GLOBAL GUIDE 2017 CORPORATE GOVERNANCE AND DIRECTORS’ DUTIES

Corporate governance and directors' duties in the UK (England and Wales): overview Nick Gibbon, Giles Peel, Clive Garston and Bridget Salaman DAC Beachcroft LLP global.practicallaw.com/3-597-4626

CORPORATE GOVERNANCE TRENDS no longer a relevant issue for FTSE 350 companies, but because this Code provision has been superseded by new requirements in the Companies Act 2006 (sections 485-8) 1. What are the main recent corporate governance trends to implement the Audit Regulation and Directive. and reform proposals in your jurisdiction?  Provision C.3.8 now requires companies to give advance

notice of any audit retendering plans in the audit committee Corporate governance continues to have a high profile in the section of their annual reports. UK, illustrated by the government's interest in its future development, particularly as it relates to executive remuneration The FRC Guidance on Audit Committees has also been updated and board composition, as described below. Changes and in line with these Code changes, and to reflect other market initiatives, driven at national and EU levels, continue apace. The developments, such as the Recommendations and Orders of advisory EU referendum result in the UK in June 2016 (Brexit) the Competition and Markets Authority in relation to audit was in favour of leaving the EU by 52 to 48% of those who voted. engagements. The government triggered Article 50 in March 2017, which The FRC's Ethical and Auditing Standards were also revised as signalled the point at which negotiations with the other members a result of the Audit Regulation and Directive, and final versions states on the exit were to commence. For the time being, the UK were published by the FRC in May 2016. therefore remains a member of the EU, and its directives and regulations will continue to apply. As part of the implementation of the Audit Regulation and Directive in June 2016, the government designated the FRC to UK Corporate Governance Code be the competent authority for audit, with responsibility for the The UK Corporate Governance Code (Code), published by the regulation of statutory audit, including setting auditing and Financial Reporting Council (FRC), is the primary governance ethical standards, monitoring and enforcement. code in the UK, applying to companies with a Premium listing of Other activity from the FRC in 2016 included the publication of equity shares on the London Stock Exchange, regardless of its feedback on its board succession planning discussion paper whether they are incorporated in the UK or elsewhere. in May 2016, and in July 2016 the publication of Corporate An updated Code was published by the FRC in April 2016 and Culture and the Role of Boards: a report of observations. The applies to accounting periods beginning on or after 17 June FRC plans to review its Guidance on Board Effectiveness in due 2016. All the changes were related to EU Regulation course and to incorporate some of its observations on culture in EU/537/2014 and Directive 2014/56/EU (Audit Regulation and the revised guidance. Directive), both of which took effect on 17 June 2016. The In February 2017 the FRC announced plans for a fundamental changes to the Code can be found in Section C.3 on auditors review of the UK Corporate Governance Code to take account and the audit committee: of its work on corporate culture and succession planning, and  Provision C.3.1 now includes an additional sentence which the issues raised in the government’s Green Paper and the states "the audit committee as a whole shall have Business, Energy and Industrial Strategy (BEIS) Select competence relevant to the sector in which the company Committee inquiry (see below, Governmental focus on operates". In its feedback statement the FRC stated its view corporate governance). The FRC will commence a consultation that sectoral competence was broader than sectoral on its proposals later in 2017, based on the outcome of the executive experience. The FRC recommends reading the review and the government’s response to its Green Paper. revised provision C.3.1 alongside its Guidance on Audit Committees. Section 4 of this guidance now has a Governmental focus on corporate governance recommendation that the company discloses "how the audit In September 2016 the BEIS Select Committee launched an committee composition requirements have been addressed" inquiry on corporate governance, focusing on directors' duties, in the audit committee section of the annual report, if not executive pay and the composition of boardrooms, including provided elsewhere. worker representation and gender balance in executive positions. This inquiry was precipitated by failings highlighted by  The requirement for FTSE 350 companies to put the two previous inquiries into BHS and SportsDirect, and in light of external audit contract out to tender at least every ten years commitments from the UK Prime Minister to overhaul corporate has been removed from provision C.3.7, not because it is governance in the UK. The inquiry has been concluded and its

© Thomson Reuters 2017 This article was first published in the Corporate Governance and Directors’ Duties Global Guide 2017 and is reproduced with the permission of the publisher, Thomson Reuters. The law is stated as at 01 April 2017.

"3rd Report - Corporate Governance" was published in April Non-financial reporting requirements 2017. Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as In November 2016 the government followed the launch of the regards disclosure of non-financial and diversity information by BEIS Select Committee inquiry with a public consultation on a certain large undertakings and groups (Non-Financial Reporting Green Paper on corporate governance reform. The Green Directive 2014), amended in 2014 to harmonise non-financial Paper sought views on: reporting across members states of the EU, applies to financial  Shareholder influence on executive pay, which has grown years beginning on or after 1 January 2017 and has introduced much faster over the last two decades than pay generally. changes to the disclosure of non-financial and diversity information by certain large undertakings and groups.  Whether there were measures that could increase the connection between boards of directors and other groups The new rules apply to certain large listed and unlisted with an interest in corporate performance, such as companies with more than 500 employees, including public employees and small suppliers. interest entities. The companies concerned will be required to disclose information on policies, risks and outcomes as regards  Whether some of the features of corporate governance that environmental matters, social and employee-related aspects, apply to listed companies should be extended to the largest respect for human rights, anti-corruption and bribery issues, and privately-held companies. diversity on their boards of directors. As part of the UK's The consultation closed in February 2017 and a response from implementation of the Directive, the new requirements have government is expected in due course. been transposed into the Companies Act with Part 15 now requiring affected companies to include a non-financial Further to the government's Green Paper, the FRC stated that statement in their strategic report. See Question 4. The companies did need to fulfil their responsibilities to a wider range Disclosure and Transparency Rules (DTRs) have also been of stakeholders and society and that it would consult to update updated as part of the implementation, such that large listed the UK Corporate Governance Code and associated guidance companies must include certain diversity policy disclosures in in 2017 to address these issues. This review has now been their corporate governance statements in their annual reports announced as mentioned above. describing, for example, how their diversity policies are applied to their "administrative, management and supervisory bodies In addition, ICSA: The Governance Institute (ICSA) and the with regard to aspects such as, for instance, age, gender, or Investment Association (IA) launched a project in January 2017 educational and professional backgrounds". to identify best practice and produce practical guidance to enhance boards' understanding of the interests of employees Payment practices and other stakeholders. Guidance is expected in the second Large companies and LLPs have new duties to report on their quarter of 2017. payment practices and performance. Both the Reporting on Payment Practices and Performance Regulations 2017/395 and Executive remuneration the Limited Liability Partnerships (Reporting on Payment Remuneration of executive directors in UK-listed companies Practices and Performance) Regulations 2017/425 apply in continues to be a hot topic and is an area of government focus. relation to financial years beginning on or after 6 April 2017. The Executive Remuneration Working Group was established These regulations impose a requirement to publish information by the IA in 2015 as an independent panel to address a concern about practices, policies and performance in relation to paying that executive remuneration structures had become too complex suppliers. Newly established entities are not required to report and not aligned with the long term interests of companies. It in their first financial year. published an interim report in April 2016, and following consultation its final report came out in July 2016 making a Closing the gender pay gap: mandatory gender pay number of recommendations. On addressing the level of gap reporting executive pay, one recommendation is that the board should Further to an earlier consultation, the government consulted on explain why the chosen maximum remuneration level is draft regulations that apply to employers (private and voluntary) appropriate for the company using both external and internal in England, Wales and Scotland with at least 250 employees relativities (such as a ratio between the pay of the CEO and from April 2017. The draft regulations outlined the information median employee). which will need to be disclosed on a relevant employer's website relating to the difference in pay between male and female In October 2016 the IA revised its Principles of Executive employees. Key components are likely to be: Remuneration and took into account the working group's recommendations. The IA wrote to all remuneration committee  The difference in mean pay between male and female chairmen, and both the revised principles and the letter are employees. hosted on the IVIS website in the guidelines section. As part of the update, the IA has ensured that the principles do not  The difference in median pay between male and female promote a single remuneration structure above others to enable employees. companies to choose the appropriate structure for their business  The difference in mean bonus pay between male and and strategy rather than, for example, automatically adopting female employees and proportions of male and female the commonly seen Long Term Incentive Plan (LTIP). relevant employees who received bonus pay.

In August 2016, GC100 and the Investor Group published  Numbers of male and female employees according to revised guidance on directors' remuneration reporting. The quartile pay bands. original version, published in 2013, provided guidance on the Directors' Remuneration Reporting Regulations 2013. They See highlighted that, among other changes, the section on www.gov.uk/government/uploads/system/uploads/attachment_ commercial sensitivity as a basis for not disclosing performance data/file/575994/HMG_response_GPG_consultation- targets had been expanded and the section on committees 2__final_.pdf. exercising discretion had been made clearer. The regulations commenced on 6 April 2017 (see www.legislation.gov.uk/ukdsi/2017/9780111152010). The

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relevant gender pay data will need to be gathered by employers CORPORATE ENTITIES from April 2017, and disclosed from April 2018. Parker Review 2. What are the main forms of corporate entity used in In 2014, former business secretary Vince Cable asked Sir John your jurisdiction? Parker to carry out a review of ethnic diversity in boards. In

November 2016, Sir John Parker and the Parker Review Committee, issued their report on the ethnic diversity of UK Private limited company boards. A private company can either be limited by guarantee or limited According to the report published in November 2016, by shares. A company limited by shares is the typical corporate approximately 14% of the total UK population is a "person of form for profit-seeking entities in England and Wales. The colour", or from a "non-white" ethnic group, up from just over 2% liability of its members is limited to the amount, if any, unpaid on in 1971. By 2030, it is expected that the proportion will be closer the shares held by them. A guarantee company is more suitable to 20% of the total UK population. The report states, among for not-for-profit organisations. other statistics, that 53 FTSE 100 boards do not have a director Public limited company (PLC) of colour serving on the board. A public company must be limited by shares, and the nominal Recommendations are made under three categories: value of a public company's allotted share capital must not be less than GB£50,000 (or the prescribed equivalent Euro  To increase the ethnic diversity of UK boards. amount). Unlike private companies, public companies are  To develop candidates for the pipeline and plan for permitted to offer their securities to the public (but are not succession. required to do so). English companies listed on the London Stock Exchange are PLCs.  To enhance transparency and disclosure. There are a number of other corporate entities available in the The first recommendation to increase the ethnic diversity of UK UK, with limited liability partnerships in particular being ever boards is that each FTSE 100 board should have at least one more widely used. director of colour by 2021, and each FTSE 250 Board should have at least one director of colour by 2024. LEGAL FRAMEWORK

Hampton-Alexander Review In February 2016, Sir Philip Hampton and Dame Helen 3. Outline the main corporate governance legislation and Alexander were asked to continue the work of Lord Davies on authorities that enforce it. How influential are reviewing, and making recommendations in respect of, the institutional investors and other shareholder groups in representation of women on boards and in senior executive monitoring and enforcing good corporate governance? positions in FTSE 350 companies. The diversity targets for List any such groups with significant influence in this FTSE boards established by the Hampton-Alexander Review area. are described further in Question 7, Gender. Market abuse Private and public companies The new EU Market Abuse Regulation (MAR) came into effect The legal and regulatory framework which applies to private and on 3 July 2016, intended further to tackle insider dealing and public companies is primarily set out in: market manipulation in Europe's financial markets. In the UK the MAR disclosure obligations apply to AIM companies as well as  The Companies Act 2006, which governs all companies Main Market companies. The European Securities and Markets registered in the UK. The Companies Act also sets out a Authority (ESMA) has issued some related guidelines (for range of general and specific directors' duties. There is example on delays in the disclosure of inside information, and guidance on the basic application of the Companies Act and on persons receiving market soundings) and a Q&A document related regulations on the Companies House website which was updated in December 2016. MAR has resulted in (www.gov.uk/government/collections/companies-house- affected companies having to review their procedures in a guidance-for-limited-companies-partnerships-and-other- number of areas. The FCA removed the Model Code (a model company-types). share dealing code for board directors and certain senior managers) from the Listing Rules in July 2016 as it was not MAR  The Insolvency Act 1986, which governs company compatible but they supported the development of an industry- insolvency and winding up (including the winding up of led code to replace it. In response, ICSA: The Governance companies that are solvent). Institute, GC100, the QCA and other market participants have  The Financial Services and Markets Act 2000 (FSMA), published a number of documents including a specimen group- which regulates the public offering and listing of shares and wide dealing policy, dealing code and dealing procedures other securities. It applies to both private and public manual. companies.

Fourth Money Laundering Directive  The City Code on Takeovers and Mergers (Takeover The Fourth Money Laundering Directive must be implemented Code), which regulates the conduct of takeovers and by 26 June 2017. Among its impacts, it is expected to result in mergers of all UK-incorporated public companies (and changes to the UK's persons with significant control regime. certain private companies in very limited circumstances). Government guidance Public companies listed or traded on any stock market The government published various guidance documents during 2016, including one on electronic signatures in August 2016 In addition, the following apply to a public company that is listed which is intended to explain some of the changes made to the or that has shares traded on a UK market: electronic signature regime introduced by Regulation (EU) No  The Market Abuse Regulation, guidance on which is set out 910/2014 on electronic identification and trust services for in the FCA Handbook under Business Standards. electronic transactions in the internal market.

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 The Prospectus Rules, which set out the form, content and  Financial Reporting Council (FRC) (www.frc.org.uk). The approval requirements for prospectuses issued in relation to FRC is the UK's independent regulator responsible for public offers of securities and admissions to public markets. promoting high quality corporate governance and reporting.

 The Disclosure and Transparency Rules (DTRs), which set Corporate governance framework out the disclosure requirements applicable primarily to The corporate governance framework in the UK is established companies that are admitted to the Official List and traded by the FRC's UK Corporate Governance Code (see on the Main Market (with some parts applying also to www.frc.org.uk/Our-Work/Codes-Standards/Corporate- companies quoted on AIM). governance/UK-Corporate-Governance-Code.aspx). All companies with a Premium Listing of equity shares in the UK  The Criminal Justice Act 1993, which sets out the current are required to report on how they have applied the Code in their criminal regime in relation to insider dealing. annual report and accounts. Companies listed on other markets,  The Financial Services Act 2012, which sets out the criminal and larger private companies, particularly those with external offences of making false and misleading statements, investors, often seek to comply with the Code to the extent it is creating false or misleading impressions, and making false applicable. or misleading statements or creating a false or misleading Linked to the Code is further guidance to support companies impression in relation to specific benchmarks. who are applying the Code. These relate to board effectiveness, Public companies listed (or applying to be listed) on the audit committees and risk management, internal control and Main Market related financial and business reporting. When admitting equity securities on the Main Market of the The Quoted Companies Alliance (QCA) has produced an London Stock Exchange, companies have the choice of three adapted version of the Code (which also incorporates other routes to market: principles and guidance) for use by small and mid-size quoted companies. It is aimed primarily at standard listed companies  A Premium (formerly Primary) Listing. and those on AIM and NEX Exchange (see  A Standard (formerly Secondary) Listing. www.theqca.com/shop/guides/70707/corporate-governance- code-for-small-and-midsize-quoted-companies-2013.thtml).  An Admission via the High Growth Segment. The Institute of Directors (IOD) has developed voluntary If a public company is listed (or applying to be listed) on the Main corporate governance guidance and principles aimed at unlisted Market, the following must be considered: companies which again draw from the FRC Code. An updated version is expected in 2017 (see  The Listing Rules (http://fshandbook.info/FS/html/FCA/LR), www.iod.com/Portals/0/PDFs/Campaigns%20and%20Reports/ which prescribe minimum requirements for the admission of Corporate%20Governance/Governance%20code%20for%20u securities to listing on the Financial Conduct Authority nlisted%20companies.pdf). (FCA)'s Official List and also set out the requirements for the content, scrutiny and publication of listing particulars The FRC also maintains a Stewardship Code, which aims to and the continuing obligations of issuers after admission to enhance the quality of engagement between investors and trading on the Main Market. companies to help improve long-term returns to shareholders. It is targeted at institutional investors (asset owners and asset  The Admission and Disclosure Standards, which contain managers) with equity holdings in UK listed companies; by admission requirements and ongoing disclosure extension the code applies to services providers such as proxy requirements that companies with securities admitted to the advisers and investment consultants. Main Market must observe. Influence of institutional investors The Main Market is the UK's regulated market for securities Institutional investors are influential in the UK and representative admitted to trading, which must also currently meet the bodies include the: associated requirements set by EU directives and regulations.  Investment Association (IA). The IA is the trade body Public companies traded (or applying to be traded) on which represents UK investment managers. It publishes a AIM series of guidelines in which it sets out its member's A company listed, or to be listed, on AIM must have regard expectations on issues such as corporate governance, principally to the AIM Rules for Companies, although certain share capital management, and other issues relating to parts of the Prospectus Rules and the DTRs also apply. capital markets. Several of these guidelines were originally produced by the Association of British Insurers (ABI). Regulatory authorities Following the merger of ABI Investment Affairs with the These include the: Investment Management Association (IMA) in 2014, the IA assumed responsibility for guidance previously issued by  Financial Conduct Authority (FCA) (www.fca.org.uk). The the ABI. The guidance is hosted by the Institutional Voting FCA supervises the conduct of retail and wholesale Information Service (IVIS). Guidance on the IVIS website financial firms and is the UK Listing Authority. includes:

 Prudential Regulation Authority (PRA) - Principles of Remuneration, October 2016; (www.bankofengland.co.uk/PRA). The PRA is part of the Bank of England and is responsible for the prudential - Introductory letter to The Investment Association regulation and supervision of banks, building societies, Principles of Remuneration, October 2016; credit unions, insurers and major investment firms. - The Investment Association Position Paper on Quarterly  Takeover Panel (www.thetakeoverpanel.org.uk). The Reporting and Quarterly Earnings Guidance, November Takeover Panel administers the Takeover Code, and 2016; supervises takeovers. - The Investment Association Guidelines on Viability Statements, November 2016;

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- Letter to FTSE Chairman - Board oversight of profit it had not been provided with clear enough evidence of market expectations and dividend policy; failure in terms of how proxy advisors interacted with investors and issuers. On that basis, ESMA did not think the introduction - Share Capital Management Guidelines, July 2016; of binding measures would be justified, but that there would be - Transaction Guidelines, November 2014; several areas, in particular in relation to transparency and disclosure, where a co-ordinated approach from the proxy - The Investment Association position on Lock-Up advisory industry would bring about greater understanding and Agreements, April 2014; assurance about what would be expected from proxy advisors. ESMA concluded that the proxy advisory industry should - Pre-emption Group – Disapplying Pre-emption Rights – develop its own code of conduct. As a result, some best practice A Statement of Principles, March 2015; principles were published in March 2014. In December 2015 - Pre-emption Group - Template Resolutions, May 2016. ESMA published a follow-up report with an assessment of the impact of these principles.  Association of British Insurers (ABI). The ABI represents the UK’s insurance and long-term savings industry. In 2014 The UK Corporate Governance Code states that there should the ABI's Investment Affairs division merged with the be a dialogue with shareholders based on mutual understanding Investment Management Association (IMA) as described of objectives, and in addition the Stewardship Code sets out above. good practice for institutional investors when engaging with UK listed companies. The FRC expects those investors who have  Pensions and Lifetime Savings Association (PLSA). The signed up to the Stewardship Code to publish on their websites PLSA represents the workplace pensions community as a statement that describes how they have applied the principles well as supporting savers. As representatives of major of the code and explains any non-compliance. In 2016 the FRC institutional investors, the PLSA seeks to ensure high assessed the signatories to the Stewardship Code based on the standards in corporate governance and stewardship are quality of their related code statements and allocated each achieved and maintained. It published a 2016 AGM season signatory to one of three tiers. The members of each tier are report in October 2016, with a particular focus on executive published on the FRC's website with the aim of improving the remuneration. The PLSA Corporate Governance Policy & quality of reporting against the code, encouraging greater Voting Guidelines were updated in January 2017 for 2017. transparency in the market and maintaining the credibility of the The new guidelines recommend that if shareholders vote code. The FRC has stated that it welcomes new or revised against a company’s remuneration policy, they should also statements on an ad hoc basis, and that those remaining in the oppose the re-election of the remuneration committee chair lowest tier, Tier 3, will be removed from the signatory list in mid- as a company director. They also call for companies to 2017. explain what steps they are taking to bring diversity to their boardroom and suggest that annual reports should include Following the Kay review recommendation for the establishment better information about a company’s corporate culture and of an investor forum to facilitate collective engagement by employment practices. investors in UK companies, the Investor Forum was constituted in October 2014. Its objectives are to make the case for long- There are a number of organisations that support institutional term investment approaches and to create an effective model investors in the exercise of their ownership rights and for collective engagement with UK companies. In October 2016 responsibilities through the provision of a variety of services. the Investor Forum announced the launch of its Collective These organisations are commonly known as proxy voting Engagement Framework, described as a step-by-step guide for agencies or shareholder voting service providers, and include: investors on how they can participate collectively with other  Institutional Shareholder Services Inc (ISS). investors through the Investor Forum, and within the confines of the law and regulatory regime, in order to address corporate  Pensions & Investment Research Consultants (PIRC). governance and strategic concerns directly with company boards. The FRC has encouraged investors with concerns to  Manifest. approach the Investor Forum should they consider that  Glass, Lewis & Co. collective engagement with other investors could be useful. Some investors disclose their Forum membership in their They produce a variety of voting guidelines. The Research Stewardship Code statements. Recommendations Electronic Voting (RREV) joint venture between ISS and the NAPF (now PLSA) ended in 2014 and in January 2015 ISS issued its first standalone proxy voting 4. Has your jurisdiction adopted a corporate governance guidelines for the UK and Ireland. These have since been code? updated, with the latest updates for meetings on or after 1 February 2017 published in November 2016. Inevitably, US organisations in particular will sometimes have expectations Yes, the UK Corporate Governance Code, published by the which are not easily aligned with UK law and practice. Financial Reporting Council (FRC), sets out good practice covering issues such as board composition and effectiveness, Engagement with shareholders at an early stage can be key the role of board committees, risk management, remuneration where a company's approach is in conflict with investor and relations with shareholders. guidelines. This is a "comply or explain" code rather than a rigid set of rules The role of proxy advisors is not without controversy and over a and compliance is not mandatory. However, public companies number of years there have been tensions between these with a premium listing on the Main Market of the London Stock organisations and some companies on a number of matters, Exchange (with certain exemptions for companies that are including transparency and disclosure around voting smaller than the largest 350 companies in the FTSE share recommendations, and the opportunity for dialogue before they index) have to explain in their annual reports how they have are made. applied the high level principles laid out in the UK Corporate The interaction between these organisations and investors and Governance Code and the extent to which they have complied companies has been reviewed at EU level, and in 2013 the with the detailed provisions. European Securities and Markets Authority (ESMA) stated that

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Reasons for any non-compliance with the provisions have to be  The likely consequences of any decision in the long term. given and issuers should explain how any alternative process achieves good governance by other means. There is some 2012  The interests of the company's employees. guidance from the FRC on what constitutes a good explanation.  The need to foster the company's business relationships If shareholders are not content with the explanations, they with suppliers, customers and others. should engage with the company, and can also exercise their statutory rights, including the power to appoint and remove  The impact of the company's operations on the community directors, to hold the company to account. and the environment. The FRC has announced that there will be a review of the code  The desirability of the company maintaining a reputation for in 2017. high standards of business conduct. In addition to the UK Corporate Governance Code, the FRC  The need to act fairly as between members of the company. issues guidance and other publications intended to assist The reporting of some CSR issues has also been enhanced companies in applying it to their particular circumstances and to since the introduction of the Strategic Report under the address specific aspects of governance and accountability. Companies Act. Quoted companies must, to the extent They cover board effectiveness, the role of audit committees, necessary for an understanding of the development, risk management, internal control and related financial and performance or position of the company's business, include in business reporting and audit tendering. their strategic report information about: The UK Corporate Governance Code is well-established, and  Environmental matters (including the impact of the the 25 year anniversary of its inception is being celebrated in company's business on the environment). 2017. With relevant amendments it is recognised as the basis for further governance codes aimed at companies outside the  The company's employees. Main Market. For example there is:  Social, community and human rights issues.  The Quoted Companies Alliance (QCA) Corporate Governance Code for Small and Mid-Size Quoted They must also include information about any policies of the Companies which is aimed at smaller Main Market company in relation to these matters and the effectiveness of companies, and those on AIM and NEX Exchange those policies. (previously called ISDX). Quoted companies must also make disclosures concerning  The Institute of Directors Corporate Governance Guidance greenhouse gas emissions in the directors' report in their annual and Principles for Unlisted Companies in the UK which is reports. aimed at unlisted companies. The Modern Slavery Act 2015 also requires larger commercial CORPORATE SOCIAL RESPONSIBILITY AND organisations to publish annual slavery and human trafficking statements on their websites. In December 2016 the Law REPORTING Society published a practice note on compliance with section 54 of the Modern Slavery Act 2015. 5. Is it common for companies to report on social, environmental and ethical issues? Please highlight, There will be greater transparency on a number of social and where relevant, any legal requirements or non-binding environmental issues by certain large undertakings due to the guidance/best practice on corporate social Companies, Partnerships and Groups (Accounts and Non- responsibility. Financial Reporting) Regulations which have implemented amendments to the EU Directive on disclosure of non-financial and diversity information. These regulations have amended the Many companies engage in corporate social responsibility Companies Act to require companies (whether traded, or (CSR) activities. Responsible investment is an approach to banking or authorised insurance companies, or companies investment that explicitly acknowledges environmental, social carrying on insurance market activity) of a certain size and which and governance (ESG) factors. The PRI Association (PRI), an have more than 500 employees to produce a non-financial independent body supported by the United Nations, first issued statement as part of their annual report. The non-financial its set of Principles for Responsible Investment in 2006. These information statement requires, for example, disclosure on principles are underpinned by a menu of possible actions for "respect for human rights" and "anti-corruption and anti-bribery incorporating ESG issues into investment practice. It is possible matters". There needs to be a description of the policies pursued to see on the PRI's website the volume of investor support for by the undertaking in relation to these and other matters, the its six principles. outcome of such policies, and related due diligence, risks and risk management. The London Stock Exchange recognises that corporate ESG data impacts capital allocation by institutional investors, and These developments are against a backdrop of the activities of issued guidance on ESG reporting in February 2017 for the organisations such as the Global Reporting Initiative (GRI) benefit of both investors and issuers. which, among others, produces guidance on, and models for, sustainability reporting. GRI continues to participate in the While it is not a legal requirement for companies to undertake governance bodies of the International Integrated Reporting many of their CSR activities, companies are required to report Council (IIRC), which promotes the adoption of integrated on certain social, environmental and ethical issues. Some public reporting and describes an integrated report as one which is a companies have a standalone committee and/or a director with "concise communication about how an organisation's strategy, responsibility for CSR-related issues. governance, performance and prospects, in the context of its external environment, lead to the creation of value over the CSR issues should feature in boardroom discussions on a short, medium and long term". regular basis as, under the Companies Act 2006, one of the duties of all directors is to promote the success of the company Some UK and European publicly listed companies are already for the benefit of its members, and in doing so have regard reporting in line with GRI's sustainability reporting guidelines. (among other matters) to: global.practicallaw.com/corpgov-guide

BOARD COMPOSITION AND RESTRICTIONS Carrying forward the work of Lord Davies of Abersoch on women on boards, voluntary targets for women on boards and in executive positions have been confirmed in the Hampton- 6. What is the management/board structure of a Alexander Review on improving gender balance in FTSE company? leadership, published in November 2016.

These include recommendations that FTSE 350 companies Structure should aim for a minimum of 33% women’s representation on English company law does not distinguish between a their boards by 2020 and that all stakeholders should work management board and a supervisory board. All directors form together to ensure increasing numbers of women are appointed one board and each has the same obligations and accountability to the roles of chair, senior independent director and executive to the company regardless of whether he is an executive director positions on boards of FTSE 350 companies. There has (typically employees) or non-executive. also been a call to action to all CEOs of FTSE 350 companies to take action to improve the under-representation of women on Management the executive committee and those reporting directly to the The articles of association (articles) of most companies provide executive committee. See that the directors are responsible for the management of the www.gov.uk/government/uploads/system/uploads/attachment_ company's business. The board of directors may decide to data/file/574540/ftse-women-leaders-review.pdf. delegate certain powers to a committee of directors or non- directors or to individual directors, or general day-to-day 8. Are non-executive, supervisory or independent management to a CEO or managing director. directors recognised or required? Board members

The directors of the company constitute the board of directors. Recognition The articles may designate a chairman with a casting vote, but not all chairmen have casting votes. There is no statutory definition of an executive director or a non- executive director, so under the law there is no distinction Employees' representation between the role and responsibilities of a non-executive director Employees do not have a right to board representation. and those of an executive director. Both types of director are However, some companies have agreements with trade unions subject to statutory obligations, duties and responsibilities. which provide for employee representatives on the board. However, a non-executive director is generally understood to be Number of directors or members a director on the board who does not form part of the executive management team and is not an employee of the company. Private companies must have at least one director and public Non-executive directors are expected to devote part, but not all, companies must have at least two directors of which at least one of their time to the company and their role is generally to provide must be a natural person. As a result of the Small Business, an advisory or supervisory element to the board, scrutinising and Enterprise and Employment Act 2015, it is expected that a challenging the company's strategy and management. prohibition on appointing corporate directors will be implemented once regulations outlining a limited number of By contrast, an executive director is typically an employee of the exceptions have been made. Any company with an existing company who holds a senior management and executive role corporate director will need to take action, either explaining how within the business. it meets the conditions for an exception or giving notice to the registrar that the corporate director has ceased to be a director. However, as executive directors have the same statutory duties as the non-executive directors as members of a unitary board, The Companies Act does not prescribe a limit on the number of these duties extend to the whole of the business, and not just directors a company may have (although the articles may set a that part of it covered by their individual executive roles. maximum). More guidance on the roles of directors can be found in the Financial Reporting Council's (FRC) Guidance on Board 7. Are there any general restrictions or requirements on Effectiveness. the identity of directors? Board composition The UK Corporate Governance Code provides guidance on the Age appropriate composition of a board of a UK listed company. For FTSE 350 companies, for example, over half the board, A director must be at least 16 years of age. There is no excluding the chairman, should comprise non-executive prescribed maximum age limit. directors determined by the board to be independent. A smaller Nationality listed company should have at least two independent non- executive directors. There are no nationality requirements. However, some companies' articles require, for example, non-UK residency for Independence tax purposes. Independence of thought is of particular importance to non- Gender executive directors, part of whose role is to provide an independent viewpoint on the board and, when necessary, to See Question 6 regarding corporate directors. The UK has not challenge the executive directors. imposed any mandatory gender quotas. However, the UK Corporate Governance Code requires companies with a Non-executive directors are considered to be independent when premium listing to report on their diversity policy, including on the board determines that they are independent in character and gender. This should include any measurable objectives that judgement, and that there are no relationships or circumstances have been set for implementing the policy, and progress on which are likely to affect, or could appear to affect, their achieving the objectives. judgement. The UK Corporate Governance Code sets out

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various relationships or circumstances that would usually be However, a company's articles typically provide for other relevant to the board's determination of independence, situations in which a director's appointment ceases and often set including, for example, if the director: out other grounds and procedures for removal.

 Has been an employee of the company or group within the Many publicly-traded companies' articles contain provisions last five years. requiring directors to resign and stand for re-appointment by shareholders on a periodic basis (see Question 11).  Has, or has had within the last three years, a material business relationship with the company either directly, or as A director may still have employment rights in relation to a partner, shareholder, director or senior employee of a termination of his employment contract regardless of his proper body that has such a relationship with the company. removal as a director within the requirements of the Companies Act and the company's articles.  Has received or receives additional remuneration from the company apart from a director's fee, participates in the company's share option or a performance-related pay 11. Are there any restrictions on a director's term of scheme, or is a member of the company's pension scheme. appointment?

 Has served on the board for more than nine years from the date of his or her first election. The Companies Act does not impose any restrictions on the term of appointment of directors. The articles, however, may 9. Are the roles of individual board members restricted? provide for retirement by rotation. For listed companies, the UK Corporate Governance Code stipulates that all directors of listed FTSE 350 companies should stand for re-election by While the articles (or a shareholders' agreement) may in shareholders annually and that directors of listed companies principle restrict the authority of individual directors, UK outside the FTSE 350 should be subject to re-election at least company law does not impose any such restrictions. every three years.

The UK Corporate Governance Code provides guidance on the separation of responsibilities for directors of listed companies. 12. Do directors have to be employees of the company? For example, the UK Corporate Governance Code recommends Can shareholders inspect directors' service contracts? that no one individual should have unfettered powers of decision, and that there should be a clear division of responsibilities at the head of the company between the running Directors employed by the company of the board and the executive responsibility for running the Directors are not required by law to be employed by the company's business. company. While executive directors are usually employed under The UK Corporate Governance Code therefore provides that the an employment contract (also referred to as a service contract, roles of chairman and chief executive should not be exercised service agreement or contract of service), non-executive by the same individual. directors are normally engaged under a contract for

services/letter of appointment.

10. How are directors appointed and removed? Is Shareholders' inspection shareholder approval required? The Companies Act requires companies to keep directors' service contracts available for inspection by shareholders

without charge. The UK Corporate Governance Code further Appointment of directors provides that the terms and conditions of appointment of non- The procedure for appointing directors is governed by the executive directors should be made available for inspection by company's articles of association (and, in some cases, by a any person at the company's registered office during normal shareholders' agreement or an investment agreement). Most business hours and at its annual general meeting. private companies' articles provide that a director may be appointed by a decision of the board or by an ordinary resolution of the company's shareholders. 13. Are directors allowed or required to own shares in the company? For listed companies, the UK Corporate Governance Code recommends that a nomination committee, made up predominantly of independent non-executive directors, should While the Companies Act does not require directors to own lead the process for board appointments and make shares in the company, directors of private companies are recommendations to the board. The board must support the generally (subject to the provisions of the articles, a appointment, which has to be confirmed by shareholders by way shareholders' agreement or similar) free to own shares in the of ordinary resolution at the next annual general meeting company. following the appointment. Listed company directors may also hold shares in the company Removal of directors and executive directors will often hold shares and be granted share options under approved schemes. Some non-executive The Companies Act provides that shareholders may remove a directors are, in practice, remunerated partially in shares but the director of any company before the expiration of his term of UK Corporate Governance Code states that remuneration for office by ordinary resolution if a particular procedure is followed. non-executive directors should not include share options or The director is able to make representations in writing to the other performance-related elements. company which must be circulated to shareholders with the notice of meeting if received in time. The director also has the There used to be a code annexed to the Listing Rules called the right to attend and speak at the meeting on his proposed Model Code which imposed restrictions on directors and others removal. dealing in the securities of a listed company, beyond those imposed by law. Its purpose was to ensure that directors, and global.practicallaw.com/corpgov-guide

other senior managers, did not abuse, and do not place MANAGEMENT RULES AND AUTHORITY themselves under suspicion of abusing, inside information that they may be thought to have, especially in periods leading up to 15. How is a company's internal management regulated? announcements of the company's results. The Model Code was For example, what is the length of notice and quorum withdrawn due to its incompatibility with the Market Abuse for board meetings, and the voting requirements to Regulation which came into force in July 2016. The Financial pass resolutions at them? Conduct Authority (FCA) supported the development of an industry-led code, and ICSA: The Governance Institute (ICSA), GC100, the Quoted Companies Alliance (QCA) and other The articles regulate the company's internal management market participants have created a number of documents (although a shareholders' agreement or an investment including a specimen group-wide dealing policy, dealing code agreement may impose additional rules). The Companies Act and dealing procedures manual. See provides sets of articles for use by companies incorporated www.icsa.org.uk/knowledge/resources/mar-dealing-code. under the Act known as model articles, but they can be, and DIRECTORS' REMUNERATION commonly are, tailored to the particular circumstances of a company before they are adopted. Companies commonly adopt bespoke articles without reference to the model articles. There 14. How is directors' remuneration determined? Is its is considerable freedom in practice. disclosure necessary? Is shareholder approval required? The relevant version of the model articles in force at the time of a company's incorporation applies to the company to the extent it has not been excluded or varied by the articles adopted. Determination of directors' remuneration Articles of private companies typically provide that: Subject to the company's articles, the remuneration of directors is set by the board. Remuneration of private company directors  The quorum for a board meeting is two, unless otherwise is decided by the board unless there is a shareholders' or determined by the directors. investment agreement in place with other requirements.  Board resolutions are passed by a majority of the directors The UK Corporate Governance Code provides that the boards attending. of listed companies should establish a remuneration committee, Subject to provisions to the contrary in the company's articles which should follow formal and transparent terms of reference and/or any shareholders' agreement, directors must be given for developing policy on executive remuneration and for fixing reasonable notice of a board meeting. the remuneration packages of individual directors. Directors of listed companies should not be involved in deciding their own In practice, private companies tend not to give long notice of remuneration. board meetings, while listed companies tend to have a programme of board meetings set at the outset of the year. Disclosure Commonly, any director can call a board meeting, and the The annual accounts of all companies (other than small company secretary can call a board meeting if asked to do so companies) must include details of directors' remuneration and by a director. The meeting must be called on reasonable notice benefits. Quoted companies are required, under the Listing (what is reasonable depends on the circumstances). Unless the Rules and the Large and Medium-sized Companies and Groups company's articles specify otherwise, there is no requirement for (Accounts and Reports) Regulations 2008, to provide the notice to be in writing, but notice must include the meeting's shareholders annually with a detailed remuneration report. proposed date, time and location. If the directors are not all Shareholder approval going to be physically present in the same location, the notice must specify how they are to communicate during the meeting, The Companies Act gives shareholders of quoted companies an for example through a conference call (to the extent permitted advisory vote on the directors' remuneration report, meaning a by the articles). director's remuneration is not conditional on shareholders' approval. In addition to an advisory vote on the directors' Apart from single-director companies, the minimum quorum for remuneration in the relevant financial year, shareholders must a board meeting is usually two directors, although the pass a binding vote on the directors' remuneration policy every company's articles or the directors themselves may increase the three years. quorum requirement. The articles may also dictate that directors with a personal interest in a matter do not count towards the The Companies Act provides that any remuneration payments quorum for voting, and may not vote, on that matter. made to a director which are inconsistent with a shareholder- approved remuneration policy are unlawful (and the underlying Unless varied by the company's articles, voting is on a simple contractual obligation is unenforceable). In addition, any majority basis, with each director having one vote. In the event payments so made will be held on trust by the recipient on behalf of a 50/50 vote split, which would defeat the proposal, some of the company. companies allow for the chairman to have a casting vote. The GC100 and Investor Forum have issued some guidance in A common alternative to a board meeting is for the directors to this area. pass a written resolution, for which there must usually be unanimous agreement among all those directors who would General issues and trends have been entitled to vote if the resolution had been raised at a Remuneration of directors and the link between remuneration board meeting. and performance remain the subject of much debate in the UK. The government is consulting in 2017 on further changes to law and regulation in this field. In the meantime some companies are 16. Can directors exercise all the powers of the company experiencing difficulties in having remuneration resolutions or are some powers reserved to the supervisory board approved. (if any) or a general meeting? Can the powers of

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directors be restricted and are such restrictions  Exercise independent judgement. enforceable against third parties?  Exercise reasonable care, skill and diligence.

 Avoid conflicts of interest. Directors' powers  Not accept benefits from third parties. The articles usually provide that the directors are responsible for the management of the company's business, for which purpose  Declare interests in (proposed) transactions or they may exercise all the powers of the company. English law arrangements. does not distinguish between, for example, a management board and a supervisory board. However, the directors' powers These duties are codified in the Companies Act and are (save are restricted by the articles, previous shareholder resolutions for the duty to exercise reasonable care, skill and diligence) and statute (and any relevant provisions in a shareholders' enforceable as fiduciary duties. The remedies for breach of a agreement, an investment agreement or service contract need fiduciary duty include: to be taken into account). Therefore some powers can only be  Injunctive relief. exercised by the shareholders in a general meeting.  Setting aside the transaction (at the company's request). Section 40 of the Companies Act protects persons dealing in good faith with a company. It provides that the power of the  Restitution and account of profits. directors to bind the company, or authorise others to do so, is  Damages. deemed to be free of any limitation under the company's constitution (which would include shareholders' agreements and The remedy for a breach of the duty to exercise reasonable care, so on). skill and diligence is damages for losses suffered. Directors also owe a duty of confidentiality to the company, and 17. Can the board delegate responsibility for specific the terms on which they are engaged by the company, issues to individual directors or a committee of especially in the case of executive directors, may impose or give directors? Is the board required to delegate some rise to further duties and obligations. responsibilities, for example for audit, appointment or For derivative actions, see Question 36. directors' remuneration?

19. Briefly outline the regulatory framework for theft, fraud, The directors' ability to delegate powers is regulated by the and bribery that can apply to directors. articles. Typically, directors can delegate any of the powers which are conferred on them under the articles to individual directors/persons or committees. While delegation is not a legal A director can be held criminally liable for theft under the Theft requirement, it is common practice for day-to-day management Act 1968, but a company cannot. of the business to be delegated to a CEO or managing director, or an executive committee. A company, and any director who consented to or connived in the act, may be held criminally liable for fraud under the Fraud The UK Corporate Governance Code provides, in relation to Act 2006. listed companies, that there should be a schedule of matters specifically reserved for the board's decision. In addition, the It is a criminal offence for a company to bribe another person directors of premium-listed companies should also establish: (including a foreign public official) or to accept a bribe under the Bribery Act 2010.  A nomination committee which should lead the process for board appointments and make recommendations to the If the offence is committed with the consent or connivance of a board. director, the director may also be held criminally liable. The Companies Act duty of a director not to accept benefits from  An audit committee with responsibilities for corporate third parties is also relevant in this context. reporting, risk management, internal control and the relationship with the external auditor.

 A remuneration committee to set the remuneration of all 20. Briefly outline the potential liability for directors under executive directors and the chairman, and recommend the securities laws.

structure of remuneration for senior management. DIRECTORS' DUTIES AND LIABILITIES Criminal market abuse

It is a criminal offence under the Financial Services Act 2012 to 18. What is the scope of a director's duties and personal make, knowingly or recklessly, a materially misleading, false or liability to the company, shareholders and third deceptive statement, promise or forecast in order to induce a parties? person to buy or sell securities.

It is also a criminal offence under the Criminal Justice Act 1993 General duties if an individual who has inside information (information that is not yet publicly known and which would affect the price of the Directors of UK companies are subject to fiduciary (meaning to securities if it were made public) deals in price-affected be in a position of trust) and other duties owed to the company. securities in relation to that information on a regulated market. It In summary, directors owe duties to: is also an offence if he encourages another person to deal or discloses such information (outside the proper performance of  Act within the powers conferred by the company's his employment). constitution.

 Promote the success of the company. global.practicallaw.com/corpgov-guide

Civil market abuse to any neglect on the part of, a director, the director may be held criminally liable. The Market Abuse Regulation (MAR) sets out the civil market abuse regime and prohibits insider dealing, improper disclosure The Corporate Manslaughter and Corporate Homicide Act 2007 of inside information and market manipulation. sets out a criminal offence for private and public companies where a corporate management failing has led to a death. Other Importantly, this does not apply to individuals. However, a Directors are also potentially personally liable, under the director may be liable for common law manslaughter if his gross Financial Services and Markets Act 2000 and under the general negligence leads to a death. law, if any prospectus or financial promotion produced in connection with an issue of securities is inaccurate or misleading or otherwise fails to meet prescribed requirements. 23. Briefly outline the potential liability for directors under

anti-trust laws.

21. What is the scope of a director's duties and liability under insolvency laws? A director may be held criminally and potentially civilly liable for the following breaches of EU and UK competition law:

Fraudulent trading  Anti-competitive agreements (including price fixing). It is a criminal offence under the Insolvency Act knowingly to  Dishonestly limiting production and supply. carry on the business of a company with the intention of  Market sharing. defrauding creditors (or for any other fraudulent purpose). In addition, a director may be liable under the Insolvency Act to  Bid-rigging. make a contribution to the company's assets on a winding up. A director may also receive a competition disqualification order, Wrongful trading preventing him from being a director or taking part in the If, before the start of the winding up of a company, a director management of a company. knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent 24. Briefly outline any other liability that directors can liquidation, he may be liable under the Insolvency Act to make a incur under other specific laws. contribution to the company's assets on its winding up.

Misfeasance or breach of fiduciary duty Data protection Under the Insolvency Act, a director may be liable to repay, restore or account for misapplied money or property, or pay In certain circumstances, directors may be held criminally liable compensation in respect of misfeasance or a breach of fiduciary for a company's breach of the Data Protection Act 1998. The duties. data protection regime will change significantly when the General Data Protection Regulation takes effect in May 2018. Fraud and misconduct offences Companies Act The Insolvency Act also imposes the following offences: A director may be held criminally liable for a number of offences  Fraud in anticipation of winding up. under the Companies Act (such as for failing to make certain regulatory filings).  Transactions in fraud of creditors.

 Misconduct in the course of winding up. Company Directors Disqualification Act 1986 A director may be disqualified from acting as a director for a  Falsification of company books. variety of reasons (such as breaches of competition law). Acting  Material omissions from a statement relating to a company's as a director while being disqualified is also a criminal offence. affairs. There are many other laws in the UK under which a director may  False representation to creditors. incur criminal or civil liability in connection with his role. Transactions defrauding creditors Directors may also be liable under the Insolvency Act to pay the 25. Can a director's liability be restricted or limited? Is it difference in respect of gifts made or undervalue transactions possible for the company to indemnify a director entered into by the company before winding up. against liabilities?

22. Briefly outline the potential liability for directors under The Companies Act provides that any provision that seeks to environment and health and safety laws. exempt or limit a director from any liability for negligence, default, breach of duty or breach of trust in relation to the company is void. There are numerous environmental offences that can be A company may indemnify a director in respect of certain costs committed by a company. A director who consented to or and expenses relating to proceedings brought by third parties connived in actions or omissions leading to the commission of (although generally not in relation to fines or penalties imposed an environmental offence may be criminally prosecuted. in criminal or regulatory proceedings or liabilities from The Health and Safety at Work etc Act 1974 sets out various proceedings where the director is unsuccessful); other health and safety related offences for employers. If a company indemnities from the company are, however, typically void. is guilty of a health and safety offence, and the offence was committed with the consent or connivance of, or was attributable

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 Payments for loss of office in connection with a share or 26. Can a director obtain insurance against personal business transfer. liability? If so, can the company pay the insurance The Listing Rules also impose restrictions on listed companies premium? in relation to transactions with directors or their associates; the

AIM rules impose parallel restrictions. A company may (subject to certain conditions) maintain directors' and officers' liability insurance cover. 30. Are there restrictions on the purchase or sale by a director of the shares and other securities of the company he is a director of? 27. Can a third party (such as a parent company or controlling shareholder) be liable as a de facto director (even though such person has not been formally Directors of private companies are not subject to any general appointed as a director)? statutory restrictions in relation to the purchase or sale of shares

or other securities. However, a director may be subject to restrictions contained in the articles, a shareholders' agreement, Yes. The Companies Act provides that a director includes any an investment agreement, his service agreement or other person occupying the position of director, by whatever name relevant agreements. called. Therefore, directors' duties (see Question 18) are also owed by de facto directors. Directors of listed companies (including on AIM) are subject to the civil and criminal market abuse and insider dealing regimes TRANSACTIONS WITH DIRECTORS AND (see Question 20) and the Market Abuse Regulation (MAR) sets CONFLICTS out a number of requirements around securities transactions by directors. 28. Are there general rules relating to conflicts of interest Many publicly-traded companies have also adopted share between a director and the company? dealing codes and a market-led specimen code has been

developed by ICSA: The Governance Institute (ICSA), GC100, the Quoted Companies Alliance (QCA) and others. Yes. The Companies Act provides that directors have a statutory duty to avoid situations in which their personal interests (actual In the context of a public takeover transaction, the Takeover or potential) conflict (directly or indirectly) with the company's Code imposes restrictions on directors in relation to the interests. Such conflicts can, though, ordinarily be authorised by purchase or sale of shares. the rest of the board provided that: DISCLOSURE OF INFORMATION  The other board members who authorise the conflict are independent of that conflict. 31. Do directors have to disclose information about the  The conflicted director (or any other interested director) company to shareholders, the public or regulatory does not vote on the authorisation. bodies?

 Either the company's articles permit the directors to authorise the conflict (in the case of a public company) or The Companies Act requires directors of private and public the articles contain nothing that would prevent such limited companies to disclose to the public certain information authorisation (in the case of a private company). about the company (for example, the identity of the shareholders, names of directors, accounts and so on). The Companies Act also imposes a duty on directors to declare the nature and extent of their interest in a proposed (or an Some of this information is held on the public record at existing) transaction or arrangement with the company. The Companies House. Shareholders are also entitled to inspect company's articles may provide that a director who has records of general meetings, including all passed resolutions. disclosed an interest will not be counted for quorum and voting purposes. Directors of companies listed on the Main Market or on AIM must comply with the Market Abuse Regulation's (MAR) requirements as to the public disclosure of inside information. MAR sets out 29. Are there restrictions on particular transactions specific circumstances when an issuer can delay public between a company and its directors? disclosure of inside information. The Listing Rules also impose further disclosure obligations on premium listed companies.

Directors of AIM companies must, among other things, also give The Companies Act imposes restrictions on the following notification, without delay, of any new developments which are transactions between a company and its directors: not public knowledge which, if made public, would be likely to  Directors' service contracts with a guaranteed term of more lead to a significant movement in the price of its AIM securities. than two years. Extensive information has to be disclosed to shareholders and,  Substantial property transactions involving the acquisition of in many instances, is made public, through the financial non-cash assets by the director from the company (and vice reporting requirements of the Companies Act. versa). Regulated entities also have to disclose certain information to  Loans, and giving a guarantee or providing security in the relevant regulatory body or bodies. connection with loans, to directors.

 Quasi-loans or other credit transactions (this applies only to public companies or companies associated with public companies). global.practicallaw.com/corpgov-guide

SHAREHOLDER RIGHTS General meetings of public companies must be called with at Company meetings least 14 clear days' notice, unless they are annual general meetings in which case the notice must be at least 21 clear days. 32. Does a company have to hold an annual shareholders' For traded companies, all general meetings (other than AGMs) meeting? If so, when? What issues must be discussed must be called with at least 21 clear days' notice unless specific and approved? conditions are met, which then allow the notice to be no less than 14 clear days.

Private companies are not required to hold an annual general To comply with the UK Corporate Governance Code, quoted meeting (AGM) of shareholders unless obliged to do so under companies must give at least 20 working days' notice for AGMs their articles. and 14 working days' notice for other general meetings. AGMs held by private companies typically involve matters such However, in some circumstances the shareholders who have a as receiving the report and accounts, appointing auditors and right to attend and vote at a meeting may agree to a shorter declaring a dividend. notice period. Public companies must hold an AGM every year, with the This needs to be agreed by 90% in the case of a private meeting taking place no more than six months after the company. company's financial year end. For public companies, if the company is non-traded, and the Public companies must lay their annual accounts and reports meeting is not an AGM, shorter notice requires the approval of before a general meeting, and this is usually done at an AGM. 95% of shareholders. The re-election of directors of public companies must also take Traded public companies can only agree to shorter notice in very place through a shareholder vote at an AGM. limited circumstances, such as certain takeover situations. Listed companies typically propose many resolutions for the Under the Companies Act, the quorum for a general meeting is consideration of their shareholders, including the following basically two shareholders, present in person or by a regular items: representative (single member companies require only one).  Receiving the annual reports and accounts. However, a company's articles can require a higher quorum.

 Approval of the directors' remuneration report. Voting can be conducted on a show of hands, where each shareholder typically has one vote. On a show of hands, an  Approval of the directors' remuneration policy (at least every ordinary resolution is passed by a simple majority of the votes three years). cast by those entitled to vote. A special resolution is passed by a majority of no less than 75% of the votes cast by those entitled  Declaring a final dividend. to vote. See Question 34.  Election/ re-election of directors. Alternatively, shareholders may request that a poll is taken, in  Appointment/ re-appointment of auditors and fixing their which case a shareholder typically has one vote for every remuneration. ordinary share he or she holds. For example, a special resolution on a poll is passed by members representing no less  Directors' authority to allot shares. than 75% of the total voting rights of the members who vote.  The disapplication of pre-emption rights on share issues. Shareholders of private companies can also pass many resolutions by a written resolution (although certain important  Directors' authority to make political donations or incur political expenditure. decisions, such as removing a director, cannot be taken by a written resolution). On a written resolution, every member  Directors' authority for market purchases of own shares. typically has one vote in respect of each ordinary share in the

company held by him.

33. What are the notice, quorum and voting requirements Shareholders can usually appoint another person as their proxy for holding meetings and passing resolutions? to exercise all or any of their rights to attend, to speak and to vote at a general meeting.

This is a complicated area as the statutory framework under the Companies Act can differ depending on whether the company is 34. Are specific voting majorities required by statute for private, public, traded (which would include AIM companies) or certain corporate actions? quoted (which are Main Market companies). It is also important to look at a company's articles, for example to see what voting rights are attached to different classes of shares. The Companies Act requires shareholder approval for a number of corporate actions, either by an ordinary resolution (simple However, general meetings of all companies are usually called majority required) or special resolution (requiring at least 75% of by their directors, or by the company secretary acting on their the votes cast). authority. Shareholders have the power to require directors to call a general meeting (and, if the directors do not call a general Actions requiring a special resolution include: meeting at the shareholders' request, shareholders have the  Changing a company's constitution or name. power to call a general meeting directly).  Re-registering a private company as public or a public A general meeting of a private company must be called with at company as private. least 14 clear days' notice (the articles may stipulate a longer period).  Various actions regarding the disapplication of pre-emption rights on share issues.

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 Certain activities to reduce (and increase) share capital or Minority shareholder action the purchase of a company's own shares from capital. Actions requiring an ordinary resolution include: 36. What action, if any, can a minority shareholder take if it believes the company is being mismanaged and what  Removal of a director or the company's auditor. level of shareholding is required to do this?

 Approval to give a director a service contract of two years or longer. Minority shareholders have two main causes of action if they  Election of a chairman at a general meeting. believe the company is being mismanaged.

 Redenomination of share capital. Unfair prejudice claim

 Authorising the allotment of shares. Under the Companies Act, shareholders can bring a claim for unfair prejudice against the company where the company's Articles or shareholders' agreements can provide for higher affairs are, or have been, conducted in a way that is unfairly majority requirements. prejudicial to all or some of the shareholders. Unfair prejudice claims may also be brought by shareholders in relation to The UK Corporate Governance Code, which applies to proposed actions or omissions. companies with a premium listing, states that when, in the opinion of the board, a significant proportion of votes has been Remedies available to the court include: cast against a resolution at any general meeting, the company should explain when announcing the results of the voting what  Ordering the company to provide for the sale and purchase actions it intends to take to understand the reasons behind the of the aggrieved shareholders' shares (a buyout). vote result. There is no definition of "significant" but the industry  Injunctive relief. view seems to be that generally a vote of over 20 to 30% cast against would be deemed significant. The Financial Reporting There is no minimum level of shareholding required for such Council (FRC) states that it is for the board to judge what counts claims. as a significant percentage in a company's particular circumstances and suggests that this figure is noted on its AGM Derivative action results. Votes withheld do not have to be included in the Shareholders can also bring a derivative claim against the assessment as to whether the vote cast against is significant. directors under the Companies Act. However, derivative claims However, the Pensions and Lifetime Savings Association are made on the company's behalf and therefore any remedy (PLSA) (formerly the National Association of Pension Funds granted will be to provide relief to the company. There is no (NAPF)) has stated that it considers that votes withheld should minimum level of shareholding required for such claims. be included in the calculation. A derivative claim can only be brought with the court's permission. The basis for the claim must be an actual or 35. Can shareholders call a meeting or propose a specific proposed act or omission involving negligence, default, breach resolution for a meeting? If so, what level of of duty or breach of trust by a director of the company. shareholding is required to do this? Other claims Minority shareholders may also apply under the Insolvency Act Shareholders with at least 5% of a company's paid-up share to wind up the company on "just and equitable grounds". capital (with voting rights) can require the holding of a general Mismanagement can in some circumstances constitute such meeting of that company. However, they must first ask the grounds. Shareholders may also have additional rights under a directors to call a meeting on their behalf. If the directors fail to shareholders' or investment agreement. act within the deadlines specified by the Companies Act, then INTERNAL CONTROLS, ACCOUNTS AND AUDIT the shareholders may call a general meeting themselves, reclaiming reasonable expenses from the company. This power is used very rarely in practice. If a general meeting is convened 37. Are there any formal requirements or guidelines by shareholders in this way, they can put their own resolutions relating to the internal control of business risks? before the meeting.

In addition, shareholders can ask the company to circulate a Under the UK Corporate Governance Code, the board of a listed written statement to members about a resolution/matter coming company should maintain sound risk management and internal before the meeting. control systems. It should monitor the company's risk There is an additional right for shareholders of a public company management and internal control systems and, at least to put their own resolutions before the company's AGM, if the annually, carry out a review of their effectiveness, and report on shareholders concerned either: that review in the annual report. The monitoring and review should cover all material controls, including financial,  Hold at least 5% of the total voting rights. operational and compliance controls.

 Are made up of 100 or more shareholders who hold an The UK Corporate Governance Code also states that the audit average of at least GB£100 paid up share capital and who committee should review the company's internal financial would all be entitled to vote at the AGM on that resolution. controls and, unless expressly addressed by a separate board risk committee composed of independent directors, or by the Members of traded companies can also request the company to board itself, review the company's internal control and risk include other matters (as opposed to resolutions) in the business management systems. to be discussed at an AGM. The Disclosure and Transparency Rules (DTRs) require listed companies to provide a description of their internal control and risk management systems in their corporate governance statements. global.practicallaw.com/corpgov-guide

Further guidance is given in the Financial Reporting Council's (FRC's) Guidance on Risk Management, Internal Control and 41. Are there restrictions on who can be the company's Related Financial and Business Reporting and its Guidance on auditors? Audit Committees.

The auditors of a company must be: 38. What are the responsibilities and potential liabilities of directors in relation to the company's accounts?  Appropriately qualified.

 Members of a recognised supervisory body and eligible for Directors are responsible for the preparation, approval and filing appointment under the rules of that body. of company accounts. The directors must not approve accounts A person cannot be an auditor of a company if he is an officer or unless they are satisfied that they give a true and fair view of the employee of the company being audited, or if he is the partner company's assets, liabilities, financial position and profit/loss. or employee of such an individual. A partnership in which an The UK Corporate Governance Code requires a statement from officer or employee of the company is a partner also cannot act directors that the company's accounts are fair, balanced and as an auditor. understandable. Under the Listing Rules and AIM Rules, directors may also be responsible for sending out copies of the annual accounts to shareholders. 42. Are there restrictions on non-audit work that auditors can do for the company that they audit accounts for? Directors may be criminally liable where accounts filed are not reasonably accurate or where accounts do not conform to the requirements of the Companies Act. Where directors make The short answer is yes. It is a complex area, but for public misstatements or fail to include prescribed information in the interest entities (PIEs, which include entities incorporated in an accounts they may be liable to investors. EU member state with securities listed on a regulated market,

credit institutions and insurers), the EU Audit Regulation sets out a list of non-audit services which are completely prohibited. 39. Do a company's accounts have to be audited? These are set out in the Financial Reporting Council's (FRC's) Revised Ethical Standard 2016. Broadly speaking, the Regulation also sets a 70% cap on permissible non-audit All company accounts must be audited unless the company is: services as a percentage of average fees over three years.

 A small company as defined in section 382 of the For other companies, there is some flexibility for an auditor to Companies Act. provide non-audit services, as contemplated by the FRC's Revised Ethical Standard 2016.  A dormant company as defined in section 1169 of the Companies Act. The UK Corporate Governance Code requires the audit committee to develop and implement policy on the engagement  A subsidiary company fulfilling certain criteria in section of the external auditor to supply non-audit services, taking into 479A of the Companies Act. account relevant ethical guidance. If an external auditor provides non-audit services, the section in the annual report which describes the work of the audit committee should explain 40. How are the company's auditors appointed? Is there a how objectivity and independence were safeguarded. limit on the length of their appointment?

43. What is the potential liability of auditors to the Auditors are appointed by an ordinary resolution of the company, its shareholders and third parties if the shareholders. Directors may also appoint auditors in certain audited accounts are inaccurate? Can their liability be circumstances. limited or excluded?

In private companies, where no alternative auditor is appointed at the end of each financial year, the auditor in office is deemed to be re-appointed. However, in public companies, auditors Auditors are criminally liable if they knowingly or recklessly allow need to be re-appointed every financial year. an auditor's report to include something that is materially misleading, false or deceptive, or if they omit any statements The EU Statutory Audit Directive and Audit Regulation and the that are required in such reports. Companies Act require certain UK incorporated traded companies and other prescribed companies to put their audit Auditors are liable to the company if they act negligently or if contract out to tender at least every ten years. The audit they breach the terms of their engagement letter. Auditors may committee must make a recommendation to the board also be liable to shareholders if they act negligently and the concerning the choice of auditor, identifying its first and second shareholders can prove that they suffered loss as a result of choices. There are provisions concerning maximum relying on the auditor's report. It is very difficult for third parties engagement terms. to bring a successful negligence claim against auditors. The provisions for a competitive tender process set out in the Under the Companies Act, auditors can enter into liability Statutory Audit Services for Large Companies Market limitation agreements with companies. These limit an auditor's Investigation (Mandatory Use of Competitive Tender Processes liability for negligence, default or breach of duty or trust. and Audit Committee Responsibilities) Order 2014 continue to However, liability cannot be limited to an amount less than is fair apply to FTSE 350 companies. and reasonable. Shareholders must approve liability limitation agreements by ordinary resolution (unless the company is a private company and waives this requirement). In practice, it remains unusual for companies to enter into liability limitation agreements with auditors.

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For listed companies, the UK Corporate Governance Code 44. What is the role of the company secretary (or provides that, under the direction of the chairman, the company equivalent) in corporate governance? secretary's responsibilities include ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as facilitating All companies can have a company secretary, although this is directors' induction and assisting with the professional not a mandatory requirement for private companies. In practice, development of directors as required. larger private companies tend to appoint a secretary to support It also provides that the company secretary should be the chairman in ensuring the good governance of the company. responsible for advising the board through the chairman on all The Companies Act does require a public company to have a governance matters. company secretary and stipulates the qualifications and experience that such person should have. The FRC's Guidance on Board Effectiveness states that the company secretary can also add value by fulfilling, or procuring The role varies between companies, but typically, as well as the fulfilment of, other requirements of the UK Corporate organising the meetings of the board and shareholders, and Governance Code on behalf of the chairman, and this is often taking responsibility for the fulfilment of a wide range of statutory the case in practice. and regulatory corporate requirements, the company secretary will act as an adviser to the chairman and the board on corporate ICSA: The Governance Institute has published detailed governance best practice and also changes in corporate law, guidance notes on the role of the company secretary. regulation and guidance.

ONLINE RESOURCES Legislation.gov.uk W www.legislation.gov.uk Description. Carries most types of legislation and accompanying explanatory documents. FCA and PRA Handbooks W http://fshandbook.info/FS/ Description. The official handbook of the FCA (which includes the Listing Rules, the Prospectus Rules and the DTRs) and the Prudential Regulation Authority (PRA) (which contains regulatory rules for banks, among other things). Financial Reporting Council (FRC) W www.frc.org.uk Description. The official website of the FRC, which publishes the UK Corporate Governance Code and the Stewardship Code. London Stock Exchange (LSE) W www.londonstockexchange.com Description. The official website of the LSE, which hosts the AIM Rules and the Regulatory News Service.

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Practical Law Contributor profiles

Nick Gibbon, Corporate Partner Giles Peel, Head of Governance Advisory Practice DAC Beachcroft LLP T +44 20 7894 6308 DAC Beachcroft LLP F +44 20 7831 6630 T +44 20 7894 6104 E [email protected] F +44 20 7831 6630 W www.dacbeachcroft.com E [email protected] W www.dacbeachcroft.com

Professional qualifications. Solicitor, England and Wales, Professional qualifications. Fellow of the Institute of 1988; Solicitor, Hong Kong, 1997. Chartered Secretaries (FCIS) Areas of practice. Corporate law; M&A; ECM. Areas of practice. Regulation; corporate governance; M&A Non-professional qualifications. MA (Hons) in Law, Non-professional qualifications. BSc (Hons) Management Cambridge University. Sciences Recent transactions

 Cross-border acquisition of a controlling interest in a UK group.

 MBO of an international financial services group.

 Sale of a catering group to a private equity-backed vehicle.

 IPO of an investment group and its subsequent secondary fundraisings including one by way of crowdfunding.

 International insurance groups' sales of a broking group and a health insurance business.

 Demerger of wealth management groups.

 Takeover Code offers for a media group and for an investment group.

 Sale of a UK technology group to a US private equity backed acquirer.

 Debt and equity co-investments into offshore insurance distributors and consultancies.

 Reorganisation of an insurance group. Professional memberships. Member of Practical Law's corporate consultation board; member of the QCA's corporate governance experts working group and former member of the Law Society's company law committee; IBA.

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Clive Garston, Consultant Bridget Salaman, Company Secretary and Adviser, Governance DAC Beachcroft LLP Advisory Practice T +44 20 7894 6984 F +44 20 7831 6630 DAC Beachcroft LLP E [email protected] T +44 61 934 3272 W www.dacbeachcroft.com F +44 61 934 3123 E [email protected] W www.dacbeachcroft.com

Professional qualifications. Solicitor, England and Wales, Professional qualifications. Fellow of the Institute of 1968. Chartered Secretaries (FCIS) Areas of practice. Corporate law; equity capital markets; Areas of practice. Company Secretary of DAC Beachcroft M&A. LLP and adviser on corporate governance and the practical Non-professional qualifications application of aspects of company law.

 LLB (Hons). Non-professional qualifications. BA (Hons) in Soviet Studies, University of Manchester.  Fellow of the Chartered Investment and Securities Institute and chairman of its corporate finance forum.

 Corporate Finance qualification of the Institute of Chartered Accountants in England and Wales. Recent transactions

 IPO of Warpaint London plc.

 IPO of SkinBioTherapeutics plc.

 Fundraising by Sabien Technology Group plc.

 Fundraising by Orogen Gold plc.

 Fundraising and acquisitions by Veltyco Group plc.

 Sale of a media company.

 AIM company acquisition of businesses in Australia. Professional associations/memberships

 International Bar Association.

 American Bar Association.

 Chartered Securities Institute - Chairman of the corporate finance team.

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