Annual Reports
The Secretariats of listed companies with a December year end will currently be busy finalising their 2015 Annual Reports and 2016 AGM documents. The good news for this year is that this coming season looks to be more settled and most companies should therefore be able to focus on consolidating their approach and utilising the useful guidance available from various bodies.
The main reporting issue for companies to deal with this year is in relation to disclosures around the new longer-term Viability Statement. This requirement stems from UK Corporate Governance Code (Code) provision C.2.2, upon which Jordans reported in their November 2014 update. This means that Boards with September 2015 and subsequent year ends will need to provide two statements in their Annual Reports:
1) The traditional Going Concern Statement, whereby Directors should state whether they consider it appropriate to adopt the going concern basis of accounting in preparing the accounts and identify any material uncertainties as to the company's ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements (provision C.1.3): and
2) The new Longer Term Viability Statement (provision C.2.2), where Directors should state whether, taking account of the company's current position and principal risks, they think they have a reasonable expectation that the company will be able to continue to operate and meet its liabilities over a chosen period, based on a robust assessment of the risks ahead. The FRC recommends that the statements are contained in the strategic report so that they are covered by the safe harbour provisions in section 463 of the Companies Act 2006 (liability for false or misleading statements in reports). FRC guidance states that the period covered by the Viability Statement should, except in rare circumstances, be significantly longer than 12 months from the approval of the financial statements. The Viability Statement responds to criticism that during the financial crisis there was little reported that indicated that there was trouble up ahead.
In agreeing the content of the Viability Statement, companies should have developed a robust process to identify responsibilities for conducing the necessary risk assessments and to ensure that the Audit Committee and the Board have sufficient space to consider the process, analyse the risks identified and to challenge and support the conclusions and length of period set out within the Statement.
Section C.2 of the Code has been broadened to require companies to confirm in their Annual Report that they have carried out a robust assessment of the principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity. The Directors should also explain how they are being managed or mitigated. Companies should monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness and report on that review in the Annual Report (provision C.2.3).
Other changes for 2015 Annual Reports include:
The Disclosure of related undertakings – as reported in Jordans' August 2015 update, up until 1 July 2015, companies were able to show a full list of subsidiaries in their accounts or take advantage of section 410 of the Companies Act 2006, which allowed them to show only the principal subsidiaries in their accounts and annex a full list of subsidiaries to their next annual return. However, section 410 exemption has been repealed, which in practical terms means that all related undertaking information must now be disclosed in the Annual Report and cannot be appended to annual returns. This applies to annual accounts approved on or after 1 July 2015. Companies should note that Companies House may reject accounts that do not include a full list of related undertakings after this date.
Revised Pre-emption Group Guidelines – Jordans reported in their May 2015 update that the Pre-Emption Group had issued a revised version of its Statement of Principles, replacing the previous version issued in 2008. This provided guidance to companies and shareholders on the factors to take into account when dis-applying pre-emption rights. Companies were encouraged to use the revised Statement with immediate effect, but the Group recognised that this may not have been practical for many companies, given that they were in the final stages of their 2015 AGM preparations. The revised guidelines permit a 10% disapplication authority to be sought at the AGM if certain conditions are met. The 2015 Statement of Principles can be found here.
FTSE 350 companies are for the first year required to make statements under the Competition & Markets Authority (CMA) Order regarding tendering for external auditors and include within the Audit Committee section of the Annual Report a statement that the company has complied with the provisions of the Order. Audit Committees should also note that the Order requires specific functions to be carried out by the Audit Committee, which should not only be reflected in the Audit Committee section of the Annual Report, but also incorporated into the committee's terms of reference and rolling meeting agendas.
Large UK companies (listed and unlisted) in the extractive industries sector are required to prepare an annual report on payments to governments for financial years beginning on or after 1 January 2015. The report must be prepared and submitted within 11 months of the end of the financial year. Details were provided in Jordans' February 2015 update. Listed companies must, under the provisions of DTR 4.3A, prepare this report and make it public within six months of the financial year-end. Listed companies are not required to include the report in their Annual Report but the report will need to be published by means of an RIS. The report will also need to be filed with Companies House, along with a filing fee.
There is a wealth of useful guidance from the FRC and other organisations designed to assist listed companies in drafting their Annual Reports. These include:
- FRC Report on Clear & Concise Developments in Narrative Reporting (December 2015) – See report
- FRC Annual Corporate Reporting Review (October 2015) – as reported in our November 2015 update, the FRC has issued its annual report reviewing annual reports of public and large private companies – See report
- FRC Developments in Corporate Governance and Stewardship – this provides the FRC's assessment of the quality of compliance with the UK Corporate Governance Code and the Stewardship Code and includes areas where the FRC would like to see improvements in the reporting of governance – Find out more.
- FRC letter of advice to Audit Committee Chairs of larger listed companies, which sets out suggestions for improvements in corporate reporting in 2015 – Find out more
- FFC letter of advice to smaller listed and AIM companies, following the FRC discussion paper on improving reporting by smaller listed and AIM companies. This letter details how to improve Annual Reports in areas which are of particular interest to investors – Find out more
- ICSA good practice for Annual Reports – as reported in our May 2015 update, the ICSA has published useful guidance on best practice/contents of Annual Reports. The guidance sets out what the ICSA believes to be the features of the best annual reports and gives examples of companies that have demonstrated good corporate reporting. Both publications can be downloaded from the ICSA website: Good practice for annual reports 2015 | Contents list for the annual report of a uk company.
- Updated ISS UK & Ireland Proxy Voting Guidelines, which introduce an ‘overboarding' policy, whereby ISS proposes limits to the number of directorships both Executive and Non-Executive Directors of listed companies can hold. See guidelines.
- Updated Investment Association Principles of Remuneration, along with a letter to Remuneration Committee Chairmen. Find out more
- Pensions and Lifetime Savings Association (PLSA) (formerly known as NAPF) updated Corporate Governance Policy and Voting Guidelines. See guidelines
Companies are also reminded that most will be reporting for the third year under the remuneration reporting regime and this year's implementation reports will be reporting against the remuneration policies approved in 2014. For many companies, 2016 is the last year before the remuneration policy must be put to a binding shareholder vote again in 2017. There is no need for companies to include their remuneration policy in full within their 2015 Annual Report if it was approved by shareholders in 2014, or to submit this to shareholders for approval again this year, unless the Directors wish to amend the policy. That said, even if a company is not amending its remuneration policy this year, various institutional shareholder bodies recommend that the headline policy table is disclosed in the directors' remuneration report, with a cross-reference to the company's website for the full policy.
AGM resolutions
The main change to the Notice of AGM this year relates to the revised 2015 Pre-Emption Statement of Principles referred to above. The thresholds for a general disapplication of pre-emption rights has not changed (up to 5% of issued share capital every year and 7.5% over a rolling three year period). However, the 2015 Statement allows companies to seek a disapplication of pre-emption rights in respect of a further 5% (so 10% in total) as long as the company confirms within the AGM Notice that it intends to use the additional 5% only in connection with an acquisition or capital investment.
As noted above, most companies should not need to obtain approval for the remuneration policy this year as long as their policy has not changed.
FTSE 350 companies are reminded that the resolution relating to the remuneration of the auditor should refer to remuneration being set by the Audit Committee, rather than the full Board.
Companies with controlling shareholders (controlling 30% or more of the voting rights of the company) need to comply with rules relating to the election and re-election of independent directors (see Jordans' February 2015 update for further information).
Where a significant proportion of votes (widely felt to be 20% or more, but this depends on an individual company's shareholder base) has been cast against a resolution at any general meeting, the company should explain, when announcing the results of voting, what actions it intends to take to understand the reasons behind the voting result.
There are also some minor changes that may also need to be reflected in the AGM resolutions, such as changing any references to the NAPF to PLSA.
As reported in Jordans' May 2015 update, the ICSA published guidance on the 2014 edition of the UK Corporate Governance Code (the ‘Code') to clarify provision E.2.4 in relation to notice of meetings. Provision E.2.4 states that companies should arrange for notices of the AGM to be sent to shareholders at least 20 working days before the meeting. The 2014 edition of the Code also includes a new requirement that "for other general meetings, this should be at least 14 working days in advance". The Companies Act 2006 (the ‘Act') states that an annual general meeting of a listed company should be held on not less than 21 clear days' notice and any other meeting on not less than 14 clear days' notice. To maintain flexibility, companies should continue to seek to pass the annual resolution required by the Act to call meetings on 14 clear days' notice so that they can decide on a case-by-case basis how much notice to give for a shareholder meeting.
Companies may also wish to review their articles to afford them flexibility to adopt alternative dividend payment methods, such as mobile phone payments, as and when they become available.
To find out more information please contact Jayne Meacham of Jordans at jmeacham@jordanscorporatelaw.com or 0117 918 1383.
