The Listed Company Bi-Annual Update - September 2021

2021 AGMs and Annual Reporting

• GC100 Report: The GC100 has recently reported on the results of its poll on how companies have conducted their annual general meetings ("AGMs") this season and how they perceive the purpose and future of AGMs. Key findings include (i) the majority of respondents having the authority to conduct hybrid meetings, and (ii) almost 50% of respondents indicating that this would be their preferred format for future meetings. There was a range of opinions on the purpose and future of AGMs, with nearly three quarters of respondents preferring to hold separate stakeholder events during the year rather than encourage wider stakeholder engagement at an AGM. The respondents also reported pressure on environmental, social and governance ("ESG") issues, calling for clarity, consistency and alignment of reporting standards to enable shareholders to make informed decisions in this area.
  
  
• FRC Remuneration Report: In May the Financial Reporting Council ("FRC") published a report on Changes in Remuneration Reporting following the UK Corporate Governance Code 2018 which sets out the findings of research conducted with the University of Portsmouth on board remuneration practices and policies. It found that the quantity of information reported has improved but the quality of reporting needs to develop, e.g. to avoid boilerplate language and to improve the disclosure of workforce engagement on executive remuneration, evidence of not rewarding individuals for bad performance and instances of shareholder dissent.
  
  
• FRC Interim Reports - Thematic Review: In May the FRC published a Thematic Review on the interim reports of 20 companies admitted to trading on the Main Market of the London Stock Exchange. Helpfully the review sets out the features of a high quality interim report, which include management commentary on important events in the reporting period and a description of their impact on the financial statements and a comprehensive update on the principal risks and uncertainties for the remaining six months of the financial year.
  
  
• FRC Risk Reporting: The FRC has also recently published its research on Reporting on risks, uncertainties, opportunities and scenarios, explaining what investors want from corporate reporting in these areas in order to improve their understanding of companies' strategy, resilience and viability. Investors feel that whilst the extent and quality of internal processes and conversations on these topics have developed well at company level, they aren't adequately reported. Four areas of focus were identified: the governance and processes in place for risk management, the nature of the risks, uncertainties and opportunities involved, the approach taken in responding to risk, uncertainty and opportunity and how that links to the business model, and the role of scenario or stress testing in strategic decisions and business planning. The report also helpfully includes examples of high-quality disclosures as a guide.
  
  
• FRC Report on Streamlined Energy and Carbon Reporting: Earlier this month the FRC reported on how a sample of in-scope entities have complied with the Streamlined Energy and Carbon Reporting requirements, highlighting examples of emerging good practice and setting out expectations for future reporting. Whilst the FRC was pleased to see examples of emerging sound practice, it noted that disclosures need to be understandable and relevant for users. The FRC expects entities to consider its findings when preparing their annual reports and accounts.
  
  
• ICGN GGP: At the beginning of September the International Corporate Governance Network (the "ICGN") published its updated Global Governance Principles ("GGP"). The key themes of the amendments relate to sustainability governance, risk management and disclosure, diversity and inclusion, workforce safety, stakeholder engagement and human rights (see Annex 2 of the GGP for a summary of the key revisions). The GGP should be read alongside the ICGN's Global Stewardship Principles (2020) as together the documents form the core foundation of the ICGN's policy framework.
  
  
• European Single Electronic Format Requirements: The European Single Electronic Format ("ESEF") (requiring issuers to publish and file their reports in XHTML format) applies to financial periods starting on or after 1 January 2021, for publication from 1 January 2022, and has been implemented in the UK pursuant to DTR 4.1.14. In early September the FRC's Financial Reporting Lab published UK electronic reporting survey: Results and feedback commenting on the preparations which have been made to comply with DTR 4.1.14 and providing a List of Resources to help companies understand and implement these requirements. The FRC Lab is also currently reviewing a set of UK and EU ESEF filings where companies have complied with these obligations early, with the aim of publishing further guidance in October 2021.

Market Abuse Regulation

• Under UK MAR all persons disclosing managerial responsibilities ("PDMRs") and their "persons closely associated" ("PCAs") must notify the issuer and the Financial Conduct Authority ("FCA") of all dealings in any of the issuer's securities by them or on their account (including all dealings by their investment managers) and the issuer must announce such dealings to the market. In June 2021 the time period for announcing dealings of PDMRs and PCAs was amended to allow issuers two working days after receiving the notification from the PDMR or PCA to announce the transaction.

Section 172 Statements

• In July the FRC's Financial Reporting Lab published a report on investors' expectations in respect of stakeholders, decisions and section 172 statements. The report sets out what investors are looking for in these areas, to help investors understand how companies are progressing towards their purpose and long-term success, and how companies can improve their reporting to better meet investors’ needs. Each section of the report includes market examples of useful reporting. The sections of the report discussing information on key stakeholders and information on decisions include detailed questions that companies should ask themselves. The discussion of the section 172 statement includes practical tips for companies on approaching these statements.

FRC Statement of Intent on ESG Challenges

• Against the backdrop of increasing focus on how companies comply with ESG reporting requirements and meet the demands of stakeholders, in July 2021 the FRC published a statement of intent on ESG challenges. The statement identifies a number of challenges faced by companies: production, audit and assurance, distribution, consumption, supervision and regulation. The FRC outlines the actions it plans to take in relation to these challenges, with a view to developing ESG reporting using a common conceptual framework. As regards corporate governance and reporting, the proposed action includes continuing to consider the role of the UK Corporate Governance Code in ensuring boards are taking appropriate account of ESG issues in their consideration of the long-term success of the company, and amending it as appropriate.

UK Listing Review

• In March 2021 HM Treasury published the UK Listing Review report following the review of the UK listing regime chaired by Lord Hill. The report identifies an urgent need to reform the Listing Rules and the prospectus regime to ensure the UK remains competitive post-Brexit. For further information, see our briefing note.
  
  
• In a statement published by The Chancellor of the Exchequer in April the Government accepted the recommendations of the UK Listing Review report and the Chancellor committed to present an annual "State of the City" report to Parliament in satisfaction of recommendation 1. The Government subsequently published Consultation: UK Prospectus Regime Review in July 2021 which explains how the Government suggests reviewing and potentially replacing the UK prospectus regime inherited from the EU. The consultation has four key objectives: (1) facilitating wider ownership of public companies; (2) improving the efficiency of public capital raising; (3) improving the quality of investor information; and (4) improving the agility of regulation in this area. This consultation closes on 24 September 2021 and so we await further updates following this. For further information, see our briefing note.
  
  
• The recommendation for an additional "growth" or "competitiveness" objective for the FCA will be picked up as part of the Future Regulatory Framework Review (Phase 2) this year.
  
  
• The recommendation to look at how technology can be used to improve retail investor involvement in corporate actions and in taking an appropriate stewardship role will be considered by the Department for Business, Energy and Industrial Strategy ("BEIS") as part of its wider consideration of the Law Commission's study on intermediated securities. BEIS is expected to publish its findings later this year.
  
  
• Seven of the UK Listing Review report's recommendations were directed at the FCA, which is considering these separately. It issued a consultation at the end of April, which resulted in changes to the Listing Rules relating to special purpose acquisition vehicles (or "SPACs") from 10 August 2021. The FCA issued a further consultation in July on the effectiveness of the primary markets, details of which are included in this briefing. This consultation, which discussed four possible models for the listing regime, closed on 14 September 2021 and we await the feedback from this.

National Security and Investment Act 2021

• The UK Government has created an extensive new regime, strengthening its powers to scrutinise transactions on grounds of national security pursuant to the National Security and Investment Act 2021 ("NSI Act"). The new regime will come into force on 4 January 2022.
  
  
• The NSI Act introduces a hybrid mandatory and voluntary notification regime. Mandatory notification, and an associated stand-still obligation, applies to notifiable acquisitions in 17 key sectors. These include industries which might not be thought critical to traditional national security concerns, such as transport and communications. It will be unlawful to complete a notifiable transaction in any of these sectors without prior approval from the Secretary of State. Failure to notify a deal to a newly formed "Investment Security Unit" will render the transaction void, and civil and criminal penalties may be imposed.
  
  
• The regime also allows parties to notify transactions to the Secretary of State on a voluntary basis. Parties to transactions falling outside the mandatory regime will therefore need to weigh up the risks of not notifying i.e. that the transaction could be "called-in" for more detailed scrutiny (and ultimately, if found to raise national security concerns, ordered to be unwound).
  
  
• For further details, see our related briefing.

Workforce engagement

• In May 2021 the FRC published a report entitled Workforce Engagement and the UK Corporate Governance Code: A Review of Company Reporting and Practice. The report includes case studies, notes and examples of engagement activities and outlines matters companies may wish to consider in respect of their workforce engagement mechanism.
  
  
• A designated NED remains the most common method chosen and the report suggests that the effectiveness of this approach depends on the actions actually taken by the NED and the other processes in place. Companies with an embedded practice of listening, openness and consultation appear to have more effective workforce engagement mechanisms.

Board diversity

• In July 2021 the FRC published a research report entitled Board Diversity and Effectiveness in FTSE 350 Companies. The report addresses the impact of gender and ethnic diversity on board effectiveness and the role of the nomination committee in recruiting diverse boards. Its main conclusions are: (1) it is the responsibility of the chair of the board to drive inclusion; (2) companies should collect more data on diversity, board dynamics and inclusion; (3) nomination committees should themselves be diverse and have a clear mandate to work with search firms that access talent from diverse pools; and (4) the greater representation of women on boards is reshaping culture and benefiting businesses from a social justice and performance perspective.

Pension Schemes Act 2021

The Pension Schemes Act 2021 is in the process of being brought into force.  There are implications for corporate activity where there is a defined benefit (DB) pension scheme and new requirements for trustees of all schemes. Key aspects, commencement dates and further details are set out in this briefing note.

DC scheme governance and disclosure

There will be various new measures designed to improve the governance of defined contribution (DC) trust-based schemes and otherwise to improve outcomes for members.  Increased DC governance requirements and the associated costs are leading many employers with trust-based DC schemes to consider transferring the scheme to a master trust.  The forthcoming changes include the following:

• The chair's annual governance statement will have to disclose investment returns net of charges in all default and also non-default funds (from 1 October 2021).
  
  
• The chair's annual governance statement and the scheme return to the Pensions Regulator will need to include a report on a 'value for members' assessment, for schemes with assets of less than £100 million operating for at least three years – this is intended to nudge smaller schemes towards consolidation (expected to apply in respect of the first scheme year to end after 31 December 2021).
  
  
• A ban on the charging of flat fees on default fund pots of less than £100 (expected to be from April 2022), possibly to be followed by a ban on flat fees altogether.
  
  
• Expected requirements for trustees to give a "stronger nudge" to Pension Wise guidance when members who are aged 50 or over apply to take or transfer their DC benefits other than for the purposes of consolidation, unless the individual opts out of it (expected to take effect from April 2022).
  
  
• Simplified, two-page benefit statements are expected to be required (from April 2022).
  
  
• There is currently a push from Government to facilitate DC schemes' investment in long-term, illiquid assets, including by allowing the smoothing of performance fees over five years.

COP26 – November 2021

• The UK is yet to publish its net zero strategy but it is anticipated that this will be released in advance of the UK hosting COP26 and will provide the business community with a better sense of how the UK intends to meet its ambitious targets of a 68% reduction of emissions by 2030 and 78% by 2035, building towards net-zero emissions by 2050. For the latest on COP26 and its implications on business, our COP26 page can be found here.

Glass Lewis: Say on Climate Votes

• The governance advisory body Glass Lewis has published a paper setting out its views on 'Say on Climate' votes. These type of votes (whereby shareholders of listed entities are given an opportunity to vote on climate-related matters), are growing in frequency. Generally, Glass Lewis strongly supports 'Say on Climate' vote proposals which relate to disclosure by the listed company of climate-related matters (which it notes will help ensure Task Force on Climate-Related Financial Disclosures ("TCFD") aligned reporting). However, Glass Lewis says it will generally recommend against any proposals that offer a shareholder vote on a climate plan or strategy. For further detail, see the Glass Lewis paper here.

Phoenix Interior Design v Henley Homes: contract law reminders

• This case has re-iterated that the Unfair Contract Terms Act 1977 ("UCTA") can apply in situations where there is a particularly destructive contractual provision in relation to one party's rights, going beyond the popular misconception that UCTA will only bite where there is inequality of bargaining power. For more information on common misconceptions about UCTA, see this briefing note.
  
  
• The concept of "quality" in the interpretation of contracts can be difficult to define due to the subjective nature of quality. This case demonstrated the importance of ensuring that the quality specification is clear and specific while remaining general enough to cover any potential loopholes. Our commentary on the concept of quality within commercial contracts is available here.

Limiting liability in B2B contracts

For companies relying on B2B contracts, please watch our series of short videos which recap the commonly encountered liability issues in commercial contracts.  

• Episode 1 covers the basics of liability caps and discusses drafting tips and pitfalls to keep in mind.
  
  
• Episode 2 covers excluding and limiting liability for negligence.
  
  
• Episode 3 discusses the impact of UCTA and recaps the reasonableness test in enforcing a liability exclusion or limitation clause which falls within its scope.
  
  
• Episode 4 covers the distinction between direct and indirect loss and debunks some common misconceptions relating to direct and indirect loss.

Betfred: lessons for B2C drafting

• We have published a briefing which discusses the key considerations to keep in mind when drafting B2C contracts, especially where the contract is made online. Key takeaways include ensuring that the terms of the contract address the issues you are most concerned about, making sure to sign-post "surprising" or important clauses while minimising complexity and taking into account consumer behaviour. We also discuss how businesses can limit their liability in relation to software errors.

Force majeure clauses in supply contracts

• Force majeure clauses have come under particular scrutiny against the backdrop of Brexit and the COVID-19 pandemic. For further information on the role of force majeure clauses where an event occurs which necessitates a change to the contract but the parties cannot agree a variation, please see our briefing.

Brexit: tariff reductions

• In this briefing we consider the impact of the UK Global Tariff Schedule which took effect on 1 January 2021 when the UK left the EU Single Market and Customs Union. We evaluate the wider effects of tariff reductions in various sectors, including food and drink, manufacturing, construction, fashion and cosmetics and retail.

Sky v Skykick: business considerations when filing broad based trade mark applications

• In this short recording we comment on the Court of Appeal's judgment in Sky v Skykick and explain how bad faith is established in relation to broad based trade mark registrations. The key takeaway is that owners can continue to file applications for broad specifications which cover goods and services which they may expand into in the future, however the courts will assess on a case-by-case basis whether there are facts leading to a finding of bad faith.

Security by design for consumer connected devices

• For companies involved in the tech sector, see our briefing on the Government's proposals to create a legal obligation of 'security by design' in respect of consumer connected devices. The main objective of these proposals is to ensure that no customer connected device enters the UK market unless it incorporates basic cybersecurity measures.

Live facial recognition technology in the real estate sector

• See our briefing on the key data protection considerations which arise when introducing live facial recognition technology in public places or in the common parts of an estate.

The introduction of new standard contractual clauses

• Following on from the Schrems II judgment, the new EU standard contractual clauses came into force on 27 June 2021, giving data exporters subject to GDPR until 27 December 2022 to transition their existing arrangements to the new clauses.
  
  
• The new clauses require the parties to undertake a Schrems II-style transfer impact assessment in respect of the local laws and practices of the destination country and will increase the accountability and compliance burdens on data importers.
  
  
• For more information on the steps which businesses should take when transitioning across to the new standard contractual clauses, carrying out transfer impact assessments and ensuring ongoing compliance, please see our briefing.

LIBOR discontinuation

• LIBOR, the reference rate of interest for many financial contracts, will for the most part be discontinued after 31 December 2021. SONIA (the "Sterling Overnight Index Average") is the preferred replacement rate for LIBOR in sterling markets. Regulatory guidance from the FCA and Bank of England has served to minimise new loans, bonds and derivatives business transacted on the basis of LIBOR since the beginning of Q2 2021. Throughout 2021, corporate borrowers have been working with their lenders to transition existing LIBOR exposures. In many cases, SONIA-based pricing has been adopted through the amendment of existing documentation. For further details, see our mid-year round up.
  
  
• Corporate borrowers should continue to identify older contracts (not just loans) which reference LIBOR and do not feature such provisions and engage with counterparties to amend affected contracts. Our commentary on consequences for other commercial contracts which reference LIBOR (for instance in late payment clauses) is available here.

Organisation for Economic Co-operation and Development ("OECD") agreement on global taxation

• The G7 and the OECD announced that 130 countries (representing more than 90% of global GDP) have joined a new two pillar plan to reform international taxation rules.
  
  
• Pillar One will allow jurisdictions to tax multinational enterprises ("MNEs") even if they do not have a local permanent establishment. It will apply to MNEs with global turnover above €20 billion and profitability above 10% if the MNE derives at least €1 million in revenue from the relevant jurisdiction. For smaller jurisdictions, this threshold will be lowered to €250k where GDP is below €40 billion. For in-scope MNEs, profits will be allocated to relevant jurisdictions using a revenue-based allocation key. Significantly for the UK, regulated financial services are to be excluded (the scope of what constitutes "regulated" for these purposes is not yet clear, but will clearly be important).
  
  
• Pillar Two will include Global anti-Base Erosion Rules (GloBE) under which a global minimum tax rate of at least 15% is to be introduced for MNEs that meet the €750 million revenue threshold for country-by-country reporting, subject to various exclusions, including for pension funds and investment funds.
  
  
• For more information, please see our updates here and here.

Health and Social Care Levy

• On 7 September 2021, the Government announced the introduction of a new UK-wide Health and Social Care Levy, which will be used to pay for adult social care reforms and enable the NHS to tackle the COVID-19 backlog.
  
  
• The Levy will apply from April 2022. It will initially be collected by way of a 1.25% increase to rates of NICs paid by employees, employers and self-employed persons. This means that employment earnings will be subject to both an increased rate of employee NICs (3.25% instead of 2% for higher earners) and at the same time an increased rate of employer NICs (15.05% instead of 13.8%). From April 2023 a separate 1.25% Levy will be introduced on both employees and employers and rates of NICs will return to their tax year 2021-22 rates. This Levy will also be paid by individuals working above State Pension Age, unlike NICs which are not.
  
  
• To coincide with, but separate from the Levy, rates of income tax on dividend income above the £2,000 tax-free dividend allowance will also be increased by 1.25% from April 2022.

It may be of interest to take a look at our previous bi-annual update published in April 2021.