Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP 59 | U.K. Corporate Governance Developments "Burdensome" New Reporting Dropped As The U.K. Government Focuses On "Cutting Red Tape" The previously proposed corporate reporting reforms that the U.K. Government is no longer proceeding with would have included a new "resilience statement," "audit and assurance policy," material fraud statement and distribution policy reporting for certain "large" listed and unlisted corporate entities. After consultation with businesses on the wider business reporting regime, it has been decided to withdraw the draft legislation that would have introduced these reforms and instead to focus on reforms to reduce unnecessary "red tape" as part of its "smarter regulation program". That program includes a review of non-financial corporate reporting. This review is looking at opportunities to rationalize and simplify current non-financial reporting requirements (NFRRs) for companies, so that those requirements remain fit for purpose and deliver information that the market finds useful, as well as supporting growth in the economy and making the U.K. competitive for businesses to operate from. The review—the "call for evidence" phase of which has closed—will look at the content requirements for strategic and directors reports—e.g., business and principal risks review, the so-called section 172(1) statement (about how directors have had to regard to stakeholder interests in their decision-making) and, for quoted companies, their strategy and business model, environmental, social, community and human rights issues and numbers of female and male directors and senior managers. It will also look at rationalizing the various threshold tests that trigger NFRRs and whether micro-entity and small and medium company reporting thresholds are set at the right level. More Flexible Pre-emption Guidelines In the U.K., the observance of pre-emption rights on new share issuances (for cash) by listed companies is overseen by the Pre-emption Group (PEG), which is an informal group of representatives of investors, intermediaries and listed companies. PEG issues a Statement of Principles setting out the expectations of investors in this area, specifically for premium-segment listed issuers but other listed or publicly traded issuers are also encouraged to follow them. A premium listing currently requires an issuer to satisfy certain historic business track record and other eligibility requirements and to accept much greater investor protections with respect to a variety of ongoing listing obligations and transactions than is required for a standard listing. For some years now, "institutional" investors have required any disapplication of pre-emption rights— which the U.K. Companies Act requires to be approved by a "special" (75% vote in favor) shareholder resolution—to be sought from shareholders on an annual basis and to be limited to no more than 7.5% of the issuer's share capital over a rolling three-year period with a maximum non-pre-emptive issuance of 5% permitted for any purpose and a further 5% permitted for a specified acquisition or investment, in each year. Any disapplication above these limits needs to be justified and explained. During the COVID pandemic, PEG relaxed these limits to enable companies to raise urgently needed additional capital quickly and easily. Shareholders were recommended to consider, on a case-by-case basis, supporting non-pre-emptive capital raises of up to 20% of the company's existing-issued equity. At the end of November 2020, this relaxation came to an end and PEG's recommendations reverted to the previous 5% plus 5% limit. In July 2022, a major review of the secondary issuances market in the U.K. (Secondary Capital Raising Review) included a recommendation that the COVID-era 20% limit be reintroduced (split between 10% for non-pre- emptive issuances for any purposes and 10% for a specified purpose), coupled with a codification of the investor protections that had been recommended under the COVID relaxation. In November 2022, PEG implemented this recommendation by issuing a new Statement of Principles. The particular interest here from a corporate governance perspective is the investor protections that the new Principles now set out. Under the 2015 Principles these protections were largely limited to disclosure in annual reports of the secondary-issuance discount, net proceeds and their application and percentage increase in issued equity as a result of the non-pre-emptive issuances over the previous-three years.