure. The shipowner was not, therefore, able to claim force majeure.

You can read more about the case in our in-depth summary.

ISS launches 2023 benchmark policy consultation

Institutional Shareholder Services (ISS) has launched its benchmark policy consultation for 2023. It is proposing 17 amendments across its policies and has asked for comments by 16 November 2022.

The only change specific to ISS’ UK and Ireland (UKI) policy concerns executive remuneration. ISS is proposing that, from 2023, executive annual salary increases will amount to good market practice if they are “lower proportionally than general increases” across the workforce, rather than “in line” with general increases (as at present).

Alongside this, ISS is proposing a change to all of its policies (including its UKI policy) to extend and update the climate board accountability policy it introduced in several policies (including its UKI policy) in 2022. The change would affect only “high emitting companies”, which are those named in the Climate Action 100+ Focus Group.

If a high emitting company:

  • fails to make adequate climate risk disclosure (e.g. in line with the Taskforce on Climate-related Financial Disclosures recommendations); and
  • does not have either medium-term GHG emission reductions targets or Net Zero-by-2050 GHG reduction targets for its own operations (Scope 1) and electricity use (Scope 2),

then ISS will generally recommend against what it considers to be the appropriate director(s) and/or other voting items available.

Government consults on private sector net zero transition framework

The UK’s Transition Plan Taskforce (the TPT) is formally consulting on a new disclosure framework for private sector entities to transition to a low-carbon economy.

The TPT (a unit within HM Treasury) was launched this year to develop a “gold standard” for UK climate transition plans.

The consultation follows the TPT’s call for evidence in May this year. For more information on that call for evidence, see our previous Corporate Law Update.

What is a “transition plan”?

A transition plan (also called a “net-zero transition plan”) is a defined strategy that outlines the steps a company or other organisation intends to take to move and adapt to a low- or zero-carbon economy.

A transition plan should go beyond merely aspirational statements and set out key milestones for the organisation to achieve and key performance indicators (KPIs) to show that it is on track towards its transition (such as targets for reducing greenhouse gas emissions). It should also set out tangible steps the organisation will take to achieve those targets (such as investment in low-carbon infrastructure and remodelling supply chains).

Following its initial call for evidence, the TPT is now proposing to define a “transition plan” as a plan that is integral to an entity’s overall strategy and sets out its plan to contribute to and prepare for a rapid global transition towards a low GHG-emissions economy.

Under the TPT definition, a transition plan would feature four key elements:

  • high-level ambitions to mitigate, manage and respond to the changing climate and to leverage opportunities of the transition to a low GHG and climate-resilient economy;
  • short-, medium- and long-term actions to achieve these strategic ambitions and how those steps will be financed;
  • governance and accountability mechanisms that support delivery of the transition plan and robust periodic reporting; and
  • measures to address material risks to, and leverage opportunities for, the natural environment and stakeholders arising out of these actions.

The proposed disclosure framework would make recommendations for companies and financial institutions to develop gold-standard transition plans.

The framework would operate on three core principles of ambition, action and accountability, with disclosures revolving around five key elements – foundation, implementation strategy, engagement strategy, metrics and targets, and governance – together comprising 19 sub-elements.

Alongside the framework, separate implementation guidance would set out the steps firms can take to develop a transition plan and disclose it. The guidance would be accompanied by a technical annex that maps the TPT’s recommendations to wider corporate reporting standards, such as the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and the standards of the International Sustainability Standards Board (ISSB).

The TPT also intends to publish a range of “sector-specific” guidance in 2023, starting with an overview of sector-specific metrics from existing guidance and culminating in best practice guidance.

Finally, the TPT has also developed a sandbox to road-test the framework and gather practical feedback from the market.

The TPT has asked for comments by 28 February 2023.

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