For listed companies with a 31 December year end thoughts will already be turning to this year’s AGM and the accompanying Annual Report. While last year’s materials will provide a more than helpful starting point this briefing sets out a number of developments which companies need to be aware of:
1. Annual financial report: the need to look forwards as well as backwards
The Sharman Inquiry into going concern and liquidity risk concluded that a board’s assessment process as to whether a company remains a “going concern” should be integrated with its normal business planning and risk management activities so that it is not seen as an accounting exercise undertaken intermittently when accounts have to be drawn up.
Resulting changes to the UK Corporate Governance Code (the “Code”) and chapter 9 of the Listing Rules mean that companies with a Premium Listing on the London Stock Exchange are now required to include specific statements in their annual financial statements identifying: (i) any material uncertainties as to the company’s ability to adopt the going concern basis of accounting in the future; and (ii) how the directors have assessed the longer term viability of the company. More specifically:
Section C.1.3 of the Code requires directors to explicitly state (in both annual and half-yearly reports) whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties as to the company’s ability to continue to do so for at least the next 12 months. Under Listing Rule 9.8.6(3)(a) this statement is to be prepared in accordance with the “Guidance on Risk Management, Internal Control and Related Financial and Business Reporting” published by the FRC. The FRC Guidance recommends that in determining whether there are any material uncertainties, directors should consider:
- the magnitude of the potential impact of any uncertain future event or change in conditions on the company and the likelihood of their occurrence; and
- the realistic availability and likely effectiveness of actions that the directors would consider undertaking to avoid, or reduce the impact or likelihood of the event or change.
Importantly the FRC Guidance provides that uncertainties should not normally be considered material if the likelihood that the company will not be able to continue to use the going concern basis of accounting is assessed to be remote, however significant the assessed potential impact.
Longer term viability statement
Separately section C.2.2 of the Code requires directors to explain in the annual report, taking account of the company’s current position and principal risks: (i) how they have assessed the prospects of the company; (ii) over what period they have done so; and (iii) why they consider that period to be appropriate. They must also state whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment. This statement is intended to express the directors’ view about the longer term viability of the company over an appropriate period of time selected by them. The FRC Guidance provides that “except in rare circumstances the period should be significantly longer than 12 months form the approval of the financial statements. The length of the period should be determined, taking account of a number of factors, including without limitation: the board’s stewardship responsibilities; previous statements they have made, especially in raising capital; the nature of the business and its stage of development; and its investment and planning periods".
2. Results announcements: “significant” discontent
Another change to the Code to flag, is where there is “significant” opposition to a shareholder resolution. Section E.2.2 of the Code now provides that: “when, in the opinion of the board, a significant proportion of votes has been cast against a resolution at any general meeting, the company should explain when announcing the results of voting what action it intends to take to understand the reasons behind the vote result”.
Given that a listed company is required to announce the results as soon as possible following the meeting (LR 9.6.18R and s353(4)(a)) this may be something which companies want to have at least preliminary thoughts on as part of planning for the meeting.
3. Disapplication of pre-emption rights on share issues: new resolutions for the New Year
On the subject of resolutions, the Pre-Emption Group has published a revised statement of principles in relation to disapplying pre-emption rights.
Under the revised principles the general authority to disapply shareholders’ pre-emption rights on share issues which a listed company can seek at the AGM, without presenting a specific business case to shareholders, has been increased by 5% to a maximum of 10% of the company’s issued ordinary share capital. This is provided that in the circular for the AGM the company confirms that it is the company’s intention that it would only ever use the additional 5% in connection with an acquisition or specified capital investment which is (i) announced contemporaneously with any issue of shares under the authority or (ii) has taken place in the six months prior to the issue and is disclosed in the announcement of the issue.
In addition it is worth noting that the most recent guidelines (referred to further below) from the Pensions and Lifetime Savings Association (the "PLSA", formerly the NAPF) expect companies to signal clearly their intention to undertake a non-pre-emptive share issue at the earliest opportunity, to establish a meaningful dialogue with shareholders and keep them informed of related issues.
4. Mining/forestry companies - payments to governments: reporting required
Under the amended Transparency Directive (as reflected in the new DTR 4.3A) companies which are active in “extractive industries” (essentially mining, oil and gas) or the “logging of primary forests” and which have securities listed on an EEA regulated market (such as the Main Market of the London Stock Exchange, not AIM) must prepare a report on any payments made by the company and its consolidated entities to governments in the previous financial year.
The requirement to prepare such a report applies regardless of where the company is incorporated (ie it applies to issuers incorporated outside the EEA as well as those incorporated in the EEA). The report must be published within 6 months of the end of each financial year. This is a longer time frame than the 4 months companies have to publish their annual report under DTR 4.1.3 but some may choose to combine the two.
UK extractive and primary forest logging companies may separately also be subject to the Reports on Payments to Governments Regulations 2014, which apply to all large companies and public-interest entities in these industries. The FCA considers that a report prepared in accordance with those regulations will contain the information required under DTR 4.3A (DTR 4.3A.8).
5. Annual Report: availability
One other change to note of a practical nature under the amended Transparency Directive is that a company's annual financial report must now remain publicly available for 10 years rather than 5 years (DTR 4.1.4).
6. Annual Report: full list of subsidiaries in accounts
Not only must this year’s annual report remain public for longer but it may also be required to be longer. The notes to the accounts must now contain information on all related undertakings (including subsidiaries, joint ventures, associated undertakings and undertakings in which they have a significant influence). The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 have repealed s410 of the Companies Act 2006 such that it is no longer possible to limit the disclosures in the notes to the accounts to principal subsidiaries.
7. Directors – other directorships: overboarding
One list, however, which may need to be shorter is the number of other directorships which the directors hold. The PLSA published a revised version of its Corporate Governance Policy and Voting Guidelines at the end of last year. These take the view that for complex companies it may be appropriate to vote against the re-election of a non-executive director who holds more than four directorships. And where a director chairs a number of key committees a stricter view may be adopted, especially where an individual is a director of two or more companies in heavily regulated industries. The most recent guidelines published by the proxy voting adviser Institutional Shareholder Services (ISS), take a similar view recommending that a non-executive director who does not hold an executive or chairmanship position may hold up to four other non-executive directorships (a chairman up to three others).
8. Audit committee report: statement of audit tender compliance
Lastly, the Code has previously recommended that FTSE 350 companies should put their external audit contract out to tender at least every 10 years (section C.3.7). Under the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 (the “Order”) this is now a requirement. In addition, the Order provides that if a company has not completed a tender process in the previous 5 years then it must set out in the Audit Committee Report relating to the fifth financial year: (i) when the company proposes that it will next complete a tender process; and (ii) why undertaking a tender process then (presumably as proposed to sooner) is in the best interests of shareholders.
Separately under section 7.1 of the Order a FTSE 350 company must include a statement in the Audit Committee Report (or elsewhere in the Annual Report in circumstances where an Audit Committee Report is not issued) of the company’s compliance with the provisions of the Order.
9. Beyond the AGM: other developments
Unfortunately the AGM does not signal the end of developments for the year. Other items on the horizon include:
Audit committee - the FRC has published a consultation paper setting out proposed changes to the Code and its guidance for audit committees. The consultation is in response to a new EU regulation relating to the conduct of statutory audits which will apply in Member States from June 2016. Proposals include changes to the composition of audit committees to require competence relevant to the sector in which the company operates and whether there should be a separate advisory vote on the audit committee report at the AGM.
New requirements for large organisations to report on their B2B payment practices and policies on a half-yearly basis - the government has not published the final rules yet but has previously said it intends them to apply from April 2016.
Modern slavery reporting - large businesses will also have to publish an annual statement of the action they have taken to ensure their supply chains are slavery free (section 54 of the Modern Slavery Act 2015). The government has issued guidance on the content of these statements and regulations bringing the new requirement into force for financial years ending on or after 31 March 2016.
Something to look out for in 2017.