Welcome to the latest edition of Corporate Update, our fortnightly bulletin offering a two-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
News
Government reverses tax cuts announced in its Growth Plan (“mini-budget”)
On 14 October 2022, the Prime Minister confirmed that the planned increase in the corporation tax rate from 19% to 25% from April 2023 announced in the March 2021 Budget, which was cancelled in the Growth Plan presented to Parliament in September, will now go ahead. On 17 October 2022, the new Chancellor, Jeremy Hunt, also announced the reversal of other tax measures set out in the Growth Plan that have not been legislated for in Parliament. Among other things, both the proposed cut in basic rate of income tax from 20% to 19% from April 2023 and the proposed cut in dividends tax by 1.25 percentage points from April 2023 will not go ahead as planned.
Takeover Panel publishes consultations on offer timetable in competitive situations and miscellaneous amendments to the Code
On 19 October 2022, the Takeover Panel announced the publication of Public Consultation Paper 2022/3 (PCP 2022/3) and Public Consultation Paper 2022/4 (PCP 2022/4). PCP 2022/3 relates to amendments to the Code to clarify how the offer timetable applies in certain competitive situations and in particular, where there are competing bids involving a takeover by scheme of arrangement.
PCP 2022/4 proposes a number of miscellaneous amendments to the Code including amendments to grant the Panel more flexibility to grant a derogation or waiver from the rules of the Code in exceptional circumstances (such as imminent insolvency of a company subject to the Code) notwithstanding that the General Principles might not be respected, and to expressly require a target board to make a recommendation to shareholders and holders of convertible securities as to the action they should take in relation to an offer or a Rule 15 offer.
The Code Committee expects to publish Response Statements to PCP 2022/3 and PCP 2022/4 in Spring 2023, with any changes coming into effect approximately one month after the Response Statements.
FRC releases report on barriers to senior leadership for people from minority ethnic groups
The Financial Reporting Council (FRC) has published a report on navigating barriers to senior leadership for minority ethnic groups in FTSE 100 and FTSE 250 companies. The review includes interviews and focus group data from individuals in a range of senior positions in FTSE 350 companies, a review of annual reports from FTSE 100 and FTSE 250 companies, and discussions with executive search consultants.
The report has twofold aims: first, to provide evidence on the challenges and opportunities that individuals from ethnic minority groups experience in progressing to a board position, executive committee roles, and direct reports of executive committee members; and second, to identify good practice and assess its effectiveness in increasing the ethnic diversity of FTSE boards. The report includes recommendations to dismantle the identified barriers and implement good practice from an individual and organisational perspective.
FRC Lab publishes Report on Net Zero Disclosures
The Financial Reporting Council Lab has published a report on net zero disclosures, setting out insights and guidance from their investigation earlier this year into how investors use company disclosures on net zero commitments and their perspective on current reporting, as well as reporting challenges for companies which have made these commitments.
The report identifies three elements that investors want to understand from disclosures: commitments (the level of ambition, scope, nature and timing of the commitment), impacts (how the commitment impacts strategy and business model), and performance (how performance is being measured in the short, medium, and long term).
As well as discussing investor needs at each of these stages, the report is supplemented by an ‘example bank’ publication which gives readers practical examples of how to best implement practice to improve disclosure.
LSE publishes feedback on creation of Voluntary Carbon Market
On 10 October 2022, the London Stock Exchange (LSE) published its feedback on its consultation (set out in Notice N12/22 and N14/22) on changes to the Admission and Disclosure Standards to create its new Voluntary Carbon Markets (VCM) for publicly traded carbon funds. Respondents supported the VCM being extended beyond investment funds to include companies operating in the voluntary carbon sector, and the LSE has amended the Standards to include operating companies in the VCM designation. Other amendments include extending markets eligible for Shanghai-London Stock Connect and other minor administrative changes.
The updated standards have immediate effect with the exception of changes to Rule 2.16 of Section 2 (on when an applicant should notify the Exchange of its proposed admission to trading of new securities) which takes effect thirty days from 10 October 2022.
ICGN publishes viewpoint on sustainability and board effectiveness
The International Corporate Governance Network (IGCN) has released a viewpoint document considering the investor perspective on board responsibility and oversight of corporate sustainability. The viewpoint includes an Appendix listing good practices for board effectiveness, as well as questions investors should be asking to gauge board engagement with sustainability issues. Measures of sustainability discussed include; culture and company values, setting board agendas, security of financial information, compliance, geopolitical risks and director liability.
Legislation
Economic Crime (Transparency and Enforcement) Act 2022 commencement regulations published
On 14 October 2022, the Economic Crime (Transparency and Enforcement) Act 2022 (Commencement No. 4) Regulations 2022 were published. The commencement regulations brought into force most of the remaining provisions of Part 1 and Schedules 1 to 5 of Economic Crime (Transparency and Enforcement) Act 2022, relating to the register of overseas entities, including:
- Sections 9 to 11, setting out the procedure for removing an overseas entity from the register; and
- Sections 7 and 8, imposing a duty on a registered overseas entity to update its information annually.
Market Insights
GC100 conducts poll on the 2022 AGM season and evolving market practice
GC100 (the association of general counsel and company secretaries working in FTSE100 companies) has conducted a poll among its members to see how companies have conducted their AGMs this year and to gauge views and the purpose and future of the AGM. 41 GC100 companies responded and not all of which responded to all questions. As such, the findings are based on the number of respondents answering each specific question. On that basis, the results show:
- Marginally more companies held physical meetings this year than hybrid meetings; just over half the companies that held hybrid meetings saw an increase in attendance compared to just one company that held a physical AGM. Costs and complexities are cited as reasons for some companies opting to hold physical AGMs, replicating similar feedback received in the 2021 poll. No company has held, or proposes to hold, a virtual meeting and only one respondent was challenged as to why a virtual option had not been made available.
- Of the 13 companies that held or will hold a hybrid AGM, 11 offered the facility for shareholders to ask questions through a dedicated phone line. However, few actually used this method, with 82% of shareholders using the chat function instead.
- 86% of respondents facilitated questions in advance but there was no corresponding increase in the number of questions asked compared to previous years.
- 19 companies said that activist shareholders had attended their AGM this year, one third of which indicated that the activists had dominated the Q&A session.
- There continues to be a range of differing opinions among respondents as to the future and purpose of the AGM, although there is a consensus that the key purpose of the AGM is to provide an opportunity for shareholders to engage with the board.
TCFD publishes 2022 status report on TCFD-aligned disclosures
The Taskforce on Climate-related Financial Disclosures (TCFD) has published its 2022 Status Report, which sets outs progress made during the five years since the TCFD published its recommendations on reporting climate-related financial risk. The review includes an analysis of 1,400 large companies across five regions and two surveys conducted in 2022 to identify the growth of companies disclosing climate-related financial information in line with the TCFD’s eleven recommended disclosures.
While there has been, on the whole, significant momentum around the adoption of, and support for, the TCFD recommendations, only 43% of companies made disclosures aligned with at least five out of the eleven recommendations in 2021. A further status report is planned for October 2023.
Case Law
BTI 2014 LLC v Sequana SA and others [2022] UKSC 25
Supreme Court considers and affirms directors’ duty to creditors
In this landmark judgement, the Supreme Court confirmed the common law duty of directors to give weight to company’s creditors in certain circumstances.
The appellant had argued that a decision by directors of a company to distribute a dividend nearly ten years before the company entered insolvent administration, but at a time when there was a “real and not remote” risk that the company might become insolvent in the future, was a breach of directors’ duty to the company’s creditors. In dismissing the appeal, the Supreme Court clarified the nature of the creditor duty and time in which it arises:
- Company directors have a common law duty to consider and give appropriate weight to the interests of the company’s creditors when they know or ought to know company is insolvent or bordering on insolvency (“imminent” insolvency); Insolvency in this context means cash flow or balance sheet insolvency, but applied with a degree of flexibility (and should exclude, for example, temporary commercial insolvency).
- The duty will also arise at the point where the directors know or ought to know that it is probable the company will enter insolvent liquidation or administration, which may be earlier than actual or imminent insolvency.
- The nature and extent of the duty will depend on the financial circumstances of the company where, the more serious the financial difficulties, the greater weight should be given to creditors’ interests. Where an insolvent liquidation or administration is inevitable, the creditors’ interests become paramount as the shareholders cease to retain any valuable interest in the company.
- The creditor duty is not a distinct “free-standing” duty, but simply a facet of the directors’ duty to act in the interests of the company.
