Corporate Governance

Shearman & Sterling LLP 29 | Recent Corporate Governance Developments in the U.K. NEW DIRECTOR LIABILITY REGIME To encourage a greater focus by directors on the new and enhanced reporting disclosure obligations for companies, the Paper proposes a new regime for policing and enforcing the responsibility of directors for discharging those obligations. Specific proposals are also made with respect to the legal responsibility of directors and companies when paying dividends and the withholding or clawback of director remuneration in cases of serious corporate failure. Enforcement Action It is proposed that, in the case of their existing and new responsibilities in relation to corporate reporting and audit-related matters, PIE directors should become subject to enforcement action by the new audit and corporate reporting regulator that will replace the FRC — the Audit, Reporting and Governance Authority (ARGA). These enforcement powers would sit alongside the existing enforcement powers available under the U.K. Companies Act and under FCA rules and the Insolvency Service. Secondly, differing from the Kingman Review, the Paper proposes that all PIE directors should be subject to this new corporate reporting and audit duties enforcement regime and not just the CEO, CFO, board chair and audit committee chair. Thirdly, the Paper proposes that ARGA be empowered to impose more detailed requirements in relation to the duties falling within its enforcement regime, including, possibly, additional behavioral standards (such as acting with integrity and honesty). ARGA would have powers to investigate possible breaches of these duties and to impose a range of civil sanctions such as reprimands, fines, orders to take mitigating action and even the issue of a temporary prohibition on acting as a PIE director. Dividends In relation to the payment of dividends, two major changes are proposed. The first addresses a longstanding concern that companies are not currently required to disclose in their accounts the amount of their distributable profits — i.e., the maximum legal amount that the Companies Act allows a company to distribute to its shareholders. The Government is proposing that companies should be required to state in their annual report the total amount of reserves that are distributable (or at least the minimum distributable amount), both on an individual parent company basis but also for the group as a whole by way of an estimate of the potential distributable reserves across the group companies that might be distributed up to the parent company. The second change is more significant, since it would require directors to confirm that not only are they satisfied that a payment of a particular dividend is within the company's distributable reserves and consistent with their fiduciary duties, but that they reasonably expect that it will not threaten the solvency of the company over the next two years in light of their risk analysis and knowledge of the company's position when the dividend is proposed. The directors would also have to confirm that the dividend is consistent with any annual Resilience Statement that their company is required to make. The Paper indicates that the purpose of this new dividend confirmation would be to focus the board's mind on the appropriateness of declaring the particular dividend, as well as making it easier for legal action to be taken against directors who pay any dividends in breach of their fiduciary duties, etc. The Government proposes that these new requirements should only apply to listed or AIM- traded companies but is open to arguments that they should also apply to other PIEs, such as the proposed additional category of large unlisted PIEs mentioned above. The new "two-year" solvency confirmation is particularly noteworthy, since it contrasts with the one-year solvency statements required for private company capital reductions and capital-funded share buybacks. Remuneration Clawback In relation to executive director remuneration, the Government intends to ask for the Governance Code's existing requirements for clawback (or withholding) of director remuneration to be strengthened so that they apply to a minimum set of conditions and with a minimum period of at least two years following the award. Depending on how effective these new Governance Code requirements prove to be, the Government reserves the option of extending them to all listed companies through changes to the listing rules. Shearman & Sterling LLP 29 | Recent Corporate Governance Developments in the UK

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