PLC QTRLY - Q2 2022

This is our regular quarterly update to help our listed company clients and other market participants keep up to date with key developments relevant to issuers on the Main Market and AIM market of the London Stock Exchange.

Government seeks to enhance trust in audit and corporate governance

The Government has published proposals to strengthen the UK’s audit, reporting and corporate governance regime: Restoring trust in audit and corporate governance.

Currently, companies with shares or other securities traded on the Main Market of the London Stock Exchange (as well as certain credit institutions, insurers and other designated entities) are treated as "public interest entities" (PIEs). Statutory audits and auditors of PIEs are subject to more stringent measures than their non-PIE counterparts, and the Financial Reporting Council (FRC) has direct responsibility for inspecting, investigating, and imposing sanctions in relation to audits of PIEs.

Under the Government's proposals, large private companies with both 750+ employees and an annual turnover of £750m+ (the 750:750 test) will also be treated as PIEs. Companies traded on AIM will also fall within the new PIE definition where they meet the 750:750 test. The Government has said there will be a "generous lead-in time" when including new PIEs within the remit of the new regulator to replace the FRC, the Audit, Reporting and Governance Authority (ARGA).

Key proposals include:

• Effectiveness of internal controls: Changes to the UK Corporate Governance Code to require companies to include a statement by the board on the effectiveness of the company's internal control systems (financial, operational and compliance), and the board's basis for that assessment
  Resilience statement: PIEs that meet the 750:750 test (750:750 PIEs) will need to publish a resilience statement in each annual report which will require directors to consider the short term and medium term threats to the company's business resilience having regard to matters such as its financial liabilities and operational preparedness.
• Audit and assurance policy: 750:750 PIEs will need to publish an audit and assurance policy at least every 3 years describing the company's approach to seeking assurance of its reported information beyond its statutory audit.
• Dividend reform: ARGA will have responsibility for issuing guidance on the determination of “realised” profits and losses. 750:750 PIEs will be required to disclose their distributable reserves and explain the board’s long-term approach to the amount and timing of returns to shareholders. Directors will also be required to confirm in the company's annual report the legality of any dividends.
• Wider regulatory powers: ARGA will have enhanced powers to investigate and sanction directors of any PIE for breaches of corporate reporting and audit related responsibilities.

FCA diversity targets for listed company boards – final rules published

We commented in our previous PLC QTRLY on the FCA's proposals on gender and ethnicity targets. The FCA has now published a policy statement (Diversity and inclusion on company boards and executive management, Policy statement PS22/3) and final amendments to the Listing Rules. The minimum targets are:

• 40% of the board are women.
• One senior board position (Chair, CEO, CFO or Senior Independent Director) is held by a woman.
• One member of the board is from a non-white ethnic minority background.

For more detail on the background to these new targets, see RPC's blog Balance on the board: Eight things UK PLCs need to know about the FCA's diversity targets.

The FRC updates its Guidance on the Strategic Report

The FRC has updated its Guidance on the Strategic Report to include the following:

• Climate-related financial risks and opportunities in line with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations.
• The need for traded limited liability partnerships and banking LLPs to publish a strategic report.
• Clarification of the scope and definitions of the requirements with regard to PIEs.
• The Government’s Streamlined Energy and Carbon Reporting requirements.

The FRC notes that the strategic report exists within the context of the annual report and "should provide a company’s shareholders with a holistic and meaningful picture of a company’s business model, strategy, risks, development, performance, position and future prospects including relevant non-financial information".

FCA proposes changes to the structure of the UK listing regime

The FCA is considering removing the distinction between "Premium" and "Standard" listings on the Official List and replacing them with one listing segment for equity shares in commercial companies.

As described in the FCA's Discussion Paper DP22/2, the single segment would have one set of eligibility criteria for companies seeking admission to the Official List and a minimum set of mandatory continuing obligations. Companies would have the choice to adopt supplementary obligations based upon the existing continuing obligations for premium listed companies.

FCA considers revising threshold for Class 1 transactions

The FCA is considering raising the threshold for Class 1 transactions from 25% to 33% under the Class Tests set out in the Listing Rules.

This proposed change is part of the FCA's consultation on the structure of the UK listing regime in DP22/2 (see above). Several respondents to the consultation have highlighted certain shortcomings of the Class Tests and significant transactions regime under the Listing Rules.

While the FCA has not yet indicated whether it will make the proposed change to the Class 1 threshold, it has said it recognises the potential benefit of having additional flexibility in how the continuing obligations regime under the Listing Rules operates.

Takeover Code: Proposed changes to the definition of "acting in concert"

The Takeover Panel is consulting on the meaning of "acting in concert" under the Takeover Code (PCP 2022/2). The proposals include codifying the Panel Executive's existing practice on the definition of "acting in concert".

The Panel requests responses to the consultation by 23 September 2022. It is anticipated a response statement setting out the final amendments will then be published in late 2022 with amendments taking effect around two months later.