Welcome to the latest edition of Corporate Update, our fortnightly bulletin offering a five-minute read of the latest developments which we consider relevant to corporate counsel. Please get in touch with your usual contact if you want to explore any of the topics covered in more detail. If you would like to subscribe to this bulletin as a regular email, please click here.
In this issue:
Economic Crime and Corporate Transparency Act 2023 receives Royal Assent
On 26 October 2023, the long anticipated Economic Crime and Corporate Transparency Bill finally received Royal Assent, becoming the Economic Crime and Corporate Transparency Act 2023. The Act will introduce a package of measures to tackle economic crime and improve corporate transparency and the integrity of the information held at Companies House (see Legislation below).
Many aspects of the Act will require further secondary legislation (which is expected over the next 12-24 months) and some regulations will need to be aligned with the operational rollout of reform at Companies House. However, Companies House has indicated that some significant aspects of the regime will be implemented by early 2024. These include:
- the significantly enhanced powers of the Registrar to check, query and reject information filed with Companies House or, in some cases, remove information already on the register;
- the requirement for companies to have an appropriate registered office address, and the new requirement to register an appropriate email address;
- a stronger company names regime restricting registration by names; and
- the requirement on incorporation for subscribers to make a statement that the company is being formed for a lawful purpose, and the ongoing requirement to confirm that the company will be its intended future activities are lawful in the annual confirmation statement.
The government has also published a series of factsheets containing details of the various changes brought about by the Act.
FRC releases policy update on the UK Corporate Governance Code
On 7 November 2023, the Financial Reporting Council (FRC) released a policy update statement providing an update on its recent consultation on revisions to the UK Corporate Governance Code and its response to the King's Speech, in which the government announced that it is not intending to prioritise the primary legislation necessary to revamp the UK’s audit and corporate reporting regime and create the Audit, Reporting and Governance Authority (ARGA) in the next Parliamentary session.
Taking various factors into account, the FRC has confirmed that it intends to take forward only a small number of the original 18 proposals set out in its consultation. In particular:
- there will be a small number of changes to the Code that streamline and reduce duplication associated with the Code;
- the main substantive change will be to take forward changes relating to internal controls, but with revisions to ensure the UK ends up with “a more targeted and proportionate Code revision”;
- the remainder of the original proposals, including the changes relating to the role of audit committees on environmental and social governance and modifications relating to diversity will not be taken forward; and
- other proposals will not be taken forward in light of the government’s recent decision to withdraw the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023, which would have required companies within scope to include additional disclosures in their annual report, including an audit and assurance policy statement, a resilience statement, a material fraud statement and a distributions policy statement and information relating to distributable profits.
The FRC intends to publish an updated Code in January 2024.
FRC Lab releases a report on ‘materiality’ in corporate reporting
On 30 October 2023, the FRC Lab published a report on applying materiality to the information in a company’s annual report and accounts. The report is designed to guide companies on how they can improve their reporting by taking a “more focused, strategic approach” to assessing materiality. The report encourages companies to take a holistic view when deciding what information is material to stakeholders. To help those preparing company reports, the report set outs a materiality “toolkit” providing more detailed guidance based on three steps:
The CGI warns boards to prepare for the impact of AI
On 27 October 2023, the Chartered Governance Institute (CGI) released a press release encouraging boards to start preparations for the challenges posed by the widespread adoption and development of Artificial Intelligence (AI). The CGI suggests that boards need to develop a governance framework for AI that clearly sets out roles and responsibilities, as well as policies and procedures for managing both AI risks and opportunities. Such a framework should be subject to routine review and updated to reflect the changes in the development of AI.
Takeover Panel publishes response to consultation on frustrating action and revises Practice Statement on invoking conditions
On 27 October 2023, the Takeover Panel published its response to its consultation on a review of Rule 21 (restrictions on frustrating action). The response also sets out the final amendments to the rule. The rule would restrict an offeree company’s board from taking certain actions (a restricted action) during a period or when the board is aware an offer might be imminent. In summary, the rule is being amended so that it would not, in general, restrict an offeree board from taking a restricted action that either is not material or is in the ordinary course of the offeree company’s business.
The Notes on Rule 21 have also been amended to provide further clarity on the circumstances in which the Panel will normally consider that a proposed action by an offeree board either is not material or is in the ordinary course. The Panel has also finalised a new Practice Statement 34 to provide further guidance on matters it will take into account in interpreting and applying Rule 21.
On the same day the Panel also announced the publication of a revised practice statement, Practice Statement No 5, setting out how the Panel Executive would typically apply the rules relating to ability of an offeror to invoke conditions or pre-conditions to an offer in order to lapse the offer.
These amendments will come into force on 11 December 2023.
FCA publishes Market Watch No. 75
On 31 October 2023, the Financial Conduct Authority (FCA) published Market Watch 75. In the latest version of this newsletter the FCA details its observations on market soundings and minimising the risk of insider dealing and unlawful disclosure. This edition focuses on the FCA’s observations since its publication of Market Watch 51 and Market Watch 58, which were published in September 2016 and December 2018 respectively, that focused on the same topic. As most of the points were already made in the previous Market Watch 58, this serves principally as a reminder to firms that the FCA is watching the behaviour of both market participants and recipients and the importance of doing market soundings properly.
Economic Crime and Corporate Transparency Act 2023 passed
The Economic Crime and Corporate Transparency Bill has received Royal Assent becoming the Economic Crime and Corporate Transparency Act 2023. The Act introduces a package of measures to tackle economic crime and improve corporate transparency and will significantly amend company law, limited partnership and LLP law. Key reforms include:
- the significant expansion of the role and powers of the Registrar of companies;
- changes to various aspects of the company administration regime, including most notably, a new identity verification regime for new and existing directors (which would require the identity of directors to be verified and their appointment notified to Companies House before they can act as directors), LLP members and persons with significant control;
- reforms to enhance the transparency and modernise the limited partnership regime; and
- reform to the corporate criminal liability regime, including the introduction of a new failure to prevent fraud offence (applicable to ‘large’ organisations) and the expansion of the common law identification doctrine allowing attribution of criminal liability to companies where ‘senior managers’ commit certain economic crimes.
The Act will also make changes to the UK’s Register of Overseas Entities, including by increasing the amount of information to be provided to Companies House, and in particular where trusts are involved within the corporate structure of the overseas entities.
Retained EU Law (Revocation and Reform) Act 2023 (Revocation and Sunset Disapplication) Regulations 2023 published
On 30 October 2023, the Retained EU Law (Revocation and Reform) Act 2023 (Revocation and Sunset Disapplication) Regulations 2023 (Regulations) were published, accompanied by an explanatory memorandum. Schedule 1 of the Regulations sets out a list instruments that were initially intended to be repealed by 31 December 2023 under the Retained EU Law (Revocation and Reform) Act 2023 but which will now be preserved, while Schedule 2 contains a list of instruments to be revoked at the end of this year (31 December 2023).