Corporate governance and directors' duties in the UK (England and Wales): overview
A Q&A guide to corporate governance in the United Kingdom (England and Wales).
The Q&A gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors’ duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals.
To compare answers across multiple jurisdictions, visit the Corporate Governance Country Q&A tool.
The Q&A is part of the global guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/resources/global-guides/corpgov-guide.
Corporate governance trends
Corporate governance and the linked topic of narrative reporting have continued to have a high profile in the UK. Changes and initiatives, driven at national and EU levels, continue apace. Changes to company law resulting from the Small Business, Enterprise and Employment Act 2015 will have increasing impact as 2016 progresses, affecting systems and processes at all companies.
UK Corporate Governance Code
A revised Code was published by the Financial Reporting Council (FRC) in September 2014 applying to accounting periods beginning on or after 1 October 2014. For many companies (such as those with a 31 December year end), the annual report published in 2016 will be the first report that needs to comply or explain against the revised Code. Key changes include:
A new provision (C.2.2) requiring the inclusion of a longer-term "viability statement", in addition to the "going concern statement", in the annual report. Taking account of the company's current position and principal risks, the directors should explain in the annual report how they have assessed the prospects of the company, over what period they have done so and why they consider that period to be appropriate. The directors should state whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, drawing attention to any qualifications or assumptions as necessary. Guidance on best practice reporting is expected from the FRC's Financial Reporting Lab in due course.
A change in emphasis in respect of executive remuneration, with a new "Main Principle" at D1. Rather than stating that "levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose", the main principle now states that "executive directors' remuneration should be designed to promote the long-term success of the company". This is an intentional shift to try and ensure that what companies pay is in the interests of building longer-term shareholder value and a sustainable business.
A revised provision at C.2.3 which now requires boards to monitor the effectiveness of their internal controls on an ongoing basis during the year, rather than just relying on an annual review.
Possible changes to the Code are currently being consulted on as part of the UK implementation of the EU Audit Directive and Regulation (see below, EU audit reform). The consultation closed on 11 December 2015, and the resultant changes will be in place by 17 June 2016 (the deadline for compliance). Changes to the Code are expected to be limited to Section C3 on the audit committee and auditors.
2016 will also see the FRC developing ideas and promoting best practice in respect of succession planning and the role of the nomination committee (a discussion paper was published on this in October 2015) and, in a second market-led project, assessing how boards shape and embed culture in their organisations.
The Modern Slavery Act 2015
The Modern Slavery Act 2015 has introduced a new reporting requirement for larger commercial organisations (companies, LLPs and partnerships), whether private or public. Section 54 requires commercial organisations (including those within a group structure) to publish an annual slavery and human trafficking statement, if they:
Supply goods and services.
Carry on a business or any part of a business in the UK (wherever they are incorporated or formed).
Have a total turnover (including that of any subsidiaries) of GB£36 million or more (there is no requirement for a minimum level of turnover in the UK itself).
If a statement is required, it needs to cover the whole of the organisation and its supply chains. If the organisation has a website, there must be a prominent link to the statement on the home page. The statement has to explain the steps the organisation has taken during the financial year to ensure that slavery and human trafficking are not taking place in any of its supply chains or in any part of its business (or state that the organisation has taken no such steps). Transitional provisions are such that businesses with a year end of 31 March 2016 and later will be the first to be required to publish a statement for their 2015/16 financial years. Statements need to be approved by the board and signed by a director.
The Home Office has issued guidance to assist with practical implementation called Transparency in Supply Chains: a practical guide (www.gov.uk/government/publications/transparency-in-supply-chains-a-practical-guide). It details which organisations need to comply, and provides advice on writing the statement, and on its structure, approval and publication.
The guidance states that an organisation should seek to publish its statement as soon as reasonably practicable after the end of the financial year. It encourages organisations to report within six months of the organisation's financial year end and states that organisations may wish to publish these statements at the same time as they publish other annual accounts. This requirement is in addition to the Companies Act 2006 requirement under section 414C for quoted companies to include information about human rights in their report and accounts, or to state if no such information is included.
Further non-financial reporting requirements from 2017
Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups (Non-Financial Reporting Directive 2014) will apply for financial years beginning on or after 1 January 2017.
The new rules will only apply to certain large listed and unlisted companies with more than 500 employees, including public-interest entities. The companies concerned will be required to disclose information on policies, risks and outcomes as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on their boards of directors. The Department for Business, Innovation & Skills (BIS) is expected to publish a consultation on the directive's transposition into English law early in 2016.
The Small Business, Enterprise and Employment Act 2015
The Small Business, Enterprise and Employment Act received Royal Assent in March 2015 and has a phased implementation which has or will amend a number of legal requirements relating to companies. These changes are wide-reaching and will impact internal systems and processes.
The current implementation timetable is available on the Companies House website, and should be monitored closely as the timetable has been, and may continue to be, subject to change. See below for some of these changes.
From May 2015, in the interests of transparency, bearer shares were abolished. As a result, all shares must have a designated owner.
From October 2015:
To help protect directors from identity theft, there was a partial suppression of the disclosure of the date of birth for directors appointed on or after 10 October 2015 at Companies House (the day element being suppressed on the public record).
The time it takes to strike a company off the public register if it is not carrying on a business or in operation, whether instigated voluntarily or by Companies House, was reduced.
When a company appoints a director or secretary (on incorporation or later), it is now the company that confirms the consent of the officer on the relevant form (and not the appointee). Companies House then writes to all new appointees to make them aware of their appointments on the public register and explain their general legal duties.
From April 2016, the following changes are expected:
There will be a simpler process to get falsely appointed directors' details removed from the public register at Companies House.
Companies House will be able to change a company's registered office address if it is unauthorised or has no connection with the company.
To improve transparency around who owns and controls UK businesses, companies (subject to some exemptions) will need to keep a register of "people with significant control" (PSC register). These requirements can be found in the new Part 21A of the Companies Act. Broadly speaking, a PSC is an individual who, in relation to a company:
directly or indirectly owns more than 25% of its shares;
directly or indirectly holds more than 25% of the company's voting rights;
holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the company;
has the right to exercise, or actually exercises, significant influence or control over the company;
exercises or has the right to exercise significant influence or control over the activities of a trust or firm which itself meets (or would meet, were it an individual) one or more of the first four conditions.
Companies will also need to disclose details about the "registrable relevant legal entities" which own or control them in their PSC registers.
Schedule 1A to the Companies Act further describes and clarifies these conditions, and the definition of "significant influence and control" is expected to be discussed in statutory guidance. The Institute of Chartered Secretaries and Administrators has consulted on related guidance, including this statutory guidance.
DTR5 issuers (that is, an issuer to whom Chapter 5 of the Financial Conduct Authority's Disclosure Rules and Transparency Rules source book applies) are exempt from keeping a PSC register, but their non-listed subsidiaries are not. By regulations, the Secretary of State can extend the exemption to other companies bound by disclosure and transparency rules (in the United Kingdom or elsewhere) broadly similar to the ones applying to DTR5 issuers. In December 2015 it was confirmed that UK companies with voting shares admitted to trading on a regulated market in an EEA state and UK companies listed on certain markets in Japan, the USA, Switzerland and Israel would also be exempt. Requirements to hold a PSC register will also be applied to limited liability partnerships. Final regulations and statutory and non-statutory guidance are expected before April 2016.
From June 2016, the following changes are expected:
A requirement for companies to "check and confirm" the company information held at Companies House will be introduced. A "confirmation statement" notifying any changes, will need to be filed at least every 12 months, and will replace the annual return.
The PSC register will need to be filed at Companies House and updated as part of the "confirmation statement" process.
Private companies will be able to opt to keep certain registers on the public register, rather than holding their own statutory registers. This applies to the registers of members, directors, secretaries, directors' residential addresses, and people with significant control. It is worth noting that where the registers are held at Companies House, all the content would be publicly available, including for example shareholder addresses and the day of birth of directors.
Changes will be made to strengthen the directors' disqualification regime.
The statement of capital form required by Companies House will be simplified.
From October 2016, a prohibition on appointing corporate directors will be introduced with some limited exceptions.
Investment Association (IA) and remuneration
In September 2015, the IA established an executive remuneration working group to bring forward proposals seeking the simplification of executive pay, as there is mounting concern in the investment industry and beyond that pay structures are becoming too complex, thereby not providing clear incentives for management to act in the best long-term interests of companies. Initial proposals are expected in the spring of 2016.
In November 2015 the IA updated their Principles of Remuneration (Principles) which set out the views of the IA on the appropriate structure of executive remuneration, and the roles of shareholders and the remuneration committee. The Principles have been updated to make clear the expectation that long term incentives have a performance and holding period of at least five years in total. A letter was sent by the IA to remuneration committee chairmen to accompany the updated Principles. This letter emphasised a number of points, including the IA's view that salary increases for executive directors should be justified with a clear and explicit rationale, particularly for any increases in excess of inflation or increases provided to the general workforce.
Closing the gender pay gap
The government has recently consulted on its manifesto commitment to require larger employers to publish gender pay information (www.gov.uk/government/consultations/closing-the-gender-pay-gap). New regulations are expected to cover both private and voluntary sector employers in England and Wales with at least 250 employees. At the time of writing, the government is considering the responses to the consultation.
EU audit reform
The regulation relating to statutory audits and auditors is subject to large scale change in 2016 as a result of Regulation (EU) No 537/2014 on the statutory audit of public interest entities and Directive 2014/56/EU amending the Statutory Audit Directive. Regulation (EU) 537/2014 will apply from 17 June 2016, by which time the Directive 2014/56/EU must also have been transposed into English law. Regulation (EU) 537/2014 applies to all audits of Public Interest Entities (PIEs), which include credit institutions, insurers, issuers of securities on regulated markets in the EU and other entities designated by the government. BIS proposes that it will not include additional entities, such as AIM companies, in its PIEs definition. Directive 2014/56/EU applies to all audits required by EU law. Together they cover matters such as mandatory rotation of auditors, the prohibition of certain non-audit services, and changes to the audit committee.
In a written statement from BIS in July 2015 it was confirmed that the government will require all PIEs to put their audit out to tender at least every ten years and change their auditor at least every 20 years.
The FRC is to be the UK competent authority for the regulation of auditors and has also issued a consultation on how to transpose and apply Directive 2014/56/EU and Regulation (EU) 537/2014. There will be changes to the FRC's ethical standards for auditors, auditing standards, UK Corporate Governance Code and guidance on audit committees. The FCA and PRA will also be changing their rules to ensure alignment.
The proposed changes to the UK Corporate Governance Code, which are subject to consultation at the time of writing, may impact the board succession plans for some companies, as there are proposals for revised provisions so that:
At least one member of the audit committee has competence in accounting and/or auditing (as opposed to recent and relevant financial experience).
The audit committee as a whole has competence relevant to the sector in which the company operates.
It is proposed that the provision for FTSE 350 companies to hold an audit tender at least every ten years be removed from the Code, as the provision has been superseded by requirements under the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 and the Regulation (EU) 537/2014. It is proposed that the Code states that advance notice of re-tendering plans should be disclosed.
The government has published various guidance documents during 2015, including one aimed at non-executive directors on cyber security (Cyber Security: balancing risk and reward with confidence: guidance for non-executive directors (www.gov.uk/government/publications/cyber-security-balancing-risk-and-reward-with-confidence)), which outlines the kind of questions non-executive directors should be asking, and one on whistleblowing (Whistleblowing – guidance for employers and code of practice (www.gov.uk/government/publications/whistleblowing-guidance-and-code-of-practice-for-employers)).
Private limited company
A private company can either be limited by guarantee or limited by shares. A company limited by shares is the typical corporate form for profit-seeking entities in England and Wales. The liability of its members is limited to the amount, if any, unpaid on the shares held by them. A guarantee company is more suitable for not-for-profit organisations.
Public limited company (PLC)
A public company must be limited by shares, and the nominal value of a public company's allotted share capital must not be less than GB£50,000 (or EUR57,100). Unlike private companies, public companies are permitted to offer their securities to the public (but are not required to do so). English companies listed on the London Stock Exchange are PLCs.
There are a number of other corporate entities available in the UK, with limited liability partnerships in particular being ever more widely used.
Private and public companies
The legal and regulatory framework which applies to private and public companies is primarily set out in:
The Companies Act 2006, which governs all companies registered in the UK. The Companies Act also sets out a range of general and specific directors' duties.
The Insolvency Act 1986, which governs company insolvency and winding up (including the winding up of companies that are solvent).
The Financial Services and Markets Act 2000 (FSMA), which regulates the public offering and listing of shares and other securities. It applies to both private and public companies and includes the UK's current civil market abuse regime.
The City Code on Takeovers and Mergers (Takeover Code), which regulates the conduct of takeovers and mergers of all UK-incorporated public companies (and certain private companies in very limited circumstances).
Public companies listed or traded on any stock market
In addition, the following apply to a public company that is listed or that has shares traded on a UK market:
The Code of Market Conduct, which supplements the current FSMA provisions on civil market abuse, setting out a non-exhaustive list of descriptions of behaviour that may amount to market abuse.
The Prospectus Rules, which set out the form, content and approval requirements for prospectuses issued in relation to public offers of securities and admissions to public markets.
The Disclosure and Transparency Rules (DTRs), which set out the disclosure requirements applicable primarily to companies that are admitted to the Official List and traded on the Main Market (with some parts applying also to companies quoted on AIM).
The Criminal Justice Act 1993, which sets out the current criminal regime in relation to insider dealing.
The Financial Services Act 2012, which sets out the criminal offences of making false and misleading statements, creating false or misleading impressions, and making false or misleading statements or creating a false or misleading impression in relation to specific benchmarks.
The whole insider dealing and market abuse regime in the UK is expected to change significantly in 2016 through the coming into effect and implementation of the Market Abuse Regulation (596/2014/EU).
Public companies listed (or applying to be listed) on the Main Market
If a public company is listed (or applying to be listed) on the Main Market, the following must be considered:
The Listing Rules (http://fshandbook.info/FS/html/FCA/LR), which prescribe minimum requirements for the admission of securities to listing on the Financial Conduct Authority (FCA)'s Official List and also set out the requirements for the content, scrutiny and publication of listing particulars and the continuing obligations of issuers after admission to trading on the Main Market.
The Admission and Disclosure Standards, which contain admission requirements and ongoing disclosure requirements that companies with securities admitted to the Main Market must observe.
The UK Corporate Governance Code (www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-Governance-Code.aspx). This applies to all public companies with a premium listing of shares on a comply-or-explain basis. The UK Corporate Governance Code is supplemented by guidance in key areas, such as risk management and board effectiveness.
The FRC's Stewardship Code, which sets out good practice for institutional investors when engaging with UK listed companies and operates on a comply or explain basis.
Public companies traded (or applying to be traded) on AIM
A company listed, or to be listed, on AIM must have regard principally to the AIM Rules for Companies, although certain parts of the Prospectus Rules and the DTRs also apply. The Quoted Companies Alliance Corporate Governance Code for Small and Mid-Size Quoted Companies (companies outside the FTSE 350) sets out voluntary corporate governance guidelines appropriate for AIM quoted companies.
These include the:
Financial Conduct Authority (FCA) (www.fca.org.uk). The FCA supervises the conduct of retail and wholesale financial firms and is the UK Listing Authority.
Prudential Regulation Authority (PRA)(www.bankofengland.co.uk/PRA). The PRA is part of the Bank of England and is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms.
Takeover Panel (www.thetakeoverpanel.org.uk). The Takeover Panel administers the Takeover Code, and supervises takeovers.
Financial Reporting Council (FRC) (www.frc.org.uk). The FRC is the UK's independent regulator responsible for promoting high quality corporate governance and reporting.
Influence of institutional investors
Institutional investors are influential in the UK and representative bodies include the:
Investment Association (IA) (formerly known as the Investment Management Association). The IA represents UK investment managers and its guidance is hosted by the Institutional Voting Information Service (IVIS). IVIS, formerly part of the Association of British Insurers (ABI), is now part of the IA. It provides corporate governance research and hosts a variety of institutional shareholder guidance on corporate governance and share capital management. Guidance on the IVIS website includes:
Principles of Remuneration 2015;
Share Capital Management Guidelines, July 2014;
Transaction Guidelines, November 2014;
ABI position on lock up agreements, April 2014;
Pre-emption Group – Disapplying Pre-emption Rights –A Statement of Principles, March 2015.
Pensions and Lifetime Savings Association (PLSA) (formerly known as the National Association of Pension Funds (NAPF)). The PLSA represents the workplace pensions community as well as supporting savers. The PLSA Corporate Governance Policy & Voting Guidelines were updated in December 2015 for 2015/16. Their stated aim is to assist PLSA members to promote the long-term success of the companies in which they invest and to ensure that the boards and management of these companies are held accountable to shareholders. Changes for 2015/16 included a new section on time commitment, which states that shareholders should be aware of concurrent directorships and should take account of the size of the company, its complexity, its circumstances and other commitments that a director has when forming a view as to the whether an individual director is "over-committed". The section goes on to say that it might be appropriate to vote against the (re)election of a non-executive director who holds more than four directorships for complex companies, and that where a director chairs a number of key committees "a stricter view" might need to be adopted, especially where an individual is a director of two or more companies in heavily regulated industries.
There are a number of organisations that support institutional investors in the exercise of their ownership rights and responsibilities through the provision of a variety of services. These organisations are commonly known as proxy voting agencies or shareholder voting service providers, and include:
Pensions & Investment Research Consultants (PIRC).
Institutional Shareholder Services Inc (ISS).
Glass, Lewis & Co.
The Research Recommendations Electronic Voting (RREV) joint venture between ISS and the NAPF (now PLSA) ended in 2014 and in January 2015 ISS issued its first standalone proxy voting guidelines for the UK and Ireland. These were updated in November 2015 for meetings on or after 1 February 2016. Inevitably, US organisations in particular will sometimes have expectations which are not easily aligned with UK law and practice.
Engagement with shareholders at an early stage can be key where a company's approach is in conflict with investor guidelines.
The role of proxy advisors is not without controversy and over a number of years there have been tensions between these organisations and some companies on a number of matters, including transparency and disclosure around voting recommendations, and the opportunity for dialogue before they are made.
The interaction between these organisations and investors and companies has been reviewed at EU level, and in 2013 the European Securities and Markets Authority (ESMA) stated that it had not been provided with clear enough evidence of market failure in terms of how proxy advisors interacted with investors and issuers. On that basis, ESMA did not think the introduction of binding measures would be justified, but that there would be several areas, in particular in relation to transparency and disclosure, where a co-ordinated approach from the proxy advisory industry would bring about greater understanding and assurance about what would be expected from proxy advisors. ESMA concluded that the proxy advisory industry should develop its own code of conduct. As a result, some best practice principles were published in March 2014. In December 2015 ESMA published a follow-up report with an assessment of the impact of these principles.
The UK Corporate Governance Code states that there should be a dialogue with shareholders based on mutual understanding of objectives, and in addition the Stewardship Code sets out good practice for institutional investors when engaging with UK listed companies. The Financial Reporting Council (FRC) announced that in July 2016 it will introduce tiering of signatories to the Stewardship Code to improve reporting against its principles: signatories that meet reporting expectations on stewardship activities will be classed as Tier 1.
Following the Kay review recommendation for the establishment of an investor forum to facilitate collective engagement by investors in UK companies, the Investor Forum was constituted in October 2014 and a board of directors has been appointed to represent the interests of the entire investment chain (asset owners, asset managers and company representatives). Its objectives are to make the case for long-term investment approaches and to create an effective model for collective engagement with UK companies. This Forum also aligns with principle 5 of the Stewardship Code, which states that institutional investors should be willing to act collectively with other investors where appropriate.
Yes, the UK Corporate Governance Code, published by the Financial Reporting Council (FRC), sets out good practice covering issues such as board composition and effectiveness, the role of board committees, risk management, remuneration and relations with shareholders.
This is a "comply or explain" code rather than a rigid set of rules and compliance is not mandatory. However, public companies with a premium listing on the Main Market of the London Stock Exchange (with certain exemptions for companies that are smaller than the largest 350 companies in the FTSE share index) have to explain in their annual reports how they have applied the high level principles laid out in the UK Corporate Governance Code and the extent to which they have complied with the detailed provisions.
Reasons for any non-compliance with the provisions have to be given and issuers should explain how any alternative process achieves good governance by other means. There is some 2012 guidance from the FRC on what constitutes a good explanation. If shareholders are not content with the explanations, they should engage with the company, and can also exercise their statutory rights, including the power to appoint and remove directors, to hold the company to account.
In addition to the UK Corporate Governance Code, the FRC issues guidance and other publications intended to assist companies in applying it to their particular circumstances and to address specific aspects of governance and accountability. They cover board effectiveness, the role of audit committees, risk management, internal control and related financial and business reporting and audit tendering.
The UK Corporate Governance Code is well-established, having been first published in 1992. With relevant amendments it is recognised as the basis for further governance codes aimed at companies outside the Main Market. For example there is:
The Quoted Companies Alliance (QCA) Corporate Governance Code for Small and Mid-Size Quoted Companies which is aimed at smaller Main Market companies, and those on AIM and the ICAP Securities and Derivatives Exchange (ISDX).
The Institute of Directors Corporate Governance Guidance and Principles for Unlisted Companies in the UK which is aimed at unlisted companies.
Corporate social responsibility and reporting
Many companies engage in corporate social responsibility (CSR) activities. Responsible investment is an approach to investment that explicitly acknowledges environmental, social and governance (ESG) factors. The United Nations has issued a set of Principles for Responsible Investment, and it is possible to see on its website the volume of investor support for these principles.
While it is not a legal requirement for companies to undertake many of their CSR activities, companies are required to report on certain social, environmental and ethical issues. Some public companies have a standalone committee and/or a director with responsibility for CSR-related issues.
CSR issues should feature in boardroom discussions on a regular basis as, under the Companies Act 2006, one of the duties of all directors is to promote the success of the company for the benefit of its members, and in doing so have regard (among other matters) to:
The likely consequences of any decision in the long term.
The interests of the company's employees.
The need to foster the company's business relationships with suppliers, customers and others.
The impact of the company's operations on the community and the environment.
The desirability of the company maintaining a reputation for high standards of business conduct.
The need to act fairly as between members of the company.
The reporting of some CSR issues has also been enhanced since the introduction of the Strategic Report under the Companies Act. Quoted companies must, to the extent necessary for an understanding of the development, performance or position of the company's business, include in their strategic report information about:
Environmental matters (including the impact of the company's business on the environment).
The company's employees.
Social, community and human rights issues.
They must also include information about any policies of the company in relation to these matters and the effectiveness of those policies.
Quoted companies must also make disclosures concerning greenhouse gas emissions in the directors' report in their annual reports.
The Modern Slavery Act 2015 will also require larger commercial organisations to publish annual slavery and human trafficking statements on their websites (see Question 1, The Modern Slavery Act).
There is an EU directive on disclosure of non-financial and diversity information by large companies and groups on the horizon, which is expected to require Europe's largest companies to be more transparent on social and environmental issues from 2017 (see Question 1).
These developments are against a backdrop of the activities of organisations such as the Global Reporting Initiative (GRI) which, among others, produces guidance on sustainability reporting. GRI co-founded the International Integrated Reporting Council (IIRC), which promotes the adoption of integrated reporting and describes an integrated report as one which is a "concise communication about how an organisation's strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term".
There has been acknowledgement of the importance of corporate sustainability reporting in Paragraph 47 of the Outcome Document of the 2012 United Nations Conference on Sustainable Development (Rio+20):
"We acknowledge the importance of corporate sustainability reporting, and encourage companies, where appropriate, especially publicly listed and large companies, to consider integrating sustainability information into their reporting cycle. We encourage industry, interested governments and relevant stakeholders, with the support of the United Nations system, as appropriate, to develop models for best practice and facilitate action for the integration of sustainability reporting, taking into account experiences from already existing frameworks and paying particular attention to the needs of developing countries, including for capacity building".
Some UK and European publicly listed companies are already reporting in line with GRI's sustainability reporting guidelines.
Board composition and restrictions
English company law does not distinguish between a management board and a supervisory board. All directors form one board and each has the same obligations and accountability to the company regardless of whether he is an executive (typically employees) or non-executive.
The articles of association (articles) of most companies provide that the directors are responsible for the management of the company's business. The board of directors may decide to delegate certain powers to a committee of directors or non-directors or to individual directors, or general day-to-day management to a CEO or managing director.
The directors of the company constitute the board of directors. The articles may designate a chairman with a casting vote, but not all chairmen have casting votes.
Employees do not have a right to board representation. However, some companies have agreements with trade unions which provide for employee representatives on the board.
Number of directors or members
Private companies must have at least one director and public companies must have at least two directors of which at least one must be an individual. As a result of the Small Business, Enterprise and Employment Act 2015, it is expected that a prohibition on appointing corporate directors will be introduced from October 2016 with some limited exceptions. The exceptions will be the subject of separate regulation. Any company with an existing corporate director will need to take action, either explaining how it meets the conditions for an exception or giving notice to the registrar that the corporate director has ceased to be a director.
The Companies Act does not prescribe a limit on the number of directors a company may have (although the articles may set a maximum).
A director must be at least 16 years of age. There is no prescribed maximum age limit.
There are no nationality requirements. However, some companies' articles require, for example, non-UK residency for tax purposes.
See Question 6 regarding corporate directors. The UK has not imposed any mandatory gender quotas. However, the UK Corporate Governance Code requires companies with a premium listing to report on their diversity policy, including on gender. This should include any measurable objectives that have been set for implementing the policy, and progress on achieving the objectives.
In 2011 Lord Davies of Abersoch published his report Women on Boards, setting a target for the boards of FTSE 100 to have 25% female representation by 2015. In his final report , published in October 2015, it was confirmed that the representation of women on FTSE 350 boards had more than doubled since 2011, standing at 26.1% on FTSE 100 boards and 19.6% on FTSE 250 boards. In the executive summary of the report it is stated that the UK is "in sixth place in the international ranking, with all the countries ahead of us, having largely introduced legislative quota regimes". The final report makes five recommendations, including one to increase the voluntary target for women's representation on boards of FTSE 350 companies to a minimum of 33%, to be achieved in the next five years. These recommendations are subject to confirmation by a steering body under a new chairman in 2016.
There is no statutory definition of an executive director or a non-executive director, so under the law there is no distinction between the role and responsibilities of a non-executive director and those of an executive director. Both types of director are subject to statutory obligations, duties and responsibilities.
However, a non-executive director is generally understood to be a director on the board who does not form part of the executive management team and is not an employee of the company. Non-executive directors are expected to devote part, but not all, of their time to the company and their role is generally to provide an advisory or supervisory element to the board, scrutinising and challenging the company's strategy and management.
By contrast, an executive director is typically an employee of the company who holds a senior management and executive role within the business.
However, as executive directors have the same statutory duties as the non-executive directors as members of a unitary board, these duties extend to the whole of the business, and not just that part of it covered by their individual executive roles.
More guidance on the roles of directors can be found in the Financial Reporting Council's (FRC) Guidance on Board Effectiveness.
The UK Corporate Governance Code provides guidance on the appropriate composition of a board of a UK listed company. For FTSE 350 companies, for example, over half the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent. A smaller listed company should have at least two independent non-executive directors.
Independence of thought is of particular importance to non-executive directors, part of whose role is to provide an independent viewpoint on the board and, when necessary, to challenge the executive directors.
Non-executive directors are considered to be independent when the board determines that they are independent in character and judgement, and that there are no relationships or circumstances which are likely to affect, or could appear to affect, their judgement. The UK Corporate Governance Code sets out various relationships or circumstances that would usually be relevant to the board's determination of independence, including, for example, if the director:
Has been an employee of the company or group within the last five years.
Has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company.
Has received or receives additional remuneration from the company apart from a director's fee, participates in the company's share option or a performance-related pay scheme, or is a member of the company's pension scheme.
While the articles (or a shareholders' agreement) may in principle restrict the authority of individual directors, UK company law does not impose any such restrictions.
The UK Corporate Governance Code provides guidance on the separation of responsibilities for directors of listed companies. For example, the UK Corporate Governance Code recommends that no one individual should have unfettered powers of decision, and that there should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for running the company's business.
The UK Corporate Governance Code therefore provides that the roles of chairman and chief executive should not be exercised by the same individual.
Appointment of directors
The procedure for appointing directors is governed by the company's articles of association (and, in some cases, by a shareholders' agreement or an investment agreement). Most private companies' articles provide that a director may be appointed by a decision of the board or by an ordinary resolution of the company's shareholders.
For listed companies, the UK Corporate Governance Code recommends that a nomination committee, made up predominantly of independent non-executive directors, should lead the process for board appointments and make recommendations to the board. The board must support the appointment, which has to be confirmed by shareholders at the next annual general meeting following the appointment by way of ordinary resolution.
Removal of directors
The Companies Act provides that shareholders may remove a director of any company before the expiration of his term of office by ordinary resolution if a particular procedure is followed. The director is able to make representations in writing to the company which must be circulated to shareholders with the notice of meeting if received in time. The director also has the right to attend and speak at the meeting on his proposed removal.
However, a company's articles typically provide for other situations in which a director's appointment ceases and often set out other grounds and procedures for removal.
Many publicly-traded companies' articles contain provisions requiring directors to resign and stand for re-appointment by shareholders on a periodic basis (see Question 11).
A director may still have employment rights in relation to termination of his employment contract regardless of his proper removal as a director within the requirements of the Companies Act and the company's articles.
The Companies Act does not impose any restrictions on the term of appointment of directors. The articles, however, may provide for retirement by rotation. For listed companies, the UK Corporate Governance Code stipulates that all directors of listed FTSE 350 companies should stand for re-election by shareholders annually and that directors of listed companies outside the FTSE 350 should be subject to re-election at least every three years.
Directors employed by the company
Directors are not required by law to be employed by the company. While executive directors are usually employed under an employment contract (also referred to as a service contract, service agreement or contract of service), non-executive directors are normally engaged under a contract for services/letter of appointment.
The Companies Act requires companies to keep directors' service contracts available for inspection by shareholders without charge. The UK Corporate Governance Code further provides that the terms and conditions of appointment of non-executive directors should be made available for inspection by any person at the company's registered office during normal business hours and at its annual general meeting.
While the Companies Act does not require directors to own shares in the company, directors of private companies are generally (subject to the provisions of the articles, a shareholders' agreement or similar) free to own shares in the company.
Listed company directors may also hold shares in the company and executive directors will often hold shares and be granted share options under approved schemes. Some non-executive directors are, in practice, remunerated partially in shares but the UK Corporate Governance Code states that remuneration for non-executive directors should not include share options or other performance-related elements.
There is a code annexed to the Listing Rules called the Model Code which imposes restrictions on directors and others dealing in the securities of a listed company, beyond those imposed by law. Its purpose is to ensure that directors, and other senior managers, do not abuse, and do not place themselves under suspicion of abusing, inside information that they may be thought to have, especially in periods leading up to announcements of the company's results.
Determination of directors' remuneration
Subject to the company's articles, the remuneration of directors is set by the board. Remuneration of private company directors is decided by the board unless there is a shareholders' or investment agreement in place with other requirements.
The UK Corporate Governance Code provides that the boards of listed companies should establish a remuneration committee, which should follow formal and transparent terms of reference for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. Directors of listed companies should not be involved in deciding their own remuneration.
The annual accounts of all companies (other than small companies) must include details of directors' remuneration and benefits. Quoted companies are required, under the Listing Rules and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, to provide shareholders annually with a detailed remuneration report.
The Companies Act gives shareholders of quoted companies an advisory vote on the directors' remuneration report, meaning a director's remuneration is not conditional on shareholders' approval. In addition to an advisory vote on the directors' remuneration in the relevant financial year, shareholders must pass a binding vote on the directors' remuneration policy every three years.
In its March 2013 FAQ guidance on the directors' remuneration reforms, the Department for Business, Innovation & Skills (BIS) states that a company has three options if shareholders fail to approve the remuneration policy:
Continue to operate according to the last remuneration policy to have been approved by shareholders.
Continue to operate according to the last remuneration policy to have been approved by shareholders and seek separate shareholder approval for any specific remuneration or loss-of-office payments that are not consistent with that policy.
Call a general meeting and put a (further) remuneration policy to shareholders for approval.
The Companies Act provides that remuneration payments made without shareholder approval are unauthorised (and the underlying contractual obligation is deemed unenforceable). In addition, any non-compliant payments made will be held on trust by the recipient on behalf of the company.
The GC100 and Investor Forum have issued some guidance in this area.
Management rules and authority
The articles regulate the company's internal management (although a shareholders' agreement or an investment agreement may impose additional rules). The Companies Act provides sets of articles for use by companies incorporated under the Act known as model articles, but they can be, and commonly are, tailored to the particular circumstances of a company before they are adopted. Companies commonly adopt bespoke articles without reference to the model articles. There is considerable freedom in practice.
The relevant version of the model articles in force at the time of a company's incorporation applies to the company to the extent it has not been excluded or varied by the articles adopted.
Articles of private companies typically provide that:
The quorum for a board meeting is two, unless otherwise determined by the directors.
Board resolutions are passed by a majority of the directors attending.
The board may pass written resolutions in lieu of a board meeting.
Subject to provisions to the contrary in the company's articles and/or any shareholders' agreement, directors must be given reasonable notice of a board meeting.
In practice, private companies tend not to give long notice of board meetings, while listed companies tend to have a programme of board meetings set at the outset of the year.
Commonly, any director can call a board meeting, and the company secretary can call a board meeting if asked to do so by a director. The meeting must be called on reasonable notice (what is reasonable depends on the circumstances). Unless the company's articles specify otherwise, there is no requirement for the notice to be in writing, but notice must include the meeting's proposed date, time and location. If the directors are not all going to be physically present in the same location then the notice must specify how they are to communicate during the meeting, for example through a teleconference (to the extent permitted by the articles).
Apart from single-director companies, the minimum quorum for a board meeting is usually two directors, although the company's articles or the directors themselves may increase the quorum requirement. The articles may also dictate that directors with a personal interest in a matter do not count towards the quorum for voting, and may not vote, on that matter.
Unless varied by the company's articles, voting is on a simple majority basis, with each director having one vote. In the event of a 50/50 vote split, which would defeat the proposal, some companies allow for the chairman to have a casting vote.
An alternative to a board meeting is for the directors to pass a written resolution, for which there must usually be unanimous agreement among all those directors who would have been entitled to vote if the resolution had been raised at a board meeting.
The articles usually provide that the directors are responsible for the management of the company's business, for which purpose they may exercise all the powers of the company. English company law does not distinguish between, for example, a management board and a supervisory board. However, the directors' powers are restricted by the articles, previous shareholder resolutions and statute (and any relevant provisions in a shareholders' agreement, an investment agreement or service contract need to be taken into account). Therefore some powers can only be exercised by the shareholders in a general meeting.
Section 40 of the Companies Act protects persons dealing in good faith with a company. It provides that the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company's constitution (which would include shareholders' agreements and so on).
The directors' ability to delegate powers is regulated by the articles. Typically, directors can delegate any of the powers which are conferred on them under the articles to individual directors/persons or committees. While delegation is not a legal requirement, it is common practice for day-to-day management of the business to be delegated to a CEO or managing director, or an executive committee.
The UK Corporate Governance Code provides, in relation to listed companies, that there should be a schedule of matters specifically reserved for the board's decision. In addition, the directors of premium-listed companies should also establish:
A nomination committee which should lead the process for board appointments and make recommendations to the board.
An audit committee with responsibilities for corporate reporting, risk management, internal control and the relationship with the external auditor
A remuneration committee to set the remuneration of all executive directors and the chairman, and recommend the structure of remuneration for senior management.
Directors' duties and liabilities
Directors of UK companies are subject to fiduciary (meaning to be in a position of trust) and other duties owed to the company. In summary, directors owe duties to:
Act within the powers conferred by the company's constitution.
Promote the success of the company.
Exercise independent judgement.
Exercise reasonable care, skill and diligence.
Avoid conflicts of interest.
Not accept benefits from third parties.
Declare interests in (proposed) transactions or arrangements.
These duties are codified in the Companies Act and are (save for the duty to exercise reasonable care, skill and diligence) enforceable as fiduciary duties. The remedies for breach of a fiduciary duty include:
Setting aside the transaction (at the company's request).
Restitution and account of profits.
The remedy for a breach of the duty to exercise reasonable care, skill and diligence is damages for losses suffered.
Directors also owe a duty of confidentiality to the company, and the terms on which they are engaged by the company, especially in the case of executive directors, may impose or give rise to further duties and obligations.
For derivative actions, see Question 36.
A director can be held criminally liable for theft under the Theft Act 1968, but a company cannot.
A company, and any director who consented to or connived in the act, may be held criminally liable for fraud under the Fraud Act 2006.
It is a criminal offence for a company to bribe another person (including a foreign public official) or to accept a bribe under the Bribery Act 2010.
If the offence is committed with the consent or connivance of a director, the director may also be held criminally liable. The Companies Act duty of a director not to accept benefits from third parties is also relevant in this context.
Criminal market abuse
It is a criminal offence under the Financial Services Act 2012 to make, knowingly or recklessly, a materially misleading, false or deceptive statement, promise or forecast in order to induce a person to buy or sell securities.
It is also a criminal offence under the Criminal Justice Act 1993 if an individual who has inside information (information that is not yet publicly known and which would affect the price of the securities if it were made public) deals in price-affected securities in relation to that information on a regulated market. It is also an offence if he encourages another person to deal or discloses such information (outside the proper performance of his employment).
Civil market abuse
The Financial Services and Markets Act 2000 (FSMA) sets out the civil market abuse regime, under which the FCA can impose penalties (unlimited in extreme cases) on persons who are engaged in, or have encouraged other persons to engage in, insider dealing, tipping off, manipulating transactions or devices, disseminating false or misleading information, or (until 3 July 2016) other market manipulation.
Directors are also potentially personally liable, under the Financial Services and Markets Act 2000 and under the general law, if any prospectus or financial promotion produced in connection with an issue of securities is inaccurate or misleading or otherwise fails to meet prescribed requirements.
The expected significant and further changes in the law in 2016 arising from the Market Abuse Regulation should be noted in this regard (Question 3).
It is a criminal offence under the Insolvency Act knowingly to carry on the business of a company with the intention of defrauding creditors (or for any other fraudulent purpose). In addition, a director may be liable under the Insolvency Act to make a contribution to the company's assets on a winding up.
If, before the start of the winding up of a company, a director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, he may be liable under the Insolvency Act to make a contribution to the company's assets on its winding up.
Misfeasance or breach of fiduciary duty
Under the Insolvency Act, a director may be liable to repay, restore or account for misapplied money or property, or pay compensation in respect of misfeasance or a breach of fiduciary duties.
Fraud and misconduct offences
The Insolvency Act also imposes the following offences:
Fraud in anticipation of winding up.
Transactions in fraud of creditors.
Misconduct in the course of winding up.
Falsification of company books.
Material omissions from a statement relating to a company's affairs.
False representation to creditors.
Transactions defrauding creditors
Directors may also be liable under the Insolvency Act to pay the difference in respect of gifts made or undervalue transactions entered into by the company before winding up.
There are numerous environmental offences that can be committed by a company. A director who consented to or connived in actions or omissions leading to the commission of an environmental offence may be criminally prosecuted.
The Health and Safety at Work etc Act 1974 sets out various health and safety related offences for employers. If a company is guilty of a health and safety offence, and the offence was committed with the consent or connivance of, or was attributable to any neglect on the part of, a director, the director may be held criminally liable.
The Corporate Manslaughter and Corporate Homicide Act 2007 sets out a criminal offence for private and public companies where a corporate management failing has led to a death. Importantly, this does not apply to individuals. However, a director may be liable for common law manslaughter if his gross negligence leads to a death.
A director may be held criminally and potentially civilly liable for the following breaches of EU and UK competition law:
Anti-competitive agreements (including price fixing).
Dishonestly limiting production and supply.
A director may also receive a competition disqualification order, preventing him from being a director or taking part in the management of a company.
In certain circumstances, directors may be held criminally liable for a company's breach of the Data Protection Act 1998.
A director may be held criminally liable for a number of offences under the Companies Act (such as for failing to make certain regulatory filings).
Company Directors Disqualification Act 1986
A director may be disqualified from acting as a director for a variety of reasons (such as breaches of competition law). Acting as a director while being disqualified is also a criminal offence.
There are many other laws in the UK under which a director may incur criminal or civil liability in connection with his role.
The Companies Act provides that any provision that seeks to exempt or limit a director from any liability for negligence, default, breach of duty or breach of trust in relation to the company is void.
A company may indemnify a director in respect of certain costs and expenses relating to proceedings brought by third parties (although generally not in relation to fines or penalties imposed in criminal or regulatory proceedings or liabilities from proceedings where the director is unsuccessful); other indemnities from the company are, however, typically void.
Yes. The Companies Act provides that a director includes any person occupying the position of director, by whatever name called. Therefore, directors' duties (see Question 18) are also owed by de facto directors.
Transactions with directors and conflicts
Yes. The Companies Act provides that directors have a statutory duty to avoid situations in which their personal interests (actual or potential) conflict (directly or indirectly) with the company's interests. Such conflicts can ordinarily be authorised by the rest of the board provided that:
The other board members who authorise the conflict are independent of that conflict.
The conflicted director (or any other interested director) does not vote on the authorisation.
Either the company's articles permit the directors to authorise the conflict (in the case of a public company) or the articles contain nothing that would prevent such authorisation (in the case of a private company).
The Companies Act also imposes a duty on directors to declare the nature and extent of their interest in a proposed (or an existing) transaction or arrangement with the company. The company's articles may provide that a director who has disclosed an interest will not be counted for quorum and voting purposes.
The Companies Act imposes restrictions on the following transactions between a company and its directors:
Directors' service contracts with a guaranteed term of more than two years.
Substantial property transactions involving the acquisition of non-cash assets by the director from the company (and vice versa).
Loans, and giving a guarantee or providing security in connection with loans, to directors.
Quasi-loans or other credit transactions (this applies only to public companies or companies associated with public companies).
Payments for loss of office in connection with a share or business transfer.
The Listing Rules also impose restrictions on listed companies in relation to transactions with directors or their associates; the AIM rules impose parallel restrictions.
Directors of private companies are not subject to any general statutory restrictions in relation to the purchase or sale of shares or other securities. However, a director may be subject to restrictions contained in the articles, a shareholders' agreement, an investment agreement, his service agreement or other relevant agreements.
Directors of listed companies (including on AIM) are subject to the civil and criminal market abuse and insider dealing regimes (see Question 20).
Directors of companies with a premium listing must comply with the Model Code, which further restricts the ability of directors to deal in their company's shares. The AIM Rules also impose restrictions on directors in relation to share dealing. Many publicly-traded companies have also adopted share dealing codes.
In the context of a public takeover transaction, the Takeover Code imposes restrictions on directors in relation to the purchase or sale of shares.
Disclosure of information
The Companies Act requires directors of private and public limited companies to disclose to the public certain information about the company (for example, the identity of the shareholders, names of directors, accounts and so on).
Some of this information is held on the public record at Companies House. Shareholders are also entitled to inspect records of general meetings, including all passed resolutions.
Directors of companies listed on the Main Market must comply with DTR 2, which requires prompt and fair disclosure of inside information to the market and sets out specific circumstances when an issuer can delay public disclosure of inside information. The Financial Conduct Authority (FCA) is, at the time of writing, consulting on amending its guidance on when issuers can legitimately delay the disclosure of inside information; the consultation closes in February 2016. The FCA states that its proposals are consistent with the Market Abuse Directive (MAD) and the Market Abuse Regulation (MAR) which comes into effect in the UK in July 2016. The Listing Rules also impose further disclosure obligations on premium listed companies.
Directors of AIM companies must, among other things, give notification, without delay, of any new developments which are not public knowledge which, if made public, would be likely to lead to a significant movement in the price of its AIM securities.
Extensive information has to be disclosed to shareholders and, in many instances is made public, through the financial reporting requirements of the Companies Act.
Regulated entities also have to disclose certain information to the relevant regulatory body or bodies.
Private companies are not required to hold an annual general meeting (AGM) of shareholders unless obliged to do so under their articles.
AGMs held by private companies typically involve matters such as receiving the report and accounts, appointing auditors and declaring a dividend.
Public companies must hold an AGM every year, with the meeting taking place no more than six months after the company's financial year end.
Public companies must lay their annual accounts and reports before a general meeting, and this is usually done at an AGM. The re-election of directors of public companies must also take place through a shareholder vote at an AGM.
Listed companies typically propose many resolutions for the consideration of their shareholders, including the following regular items:
Receiving the annual reports and accounts.
Approval of the directors' remuneration report.
Approval of the directors' remuneration policy (at least every three years).
Declaring a final dividend.
Election/ re-election of directors.
Appointment/ re-appointment of auditors and fixing their remuneration.
Directors' authority to allot shares.
The disapplication of pre-emption rights on share issues.
Directors' authority to make political donations or incur political expenditure.
Directors' authority for market purchases of own shares.
This is a complicated area as the statutory framework under the Companies Act can differ depending on whether the company is private, public, traded (which would include AIM companies) or quoted (which are Main Market companies). It is also important to look at a company's articles, for example to see what voting rights are attached to different classes of shares.
However, general meetings of all companies are usually called by their directors, or by the company secretary acting on their authority. Shareholders have the power to require directors to call a general meeting (and, if the directors do not call a general meeting at the shareholders' request, shareholders have the power to call a general meeting directly).
A general meeting of a private company must be called with at least 14 clear days' notice (the articles may stipulate a longer period).
General meetings of public companies must be called with at least 14 clear days' notice, unless they are annual general meetings in which case the notice is at least 21 clear days.
For traded companies, all general meetings (other than AGMs) must be called with at least 21 clear days' notice unless specific conditions are met, which then allow the notice to be no less than 14 clear days.
To comply with the UK Corporate Governance Code, quoted companies must give at least 20 working days' notice for AGMs and 14 working days' notice for other general meetings.
However, in some circumstances the shareholders who have a right to attend and vote at a meeting may agree to a shorter notice period.
This needs to be agreed by 90% in the case of a private company.
For public companies, if the company is non-traded, and the meeting is not an AGM, shorter notice requires the approval of 95% of shareholders.
Traded public companies can only agree to shorter notice in very limited circumstances, such as certain takeover situations.
Under the Companies Act, the quorum for a general meeting is basically two shareholders, present in person or by a representative (single member companies require only one). However, a company's articles can require a higher quorum.
Voting can be conducted on a show of hands, where each shareholder typically has one vote. On a show of hands, an ordinary resolution is passed by simple majority of the votes cast by those entitled to vote. A special resolution is passed by a majority of no less than 75% of the votes cast by those entitled to vote. See Question 34.
Alternatively, shareholders may request that a poll is taken, in which case a shareholder typically has one vote for every ordinary share it holds. For example, a special resolution on a poll is passed by members representing no less than 75% of the total voting rights of the members who vote.
Shareholders of private companies can also pass many resolutions by a written resolution (although certain important decisions, such as removing a director, cannot be taken by a written resolution). On a written resolution, every member typically has one vote in respect of each ordinary share in the company held by him.
Shareholders can usually appoint another person as their proxy to exercise all or any of their rights to attend, to speak and to vote at a general meeting.
The Companies Act requires shareholder approval for a number of corporate actions, either by an ordinary resolution (simple majority required) or special resolution (requiring at least 75% of the votes cast).
Actions requiring a special resolution include:
Changing a company's constitution or name.
Re-registering a private company as public or a public company as private.
Various actions regarding the disapplication of pre-emption rights on share issues.
Certain activities to reduce (and increase) share capital or the purchase of a company's own shares from capital.
Actions requiring an ordinary resolution include:
Removal of a director or the company's auditor.
Approval to give a director a service contract of two years or longer.
Election of a chairman at a general meeting.
Redenomination of share capital.
Authorising the allotment of shares.
Articles or shareholders' agreements can provide for higher majority requirements.
The UK Corporate Governance Code, which applies to companies with a premium listing, states that when, in the opinion of the board, a significant proportion of votes have been cast against a resolution at any general meeting, the company should explain when announcing the results of the voting what actions it intends to take to understand the reasons behind the vote result. There is no definition of "significant" but the industry view seems to be that generally a vote of over 20 to 30% cast against would be deemed significant. Votes withheld do not have to be included in the assessment as to whether the vote cast against is significant. However, the Pensions and Lifetime Savings Association (PLSA) (formerly the National Association of Pension Funds (NAPF)) has stated that it considers that votes withheld should be included in the calculation.
Shareholders with at least 5% of a company's paid-up share capital (with voting rights) can require the holding of a general meeting of a company. However, they must first ask the directors to call a meeting on their behalf. If the directors fail to act within the deadlines specified by the Companies Act, then the shareholders may call a general meeting themselves, reclaiming reasonable expenses from the company. This power is used very rarely in practice. If a general meeting is convened by shareholders in this way, they can put their own resolutions before the meeting.
In addition, shareholders can ask the company to circulate a written statement to members about a resolution/matter coming before the meeting.
There is an additional right for shareholders of a public company to put their own resolutions before the company's AGM, if the shareholders concerned either:
Hold at least 5% of the total voting rights.
Are made up of 100 or more shareholders who hold an average of at least GB£100 paid up share capital and who would all be entitled to vote at the AGM on that resolution.
Members of traded companies can also request the company to include other matters (as opposed to resolutions) in the business to be discussed at an AGM.
Minority shareholder action
Minority shareholders have two main causes of action if they believe the company is being mismanaged.
Unfair prejudice claim
Under the Companies Act, shareholders can bring a claim for unfair prejudice against the company where the company's affairs are, or have been, conducted in a way that is unfairly prejudicial to all or some of the shareholders. Unfair prejudice claims may also be brought by shareholders in relation to proposed actions or omissions.
Remedies available to the court include:
Ordering the company to provide for the sale and purchase of the aggrieved shareholders' shares (a buyout).
There is no minimum level of shareholding required for such claims.
Shareholders can also bring a derivative claim against the directors under the Companies Act. However, derivative claims are made on the company's behalf and therefore any remedy granted will be to provide relief to the company. There is no minimum level of shareholding required for such claims.
A derivative claim can only be brought with the court's permission. The basis for the claim must be an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.
Minority shareholders may also apply under the Insolvency Act to wind up the company on "just and equitable grounds". Mismanagement can in some circumstances constitute such grounds. Shareholders may also have additional rights under a shareholders' or investment agreement.
Internal controls, accounts and audit
Under the UK Corporate Governance Code, the board of a listed company should maintain sound risk management and internal control systems. It should monitor the company's risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report. The monitoring and review should cover all material controls, including financial, operational and compliance controls.
The UK Corporate Governance Code also states that the audit committee should review the company's internal financial controls and, unless expressly addressed by a separate board risk committee composed of independent directors, or by the board itself, review the company's internal control and risk management systems.
The DTRs require listed companies to provide a description of their internal control and risk management systems in their corporate governance statements.
Further guidance is given in the FRC's Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and its Guidance on Audit Committees.
Directors are responsible for the preparation, approval and filing of company accounts. The directors must not approve accounts unless they are satisfied that they give a true and fair view of the company's assets, liabilities, financial position and profit/loss.
The UK Corporate Governance Code requires a statement from directors that the company's accounts are fair, balanced and understandable. Under the Listing Rules and AIM Rules, directors may also be responsible for sending out copies of the annual accounts to shareholders.
Directors may be criminally liable where accounts filed are not reasonably accurate or where accounts do not conform to the requirements of the Companies Act. Where directors make misstatements or fail to include prescribed information in the accounts they may be liable to investors.
Auditors are appointed by an ordinary resolution of the shareholders. Directors may also appoint auditors in certain circumstances.
There is currently no limit on the length of an auditor's appointment. In private companies, where no alternative auditor is appointed at the end of each financial year, the auditor in office is deemed to be re-appointed. However, in public companies, auditors need to be re-appointed every financial year.
The UK Corporate Governance Code currently stipulates that FTSE 350 companies should put the external audit contract out to tender at least every ten years.
The Competition and Markets Authority also published in September 2014 a final order requiring FTSE 350 companies to put their audit contracts out to tender every ten years and to give more powers to audit committees in relation to the appointment of the auditor (for example, it must be the audit committee which initiates and supervises the competitive tender process). The order applies to financial years commencing on or after 1 January 2015.
Further changes, some of which are subject to consultation at the time of writing, will result from the UK implementation of the Regulation (EU) 537/2014 and amendments to Directive 2014/56/EU by 17 June 2016 (see Question 1, EU audit reform).
The auditors of a company must be:
Members of a recognised supervisory body and eligible for appointment under the rules of that body.
A person cannot be an auditor of a company if he is an officer or employee of the company being audited, or if he is the partner or employee of such an individual. A partnership in which an officer or employee of the company is a partner also cannot act as an auditor.
There are no legal restrictions on the non-audit work that auditors can do for a company whose accounts they audit. However, the Financial Reporting Council's (FRC) Ethical Standard 5 - non-audit services provided to audited entities sets out the approach to be adopted by audit firms in relation to non-audit services. As part of the FRC consultation described above (Question 1, EU audit reform), the FRC is proposing to introduce a revised Ethical Standard (2016) which will apply to all audit and other public interest assurance engagements performed under the FRC's performance standards.
The UK Corporate Governance Code requires the audit committee to develop and implement policy on the engagement of the external auditor to supply non-audit services. In addition, the audit committee should explain to the board how auditor objectivity and independence is safeguarded.
Auditors are criminally liable if they knowingly or recklessly allow an auditor's report to include something that is materially misleading, false or deceptive, or if they omit any statements that are required in such reports.
Auditors are liable to the company if they act negligently or if they breach the terms of their engagement letter. Auditors may also be liable to shareholders if they act negligently and the shareholders can prove that they suffered loss as a result of relying on the auditor's report. It is very difficult for third parties to bring a successful negligence claim against auditors.
Under the Companies Act, auditors can enter into liability limitation agreements with companies. These limit an auditor's liability for negligence, default or breach of duty or trust. However, liability cannot be limited to an amount less than is fair and reasonable. Shareholders must approve liability limitation agreements by ordinary resolution (unless the company is a private company and waives this requirement). In practice, it remains unusual for companies to enter into liability limitation agreements with auditors.
All companies can have a company secretary, although this is not a mandatory requirement for private companies. In practice, larger private companies tend to appoint a secretary to be the chief administrative officer and to support the chairman in ensuring the good governance of the company. The Companies Act does require a public company to have a company secretary and stipulates the qualifications and experience that such person should have.
The role varies between companies, but typically, as well as organising the meetings of the board and shareholders, and taking responsibility for the fulfilment of a wide range of statutory and regulatory corporate requirements, the company secretary will act as an adviser to the chairman and the board on corporate governance best practice and also changes in corporate law, regulation and guidance.
For listed companies, the UK Corporate Governance Code provides that, under the direction of the chairman, the company secretary's responsibilities include ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as facilitating directors' induction and assisting with the professional development of directors as required.
It also provides that the company secretary should be responsible for advising the board through the chairman on all governance matters.
The FRC's Guidance on Board Effectiveness states that the company secretary can also add value by fulfilling, or procuring the fulfilment of, other requirements of the UK Corporate Governance Code on behalf of the chairman, and this is often the case in practice.
The Institute of Chartered Secretaries and Administrators has published detailed guidance notes on the role of the company secretary.
Description. Carries most types of legislation and accompanying explanatory documents.
FCA and PRA Handbooks
Description. The official handbook of the FCA (which includes the Listing Rules, the Prospectus Rules and the DTRs) and the Prudential Regulation Authority (PRA) (which contains regulatory rules for banks, among other things).
Financial Reporting Council (FRC)
Description. The official website of the FRC, which publishes the UK Corporate Governance Code and the Stewardship Code.
London Stock Exchange (LSE)
Description. The official website of the LSE, which hosts the AIM Rules and the Regulatory News Service.
Nick Gibbon, Corporate Partner
DAC Beachcroft LLP
Professional qualifications. Solicitor, England and Wales, 1988; Solicitor, Hong Kong, 1997.
Area of practice. Corporate law; M&A; ECM.
Non-professional qualifications. MA (Hons) in Law, Cambridge University.
MBO of an international financial services group.
Sale of a catering group to a private equity-backed vehicle.
IPO of an investment group and its subsequent secondary fundraising by way of crowdfunding.
International insurance groups' sales of a broking group and a health insurance business.
Demerger of wealth management groups.
Takeover Code offer for a media group.
Sale of a UK technology group to a US private equity backed acquirer.
Debt and equity co-investments into offshore insurance distributors.
Reorganisation of an insurance group.
Acquisition of a technology consultancy.
Professional memberships. Member of Practical Law's corporate consultation board; member of the QCA's corporate governance experts working group and former member of the Law Society's company law committee.
Giles Peel, Head of Governance Advisory Practice
DAC Beachcroft LLP
Professional qualifications. Fellow of the Institute of Chartered Secretaries (FCIS)
Area of practice. Regulation; corporate governance; M&A
Non-professional qualifications. BSc (Hons) Management Sciences
Clive Garston, Consultant
DAC Beachcroft LLP
Professional qualifications. Solicitor, England and Wales, 1968
Areas of practice. Corporate law; equity capital markets; M&A
Fellow of the Chartered Securities Institute.
Corporate Finance qualification of the Institute of Chartered Accountants in England and Wales.
Takeover of Sintec Media plc.
Takeover of Probability plc.
Fundraising by Sabien Technology Group plc.
Fundraising by Premaitha Health plc.
Sale of an accountancy practice.
Acquisition of a media company.
International Bar Association.
American Bar Association.
Chartered Securities Institute.
Bridget Salaman, Adviser, Governance Advisory Practice
DAC Beachcroft LLP
Professional qualifications. Fellow of the Institute of Chartered Secretaries (FCIS)
Area of practice. Corporate governance and the practical application of company law.
Non-professional qualifications. BA (Hons) in Soviet Studies, University of Manchester.