Corporate Governance

Shearman & Sterling LLP 49 | U.K. Corporate Governance Developments Audit Committees The White Paper had raised the possibility of ARGA having the power to appoint a new auditor as well as to appoint an observer on the audit committee in certain cases of concern with the existing auditing arrangements. The Government is not proceeding with these proposals but will ask ARGA to develop new requirements for audit committees designed to encourage greater shareholder engagement with company audits and the audit plan, as well as with respect to the appointment and oversight of auditors. In addition, auditors will also be required to say rather more in the statutory statement that they must make when they resign as an auditor, specifically about their recent relationship with the company and its audit committee. Director Duties and ARGA Enforcement As proposed, ARGA will be given powers under a new civil regime to enforce and impose penalties for breach of a PIE director's statutory duties as they relate to corporate reporting and audit. The Government says that in exceptional circumstances those powers could be extended to non-PIE directors (the example is given of groups being structured to avoid technically qualifying as a PIE-headed group). The Government will also be working with the FRC to devise ways in which PIE directors can be held to account where their conduct falls short of certain "behavioral expectations" — these are seen as being "established values" that are already embodied in directors' existing statutory general duties. An example is given of dishonest conduct involving corporate reporting and audit duties. The Government is keen to stress that this new PIE director duty and enforcement regime is not intended to "catch directors out" or to make it significantly more onerous to be a PIE director, but rather to improve corporate reporting and audit standards through subjecting directors to a civil, rather than criminal regime under which they will be held to account for conduct that falls below what would already be reasonably expected of them. Existing liability regimes for PIE (and other) directors will, however, remain in place, including criminal offenses under the Companies Act 2006, disqualification under the Company Directors Disqualification Act 1986 and proceedings taken by the U.K.'s Serious Fraud Office or Insolvency Service. Where existing regulatory regimes overlap (e.g., the FCA in relation to its listing and other rules) MOUs will be put in place between the different regulators to avoid conflict. Shearman & Sterling LLP 49 | UK Corporate Governance Developments TOUGHER CORPORATE GOVERNANCE REQUIREMENTS FOR ALL LISTED ISSUERS Another significant development for corporates using the U.K. capital markets as a listing venue is the proposal from the FCA (in its Discussion Paper 22/2, also published in May this year) for the merger of the U.K.'s two existing listing segments into a single listing segment. Currently, corporates wishing to list in London can choose between applying for a standard listing or a premium listing. A standard listing imposes minimum investor-focused listing requirements, with no requirements to follow the UKCGC or to seek shareholder approval for certain actions and much reduced content requirements for non-financial disclosures in annual reports etc. In contrast, a premium listing — typically chosen by those issuers which wish to be eligible for inclusion in the FTSE U.K. indices — imposes much tougher investor and corporate governance requirements, including a "comply or explain" adoption of the UKCGC, shareholder approval for significant transactions, related party transactions and cancellation of listing, independent shareholder voting on the election of independent directors, more detailed disclosures in the annual report, restrictions on the use of multiple voting share classes and the appointment of a "sponsor" adviser to provide certain comfort to the FCA and shareholders about the issuer's compliance with its listing obligations. The significance of the FCA's proposal so far as corporate governance is concerned is that those listed issuers which have a standard listing — other than certain "excluded" issuers (such as overseas companies using London for a secondary listing) which would continue to be subject to the existing standard segment requirements — will, under the new single listing segment, have to follow many (though not all) of the corporate governance and other listing requirements that currently only apply to premium listings. These would include following, on a "comply or explain" basis, the requirements of the UKCGC, shareholder approval for related party transactions and cancellation of listing, restrictions on multiple voting shares and the appointment of a "sponsor." Issuers will also be able to opt into following the other current "continuing" premium listing requirements that will not be mandatory for the single segment. This will represent a big change to the choice of corporate governance arrangements currently available to issuers considering a listing in the U.K., justified, in the FCA's view, by the high standards of transparency, corporate governance and shareholder engagement that it believes should apply to any listing in the U.K. Needless to say, this proposal has not met with universal support, with many commentators concerned about its likely impact on the attractiveness of London as a listing venue for those issuers looking for a more "light touch" listing regime.

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