Corporate governance key updates | April – July 2024

On 9 April 2024, the Transition Plan Taskforce (TPT) published a final suite of transition plan resources. These resources are sector-specific and target asset owners, asset managers and banks, as well as industries with high greenhouse gas emissions such as electric utilities and power generators, food and beverage, metals and mining, and oil and gas.

The aim of the final suite of transition plan resources is to unlock finance for these sectors’ transition plans to net-zero by providing a Disclosure Framework and independent advisory pieces from TPT’s working groups. The Disclosure Framework is based on three principles – ambition, action, and accountability. It seeks to provide practical support to UK companies already disclosing their transition plans on a voluntary basis or those preparing to do so in accordance with international sustainability standards such as the International Sustainability Standards Board.

In doing this, the Disclosure Framework provides consistency and maintains the standards of the TPT and the European Sustainability Reporting Standards.

Through the establishment of the TPT’s transition plan resources, companies now have access to comprehensive guidance documents to facilitate the development and implementation of their transition plans in accordance with the TPT Disclosure Framework.

On 24 April 2024, the UK Takeover Panel (the Panel) published a Public Consultation Paper (PCP 2024/1) (the PCP) proposing a new framework that narrows the scope of companies subject to the UK Takeover Code (the Code). The proposed framework was devised following an informal pre-consultation with key stakeholders.

Currently, the Code ensures that shareholders in an offeree company are treated fairly and are not denied an opportunity to decide on the merits of a takeover, and that shareholders in the offeree company of the same class are afforded equivalent treatment by an offeror.

If the Panel’s proposals are implemented, the Code will apply to any company that has its registered office in the UK, the Channel Islands, or the Isle of Man, where either of the following requirements applies:

• Any of the company’s securities are admitted to trading on a UK regulated market, a UK multilateral trading facility (such as AIM or AQUIS), or a stock exchange in the Channel Islands or the Isle of Man (such as TISE); or
• the company was UK-listed at any time during the three years prior to the relevant date (regardless of whether it satisfies the residency test).

As referenced above, the relevant date is the date on which an announcement is made of a proposed or possible offer for the company or the date on which some other event occurs in relation to the company which has significance under the Code.

For the avoidance of doubt, the residency test relates to companies which are not UK-listed but have their central management and control in either the UK, the Channel Islands, or the Isle of Man, and will fall within the scope of the Code.

It should be noted that any UK-listed companies which are currently within the scope of the Code and cease to be UK-listed on or after the implementation date of the new framework would remain subject to the Code for a period of three years from the date of delisting. This is an amendment from the current Code, which provides a 10-year run-off period.

However, the following UK-registered companies will fall outside the scope of the Code post-implementation and be subject to transitional arrangements:

• Public and private companies which were UK-listed more than three years prior to the relevant date.
• Public or private companies whose securities are, or were previously, traded solely on an overseas market.
• Public or private companies whose securities are, or were previously, traded using a matched bargain facility.
• Any other public companies that are not UK-listed.
• Private companies which filed a prospectus at any time during the 10 years prior to the relevant date, unless they have been UK-listed during the three years prior to the relevant date.

Transitional arrangements will apply for a period of three years from the implementation of the new framework to ensure that a public or private company to which the Code currently applies, and which is not UK-listed (a ‘transition company’) will have time to adjust to the new regime.

In creating this new framework, the Panel aims to refocus the application of the Code on companies registered and listed in the United Kingdom and address criticism received from market participants and companies that the Code’s current jurisdictional rules are too complex and onerous.

The PCP welcomes comments on the proposal, and the consultation closes on 31 July 2024. The Panel intends to publish a Response Statement establishing the final rule changes to the Code in Autumn 2024, with the changes being implemented approximately one month thereafter.

By narrowing the scope of the Code, the PCP can reduce regulatory and administrative burdens on several companies which fall out of the jurisdictional scope of the Code. However, shareholders of companies which remain captured by the Code should consider implementing sufficient and adequate procedures to ensure compliance, implementing protective provisions, or considering an exit plan.

On 16 May 2024, the Government published an implementation update on the UK’s Sustainability Disclosure Requirements (SDR).

The SDR was first established in Greening Finance: A Roadmap to Sustainable Investing in 2021, and its aim is to facilitate the provision of sustainability information between key stakeholders, capturing corporate disclosures, financial product disclosures, and broader taxonomy disclosures.

Thus, the recent updates on several aspects of the current SDR framework, specifically in the context of the global progress made on sustainability standards, including the launch of the IFRS Foundation’s International Sustainability Standards Board (ISSB) standards in July 2023.

The key updates within the Implementation Guidance document are to:

• Transition Plan Disclosures: The government confirms its intentions for relevant regulators to strengthen expectations for transition plan disclosures and ensure that they align with international standards. Additionally, the government will consult in Q2 2024 on its approach towards the UK’s largest companies and their transition plan disclosures.
• UK Green Taxonomy: The document notes that “The government continues to work at pace and expects to consult in due course” on the proposed Green Taxonomy, although no specific date is given. Following consultation feedback, the government will introduce a testing period for voluntary disclosure, which will last at least two years before exploring the possibility of mandatory disclosures. Although mandatory disclosures against the taxonomy have yet to be decided by the Government.
• Nature-Related Disclosures: The government welcomes the work of the Taskforce on Nature-Related Financial Disclosures (TNFD) in developing recommendations on nature-related issues. However, there is no indication that the recommendation will be implemented or place any nature-related obligations on companies.

The government will publish a revised timeline and details of the updates and consultation process for the SDR; this may occur by the end of the year.

The government continues to showcase its commitment to ensuring compliance of UK companies regarding their disclosure process, specifically towards substitutability, and ensuring that UK regulators adjust their expectations to uphold the standards both nationally and internationally.

The NSIA came into force on 4 January 2022, significantly extending the UK Government’s power to investigate and intervene in transactions which pose or could pose threats to the UK’s national security.

On 18 April 2024, the Cabinet Office published the outcome to its call for evidence in relation to the NSIA which sought views on how the national security and investment regime can be more attractive to businesses while maintaining and refining the protections needed in order to protect national security.

The Government intends to focus on five areas until Autumn 2024:

1. Publish an updated NSI section 3 statement in May 2024.
2. Publish updated market guidance in May 2024 – further examples across a range of areas including the factors the Government expects to take into account when assessing risk, statutory time limits, further guidance on what is captured by the mandatory area definitions and specific examples of the situations in which NSIA can apply to transactions in academia, research and Outward Direct Investment.
3. Consult on updating the mandatory areas by Summer 2024 – possible additions to the list of 17 sensitive areas of the economy that are subject to NSIA as well as changes to how some of the existing areas are defined.
4. Consider technical exemptions to the mandatory notification requirement for inclusion in legislation to be laid in Autumn 2024 – for example, an exemption for appointing liquidators, official receivers and special administrators or an exemption for certain internal company reorganisations.
5. Improving the operation of the NSI system – focus on transparency around the operation of NSI system and length of assessment process.

Following this, on 21 May 2024, the government then published two new sets of guidance: an updated “Section 3 Statement” and updated Market Guidance. The primary updates focus on enhancing the comprehension and compliance of the current NSIA.

In summary, the key provisions introduced by the Section 3 Statement and Market Guidance include:

• Expanded risk clarifications – this will provide greater insight into the potential security risks the Secretary of State considers a potential threat to nation security and likely to trigger the call-in power.
• New hypothetical scenarios – primarily useful for funds and fund sponsors as the scenarios include examples and guidance for complex fund structures where it is unclear who the beneficial owners are.
• Acceleration in financial distress cases – this could provide a possibility for parties in an acquisition to escalate the government’s decision on whether to call in an acquisition.
• Enhanced guidance on assessing acquirer risk – primarily for funds, fund sponsors, and state-affiliated entities, the Secretary of State emphasised that where entities are connected to states or organisations hostile to the UK, this will inform the Secretary of State’s assessment of acquirer risk.
• Outward direct investment – provides clarity on the application of the NSIA to situations involving non-UK investments (provided the necessary UK-nexus criteria are satisfied).
• Detailed advice for the higher education and research-intensive sectors – includes examples of how NSIA applies to certain academic collaborations.
• Improved guidance on completing forms and timelines – provides tips when completing a notification form.

The government is planning to launch a formal public consultation on updating the definitions for the 17 sensitive areas of the economy that are subject to NSIA’s mandatory notification requirements. However, this may be subject to the Labour Party’s commitment to establishing a pro-business environment and national security following the party’s win of the General Election, which was held on 4 July 2024.

The government’s update of the NSIA suggests a desire to streamline the current NSIA and its application to ensure that the UK investment screening regime is robust. However, there also seems to be a focus on counteracting the restrictive nature of the NSIA to be as “business friendly as possible”.

On 6 June 2024, the Institute of Directors (the IoD) launched a public consultation on a proposed voluntary Code of Conduct for directors of all types of corporate entity (including private, public, and not-for-profit entities) (the Code).

The Code is a voluntary, principles-based code of best practice which sets out what the IoD considers an appropriate framework to facilitate directors in their decision-making, ensuring that they build and maintain the trust of the wider public in their business activities.

The Code will not add to the existing general legal duties of a director (as defined in the Companies Act 2006) and there will be no formal enforcement mechanism. The Code is intended to enhance the legitimacy and reputation of directorship with both stakeholders of the organisation and also with wider society.

In recent years, directors have faced increased scrutiny and economic pressures, exposing themselves and the companies for which they act to corporate scrutiny and reputational damage.

The Code outlines six principles for directors to adhere to:

1. Leading by example – demonstrating exemplary standards of behaviour in personal conduct and decision-making.
2. Integrity – acting with honesty, adhering to strong ethical values, and doing the right thing.
3. Transparency – communicating, acting, and making decisions openly, honestly, and clearly.
4. Accountability – taking personal responsibility for actions and their consequences.
5. Fairness – treating people equitably, without discrimination or bias.
6. Responsible Business – integrating ethical and sustainable practices into business decisions, considering societal and environmental impacts.

Under each principle, the Code sets out various undertakings which directors are encouraged to apply and fulfil.

The public consultation will run until mid-August 2024.

The publication of this consultation demonstrates the IoD’s understanding that director conduct is a source of business and reputational risk for both organisations and individual directors. The introduction of the Code helps to manage that risk, with rules of conduct that foster accountability and integrity and supports directors in fulfilling their responsibilities.

However, as the proposed Code is voluntary, professional bodies such as the Institute of Chartered Accountants in England and Wales (ICAEW) have expressed concerns about the effectiveness of a voluntary code with no enforcement mechanism or register of signatories.

On 31 July 2023, the Financial Conduct Authority (the FCA) introduced the Consumer Duty (the Duty), which requires companies to “act to deliver good outcomes for retail customers”. The FCA has stated that the Duty does not simply restate existing rules but sets higher standards.

Following the Duty’s introduction, companies to which the Duty applies must prepare a report for their board on the outcomes being received by retail customers (the Report).

The Report must set out:

• The results of the company’s Duty monitoring programme.
• Details of actions that are required as a result of this monitoring.

The deadline for companies required to prepare and approve their first Report is 31 July 2024. Thereafter, the Report is to be conducted on an annual basis.

Once the Duty applies from 31 July 2023, there will be a series of ongoing obligations for company boards to oversee, including:

• Embedding good customer outcomes – meaning boards should ensure that strategies, governance, leadership, processes, and people policies reflect the obligation to act to deliver good outcomes for customers.
• Ongoing monitoring – meaning boards must retain oversight to satisfy themselves that customers are getting good outcomes and, if this cannot be ascertained, determine what actions are required to comply with the Duty.
• Annual assessment – meaning boards must review and approve a report setting out whether the company is delivering good outcomes for its customers that are consistent with the Duty.

The FCA intended that their expectation is met by ensuring accountability for compliance is the responsibility of the company’s boards and senior management and that the Duty must be a top priority.

Therefore, it is expected that the annual Report should be a framework to highlight how companies met the Duty requirements and effectively identify areas for improvement if there were poor outcomes. This will demonstrate the board’s ability to provide good customer outcomes and a framework to highlight how firms are meeting the Duty requirements and identifying poor outcomes effectively.