This edition covers the new Investment Association Share Capital Management Guidelines and Shareholder Priorities for 2023, FRC publications on ESG and corporate governance, and the FCA’s Primary Market Bulletin 43.
Entire Annual Allotment Headroom May Now Be Used for Fully Pre-Emptive Offers
In February 2023, the Investment Association published its updated Share Capital Management Guidelines to adopt recommendations from the Secondary Capital Raising Review which seek to improve capital raising processes for UK listed companies. These guidelines apply to premium-listed companies, although standard-listed and AIM companies are encouraged to adopt them.
Companies should take advantage of these changes by seeking shareholder approvals incorporating the additional flexibility under the updated guidelines at their upcoming AGMs.
Increased flexibility for pre-emptive offering structures (i.e. rights issues and open offers) — Companies may seek annual allotment authorities from their shareholders of up to two-thirds of their issued share capital (as was the case under the previous guidelines). However, any amount in excess of one-third of the issued share capital is now extended to all forms of fully pre-emptive offers (e.g., including open offers) and not just to rights issues as was previously the case. Investment Association members nonetheless expect companies to explain why they have chosen their capital raising structure and why it is appropriate for the company and its shareholders. The guidelines note that rights issues continue to be the preferred method of fully pre-emptive capital raising for retail investors.
The purpose of this change is to incentivise the use of pre-emptive fundraising structures and reduce the need for a general meeting in relation to a larger proportion of open offers.
Increased headroom for non-pre-emptive offerings (i.e. placings) — The guidelines support the new Pre-emption Group Statement of Principles which allows annual disapplication authorities of up to 20% of the issued share capital and an additional 4% for a follow-on offer (for further details, see this Latham blog post). The Institutional Voting Information Service (IVIS) would red-top companies that seek pre-emption authorities in excess of these thresholds or authorities up to 24% that do not: (i) follow the Pre-emption Group’s template resolutions; (ii) confirm that the company will follow the shareholder protections regarding the use of such authorities; and (iii) confirm that the company will follow the expected features of a follow-on offer as set out in the Statement of Principles.
This increased disapplication headroom means that companies would be able to raise larger amounts of capital through placings using their routine annual authorities. In addition, cashbox structures should appear less frequently as, once these routine 20% disapplication authorities are passed at AGMs, fewer companies would need to deploy a cashbox structure to circumvent statutory pre-emption rights in order to implement accelerated non pre-emptive offerings.
- Capital hungry companies may seek higher disapplication authorities for non pre-emptive offerings — The guidelines recognise that capital-hungry companies may have reason to raise larger amounts of equity capital. IVIS would amber-top the pre-emption authorities in excess of 24% of the issued share capital for companies that have disclosed at the time of their IPO in their prospectus that they are a capital-hungry company.
Investment Association Shareholder Priorities and IVIS Approach for 2023
In February 2023, the Investment Association published its Shareholder Priorities for 2023, which retains the priorities from previous years. The 2023 paper sets out progress against each priority in 2022, investor expectations for the 2023 AGM season, and the IVIS approach to assessing companies against these expectations in 2023.
Most FTSE 350 companies should be in a position to satisfy these shareholder priorities in 2023, provided they apply concerted efforts to address the shareholder priorities around climate change accounting and audit quality (as further detailed in the second and third bullets below).
- Responding to Climate Change — IVIS will continue to amber-top all commercial companies that do not make disclosures against all four pillars of the Task Force on Climate-related Financial Disclosures (TCFD), noting that only one FTSE 100 company was amber topped on this basis in 2022. IVIS will also monitor company disclosures with respect to metrics and targets, and how results of a scenario analysis impact the company’s business model and strategy.
- Accounting for Climate Change — IVIS will continue to monitor whether companies have stated that the directors had considered the relevance of climate and transition risks when preparing and signing off on the accounts.
The Investment Association noted that the proportion of companies including these disclosures across the FTSE 100 has been quite low (51.8% in 2022). Companies, particularly significant greenhouse gas emitters, should seek to make such statements and incorporate the financial impact of climate-related matters into their accounts for 2023.
- Audit Quality — companies should ensure that their annual report and accounts contain targeted disclosures (including case studies, when helpful) on (i) how the audit committee has assessed the quality of the audit; (ii) how the auditor has demonstrated professional scepticism; and (iii) how the auditor has challenged management’s assumptions when necessary.
In 2022, only 8% of FTSE 100 companies were able to adequately demonstrate how they had assessed the quality of the audit. For 2023, companies should focus on this shareholder priority by demonstrating how they had reported against each aspect of the questions above.
- Gender Diversity — for 2023, IVIS will increase its existing diversity targets by 2% which is aligned with the ambition to hit the FTSE Women Leaders Women on Board targets by 2025: (i) red top FTSE 350 companies where women represent 35% or less of the board, or 30% or less of the executive committee and their direct reports; and (ii) given the level of gender diversity on small cap boards, IVIS will maintain its approach to red topping FTSE Small Cap companies where women represent 25% or less of the board, or 25% or less of the executive committee.
IVIS will also assess whether companies are meeting the new Listing Rule requirement for companies to disclose on a comply-or-explain basis whether one of the four senior positions on the board (chair, SID, CEO, or finance director) is held by a female. At this stage, IVIS will not colour-top on this issue.
- Ethnic Diversity — IVIS is not changing its approach to ethnic diversity for 2023. It will: (i) red-top FTSE 100 companies that have not met the Parker Review target of one director from a minority ethnic group; and (ii) amber-top FTSE 250 companies that do not disclose either the ethnic diversity of their boards or a credible action plan to achieve the Parker Review targets by 2024.
- Stakeholder Engagement — IVIS will monitor and highlight areas of the annual report which reflect engagement with stakeholders on the cost-of-living crisis.
FRC Updates Its Statement of Intent on ESG
On 30 January 2023, the Financial Reporting Council (FRC) published its updated Statement of Intent on ESG, setting out areas in which ongoing challenges remain in ESG reporting, suggesting actions for preparers to produce decision-relevant information. The statement also sets out the FRC’s plans to engage with the market in 2023 to ensure that stakeholder needs are being met as demand for ESG information continues to evolve.
The update includes links to the ESG materials that the FRC has produced since 2021 (including thematics, guidance, and examples of best practice) which will be helpful reference for companies in preparing their ESG disclosures.
FCA Newsletter Confirms Chinese GAAP Is Deemed Equivalent to UK IAS
On 20 February 2023, the FCA published Primary Market Bulletin 43 which covers the following:
- Equivalence of Non-UK Regimes — the FCA reminded that it is able to exempt third-country issuers from certain requirements in DTR 4 (financial reporting rules) if it considers the law of the third country in question to be equivalent, or if the issuer complies with requirements of the law of a third country it considers to be equivalent. In particular, it noted that it deems the Chinese Generally Accepted Accounting Principles (GAAP) to be equivalent for these purposes.
Therefore, issuers admitted to trading on a UK-regulated market with a registered office in a third country, which report their financials using Chinese GAAP, are exempt from (broadly) the DTR requirements to publish financial reports prepared in accordance with UK-adopted International Accounting Standards (IAS). Other jurisdictions with requirements deemed equivalent, for the purposes of DTR 4, include the EEA, Switzerland, United States, Canada, Japan, and South Korea.
- Structured Digital Reporting — the FCA has recently enabled its National Storage Mechanism to accept annual financial reports with financial statements that have been tagged using the latest ESEF 2022 taxonomy.
- Multi-factor Authentication — the FCA is introducing multi-factor authentication to strengthen how firms and others log into its systems (including the electronic submission system) and to protect and control access to its data.
FRC Dispels Misconceptions of Corporate Governance and Stewardship
On 20 February 2023, the FCA published a myth-buster to dispel common misconceptions about Corporate Governance and Stewardship. The document addresses several frequently asked questions, such as:
- What is corporate governance?
- What do we mean by stewardship?
- Does the Corporate Governance code give the FRC powers to enforce against directors?
This short paper dispels some of the myths around these important topics and is a useful tool for everyone, regardless of their experience in this area.