Corporate Law Update

• The FRC is consulting on proposed changes to the UK Corporate Governance Code
• The UK’s criminal insider dealing regime is updated to align with the equivalent civil regime
• The expulsion of a member of an unincorporated association was unfair because it did not follow principles of natural justice
• The Government is asking for evidence on the UK’s non-financial reporting framework

FRC consults on proposed changes to the UK Corporate Governance Code

The Financial Reporting Council (FRC) is consulting on changes to its UK Corporate Governance Code which, if implemented, would take effect for financial years beginning on or after 1 January 2025.

The main purposes of the changes are to implement recommendations of the UK Government’s 2021 white paper on restoring trust in governance and audit and to improve the quality of narrative reporting.

You can read more about the consultation in our separate in-depth piece.

In summary, the key proposed changes to the Code include the following.

• A new requirement for the board to report and make an annual declaration on the effectiveness of the company’s internal control structure and financial reporting procedures.
• A new requirement to publish an audit and assurance policy that looks out over a three-year time horizon.
• Increased integration of ESG matters and culture within a company’s strategy and reporting.
• A stronger link between director pay and long-term strategy, with a particular focus on environmental, social and governance objectives.
• Addressing director overboarding by requiring disclosure of all external board commitments and factoring them into annual performance evaluations.
• Further promoting diversity and inclusion by broadening the concepts embraced by D&I and embedding D&I in the company’s nomination and succession-planning processes.

The FRC has asked for comments by 13 September 2023.

New legislation aligns UK’s civil and criminal insider dealing regimes

New legislation has been published to align the scope of the UK’s civil and criminal insider trading regimes.

The UK’s civil insider trading restrictions are set out in the UK version of the Market Abuse Regulation, inherited from EU law when the UK left the European Union. Its criminal insider trading regime is set out in the Criminal Justice Act 1993 and secondary legislation.

Until now, the civil regime has been much broader than the criminal regime, covering a wider range of financial instruments and a much larger range of markets. The criminal regime, by contrast, applied only to specific types of security and securities exchange specified by HM Treasury.

The new regulations, which come into effect on 15 June 2023, update the criminal insider dealing regime to bring it in line with the civil regime. In particular, they extend the criminal insider dealing regime to the following markets:

• a UK, EU or Gibraltar regulated market (such as the London Stock Exchange Main Market or the Frankfurt Stock Exchange);
• a UK, EU or Gibraltar multilateral trading facility (MTF) (such as the London Stock Exchange’s AIM market);
• a UK, EU or Gibraltar organised trading facility (OTF) (generally, private trading venues); and
• any market established by NASDAQ, SIX Swiss Exchange or the New York Stock Exchange (NYSE).

The regulations also extend the criminal regime to a wider range of financial instruments, including equity and debt securities, money-market instruments, options, futures, swaps, forwards, contracts for difference and emissions allowances.

Expulsion of member of unincorporated association was contrary to natural justice

The High Court has held that a member’s expulsion from a non-charitable unincorporated association was invalid because it did not follow principles of “natural justice”.

Haque and anor v Faradhi and anor [2023] EWHC 1135 (KB) concerned a faith-based community organisation with many hundreds of members across the United Kingdom.

The governing council of the organisation took the decision to suspend and, subsequently, expel two of the organisation’s members following complaints and comments made regarding potential irregularities in historic elections to the governing council.

One of those members argued that his expulsion was carried out in breach of the organisation’s constitution, because the procedure adopted did not follow principles of natural justice. In particular, he argued that natural justice required that he be able to make representations regarding his expulsion to an independent body.

He asked the court to declare that his expulsion was invalid and reinstate his membership of the organisation.

The court agreed that the expulsion contravened natural justice because, although the member had been given an opportunity to protest his removal, several of the persons hearing his representations were people about whom the member had complained. The court said that there was a risk that the panel making the final decision on the member’s expulsion was not independent, and this rendered the process unfair.

However, in the event, the court declined to declare the member’s expulsion invalid or to reinstate him. Instead, the judge awarded the member nominal damages of £100.

Although the case deals with specific circumstances, the principles the judge discusses are important and useful to bear in mind in any wider context where a decision is being made that may adversely affect an individual or corporate entity.

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

Government consults on UK’s non-financial reporting requirements

The Government has published a call for evidence seeking views on the UK’s framework for non-financial reporting by businesses in an attempt to ensure that the framework supports economic growth and long-term value creation.

It notes that the framework has expanded incrementally over time, increasing the size and complexity of annual reports and adding information that needs to be reported outside the annual report. Through the review, the Government hopes to refresh and rationalise current reporting requirements so that the UK’s framework is fit for purpose and delivers decision-useful information to the market.

In conducting its review, the Government will consider the difficulty with complying with current requirements and whether current reporting requirements produce decision-useful information for stakeholders in a readily available and accessible form.

The Government is also seeking views on rationalising and simplifying:

• the current financial size thresholds in the Companies Act 2006 (“micro”, “small”, “medium-sized” and “large”); and
• other categories of business (such as “quoted companies”, “traded companies” and companies above other specified size thresholds),

which in turn inform the extent of a business’ reporting obligations.

The review applies to both companies and limited liability partnerships (LLPs), concentrating on non-financial information required by the Companies Act 2006, primarily in a company’s directors’ report and strategic report. This includes narrative reporting on the following items, among others, which may or may not apply to a company, depending on its size.

• Strategy and business model.
• The development and performance of the business during the financial year.
• The principal risks and uncertainties facing the business.
• For companies, how the directors have had regard to the several statutory factors when undertaking their statutory duty to promote the company’s success.
• Environmental, social, community, human rights and anti-corruption matters and policies.
• Climate-related financial disclosures (modelled broadly on the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD))
• Greenhouse gas emissions, energy consumption and energy efficiency action (also known as Streamlined Energy and Carbon Reporting (SECR))
• Engagement with employees, suppliers and customers.
• Arrangements for disabled employees.
• A breakdown of the business’ directors, senior managers and employees by sex.
• Political donations and expenditure.
• For very large private companies, the company’s corporate governance arrangements.

The Government also has invited respondents to provide feedback on other non-financial reporting requirements, such as modern slavery and gender pay gap reporting.

The call for evidence takes the form of a series of open questions through an online questionnaire.

The Government has asked for initial views by 16 August 2023.