Corporate weekly highlights—18 November 2016

Welcome to the weekly highlights from the Lexis®PSL Corporate team for the week ending 17 November 2016, which provide news updates and a comprehensive list of dates for your diary. This week’s edition features: Hermes Investment Management’s report on executive remuneration practices; the ranking of signatories to the UK Stewardship Code by the Financial Reporting Council (FRC); case analysis of a High Court decision allowing a company to rely on the exception to the prohibition on cancellation schemes in connection with a takeover; the announcement of the government’s grounds for appealing the ruling that parliamentary approval was required to trigger Article 50; and analysis on the corporate offence of failure to prevent the criminal facilitation of tax evasion. 

 

pexels-photo-27406Corporate Governance

Report calls for fundamental shift in executive remuneration

Proposals to improve existing executive director pay practices have been set out in a report by Hermes Investment Management. The report is aimed primarily at large publicly listed companies. It sets out proposals which are designed to improve existing executive director pay practices in order to better achieve their intended objectives.

The report identifies some perceived weaknesses of the current model, including excessive pay levels, misalignment to long-term value, complexity of incentive schemes, weak accountability and low levels of trust between remuneration committees and the public.

Overall, Hermes recommends a fundamental shift in the structure of executive remuneration packages, towards a 'simpler, more transparent and less-leveraged' pay package.

FRC ranks Stewardship Code signatories using tier system

The Financial Reporting Council (FRC) has begun categorising signatories to the UK Stewardship Code (Code) into tiers, based on the quality of their Code statements. The Code supplements the UK Corporate Governance Code and applies principally to institutional investors.

The assessment focused on the quality of descriptions of Code signatories' approach to stewardship and their explanations in accordance with the 'comply or explain' basis of the Code.

40% of signatories are in the top tier, meaning their reporting is of a good quality. Those in the bottom tier, who require significant improvement, have six months to progress or will be dropped as a signatory to the Code.

Takeovers—case analysis

Exception to the prohibition on cancellation schemes (Re Home Retail Group plc)

In the case Re Home Retail Group plc [2016] EWHC 2072 (Ch), the High Court considered whether Home Retail Group plc (the Company) could rely on an exception to the Companies Act 2006 (CA 2006) prohibition on the use of cancellation schemes in connection with a takeover. The court considered whether the Ramsay principle of the interpretation of tax legislation affected the availability of the statutory exception that permitted a cancellation scheme involving the insertion of a new holding company into a group structure.

Ultimately the High Court did not decide whether the Ramsay principle could apply to the interpretation of CA 2006, s 641(2)(B). Instead the court commented that if the Ramsay principle were capable of applying to the section, it would not 'bite' on a cancellation scheme such as the present one, which was part of a real world transaction having a clear commercial and business purpose. The court concluded that it must therefore be the case that the proposed scheme had the benefit of the exception and it gave permission for the Company to convene a shareholders meeting for the purpose of considering the scheme of arrangement.

Brexit related developments

Government claims crown retains power to trigger Article 50

The government has released its grounds for appealing the Divisional Court’s ruling that the crown did not have power to trigger Article 50 without parliamentary approval. The government asserts that the court erred in its judgement when it determined the necessary implication of the European Communities Act 1972 was that the crown had no such prerogative power. Instead, the government believes the crown’s ability to enact Article 50 is set out by the EU Referendum Act 2015.

Relevant updates from other practice areas

Corporate crime

Tax evasion—the corporate offence of failure to prevent

In this analysis Simon Airey, partner, and Joshua Domb, associate, of DLA Piper, in consultation with Andy Cole CBE (former director of specialist investigations at HMRC), explain the recent published responses to the new corporate offence of failure to prevent the criminal facilitation of tax evasion. They say that many concerns regarding the draft have already been calmed, but stress that companies should not be complacent about the work to be undertaken before the new law comes into force next year.

The authors state that if the offence is passed in its current form the impact on businesses and lawyers advising them will be as follows. Companies will need to carefully consider who their associated persons are, and which of these could facilitate tax evasion under relevant laws anywhere in the world. This will need to form part of a detailed risk assessment. Companies will then need to design and implement policies and procedures to ensure that they can take advantage of the 'reasonable procedures' defence. These measures will represent a further compliance burden on companies at a time when compliance teams and budgets are already stretched. As the new regimes is intended to come in force in September 2017, companies are advised to begin these processes as soon as possible. Furthermore, professional services firms advising clients on the legality or otherwise of 'tax efficient' products or structures will also have to be careful not to fall foul of the new law.

DateSubjects covered
6 December 2016Member states are required to transpose the Reporting Directive into national law by 6 December 2016. The Reporting Directive amended the EU Accounting Directive 2013/34/EC as regards disclosure of non-financial and diversity information by certain large undertakings and groups. In the UK, this introduces disclosure requirements in relation to anti-corruption and bribery issues in the strategic report, which must be transposed into UK law by 6 December 2016.
16 December 2016The Department for Business, Energy and Industrial Strategy (BEIS) is seeking views on its discussion paper outlining possible approaches to the transposition of Article 30 of the Fourth Money Laundering Directive. This Article relates to the requirement for EU member states to maintain a central register of beneficial ownership information of corporate and other legal entities in their territory.

Relevant Articles
Area of Interest