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
FRC publishes Annual Review of Corporate Reporting 2021/22
On 27 October 2022, the Financial Reporting Council (FRC) published its Annual Review of Corporate Reporting and Corporate Reporting Highlights for 2021/22. The Review sets out the FRC’s findings on the current state of UK corporate reporting and identifies areas of concern. Key findings include:
- Quality of corporate reporting: FTSE 350 companies have maintained the overall qualify of reporting despite a challenging environment, with fewer substantive questions raised in comparison to the prior year, and improvements in the reporting of judgements and estimation uncertainty, impairment of non-financial assets and alternative performance measures. However, accuracy of cash flow statements, reporting on financial instruments and deferred tax assets remain areas of concern.
- Climate related reporting: In relation to the introduction of requirements for listed companies to make TCFD-consistent climate-related disclosures this year, the FRC has noted that most of the companies sampled were able to provide disclosures ‘particularly expected’ in the Listing Rules. The FRC identified five main areas for companies to consider when undertaking climate related reporting and noted that some companies claimed compliance with the TCFD’s recommended disclosures when it appeared that they had not complied.
- Reporting on risks: Given the challenging macroeconomic and geopolitical environment, emphasis is placed on the need for companies to continually assess risks and reflect them in their strategy and reporting. Companies should be clear on the impact of risks and uncertainties on their strategy, business model, viability and going concern assessments, and be consistent across the annual report and accounts.
The FRC has also released a Summary of key matters for 2022/23 reports and accounts, which sets out expectations of the Corporate Reporting Review team and key considerations for annual report and accounts for the forthcoming year. The FRC is set to focus on addressing strategic and other material risks, significant management judgements, the effect of inflation within financial contracts and climate change.
FRC Lab launches project on materiality in corporate reporting
The FRC Lab has issued a call for companies, investors and other parties to participate in a new project seeking to understand how companies develop, assess and use of the concept of “materiality” and consider how enhancements to disclosure about materiality processes might assist investors.
The project will cover both financial and non-financial reporting. Its scope will be determined in conjunction with participants, who will be invited to comment on the Lab’s draft findings. The Lab expects to publish findings in 2023.
CLLS and the Law Society respond to draft Economic Crime and Corporate Transparency Bill
The City of London Law Society and Law Society Company Law Committees have submitted a joint response to the Economic Crime and Corporate Transparency Bill. While the Bill is not subject to formal consultation, the CLLS and Law Society were seeking to contribute to the discussion of the proposed reforms as the Bill progresses through Parliament. The response also suggested various changes to improve or clarify the draft legislation.
Particular concerns were raised around the proposed identity verification requirements for directors and PSCs, the prohibition on a director acting unless their identity has been verified and appointment notified, and the increased scope of the powers granted to the Registrar to correct the Register.
CLLS updates note on e-signatures
On 26 October 2022, City of London Law Society published an update to the 2016 practice note on execution of documents using electronic signatures, which sets out the legislative framework around the use of e-signatures and gives guidance on their use in executing commercial contracts.
The update reflects developments such as the Law Commission’s Report on electronic execution of documents, changes in practice adopted by HM Land Registry and HMRC post-pandemic, and the more wide-spread adoption and use of e-signing platforms. The changes are largely mechanical and views expressed in the original note have been given additional support. A redline version of the updated note showing the changes is also available.
Case Law
High Court considers Interaction between provisions in the Model Articles
In this case, the High Court had to consider the application of article 7 Model Articles and its interaction with article 11(2) and (3) Model Articles in determining the validity of the purported appointment of joint administrators of by the sole director of Active Wear Limited, a company which adopted Model Articles without modification.
Under article 7(2), if a company only has one director, and no provision of the articles requires it to have more than one director, the 'general rule’ on director decision making is disapplied so that the sole director may take decisions without regard to any of the ‘provisions of the articles relating to directors’ decision-making’. Here, the judge took the view that article 11 (requiring quorum for directors’ meetings to be never less than two) is specifically disapplied by article 7(2) where there is a sole director and no other provision requiring more than one director.
The case is confirmation that the Model Articles can be used by a private company with a sole director without modification. While the judgement appears to diverge from an earlier decision in Re Fore Fitness Investments Holdings Ltd, the High Court made clear that the decision in Re Fore-Fitness was distinguished on its facts. Caution may still need to be exercised where a company historically had more than one director or where article 11(2) has been modified by bespoke provisions.
Publications
A Crytoassets Primer for Corporate Treasurers
Slaughter and May has published a crypotassets primer for corporate treasury teams. The briefing helps with jargon-busting and outlines key points for understanding the possible uses of cryptoassets, the market environment and the regulatory framework, as well as the tax treatment of cryptoassets.
