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Equiniti Bulletin – October 2021

EQ Bulletin – November 2021

Thursday, 4 November 2021

Welcome to our monthly bulletin of what’s happening within the regulatory environment that impacts the share registration and employee share plans space.

Paul Matthews Circle Paul Matthews CEO - EQ Boardroom

Last month we welcomed nearly 900 attendees to the 2021 EQ Conference. Highlights included lively debates during the keynote Boardroom Table-Talks, and technical experts sharing their insights in our Know-How Workshops. Sessions can be viewed on-demand here.

This month, as the United Nations Climate Change Conference gets underway, ESG and sustainability play a central role in our latest update from the world of corporate governance. We report on the FRC's findings on its carbon reporting review and the publication of FAQs on international sustainability standards-setting. 

As always, if you have any questions on the content of this month's bulletin, please get in touch with your Client Relationship Lead.

Kathy Cong Circle Kathy Cong Managing Director, Prism Cosec

An Insight From Prism Cosec

The Financial Reporting Council has been busy recently issuing several reports or reviews on diverse issues. Two documents focussed on environmental matters, a review of streamlined carbon reporting and International Sustainability Standards Setting.

Also, of interest is the report that was issued on Structured Reporting by the FRC Lab, which with the implementation of structured reporting on the horizon, will be of interest to those companies who will be required to produce reports in the XHTML format. However, the recent re-emergence of Government’s intent to dematerialise shares may have an even greater impact on companies; the potential scope of this is not yet known.

Review Of Streamlined Carbon Reporting

The Financial Reporting Council (FRC) has published the findings of its review of reporting on emissions, energy consumption and related matters under the Streamlined Energy and Carbon Reporting (SECR) rules which came into effect from 1 April 2019. The review considered how a sample of companies and Limited Liability Partnerships (LLPs) had complied with the SECR requirements, identified examples of emerging good practices and outlined its expectations for future reporting. The sample comprised ten FTSE 350 companies, ten AIM companies, five large private companies and two large LLP’s. 

The review noted that while there was compliance with the minimum statutory disclosure requirements, more needs to be done to make the disclosures relevant and understandable for users. For instance, the reports did not, amongst other matters:

  • Include enough information on the methods used to calculate emissions and energy use consumption.
  • More thought is needed about integrating these disclosures with narrative reporting on climate change, where relevant, and making them easier for users to navigate. 
  • In some instances, it was unclear whether the ratios selected were the most appropriate for the entities’ operations.

The review noted that there is scope for improvement and includes details of expectations for future reporting, which include:

  • The presentation of all the required information in a form that is clear, understandable, and easy for users to navigate, using cross-references where relevant information is provided across several parts of the annual report.
  • The provision of an adequate explanation of the methodologies used to calculate emissions and energy use.
  • Providing an explanation or reconciliation where ratios provided cannot be recalculated from, or are inconsistent with other disclosures in the annual report and accounts.
  • A description of the extent of any due diligence or assurance over emissions and energy use metrics.
  • Clear explanations that help users understand and compare significant commitments, such as ‘net-zero emissions’ targets that may require the disclosure of additional emissions-related information beyond the minimum required by SECR.

The review is available here

International Sustainability Standards Setting

The FRC has published a set of frequently asked questions on international sustainability standards setting. This document aims to notify UK stakeholders of developments in sustainability standard setting by the International Financial Reporting Standards Foundation (IFRS Foundation). This is a fast-moving area that has the potential to impact corporate reporting significantly in the future.

The IFRS Foundation intends to develop International Sustainability Standards by establishing an International Sustainability Standards Board (ISSB) alongside the International Accounting Standards Board (IASB). An announcement relating to the establishment of the ISSB is expected in November 2021 (at the same time as COP26) and it is anticipated that a draft standard on climate will be announced in early 2022. As with the adoption of International Accounting Standards (IAS/IFRS), it will be for individual jurisdictions to determine whether these standards are mandated for use, the scope of companies affected and the timeframe over which this might occur.

The frequently asked questions can be viewed here

Government Policy Paper: Share Dematerialisation

The Government published a policy paper announcing a package of proposed regulatory reforms. The paper forms the second phase of its response to recommendations made by the Taskforce on Innovation, Growth and Regulatory Reform on how the UK can reshape its approach to regulation following Brexit.

Among the proposals is a plan to dematerialise shares that are still held in paper, rather than electronic form. The Government will work with industry, regulators and shareholders in the medium term to determine the best mechanism for converting these paper shares into electronic form while preserving the rights of existing shareholders. It is not currently clear if this review will affect all companies or only quoted companies. 

The policy paper can be viewed here.

HM Treasury - Call For Evidence UK Secondary Capital Raising Review

HM Treasury has published a call for evidence concerning a review of the capital raising processes of existing publicly traded issuers by the UK Secondary Capital Raising Review. Responses should be received by 16 November, and after that, the intention is for discussions with interested parties to report to HM Treasury in Spring 2022. The review seeks views on matters such as:

  • Whether it would be possible for the overall duration and cost of the existing UK rights issue process to be reduced. 
  • Should new technology be utilised in the process to ensure that shareholders receive relevant information in a timely fashion and can exercise their rights.
  •  Whether fund-raising models in other jurisdictions should be considered for use in the UK (examples given in the review document relate to systems in use in Australia).
  •  Whether the greater transparency around short selling introduced after the financial crisis has benefited the rights issue process, and if there is more that can and should be done in this area. 
  • Any refinements that could be made to the undocumented secondary capital raising process in light of recent experiences during the Covid-19 pandemic.
  • Any other recommendations or points made by the Rights Issue Review Group in 2008 that should be investigated further. 
  • If there are any other ways in which the secondary capital raising process in the UK should be reformed.

The review can be downloaded here.

Takeover Panel – Panel Bulletins

The Takeover Panel has published the first of its bulletins which it intends to release periodically to remind practitioners and market participants of the operation of specific provisions of the Takeover Code when the Panel Executive becomes aware of issues. The Panel has confirmed that Panel Bulletins will not involve any changes to the interpretation or application of the Takeover Code. Two bulletins have been issued:

Panel Bulletin 1 concentrates on the requirements in relation to meetings and telephone calls with shareholders and others. There is a reminder to parties to an offer of the importance of ensuring equality of information to offeree company shareholders and additionally reminds financial advisers and corporate brokers of their responsibility for ensuring that no material new information or significant new opinions are provided in meetings or calls with shareholders. The Bulletin does indicate that the Panel Executive has seen a small number of recent cases where meetings or calls have taken place between a party to an offer's management and offeror or offeree company shareholders with no arrangements being made for an appropriate adviser to attend those meetings or calls, or where the confirmations under Rule 20.2 were given without the necessary care and consideration.

Panel Bulletin 2 deals with management buy-outs or similar transactions and reminds financial advisers of the importance of early consultation with the Executive in relation to any transaction that could be a management buy-out or similar transaction in order to agree the application of the relevant Code rules.

The Bulletins are available here (Panel Bulletin 1) and here (Panel Bulletin 2).

Review Of Alternative Performance Measures

The FRC has produced a review into the use of Alternative Performance Measures (APMs) by UK listed companies. The study found that companies need to be more transparent about the use of APMs, and their linkage to their IFRS or UK GAAP results (GAAP results). The report also found that while companies generally provided good quality APM disclosures, their context needs to be better explained, particularly as profit-based APMs tended to be more favourable than their GAAP results. Companies need to define their APMs clearly and explain why they are necessary but should not give them greater precedence than their GAAP equivalents. Relevant GAAP information can also be obscured by using alternative measures; companies are encouraged to consider the number of APMs they present. 

The FRC expects to see improvements in several areas, which includes:

  • Providing an even-handed treatment of gains and losses when classifying amounts as adjusting items;
  • Ensuring APM reconciliations and calculations are complete and transparent;
  • Explaining terms used in describing APMs, such as providing ‘underlying results’ or adjusting for ‘non-recurring’ items; and
  • Providing more detailed information about the cash and tax impact of adjusting items and the potential impact of adjustments for multi-year restructuring programmes on future results.

The report can be downloaded here.

Thematic Review Of Going Concern And Viability Disclosures

The FRC has published a review of the key findings of a study of viability and going concern disclosures in a sample of annual reports and accounts with year ends between December 2020 and March 2021. The review emphasised the importance of high-quality viability and going concern disclosures and highlighted several areas for improvement. 

Key findings in the report were: 

  • Disclosures generally lacked sufficient qualitative and quantitative detail concerning the inputs and assumptions used in forecast scenarios supporting the viability and going concern assessments. Better viability and going concern disclosures should include granular, company-specific information, proportionate to its financial position and exposure to uncertainties.
  • There was some evidence of significant judgements being applied in determining whether the company was a going concern or subject to material uncertainty, without identifying or explaining these judgements.
  • While most companies noted that the principal risks and uncertainties identified in the strategic report had been considered when assessing viability, disclosure of how those risks and uncertainties had been modelled in the viability scenarios was not always clear. The best disclosures clearly mapped the principal risks identified to the viability scenarios tested.
  • Overall, companies did not disclose their resilience to risks that could threaten their going concern status or longer-term viability. 
  • The most common viability period selected by companies was three years. Although most companies disclosed why this was appropriate, the explanations often failed to fully identify and consider all the relevant factors in determining this period. The FRC expects going concern disclosures to clearly justify the period of assessment and consider longer-term factors were possible, such as debt repayment profiles, the nature of the business and its stage of development, planning and investment periods, strategy and business model and capital investment.

The review can be downloaded here.

Thematic Review IAS 37

The FRC has published the findings of its review into IAS 37- Provisions, Contingent Liabilities and Contingent Assets which has been identified as an ongoing problem area.

The reporting of provisions and contingent liabilities is important to investors due to the forward-looking information provided about a company’s exposures. The issues giving rise to provisions and contingent liabilities can be long-term in nature, such as climate change and other environmental obligations, or significant to the assessment of future business performance, for example, onerous contracts and regulatory penalties or compensation.

The review, which covered 20 companies listed on the Main Market, found scope for improvements in several areas. This included an explanation of how the amounts of expected outflows have been estimated, identifying the key assumptions applied and describing the associated uncertainties, disclosure of the phasing of outflows companies expect to see as they utilise their provisions and a description of the underlying costs for which companies make provisions.

The report concludes with an indication of expectations for good disclosure of provisions, contingent liabilities and contingent assets including amongst others the following, wherever the matters are material and of relevance to the company’s financial reporting:

  • Clear and specific descriptions of the nature of each material exposure, the timeframe over which it is expected to crystallise and the basis for determining the best estimate of the probable or possible outflow.
  • Explanation of significant judgement exercised by management in determining the recognition and measurement of provisions, setting out the rationale for management’s conclusion and the effect on the financial statements of taking an alternative view.
  • Quantitative and qualitative information about critical estimation uncertainty affecting the next financial year, including disclosure of key assumptions and sensitivities.
  • Management commentary on significant year-end balances and unrecognised exposures, and on significant movements recognised during the period (whether additions, new provisions, utilisations or reversals).

The review can be downloaded here

Structured Reporting: An Early Implementation Study

Under the Disclosure Guidance and Transparency Rules, companies with transferable securities admitted to trading on a UK regulated market will need to publish their annual report in XHTML from 2021 onwards. The Financial Reporting Council Lab has produced a report designed to support those companies affected in the move towards high-quality digital reporting. The review of fifty early structured reports found that many reports fell short of the quality that will be expected for companies’ official filings. The report sets out key considerations and tips for companies covering: 

  • How to set up the structured reporting process;  
  • How to enhance the usability of structured reports; and 
  • Common tagging issues to avoid. 

The report can be downloaded here

Case Law: Execution Of Documents

Mars Capital Finance Ltd v Hussain [2021] EWHC 2416 (Ch) 

This case was heard in the High Court before Mr M H Rosen QC. The case focussed on whether a company must execute a contract for the sale of land under section 44(2) of the Companies At 2006 to satisfy the signature requirement in section 2(3) of the Law of Property (Miscellaneous Provisions) Act 1989. The defendant borrowers argued that as a Property Sale Agreement (“PSA”) did not bear Mars Capital Finance Limited (“Mars”) company seal and was signed by a single director without being attested by a witness, it had failed to comply with the execution formalities in section 44(2) of the Companies Act 2006 (CA 2006). The result being that the PSA did not satisfy the signature requirement in section 2(3) of the Law of Property (Miscellaneous Provisions) Act 1989 (“LPMPA”). 

While the court concluded that section 2(3) was ultimately irrelevant (because the transfer had been completed and registered, and section 2 only applied to executory contracts), it agreed with Mars submission that it was not necessary for the PSA to be executed by Mars under section 44(2) of the CA 2006 to satisfy the signature requirement in section 2(3) of the LPMPA. As a contract, the PSA could be signed on Mars behalf by a person acting under Mars authority under section 43(1)(b) of the CA 2006. Accordingly, a single, unwitnessed signature by an authorised signatory was sufficient.

The full judgement in the case can be found here.

National Security And Investment Act 2021

On 6 September 2021, the draft National Security and Investment Act 2021 (Monetary Penalties) (Turnover of a Business) Regulations 2021 and the draft National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 were published. The regulations set out descriptions of qualifying entities and their activities in the UK that will bring a proposed acquisition of a qualifying entity within the Act's mandatory notification requirements. Both regulations need to be approved by both Houses of Parliament.

National Security And Investment Act 2021 (Monetary Penalties) (Turnover of a Business) Regulations 2021

The draft regulations can be viewed at The National Security and Investment Act 2021 (Monetary Penalties) (Turnover of a Business) Regulations 2021 ( and broadly contain provisions:

  • For permitted maximum penalties of the Act, a business includes a sole trader (draft regulation 2). 
  • For determining when a business is to be treated as controlled by another business, in similar terms to regulation 2 (control of an enterprise) of the Enterprise Act 2002 (Mergers) (Interim Measures: Financial Penalties) (Determination of Control and Turnover) Order 2014.
  • For determining the turnover (both in and outside the United Kingdom) of a business. As previously proposed by BEIS, the definition of turnover in draft regulation 4 and the schedule is in similar terms to the definition of turnover in the Enterprise Act 2002 (Mergers) (Interim Measures: Financial Penalties) (Determination of Control and Turnover) Order 2014. But, there are some differences including, a provision that, in the event of a disagreement between a business and the Secretary of State, the turnover is the amount determined by the Secretary of State, and a provision to define the subsidies to be included in the determination of turnover.

The draft regulations, which are scheduled to come into force on 4 January 2022.

National Security and Investment Act 2021 (Monetary Penalties) (Turnover of a Business) Regulations 2021

National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021