Governance Readout

As referenced in our last Readout and in one of the discussion papers we issued on the recommendations of the Austin Report, the matter of pre-emption rights is back in focus. The Pre-emption Group, a group that publishes guidance on the disapplication of pre-emption rights, have already adopted a key recommendation made in Mark Austin’s paper.

The Pre-Emption Group have updated their principles, such that they have reverted to the approach supported by them during the height of the pandemic. Their guidance and the threshold for company capital raising have been made permanent as part of their updated principles.

The Group now recommends UK listed companies are allowed to issue shares up to an overall level of 22% of the issued share capital without pre-emptive rights so long as the company split this into a 10% general authority and a further 10% authority in relation to an acquisition or a ‘specified capital investment’ and a further 2% for retail shareholders only.

With so much interest in these changes as companies prepare for their 2023 AGMs, our colleagues in Georgeson have produced a helpful memo exploring these updates.

Computershare’s view

As you can see from the Georgeson memo, for the time being, a significant majority of FTSE 350 companies are currently taking a cautious approach to the expanded guidance and are sticking to previous thresholds (for total authorities without pre-emptive rights of 10%). Additionally, the survey of investors appears to indicate that some investors may take a sceptical approach to the expanded guidance. Therefore, it may be advisable to only pursue the additional flexibility if you consider that it is realistically needed. Once more companies propose expanded authorities, Georgeson plans to issue an updated memo with these voting outcomes from which more robust conclusions can be drawn.

Throughout 2022 the Takeover Panel have been consulting on and finalising their response to amendments to the definition of ‘acting in concert’, as well as related provisions of the Takeover Code.

The approved amendments come into force on Monday 20 February. These changes codify existing practice into the Code, but some elements may have significant consequences such as setting a floor price to an offer and/or triggering a mandatory bid obligation.

The key changes are:

• Importance of ‘acting in concert’ definition and focus on presumptions – the definition remains a key component of the Code and the general approach will be that a party to the offer and anyone considered ‘acting in concert’ will be treated as a single entity. As such, dealings in shares by those considered ‘acting in concert’ can have material consequences when identifying if a shareholder, founder etc is to be considered a concert party.
• There are three categories of relationship that could result in a person being considered to be ‘acting in concert’
1. Person actively co-operates with another, in accordance with some form of agreement (actually acting in concert)
2. Persons are affiliated with each other, such as where one entity has the majority voting rights in another (deemed to be acting in concert)
3. Persons are in one of a number of categories and the nature of the relationship may give rise to a rebuttable presumption that they are acting in concert (presumed to be acting in concert)
• Raising the threshold in presumption 1 and including voting shares and equity share capital — firstly the 20% threshold to be considered as having control is being raised to 30% to align with other definitions of control found within the code. Secondly there is a codification of existing practice in that it will clarify that the presumption applies to shares with voting rights and equity shares, regardless of whether securities have voting rights. However, the 30% threshold would be applied differently due to the fact that it is believed control dilutes through chains of ownership, therefore equity shares the control can diminish unless investment is of more than 50% of the equity.

It's worth noting that the Panel’s response statement to the consultation provides guidance on some elements of the broader changes. The Panel held a webinar on the 1^st February looking at these changes and plan to upload it onto their website in due course.

Computershare’s view

The increase in the threshold is likely to assist those organisations planning to IPO and those who have founder shareholders, but it doesn’t diminish the fact that ascertaining and agreeing with the Panel the impact of a concert party. This can be time-consuming and exceptionally detailed and, from our experience, the general view is that once an individual is a concert party they are always a concert party, unless sufficient evidence can be obtained to demonstrate there is a full and sustained breakdown of communication etc. between the individual and the organisation.

It’s very useful that the guidance published by the Panel clarifies the approach that would be taken in some areas such as joint ventures, government-owned entities and private company shareholders.

The European Union have published in the Official Journal the Directive on improving gender balance among directors of listed companies and related measures (Directive EU 2022/2381).

The directive requires that at least 40% of non-executive director positions, or 33% of all director positions in listed companies be held by members of the underrepresented sex (regardless of gender) by 30 June 2026.

It came into force on 27 December and now that 20 days have passed since its publication, member states must implement the Directive into their national law by 28 December 2024.

Computershare’s view

Any work on progressing improved representation from underrepresented groups at the top of organisations should be welcomed. There is, after all, a raft of evidence that having a broad spectrum of diversity of skills and backgrounds has positive impacts on boards’ decision-making, improves culture more broadly, and supports their growth and financial success.

This Directive will have limited impact on UK companies because the UK is out of scope, but perhaps more importantly, because the UK is further along the path in improving gender and other diversity metrics on the boards of their listed companies given the FCA target of 40% of women on Boards set out in April 2022 and thanks to the work of the Hampton-Alexander and Parker Reviews.

The Financial Conduct Authority (FCA) have published a consultation paper looking at streamlining the rules related to structured electronic reporting.

Under existing Disclosure and Transparency rules (DTR 4.1.14), listed companies are required to publish their annual report in the single electronic format as specified in the UK Transparency Directive European Single Electronic Format Regulation (this is the UK version of the EU regulation that was transposed UK law as part of exit from the EU).

In keeping with the government’s drive to replace retained EU law and to simplify the existing structures, the FCA is proposing to remove the cross-references to the EU regulation and set out the necessary requirements directly into the UK Transparency Rules.

DTR4 would be expanded, and a new annex introduced to broadly reflect the existing EU regulation, but also to make minor clarifications and changes that the FCA feel are required. There is also a proposal that the current requirement for taxonomies used when tagging information in financial statements and their associated notes, should be contained within a technical note, thus making it easier to amend and keep such taxonomies aligned with generally accepted practices.

The consultation will close on 24 February and because the changes aren’t expected to change existing requirements or upset the current approach taken by companies, the new provisions will apply immediately upon approval, without any transition period.

The UK government has published an illustrative statutory instrument to demonstrate how they are likely to introduce changes to the UK’s prospectus regime when the existing UK regulation is repealed.

In their policy statement, the reforms of the prospectus regime are part of tranche 1 of the programme to ‘building a smarter financial services framework’. It is indicated that the government intends to make significant progress on tranche 1 by the end of 2023.

Under the Financial Services & Markets Bill, the government plans to use their new powers to replace the existing regime with a new regulatory framework using a ‘designated activities regime’ and while the illustrative instrument isn’t in its final form, it is likely that the key themes contained within it will be kept in some form.

The major change being suggested to the prospectus regime is that the Financial Conduct Authority would have the power to decide if a prospectus is required where an application to admit securities for trading on a regulated market or AIM is being sought.

Other interesting items within the illustrative instrument include:

• The concept of an offer to the public would be expanded to capture ‘relevant securities’ (a definition which encompasses equity and debt securities that aren’t tradeable on capital markets), instead of transferable securities, referenced by the legislation currently.
• No automatic requirement for an issuer to publish a prospectus if the organisation wished to admit transferable securities to a regulated market. This is designed to allow the FCA flexibility to decide when a prospectus may or may not be required.
• Allowing the FCA to make rules on admitting securities to a primary Multilateral Trading Facility (e.g., AIM), once again giving the FCA the power to decide if a prospectus would be required or not.

Computershare’s view

Whilst the contents of the instrument are only for illustrative purposes, it is clear that the government wants to provide the FCA with greater power in their approach to regulating admission to the UK markets. There is a sense that by giving the regulator greater power, it will hopefully provide investors with increased comfort that they will remain protected under the new regime regardless of the company or market.

Investors want transparency and action on how companies are managing ESG risks and opportunities to grow and create long-term value.

To help issuer companies prepare for 2023 Annual General Meetings, Georgeson has launched the second edition of their Institutional Investor Survey Insights Report. In the report, you’ll read about investor views and expectations on ESG trends, and what’s driving engagement, voting and investment decisions.

Georgeson interviewed 30 global institutional investors that represent US$47 trillion in assets under management and cover voting and engagement in the UK, Europe, US, Japan and ASEAN markets to create the report.

You can watch their webinar where you’ll hear directly from investors with reference to insights report on their priorities for company annual meetings in 2023.

On Wednesday 22 February 2023, the Non-Executive Directors’ Association (“NEDA”) and WTW are hosting the annual NED Debate, in association with CMS and sponsored by Georgeson.

Creating the ‘Effective Board’ is a central theme for all organisations, ensuring that they are well governed and well managed. The leader of the board is ‘the Chairman’ and so the simple equation to consider is “a good Chairman = a good Board.”

“This post-COVID Annual Debate will seek to explore the role of the Chairman, especially how the role has evolved, including the language and terminology in current use – should reference be made to the traditional title of Chairman or what is seen to be more inclusive use of ‘Chair’ or even ‘Chairperson’? Given the pivotal nature of the role the essential factor is to make sure you have the right person in post. The problem is individuals may take on the role as the “next person in line”, rather than having the appropriate blend of capabilities – the knowledge, the skills, the attributes and the experience needed. Can ‘the chairman’ be trained and educated, or are they born with the innate ability to draw on their personal traits and bring out the best in their team?”

You can register for the event here.