Corporate weekly highlights—4 November 2016

Welcome to the weekly highlights from the Lexis®PSL Corporate team for the week ending 4 November 2016, which provide news updates and a comprehensive list of dates for your diary. This week’s edition features: Lexis®PSL Corporate’s new Market Tracker Trend report on the 2016 AGM season; a post-Brexit update on trends in UK public M&A; the CLLS/Law Society joint working parties’ updated Q&A on Market Abuse Regulation; the FRC’s newly published thematic review of annual company reports and report on business model reporting; the Parker Review into board diversity; the Investment Association’s open letter to all FTSE 350 companies setting out new shareholder expectations on executive pay; the announcement that Institutional Shareholder Services, Inc has opened its 2017 benchmark voting policy consultation period; and the European Securities and Markets Authority’s (ESMA) statement setting out its 2016 enforcement priorities. It also includes analysis in relation to the recently published ESMA Q&A on MIFID II and MiFIR and analysis on malus and clawback in practice.
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Market Tracker Trend Report—AGM season 2016

Lexis®PSL Corporate has published a trend report analysing the latest market practice and trends emerging from the 2016 season of annual general meetings (AGMs) held by the companies in the FTSE 350.

The report covers: narrative reporting, AGM notices, voting results and trends.

All the companies surveyed reported in accordance with the 2014 version of the UK Corporate Governance Code (the Code).

The report includes expert commentary from Peter Swabey, Policy & Research Director at ICSA: The Governance Institute and James Herbert, Director at Eight Roads.

For details, see Market Tracker Trend ReportAGM season 2016

Public M&A—Market Tracker

Trends in UK public M&A—post-Brexit update

Lexis®PSL Corporate has conducted research to examine the c

urrent post-Brexit market trends in respect of UK public M&A for the period between 1 September 2016 to 31 October 2016 (Review Period). The update examines possible offers and firm offers announced during the Review Period, considering deal structure, volume and value, the industries seeing deal activity, how deals are being financed and the active public to private market. It also looks at the £1.02 billion lapsed offer for SVG Capital plc by HarbourVest Partners, LLC.

The update confirms that the UK public M&A market remains buoyant following the Brexit-vote, with foreign bidders and private equity firms taking advantage of currency fluctuations, high cash reserves and low interest rates globally to acquire attractive UK targets.

For details, see News Analysis: Trends in UK public M&Apost Brexit update

Equity capital markets—Market Abuse Regulation related developments

CLLS/Law Society Joint Working Parties update Q&A on Market Abuse Regulation

The City of London Law Society (CLLS) and Law Society Company Law Committees’ Joint Working Parties on Market Abuse, Share Plans and Takeovers Code have updated their Q&A on the Market Abuse Regulation and related regulations. The updated version incorporates the additional Q&A relating to takeovers first published on 15 August 2016 and takes account of the European Securities and Markets Authority (ESMA) Questions and Answers published on 26 October 2016 (ESMA 2016/1520).

The document states that the Q&A is the explanation of how the Market Abuse Regulation should apply to certain practical situations. The Q&A is subject to review and amendment in the light of practice on the implementation of the Market Abuse Regulation and to any relevant future UK or EU guidance published in relation to it.

FRC related developments

FRC publishes thematic review of annual company reports

A thematic review on certain aspects of tax reporting in company annual reports and accounts has been published by the Financial Reporting Council (FRC). The review identified improvements in the transparency of tax disclosures, along with several opportunities for companies to improve the usefulness of their disclosures of significant judgments and estimates relating to tax.

The review, undertaken by the Corporate Reporting Review (CRR), examined the annual reports and accounts of 33 pre-informed FTSE 350 companies.

In its report, the FRC stated that improvements in the transparency of tax disclosures included in strategic reports and effective tax rate reconciliations were evident. It noted that this indicated the beneficial impact of the 'pre-informing' approach. Other findings included: there is scope for companies to articulate better how they account for tax uncertainties; the introduction of new IFRS requirements allows companies to consider their approach; and companies could improve the usefulness of their disclosures of significant judgments and estimates relating to tax.

FRC publishes report on business model reporting

The FRC Financial Reporting Lab has published a report on ‘Business model reporting’. It aims to provide insight on the importance of business model information to investors and the type of information they require.

The FRC found: business model information is fundamental to investors' analysis and understanding of a company; lack of good disclosure around business models raises concerns over the quality of management; and investors want business model information positioned towards the front of the strategic report.

According to the report, investors want more detail than is currently provided by most companies.

The report also includes examples of what it sees as good practice, as well as highlighting how disclosure could be modified to provide more value to investors.

FRC publishes report on business model reporting

The FRC Financial Reporting Lab has published a report on ‘Business model reporting’. It aims to provide insight on the importance of business model information to investors and the type of information they require.

The FRC found: business model information is fundamental to investors' analysis and understanding of a company; lack of good disclosure around business models raises concerns over the quality of management; and investors want business model information positioned towards the front of the strategic report.

According to the report, investors want more detail than is currently provided by most companies.

The report also includes examples of what it sees as good practice, as well as highlighting how disclosure could be modified to provide more value to investors.

Executive pay

IA calls for disclosure on executive pay

An open letter from the Investment Association (IA) to all FTSE 350 companies sets out new shareholder expectations on executive pay. The open letter follows recommendations of the industry-led independent Executive Remuneration Working Group, which looked to address the issue of complexity surrounding executive pay, and says IA’s Principles of Remuneration (Principles) have been updated to pave the way for greater simplicity and flexibility of pay structures.

Key changes in the updated Principles include the following recommendations: although non-executive directors should oversee executive remuneration, the company chairman and whole board should be appropriately engaged in the remuneration setting process; remuneration committees need to exercise independent judgment and not be over reliant on their remuneration consultants; non-executive directors should generally serve on the remuneration committee for at least one year before starting to chair the committee and have sufficient skill and experience to manage the remunerations setting process; remuneration committees are encouraged to adopt the structure which is most appropriate for the implementation of their business strategy; companies should disclose pay ratios between the CEO and median employee, and the CEO and the executive team; executive directors and senior executives should build up significant shareholdings in companies; remuneration committees should consider implementing post-employment shareholding requirements, which would require an executive to retain a proportion of their shareholding for a time period after they have left the employment of the company; a new section on shareholder consultation has been added; and remuneration committees should respond to a significant vote against their remuneration report or policy.

Corporate governance—voting policies

ISS opens benchmark voting policy consultation period

Institutional Shareholder Services, Inc. (ISS) has announced the launch of its 2017 benchmark voting policy consultation period. The consultation solicits views from governance stakeholders globally on certain proposed voting policies for 2017, specifically requesting feedback from interested market constituents on new or potential changes to 15 voting policy areas.

ISS will take into consideration the comments on the 15 voting policy areas for the final updates to its benchmark voting policies to be applied for shareholder meetings taking place on or after 1 February 2017. They have planned to announce the final 2017 benchmark policy changes during the second half of November 2016.

Equity capital markets

ESMA sets out 2016 enforcement priorities

ESMA has published its annual public statement on European Common Enforcement Priorities, which sets out its enforcement priorities for the 2016 financial statements of listed companies. The statement also highlights the need for transparency when disclosing the potential impact of Brexit on issuers' financial statements.

The statement sets out the common priorities that ESMA and national enforcers will focus on when examining listed companies' 2016 financial statements in order to promote a consistent application of the International Financial Reporting Standards (IFRS) across the EU. When examinations are performed, enforcers will take corrective action whenever material misstatements are identified.

ESMA will collect data on how European listed entities have complied with the priorities and report on its findings in a report on the 2016 enforcement activities.

Relevant updates from other practice areas

Financial services

MiFID II—ESMA Q&As on investor protection

In this analysis Henrietta de Salis, partner at Willkie Farr & Gallagher, suggests that firms should be looking at their policies and procedures in relation to the recently published ESMA questions and answers (Q&As) document on the implementation of investor protection topics under the recast Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR). The author outlines relevant clarifications which have been provided by the Q&As document, along with the next steps that firms and clients should take in relation to the proposed changes.

Share incentives

Malus and clawback in practice

In this analysis Stephen Ratcliffe, partner in the employment and benefits department at Baker & McKenzie LLP, examines the increased application of malus and clawback provisions, the difficulties companies face when applying them and explains how firms should operate their policies on malus and clawback in practice.

Dates for your diary

DateSubjects covered
10 November 2016The deadline for comments on HM Treasury's consultation paper regarding the transposition of the Money Laundering Directive into UK law. The consultation paper was published by HM Treasury in September 2016.
6 December 2016Member states are required to transpose the Non-Financial Reporting Directive 2014 (Directive 2014/95/EU)(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. For further information, see LNB News 25/10/2016 170.

Relevant Articles
Area of Interest