Corporate weekly highlights—8 November 2018

This week’s edition of Corporate highlights includes news and analysis of various draft statutory instruments issued under the European Union (Withdrawal) Act 2018 as well as the changes being proposed to the Takeover Code as a result of Brexit. It also provides details of the FRC’s work in relation to corporate reporting, including three thematic reviews of accounts and reports, the OECD’s analysis of global corporate governance frameworks, the launch of the Cost Transparency Initiative and a look at why environmental social governance matters.

In this issue:

Brexit

Brexit SI Bulletin—drafts laid for sifting on 31 October 2018

Under the European Union (Withdrawal) Act 2018 (EU(W)A 2018), before certain statutory instruments (SIs) are formally laid in Parliament, they have to go through a preliminary sifting process to determine the appropriate parliamentary procedure. The SIs are those that the government proposes to introduce using the negative procedure (whereby instruments are laid in Parliament after being made and become law without debate unless there is an objection from either House). The Commons European Statutory Instruments Committee (ESIC) and the Lords Secondary Legislation Scrutiny Committee (SLSC) are responsible for the sifting process, which is outlined in EU(W)A 2018, Sch 7, para 3. The committees have ten sitting days (from the day after each SI is laid for sifting) to scrutinise the provisions and make recommendations on whether the negative procedure is the appropriate parliamentary procedure.

The SIs laid for sifting on 31 October 2018 were:

  1. The Employment Rights (Amendment) (EU Exit) Regulations 2018
  2. The Employment Rights (Amendment) (Northern Ireland) (EU Exit) Regulations 2018
  3. The European Network of Employment Services (EU Exit) Regulations 2018
  4. The Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2018
  5. The European Economic Interest Grouping (Amendment) (EU Exit) Regulations 2018
  6. The European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2018
  7. The Livestock (Records, Identification and Movement) (England) (Amendment) (EU Exit) Regulations 2018

The sifting period for these instruments closes on 21 November 2018.

For further information, see News Analysis: Brexit SI Bulletin—drafts laid for sifting on 31 October 2018.

Brexit SI Bulletin—drafts laid for sifting on 5 November 2018

Under EU(W)A 2018, before certain SIs are formally laid in Parliament, they have to go through a preliminary sifting process to determine the appropriate parliamentary procedure. The SIs are those that the government proposes to introduce using the negative procedure (whereby instruments are laid in Parliament after being made and become law without debate unless there is an objection from either House). The ESIC and the SLSC are responsible for the sifting process, which is outlined in EU(W)A 2018, Sch 7, para 3. The committees have ten sitting days (from the day after each SI is laid for sifting) to scrutinise the provisions and make recommendations on whether the negative procedure is the appropriate parliamentary procedure.

On 5 November 2018, The Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2018 were laid for sifting. The sifting period for this instrument closes on 23 November 2018.

The earlier version of this draft SI, which was laid for sifting on 31 October 2018, was withdrawn from consideration due to missing information in the accompanying Explanatory Memorandum. This information is provided at Annex A of the Explanatory Memorandum to the relaid draft.

For further information, see Brexit SI Bulletin—drafts laid for sifting on 5 November 2018.

Government publishes instrument to amend Companies Act regime post-Brexit

Corporate analysis: The government has published a draft of The Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2018. The Regulations propose to amend the Companies Act 2006 (CA 2006) and supporting secondary legislation to facilitate the effective functioning of the UK’s company law framework post-Brexit. The Regulations also propose to revoke the Companies (Cross-Border Mergers) Regulations 2007.

Some provisions in the Regulations will not be appropriate without a negotiated agreement on Brexit with the EU. The amendments need to be made to reflect the UK’s position outside of the single market and common framework in the area of company law and to ensure that the UK does not provide more preferential treatment to EEA companies preventing a breach of the World Trade Organisation’s Most Favoured Nation rules.

The draft of the Regulations laid for sifting on 31 October 2018 was replaced by a new version that was laid for sifting on 5 November 2018, due to missing information in the Explanatory Memorandum accompanying the first draft. The Regulations are subject to the sifting process under the EU(W)A 2018until 21 November 2018.

Key provisions of the Regulations include:

  1. changes to the definition of ‘regulated market’ in CA 2006, ss 136 and 832
  2. a variation of the filing requirements relating to the appointment of EEA corporate directors and secretaries of Uk companies, to ensure they are consistent with those that relate to non-EEA corporate directors and secretaries
  3. amendments to the CA 2006 and the Overseas Companies Regulations 2009, SI 2009/1801 to ensure that after exit day all overseas companies must observe the same registration, filing, and disclosure requirements in the UK, irrespective of whether they are incorporated in the EEA or not
  4. the removal of references to EU Member States from CA 2006, Pt 14, and
  5. the revocation of the Companies (Cross-Border Mergers) Regulations 2007, SI 2007/2974, with effect from exit day, given that the UK will no longer have access to the regime designed for mergers between limited liability companies established in different EEA States

For further information, see News Analysis: Government publishes instrument to amend Companies Act regime post-Brexit.

EEIGs in the UK post-Brexit—draft regulations published

Corporate analysis: The government has published a draft of The European Economic Interest Grouping (Amendment) (EU Exit) Regulations 2018. The Regulations are intended to ensure that any European Economic Interest Grouping (EEIG) registered in the UK immediately before exit day has a clear legal identity and can operate effectively on and after Brexit. A new legal form known as a UK Economic Interest Grouping (UKEIG) is proposed. The Regulations are subject to the sifting process under the EU(W)A 2018 until 21 November 2018.

For further information and a discussion on the background to the Regulations, how they are expected to work and their likely impact, see News Analysis: EEIGs in the UK post-Brexit—draft regulations published.

European companies in the UK post-Brexit—draft regulations published

Corporate analysis: The government has published a draft of The European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2018. The Regulations are intended to ensure that any European company (otherwise known as Societas Europaea (SEs)) registered in the UK immediately before exit day has a clear legal identity and a domestic framework within which to operate on and after Brexit. A new corporate form known as a UK Societas is proposed. The Regulations are subject to the sifting process under the EU(W)A 2018 until 21 November 2018.

For further information and a discussion on the background to the Regulations, how they are expected to work and their likely impact, see News Analysis: European companies in the UK post-Brexit—draft regulations published.

Accounts and reports post-Brexit—draft regulations published

Corporate analysis: The government has published a draft of The Accounts and Reports (Amendment) (EU Exit) Regulations 2018, which is subject to the affirmative resolution procedure.

The Regulations propose a number of amendments to CA 2006, Pt 15 in relation to the preparation and filing of accounts by UK companies. These amendments address a number of technical difficulties arising from Brexit, such as substituting references to the Accounting Directive with references to domestic legislation. They also take more significant steps, including limiting the scope of certain accounting exemptions. Where appropriate, similar amendments have been made to the legislation which effectively mirrors CA 2006, Pt 15, such as that relating to qualifying partnerships, LLPs, friendly societies and building societies.

Key provisions of the Regulations include:

  1. amendments to conditions to be met by a company wishing to switch from preparing accounts under one accounting framework to preparing them under another in CA 2006, ss 395 and 403, and
  2. the removal of the exemption in the Overseas Companies Regulations 2009, SI 2009/1801, allowing an EEA company to omit delivery of its accounts to the UK registrar of companies in respect of their UK establishment or to deliver them without having been audited
  3. changes to the scope of:
    1. the exemption from producing accounts for dormant subsidiaries in CA 2006, ss 394A394C
    2. the exemptions from filing group accounts in CA 2006, ss 400 and 401
    3. the requirement to make the latest accounts of a qualifying partnership open for inspection under the Partnerships (Accounts) Regulations 2008, SI 2008/569, and
    4. the exemption from preparing a report under the Reports on Payments to Governments Regulations 2014, SI 2014/3209

For further information and a discussion of the background to the Regulations, how they are expected to work and their likely impact, see News Analysis: Accounts and reports post-Brexit—draft regulations published and LNB News 01/11/2018 102.

Takeovers (Amendment) (EU Exit) Regulations 2019

A new draft of The Takeovers (Amendment) (EU Exit) Regulations 2019 was issued on 5 November 2018. It replaces the previous draft published on 30 October 2018, which is subject to the affirmative resolution procedure.

The Regulations propose to amend CA 2006, Pt 28 to enable the domestic takeovers regime to operate effectively on a freestanding basis outside the EU framework.

The new draft of the Regulations differs from the previous draft in only one way—there is a deletion in paragraph 13(2) of the Schedule. Paragraph 13(2) previously stated that the maximum period allowed for acceptance of a takeover bid may be extended on the condition that the offeror gives at least two weeks’ notice to the Takeover Panel of the offeror’s intention to close the takeover bid. The words ‘the Takeover Panel’ have been removed from this paragraph, so it no longer specifies who the notification must be given to, which would imply that a public notification is required.

For further information, see: LNB News 06/11/2018 46 and LNB News 30/10/2018 113.

Code Committee proposes amending the Takeover Code for Brexit

The Code Committee of the Takeover Panel (Code Committee) has published a consultation on proposed amendments to the Takeover Code (Code) in relation to Brexit (PCP 2018/2). The deadline for sending comments is 17 December 2018.

The consultation paper:

  1. considers the current legislative framework of the takeovers regime in the UK and proposed revisions to it following Brexit (Section 2)
  2. explains the implications of the shared jurisdiction regime ceasing of Directive 2004/25/EC on Takeover Bids (Directive) to apply in the UK (Section 3)
  3. describes the proposed amendments to the Introduction to the Code and to the definitions of ‘regulated market’, ‘multilateral trading facility’ and ‘shares or securities’ in the Definitions section of the Code (Section 4)
  4. sets out proposed amendments to the Rules and Appendices of the Code (Section 6), and
  5. provides an assessment on the impact of the proposals (Section 7)

It also includes:

  1. the latest version of The Takeovers (Amendment) (EU Exit) Regulations 2019 (Appendix A)
  2.  amendments to be made CA 2006, Pt 1 by the Regulations (Appendix B)
  3. a list of shared jurisdiction companies in relation to which the Takeover Panel is the ‘regulated market regulator’ or the ‘registered office regulator’ (Appendix C)
  4. proposed amendments to the Code (Appendix D), and
  5. a list of seven questions on which the Code Committee would like feedback (Appendix E)

The draft agreement between the UK and the EU relating to Brexit (Withdrawal Agreement) published on 19 March 2018 provides for a transition period from the date of withdrawal until 31 December 2020, during which period EU law would continue to be applicable to and in the UK. If such a transition period is agreed in the final version of the Withdrawal Agreement (and the Withdrawal Agreement receives the necessary Parliamentary approvals) then, subject to any other arrangements agreed between the EU and the UK during the transition period, the amendments to the Code set out in the consultation will come into effect following the end of the transition period. However, if Brexit takes place in a ‘no deal’ scenario (ie without a Withdrawal Agreement including a transition period having been agreed), then the amendments to the Code set out in the consultation will come into effect at 11 pm on 29 March 2019, in accordance with Article 50 TEU. The Takeover Panel intends to publish the final amendments to the Code ahead of that date.

For further information, see: LNB News 06/11/2018 30.

Analysing the proposed amendments to the Takeover Code arising from Brexit

Corporate analysis: The public consultation paper (PCP 2018/2) issued by the Takeover Panel (Panel) on 5 November 2018 included proposed amendments to the Takeover Code (Code) arising from Brexit.

For a discussion of this, with particular focus on the proposed deletion of the shared jurisdiction rules and the Panel’s decision to retain references to ‘Phase 2 European Commission proceedings’ in the Code, see News Analysis: Analysing the proposed amendments to the Takeover Code arising from Brexit.

Corporate governance

OECD publishes analysis of flexibility and proportionality in corporate governance frameworks

The Organisation for Economic Co-operation and Development (OECD) has published a report, Flexibility and Proportionality in Corporate Governance. In the report, the OECD assesses the flexibility and proportionality of any arrangements available within national corporate governance frameworks around the world relating to:

  1. pre-emptive rights
  2. board composition, board committees and board member qualifications
  3. input on pay and the detail of disclosure on remuneration
  4. related party transactions
  5. disclosure of periodic financial information and ad hoc information
  6. major shareholding disclosure, and
  7. takeovers

The report found that the vast majority of countries have criteria that allow for flexibility and proportionality at company level in all seven areas of regulation under review. The report covers 39 jurisdictions, including in-depth case studies of the United Kingdom, Sweden, Italy, Japan, the USA and Portugal and is based in part on a questionnaire to which all participating jurisdictions responded in 2017.

For further information, see: LNB News 07/11/2018 15.

FCA welcomes launch of Cost Transparency Initiative

The Cost Transparency Initiative (CTI) was set up on 7 November 2018. It is an independent group working to improve cost transparency for institutional investors, with the responsibility for progressing the work already undertaken by the Institutional Disclosure Working Group (IDWG) in this area. The Financial Conduct Authority (FCA) has said that the CTI will improve institutional investors’ ability to access and assess critical information on costs.

The IDWG was established by the FCA, as the FCA wanted to see more consistent and standardised disclosure of costs and charges to institutional investors. The CTI is supported by the Pensions and Lifetime Savings Association (PLSA), the Investment Association (IA) and the Local Government Pension Scheme Advisory Board. The FCA will join the CTI as an observer. It was recommended that a group such as the CTI be set up as part of the IDWG’s report to the FCA on 15 June 2018.

The report and draft templates prepared by the IDWG have been passed to the CTI. The FCA believes that a standardised disclosure template should allow investors to compare charges between providers and give them a clear expectation of the disclosure they can expect. The templates have been designed to be aligned with the relevant disclosure obligations in MiFID II, so while firms must continue to ensure that they individually meet all relevant regulatory requirements, if these templates are completed in a comprehensive and accurate way, including all costs and associated charges, the information in the templates should assist firms in meeting those requirements.

For further information, see: LNB News 07/11/2018 86.

Accounts and reports

FRC reviews quality of corporate reporting under IFRS 9 and IFRS 15

The Financial Reporting Council (FRC) has published two thematic reviews, which are intended to help companies improve the quality of corporate reporting in relation to IFRS 9 (financial instruments) and IFRS 15 (revenue from contracts with customers). The reviews analyse the disclosures in a sample of company interim reports from June 2018 and explain their effect, providing examples of better practice for other companies to follow when adopting these accounting standards in their upcoming annual reports and accounts. The FRC will challenge companies who fail to provide an adequate level of disclosure about the impact of IFRA 9 and IFRS 15 through their regular accounts review process in 2018.

To continue its analysis of the adoption of IFRS 15 and IFRS 9, the FRC will perform follow-up reviews on companies’ disclosures around revenue and financial instruments, and their impact, in a sample of annual reports. It will assess companies’ compliance with the more extensive set of year-end disclosure requirements and will select samples from those sectors which are more heavily impacted by the new reporting requirements.

For further information, see: LNB News 05/11/2018 81.

FRC publishes thematic review of corporate reporting for smaller companies

The FRC has published a thematic review to highlight where corporate reporting by smaller companies needs to improve. The report and accounts of 40 smaller listed and AIM quoted companies were examined, with the review looking in particular at alternative performance measures, strategic reports, pensions disclosures, accounting policies, cash flow statements and tax disclosures. The thematic review makes a number of recommendations and findings, providing examples of better practice for other companies to follow. Overall, it found that smaller companies should provide more specific disclosures of significant accounting judgments and more quantitative information on key sources of estimation uncertainty.

For further information, see: LNB News 06/11/2018 77.

Financial Reporting Lab outlines how to present performance metrics

The FRC’s Financial Reporting Lab (the Lab) has published guidance for companies on the presentation of performance metrics in their reporting. In the new guidance, Performance metrics—Principles and practice, the Lab emphasises that investors want performance metrics to be aligned to strategy, transparent, in context, reliable and consistent. It includes examples of how companies can achieve this and applies the principles outlined in the Lab’s June 2018 report, Performance metrics—an investor perspective.

The new guidance follows calls for clarity from investors, who have found that many companies are addressing the principles set out in the Lab’s June 2018 report, but do not always report on this clearly when preparing their metrics.

For further information, see: LNB News 07/11/2018 78.

Environmental and health and safety law for corporate lawyers

Environmental social governance—why it matters

Environmental analysis: Environmental social governance (ESG) is a broad and constantly expanding area. Tim Clare at Anthesis (UK) Limited explains what ESG encompasses, why it is increasing in importance, how it has developed in the private equity sphere and why it is an area lawyers cannot ignore.

For further information, see News Analysis: Environmental social governance—why it matters for environmental lawyers.

Additional news—daily and weekly news alerts

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Dates for your diary

Date Development
23 November 2018 Closing date for Law Commission consultation on the electronic execution of documents.
Following publication of its 13th programme of law reform, the Law Commission provisionally concluded (among other things) that an electronic signature is capable in general of meeting a statutory requirement for a signature and that no legislative reform is necessary. The Law Commission believes this approach will remove current uncertainties in the law, allowing businesses to ‘speed up transactions by going fully digital’ and is seeking views on this conclusion.
See: LNB News 21/08/2018 4.
29 November 2018 Closing date of call for evidence on proposals for new measures to tackle late payments to small businesses.
A consultation has been launched on proposed new measures to address the issue of large companies abusing their position in the market by delaying payments to small businesses.
See: LNB News 04/10/2018 64.
7 December 2018 Closing date for response to PCP 2018/1 on proposed amendments to Rule 29 of the Takeover Code, which relates to asset valuations.
The Takeover Panel proposes to amend Rule 29 to more accurately reflect current practice and provide a more logical framework for the asset valuation regime.
See News Analyses: Takeover Panel seeks to provide clarity on treatment of asset valuations and LNB News 17/10/2018 81.

Trackers

To track key legislative and regulatory developments, see our Trackers:

  1. Brexit legislation tracker
  2. Brexit timeline
  3. MiFID II—timeline
  4. Market Abuse—timeline
  5. Prospectus Regulation tracker
  6. Transparency Directive tracker
  7. Listing Rules tracker
  8. Disclosure Guidance and Transparency Rules Sourcebook tracker
  9. Prospectus Rules tracker
  10. Small Business, Enterprise and Employment Act 2015 tracker

Latest Q&As

New Q&As added this week:

  1. How might a dispute about the address of a company’s registered office be resolved?
  2. How do you wind-up a partnership following a dispute between the partners? What is the general procedure, fee payable and form of the claim?
  3. What exemptions are in force under the Prospectus Regulation from the requirement to publish a prospectus for small offers of securities to the public in the EU where the consideration is below a certain limit?
  4. Can a third party enforce the provisions of a limited liability partnership deed?
  5. Are shareholders entitled to full accounts even if only abridged and unaudited accounts are filed at Companies House?
  6. Does an allotment of shares in a company to the company's director require member approval under the substantial property transactions regime?

Relevant Articles
Area of Interest