Corporate Law Update: 18 - 24 May 2024

This week:

Draft rules for director ID verification published

Companies House has published draft rules for directors, persons with significant control (PSCs) and others needing to verify their identity under changes due to come into effect in due course.

The Economic Crime and Corporate Transparency Act 2023 amended the Companies Act 2006 and the Limited Partnerships Act 1907 to require certain persons to verify their identity.

This includes individual directors and PSCs of UK companies, as well as individual general partners of a limited partnership formed in the UK. It also includes “registered officers” of certain persons, such as PSCs that are themselves legal entities.

Those requirements are not yet in effect and are effectively being suspended while Companies House puts in place systems to allow individuals to verify their identity.

Individuals will be able to verify their identity directly through Companies House or, alternatively, through an “authorised corporate service provider”, such as an accountant or lawyer.

The draft rules set out the documentation an individual will need to provide to verify their identity through either route. The key points are as follows.

  • The individual will need to provide a valid email address and a current residential address.
  • In some cases, an individual will need to provide only one piece of documentation. This will generally be the case where the document contains biometric information, such as a biometric passport or a biometric identity card.
  • In other cases, an individual will need to provide two pieces of documentation: a form of photographic ID, together with a form of supporting documentation.
  • If verifying direct through Companies House, an individual will have multiple options, including through the gov.uk ID Check app, the One Login facility or a post office.

The draft rules would be made under a new statutory instrument: the Registrar (Identity Verification and Authorised Corporate Service Providers) Regulations 2024. A draft of these Regulations was published on Thursday, 23 May 2024. We will report on them next week.

Read the draft Registrar’s Rules for individuals wishing to verify their identity (opens PDF)

Access the draft Registrar (Identity Verification and Authorised Corporate Service Providers) Regulations 2024

Draft legislation published to further protect residential addresses

The Government has published draft regulations which would, if made, extend the ability for individuals to protect their usual residential address (URA) from view at Companies House.

The new regulations would allow any individual to suppress their URA from public view if it has previously been used by a company as its registered office address, which currently is not possible. (If the company in question has been dissolved, the individual would need to wait six months from dissolution before applying.)

Companies House would leave the “outward code” from the post code of the address unobscured. This means the first three or four characters of the post code (e.g. EC4A). If the address does not have an outward code, Companies House would leave the geographical area unobscured (e.g. “Liverpool”).

The regulations would not allow an individual to hide their URA from public view if it is the company’s current registered office address.

The same changes would apply to limited liability partnerships (LLPs).

If made, the regulations would come into force on 30 September 2024.

Access the draft Companies and Limited Liability Partnerships (Protection and Disclosure of Information and Consequential Amendments) Regulations 2024 (opens PDF)

Guidance on national security and investment regime updated

The Government has updated its market guidance on the UK’s national security and investment (NSI) regime (which is contained principally in the National Security and Investment Act 2021).

The principal additions to the guidance relate to the following.

  • How long assessments under the regime take.
  • Acquiring voting rights that allow a person to “govern the affairs” of an entity.
  • Acquisitions involving parties that are suffering “material financial distress”.
  • Outward direct investment, where a UK party is acquiring assets or an entity outside the UK but the acquisition falls within the scope of investigation.
  • How to complete a notification form correctly and comprehensively.
  • The application of the regime to the higher education and research-intensive sectors.

Separately, the Government has updated its section 3 statement on the NSI regime. The section 3 statement is a statutory requirement that sets out how the Government expects to use its call-in powers under the regime.

In short, the changes to the section 3 statement include the following.

  • More information on acquisitions that may fall within the NSI regime, including outward direct investment and asset transfers (particularly those involving non-tangible assets).
  • Updated examples for how the Government will assess the different types of risk that will inform a call-in decision (namely target risk, acquirer risk and control risk).
  • How the Government will assess risk arising from UK acquirers or where an acquirer has previously notified a transaction that has been cleared under the regime.
  • How the Government will assess risk arising from acquisitions by investors, including their source of funds and whether they have a history of passive and long-term investments (the latter of which the statement notes may indicate less control risk).
  • More information on the relevance to the Government’s assessment of cumulative acquisitions across a sector or supply chain.

Read the Government’s summary of updates to its NSI guidance

Read the Government’s updated guidance on the UK’s national security and investment regime

Read the Government’s updated section 3 statement for the NSI regime

Non-financial reporting burden may be eased for medium-sized companies

The Government is consulting on two changes to the UK’s non-financial reporting regime that would ease the burden on medium-sized companies.

A company is “medium-sized” in a financial year if it satisfies two out of three criteria:

  • Its annual turnover was more than £10.2m but not more than £36m.
  • Its balance sheet total was more than £5.1m but not more than £18m.
  • Its average number of employees was more than 50 but not more than 250.

Medium-sized companies are required to prepare full, unabridged financial statements, as well as a directors’ report and a separate strategic report. A medium-sized company’s strategic report is more basic than that of a large company, but it must still contain a fair review of the company’s business, an analysis of its development and performance, and a description of its principal risks and uncertainties.

In March, the Government confirmed that it proposes to raise the upper turnover and balance thresholds to £54m and £27m respectively, alongside increases in the financial thresholds for other company sizes (i.e. micro, small and large). You can read our previous Corporate Law Update for more information on proposed changes to alleviate non-financial reporting obligations.

The Government is now proposing to make two further changes:

  • Increasing the employee headcount threshold for medium-sized companies from 250 to 500. The Government estimates that this would result in around 2,000 companies being re-classified from large to medium-sized on top of reclassifications following the financial threshold changes.
  • Removing the requirement to produce a strategic report. The consultation states that investors report not making significant use of strategic reports for medium-sized private companies. The Government is therefore proposing to abolish the requirement, although it would remain for public companies and companies that are public interest entities (PIEs). It estimates this could benefit between 41,000 and 43,000 companies.

The consultation also confirms that the Government intends to remove certain content requirements from the existing directors’ report (for all sizes of company). These include reporting on engagement with employees, suppliers and customers, on R&D activities and on likely future developments.

The Government has asked for responses by 27 June 2024.

Read the Government’s consultation on further changes to non-financial reporting by medium-sized companies

UK moves forward on first domestic sustainability reporting standards

The Government has taken further steps towards establishing the first sustainability reporting standards in the United Kingdom by establishing a framework for endorsement and adoption.

The framework sets out on the procedure by which sustainability standards will be adopted into UK law. Broadly, the procedure will work as follows.

  • Stage 1. The International Sustainability Standards Board (ISSB) adopts IFRS Sustainability Disclosure Standards. In June 2023, the ISSB adopted the first two such standards: IFRS S1 and IFRS S2 (see our previous Corporate Law Update).
  • Stage 2. The Secretary of State officially endorses IFRS Sustainability Disclosure Standards, on advice from the Department for Business and Trade and a new Technical Advisory Committee (TAC). This results in the creation of UK Sustainability Reporting Standards (UK SRSs).
  • Stage 3. UK SRSs are implemented in UK law by legislation (for UK-registered companies) and the Financial Conduct Authority (FCA) (for companies listed in the UK). This will be facilitated by a new Policy and Implementation Committee.

Although UK SRSs will most likely emulate the ISSB’s standards, the Government will have the power to modify them for use in the UK, including by inserting or deleting detail.

The TAC will consult with stakeholders before making recommendations to the Secretary of State. The Government itself will then consult on a draft of each UK SRS before implementing it.

Endorsement will not automatically result in a UK SRS becoming a legal requirement. However, the FCA will be able to impose requirements on listed companies to report in accordance with UK SRSs.

Separately, the Government has published an “implementation update”, providing details on its next steps for implementing UK SRSs. The update states that the Government aims to make the first UK SRSs available in Q1 2025.

It also confirms that, following the work of the Transition Plan Taskforce (TPT) and the potential endorsement of IFRS S2 (which includes an element of transition plan reporting), the Government aims to consult on how the UK’s largest companies can most effectively disclose their transition plans.

Finally, the update confirms that the Government intends to consult, in due course, on the UK’s proposed “green taxonomy”.

Read the Government’s framework for creating UK Sustainability Reporting Standards

Read the Government’s implementation update for UK Sustainability Reporting Standards and transition plan reporting (opens PDF)

FCA surveys LTIP disclosures by listed companies

The Financial Conduct Authority (FCA) has conducted an analysis of disclosures by listed companies of their long-term incentive plan (LTIP) arrangements.

The review studied 25 premium-listed companies over a three-year period.

The FCA found that all 25 companies had complied with the obligation under Listing Rule (LR) 9.4.1R(2) to obtain shareholder approval for their LTIP. However, only 40% of companies had released a circular that complied with the requirements in LR 13.8.11R (which sets out specific information that must be included on the company’s LTIP).

The review also found that the most commonly used LTIP financial metrics were total shareholder return (TSR), return on capital employed (ROCE), and earnings per share (EPS).

The FCA also noted that just under a third of the companies surveyed included non-financial metrics in their LTIP, including metrics linked to CO2 emissions reduction, water conservation, pollution, waste, employee satisfaction and customer safety.

Read the FCA’s Primary Market Bullet 49 on premium listed company LTIP disclosures

FCA surveys annual financial reporting by listed companies

The Financial Conduct Authority (FCA) has conducted an analysis of annual financial reporting by listed companies.

Under Disclosure Guidance and Transparency Rule (DTR) 4.1.3R, an issuer whose securities are admitted to a UK regulated market (such as the London Stock Exchange Main Market) must publish an annual financial report within four months of its financial year-end.

Under DTR 4.1.15R, the report must be prepared using XHTML. If the report contains consolidated financials, it must be prepared using UK-adopted and tagged using digital classification.

Under DTR 6.2.10R, the issuer must upload the report to the UK’s National Storage Mechanism (NSM). In addition, when announcing its annual financial report, an issuer must confirm that the report has been uploaded to the NSM and state the website on which the report can be found.

The FCA notes that it has observed instances of issuers publishing their annual financial report but not uploading it to the NSM, or failing to include the required confirmations above in their announcement.

It also notes low compliance with the disclosure requirements for annual financial reports. This includes consolidated financial statements that have not been correctly tagged and reports that have been filed in the NSM but not in XHTML format.

The FCA has said it will continue to monitor compliance and has reminded issuers that it will suspend listed securities in the event of non-compliance.

Read the FCA’s Primary Market Bullet 49 on listed company annual financial reporting compliance