UK Corporate Update 1

20 June 2013

UK Corporate Update.

New UK annual strategic report and requirements to

disclose human rights, diversity and greenhouse gas

emissions

Rules which will require companies to prepare a separate strategic report

alongside the annual directors’ report have been laid before Parliament. The

rules will require quoted companies to make new disclosures about human

rights, gender diversity and greenhouse gas emissions.

The Companies Act 2006 (Strategic Report and Directors’ Report)

Regulations 2013 (the “SR Regulations”) amend the Companies Act 2006

and will take effect for financial years ending on or after 30 September 2013.

Companies with a calendar year end will therefore need to include the new

disclosures when they publish their 2013 report in spring 2014.

Strategic report

The SR Regulations replace the business review currently required by

Section 417 Companies Act 2006 with a strategic report pursuant to new

Sections 414A-D Companies Act 2006. The requirements applicable to the

strategic report largely replicate the business review except that quoted

companies will also have to include, to the extent necessary for an

understanding of the development, performance or position of their business:

information about human rights alongside social and community

issues (including information on any human rights policy and its

effectiveness);

a breakdown showing, at the end of the financial year, (i) the number

of persons of each sex who were directors of the quoted company, (ii)

the number of persons of each sex who were senior managers of the

quoted company and the undertakings consolidated in the quoted

company’s accounts, and (iii) the number of persons of each sex who

were employees of the quoted company and its consolidated

undertakings.

In this issue New UK annual strategic report and requirements to disclose human rights, diversity and greenhouse gas emissions ................... 1

Changes to EU transparency requirements approved ........................... 5

New EU Accounting Directive approved ............ 7

Prospectus Directive: comparison of liability regimes in EEA States ...... 9

More information on risk to be provided in auditor reports ............................. 10

FRC defers the update to its going concern guidance . 11

Statutory audit services market investigation ........ 12

ICSA guide on cyber risk 12

EU Commission consultation on single-member limited liability companies ...................... 13

UK Corporate Update 2

Other changes include a new requirement for quoted companies to describe

their business model and strategy. This makes mandatory the existing comply

or explain disclosures in the UK Corporate Governance Code.

Companies will also be able to include in the strategic report matters required

to be disclosed in the directors’ report if they are of strategic importance.

All Companies Act provisions that applied to the business review will apply to

the strategic report. In particular, the safe harbour from liability for directors

for false or misleading statements in Section 463 will apply to the strategic

report.

Abolition of the summary financial statement

The option for companies to send to shareholders a summary financial

statement rather than the annual report and accounts is being removed.

Instead, companies will have the option to send the strategic report (together

with certain supplementary information) if shareholders agree. The SR

Regulations do not address the mechanics of obtaining shareholder consent

and further regulations are likely to be required. BIS stated in its October

2012 consultation on the SR Regulations that shareholders’ previous

elections to receive the summary financial statement would in future apply to

the strategic report.

Greenhouse gas emissions in directors’ report

The SR Regulations require a quoted company to state the annual quantity of

emissions in tonnes of carbon dioxide (i) from activities for which the

company is responsible, including the combustion of fuel and the operation of

its facilities and (ii) resulting from the purchase of electricity, heat, steam or

cooling by the company for its own use. If the annual period is different from

the period in respect of which the directors’ report is prepared, this must be

disclosed in the directors’ report.

Except for the first year of reporting, the report must give information for the

preceding year as well.

At the same time as publishing the SR Regulations, BIS also published

guidelines on environmental reporting, including guidelines on complying with

the greenhouse gas emission disclosure requirements.

The SR Regulations contain a number of changes from the draft regulations

on which DEFRA consulted in July 2012:

> the draft regulations required disclosures of emissions from operations

controlled by the company. The reference to control was not without

difficulty and has been replaced by a concept of activities for which the

company is responsible. This may be a nod to the need for operational

responsibility over emissions if one is expected to report upon them. It

is apparent from the guidance, for example, that greenhouse gas

emissions from outsourced activities need not be reported on. Where

UK Corporate Update 3

there is a difference between the operations reported on for

greenhouse gas emissions and those covered by the consolidated

financial statement, this should be explained;

> a comply or explain disclosure has been introduced into the regulations

instead of just the guidance so that, if it is not practicable for a

company to obtain the necessary information, the report can state what

information is not included and why;

> companies may state more than one intensity ratio. The ability to state

more than one ratio will be welcomed by companies as some sectors

use ratios per product or commodity rather than across the whole of a

group’s operations. However, it is still necessary to state at least one

intensity ratio that relates to their emissions i.e. for the entire company;

and

> there is no longer a requirement in the regulations to state if

information was obtained as a result of compliance with schemes such

as the CRC Energy Efficiency Scheme. However, companies must still

disclose the methodology used to calculate emissions and the

guidance makes clear that you need to state the statutory scheme as

one of the methodologies used.

Assurance or verification is not required but is recommended as good

practice.

Removal of disclosures from directors’ report

The following reporting requirements are being deleted as they duplicate

other requirements or are not considered to provide meaningful information:

> the requirement for quoted companies to report on their essential

contractual arrangements.

> information about principal activities;

> information about asset values;

> information about charitable donations;

> the requirement for private companies to disclose information about the

acquisition of their own shares;

> information about the policy and practice of payment to creditors.

Comment

The timetable for implementation of the SR Regulations is relatively short and

companies should be considering the steps they need to take to be in a

position to make the new disclosures. Areas where further action may be

required include:

UK Corporate Update 4

> Human rights disclosures: In the absence of any guidance on the

new disclosures, companies may wish to consider definitions of human

rights in existing frameworks such as the United Nations Global

Compact, the United Nations Guiding Principles on Business and

Human Rights (known as the “Ruggie Principles”) and the OECD’s

Guidelines for Multi-National Enterprises or the Global Reporting

Initiative;

> Diversity: Companies should consider whether any additional

processes need to be put in place to enable them to be in a position to

disclose the breakdown of men and women not just at the level of the

quoted company but in its group as a whole. In particular, the need to

provide a breakdown of directors of undertakings consolidated in the

quoted company’s accounts alongside senior managers should be

noted;

> Greenhouse gas emissions Compliance with the new regime will

require significant effort and companies need to have identified the

activities for which they are responsible, collect the relevant data for

the current year, determine the methodology for calculating emissions

and the relevant intensity ratio(s).

Overlap with European proposals

In April 2013, the European Commission published a draft directive to require

large and listed companies to include additional disclosures of non-financial

information in their annual reports. This won’t become law until at least 2016

but has the potential to increase reporting on non-financial information. For

example, if implemented in its current form, the directive would require large

and listed companies to disclose information on anti-corruption and bribery

matters, information on risks regarding non-financial matters and additional

information on diversity based on a broad definition that goes beyond gender

to cover age, geographical diversity, education and professional background.

The Commission has also indicated its intention to add a further provision to

the draft directive requiring large and listed companies to disclose tax

payments on a country by country basis.

Further information

Click here for a copy of BIS’ press release and a link to the SR Regulations

that were laid before Parliament.

Click here for a copy of BIS’ Environmental Reporting Guidelines, including

guidance on greenhouse gas emissions disclosures.

Click here for a copy of BIS’ October 2012 consultation on draft regulations.

Click here for a copy of DEFRA’s July 2012 consultation on greenhouse gas

reporting.

UK Corporate Update 5

Changes to EU transparency requirements approved

The European Parliament has adopted a directive amending the

Transparency Directive (2004/109/EC). The changes will affect companies

with securities admitted to trading on regulated markets in the EEA. In

particular:

> extractive and forestry logging companies (wherever incorporated) will

be required to disclose payments to governments on a country by

country and project specific basis;

> the requirement for companies to produce interim management

statements or quarterly reports will be abolished, subject to a residual

member state discretion; and

> the requirements for companies to notify interests in shares and related

financial instruments will be extended to ensure greater consistency

across the EU.

Further detail is set out below.

Extractive industry payments

Companies active in the extractive or logging of primary forest industries will

have to publish details on payments they make in the countries in which they

operate. The new rules cover oil, gas, mining and forestry companies and will

compel them to report on all payments over $100,000 made by them to local

governments and authorities, on a project by project basis, including details of

taxes levied on their income, production or profits, royalties and licence fees.

The report must be published annually within six months after the end of each

financial year.

The rules are set out in a new consolidated accounting directive (also

approved in the same session of the European Parliament) to which the

amending directive cross refers and will also apply to large unlisted

companies registered in the EEA.

For further detail on the rules, together with a comparison of reporting

requirements for SEC registered companies and companies who have signed

up to the Extractive Industries Transparency Initiative, see our report

“Disclosing extractive industry payments: navigating the maze”.

Abolition of interim management statements and extension of period for

publication of half-yearly reports

To reduce regulatory burdens, particularly on smaller listed companies, the

requirement for issuers to publish interim management statements or

quarterly reports will be abolished.

It will still be possible for member states to introduce more onerous rules on

periodic financial reporting subject to the additional information not

constituting a disproportionate burden. However, the UK has already

UK Corporate Update 6

indicated that it is in favour of abolishing interim management statements (as

recommended by the Kay Review last year).

In a further step to ease the regulatory burden, the amending directive

extends the period for issuers to publish their half yearly reports from two

months to three months after the end of the half-year period. The period for

publication of annual financial reports remains four months after year end.

Reporting format

All annual financial reports are to be prepared in a single electronic format

from 1 January 2020, subject to a cost benefit analysis to be undertaken by

ESMA. To facilitate the introduction of a single electronic format such as

XBRL (eXtensible Business Reporting Language), the Commission is given

the power to adopt regulatory technical standards, to be developed by ESMA,

by 31 December 2016.

Cross-border access to information

The current network of officially appointed national storage mechanisms for

regulated information does not (to quote recital 13 of the amending directive)

ensure “an easy search” for such information across the EU. The amending

directive therefore delegates power to the European Commission to ensure

the inter-operability of communication technologies used by the national

storage mechanisms and improve access to regulated information at EU

level. A web portal serving as a “European access point” is also to be

established by 1 January 2018.

ESMA will assist the European Commission by developing regulatory

standards concerning the technical requirements for the operation of the

central access point and the communication technologies used by national

storage mechanisms.

As a further measure to improve access to information, the amending

directive provides that issuers must ensure that their periodic financial reports

(annual financial report and the half-yearly report) remain publicly available

for 10 years. The current requirement is 5 years.

Changes to notification of interests regime

The amending directive provides for changes to the notification of interests

provisions, both to broaden the scope of the rules to require greater

disclosure of economic interests and to ensure greater uniformity in their

application across the EU. The definition of financial instruments relating to

shares that are subject to notification is extended to cover cash-settled

derivatives. This will bring the EU rules broadly in line with the UK’s super-

equivalent rules in DTR 5 which already require notification of financial

instruments which create a long economic interest in an issuer’s shares.

The changes are also designed to introduce greater consistency to the

notification of interests regimes in member states by removing options in the

UK Corporate Update 7

way that the Transparency Directive is implemented. In particular, it will be

mandatory to aggregate holdings of voting rights with holdings of financial

instruments in calculating notifiable interests. Member states will still be

permitted to set lower notification thresholds than the thresholds mandated by

the Transparency Directive but they will not be able to impose different

requirements regarding calculation or aggregation of interests.

The greater level of harmonisation will be welcomed by investors, who will be

able to streamline their reporting systems and procedures.

Sanctions

To improve compliance, the amending directive sets out minimum powers to

enable competent authorities to enforce key provisions of the Transparency

Directive. These are similar to those recently agreed in the new Capital

Requirements Directive, CRD 4, and include the power to impose fines of up

to €10,000,000 or 5% of annual turnover or up to twice the amount of profits

gained or losses avoided because of the breach, whichever is the highest. In

addition, for breaches of the notification of interests provisions, competent

authorities will have the power to suspend the exercise of voting rights

attached to the shares of the entity or individual in breach.

Timing

The amending directive will now be referred to the Council for adoption and

will take effect after publication in the Official Journal in the next few months.

Member States will be required to transpose the directive into national law

within two years (i.e. in 2015). In the meantime draft non-binding guidelines

and technical standards under the legislation are expected to be developed

by ESMA.

Further information

Click here for the text of the amending directive approved by the European

Parliament (see pages 455 to 526)

Click here for the text of the accounting directive, as approved by the

European Parliament (see pages 239 to 454).

Click here for the press releases published by the European Commission and

a link to FAQs on the amending directive.

New EU Accounting Directive approved

The European Parliament has adopted a directive that consolidates EU

accounting requirements into one directive, relaxes the accounting rules for

smaller companies and introduces country by country reporting of payments

to governments by large companies in the extracting and logging of primary

forests sectors. The Directive is expected to be adopted by the Council

shortly and take effect after publication in the Official Journal later this

summer. Member States will then have two years to implement the Directive.

UK Corporate Update 8

The Directive updates the EU’s accounting framework. In particular, it:

> consolidates existing directives on individual and company accounts

(Directives 78/660/EEC and 83/349/EEC also known as the Fourth and

Seventh Directives);

> incorporates the directive that permits micro-entities to prepare a very

simple balance sheet and profit and loss account with virtually no notes

(Directive 2012/6). Micro entities are companies with less than 10

employees, a turnover of €700,000 and/or a balance sheet total of not

more than €350,000);

> requires Member States to distinguish small companies from larger

ones. Small companies are those with less than 50 employees, a

turnover of not more than €8 million and/or a balance sheet total of not

more than €4 million. Member States are also permitted to use

thresholds of up to €12 million for turnover and €6 million for balance

sheet total. The thresholds will be updated for inflation;

> reduces the information to be provided by small companies in the notes

to the accounts; and

> removes the EU requirement for small companies to be audited

(though Member States can take a more proportionate approach).

The Directive does not adopt the IFRS for SMEs as this is considered to be

too burdensome for smaller companies. Member States may, however, permit

or require the IFRS for SMEs provided that it is modified to comply with the

Directive. In the UK context, there may need to be some minor amendments

to FRS 102, the standard that is replacing UK GAAP from 2015. FRS 102 is

based on the IFRS for SMEs but makes its own modifications for UK

requirements. Further amendments may also be necessary to the FRSSE,

the UK standard for smaller entities, to reflect the Directive’s provisions on

micro-entities.

Extractive industry payments

The requirement in the Directive for large companies in the extractive and

logging of primary forests sectors to report on the payments they make to

governments has received the most press attention. The new rules cover oil,

gas, mining and forestry companies and will compel them to report on all

payments over $100,000 made by them to local governments and authorities,

on a project by project basis, including details of taxes levied on their income,

production or profits, royalties and licence fees. The report must be published

annually within six months after the end of each financial year.

Large companies for this purpose are companies with more than 250

employees, a turnover of more than €40,000,000 and/or a balance sheet total

of more than €20,000,000. Companies listed on a regulated market in the

EEA will also be subject to the same requirement following an amendment to

UK Corporate Update 9

the Transparency Directive adopted by the European Parliament at the same

time as the Directive.

For further detail on these requirements, together with a comparison of

reporting requirements for SEC registered companies and companies who

have signed up to the Extractive Industries Transparency Initiative, see our

report “Disclosing extractive industry payments: navigating the maze”.

Further plans

In welcoming Parliament’s adoption of the Directive, Commissioner Barnier

indicated his intention to move ahead with plans to require large companies

and groups to disclose tax payments on a country by country basis, similar to

the requirements introduced for banks and credit institutions by the new

Capital Requirements Directive, CRD IV. This may be implemented by

amendments to the draft directive on non-financial reporting which was

published by the Commission in April and is now being negotiated as part of

the EU legislative process.

Further information

Click here for the text of the Directive, as approved by the European

Parliament (see pages 239 to 454).

Click here for a link to press releases published by the European Commission

(including Commission Barnier’s comments) and a link to FAQs on the

Directive.

Prospectus Directive: comparison of liability regimes in

EEA States

Following an invitation from the European Commission in 2011, ESMA has

published a report comparing the liability regimes applied by the EEA States

in relation to the Prospectus Directive.

The purpose for which the Commission requested this study was “in order to

identify and monitor” the liability regimes in the EEA States. The report was

prepared on the basis of questionnaires completed by the competent

authority in each EEA State and compares the civil, administrative and

government liability, criminal liability and sanctions applied in each

jurisdiction.

Upon analysing the responses, ESMA has found that there are areas of

commonalty between the jurisdictions but there is also a wide range of

possible manners in which the liability aspects under the prospectus regime

can be addressed. Specifically (amongst other things):

generally all EEA States apply either entirely general provisions (for example,

general tort or contractual law) or a combination of specific provisions,

supported by general provisions to address liability under the Prospectus

Directive;

UK Corporate Update 10

> there is no uniform manner of setting out the persons subject to the

different liability regimes but the vast majority of the EEA States have

indicated in their legislation the specific persons that are subject to civil

and administrative liability;

> in relation to the degree of fault which triggers liability, the majority of

EEA States display a similar approach in all four areas where at least

some form of negligence is required; and

> breaches of legislation regarding the inclusion of false or incomplete

information in a prospectus are subject to both civil and criminal liability

in all EEA States.

ESMA notes that the diversity of different regimes could, particularly on cross

border transactions, make it difficult for market participants to assess their

respective risks and rights in relation to prospectus liability. However, there is

nothing to indicate any plans to conform the liability regimes at this stage.

Annex II to the report contains the responses to the questionnaire set out as a

comparative table.

Click here for “Comparison of liability regimes of Member States in relation to

the Prospectus Directive”.

More information on risk to be provided in auditor reports

The FRC has published rules that will require auditors, in their report on the

accounts of listed companies, to describe the areas in which they think there

may be material risks of misstatement in the accounts and how these affected

the audit process. This follows a consultation in February 2013 on

amendments to the relevant auditing standard, ISA (UK and Ireland) 700. The

changes apply to auditor reports of entities that are required or who choose

voluntarily, to report on how they have applied the UK Corporate Governance

Code.

The aim is to make auditor reports more informative so they identify the areas

the auditors felt posed most risk and are less of a “pass/fail” opinion. The

changes require the auditor’s report to:

> describe the risks of material misstatement that were identified by the

auditor and which had the greatest effect on overall audit strategy,

allocation of resources in the audit and directing the efforts of the

engagement team;

> provide an explanation of how they applied the concept of materiality in

planning and performing the audit; and

> provide an overview of the scope of the audit, showing how this

addressed the risk and materiality considerations.

UK Corporate Update 11

It is possible that these disclosures will have an impact on the accountant’s

comfort and report documentation in IPOs and secondary offerings. They may

also prompt extra discussion in relation to the risk factors in the prospectus.

However, the requirement really highlights where the auditors felt they

needed to focus their energies as opposed to, necessarily, pointing out actual

problems.

The revised standard takes effect for financial years commencing on or after

1 October 2012. This is to tie in with changes to the UK Corporate

Governance Code, including the new provision for the audit committee report

to include a description of significant issues regarding the financial

statements. Although ISA (UK and Ireland) 700 had already been amended

once to reflect the changes to the Code, the FRC concluded that further

guidance was required to avoid standardised disclosures in the audit report.

The revised audit standard and an example of an auditor’s report reflecting

the additional requirements can be found here.

The FRC’s feedback statement on the revisions to the audit report can be

found here.

FRC defers the update to its going concern guidance

The Financial Reporting Council has published a statement of how it intends

to proceed with the implementation of the Sharman report on going concern.

The report (published in June 2012) recommended that listed companies

should give more disclosure in their annual reports on the risks to the viability

of their business over their full business cycle.

Following a number of criticisms to its January consultation on an update to

its going concern guidance, the FRC has decided to take more time to

develop clearer, more proportionate guidance. The main focus of criticism

was the use of the term “going concern” to describe both the specific

assessment required when preparing the financial statements (that the going

concern basis of accounting was appropriate) and the broader assessment of

risks affecting a company’s viability. Some respondents felt that the FRC had

set the hurdle for the going concern test so high that almost no companies

would be able to meet it for the purposes of making the confirmation that the

company was a “going concern” for the purposes of the Listing Rules and the

UK Corporate Governance Code.

There was also criticism that the date for implementation of the FRC’s

guidance, for financial years commencing on or after 1 October 2012, gave

companies insufficient time to prepare.

The FRC has therefore decided to reconsider the guidance and plans to

publish three further consultations in the autumn:

> on changes to the UK Corporate Governance Code to make the

distinction between the going concern assessment and the viability of

UK Corporate Update 12

the business model clearer (such changes would take effect in October

2014);

> on the development of integrated going concern and risk management

guidance to make a clearer link between the assessment of business

viability and the broader risk assessment that should form part of the

company’s normal risk management and reporting processes; and

> on separate, simplified guidance for small and medium-sized entities

following calls for a more proportionate approach.

Click here for the FRC’s press release, its January consultation and

responses to that consultation.

Statutory audit services market investigation

The Competition Commission has published a notice setting out that the FRC

could be given a secondary duty to promote competition between firms

providing audit services to FTSE 350 companies.

This is a further possible remedy to the lack of competition in the statutory

audit market and follows the notice of possible remedies that was published

along with the summary of the Competition Commission’s provisional findings

on 22 February 2013 (see UK Corporate Update 28 February 2013).

The FRC would not have the power to enforce the competition rules but

would be required to carry out its primary duties in a way which promotes

competition between firms. The Competition Commission indicates that the

FRC’s Audit Quality Review reports (which monitor the quality of audit

reports) might be used for this purpose in that they could enable companies

or shareholders to compare the performance of rival audit firms.

Views on this proposal should be given in writing to the Competition

Commission by 19 June 2013.

The Competition Commission is aiming to publish its provisional decision on

remedies during July 2013, although the statutory deadline is not until 20

October 2013.

Click here for the “Notice of a Further Possible Remedy under Rule 11 of the

Competition Commission’s Rules of Procedure”.

ICSA guide on cyber risk

ICSA have published a guide on cyber risk which urges companies to carry

out comprehensive, business-wide risk assessments as a business critical

activity.

The guide highlights the fact that cyber risk is different from other types of risk

due to the rapid evolution of technology and the fact that little information is

shared about them.

UK Corporate Update 13

Although the risk profile will be different for each organisation, the guide sets

out advice for carrying out an assessment of the company’s risk which

includes the following suggestions:

> a company may not have sufficient experience of cyber attack to carry

out an initial assessment so it is often beneficial to seek external

advice;

> risk assessments should concentrate on the protection of information,

including customer data; and

> assessments should include the risks of using third party providers.

The guide states that while companies can outsource activities, the

risks and the consequences will remain with the company.

When reviewing the risk assessment, the guide recommends that the board

and audit committee should focus on the consequences of a cyber attack,

giving priority to the risks of strategic importance and those with implications

for the company’s reputation.

Following the risk assessment the board will need to make a decision about

the risk the company is prepared to take balanced against the costs involved

in protecting the organisation from cyber attack. In any event it will be crucial

to monitor and consider the effectiveness of the control procedures in place.

Click here for the ICSA guide.

Click here for a client briefing on cyber attack from August 2012.

EU Commission consultation on single-member limited

liability companies

The European Commission has published a consultation paper to obtain

information on whether harmonising national laws on single-member limited

liability companies would simplify the rules and reduce the administrative

burden on and costs for companies (in particular, SMEs).

The consultation follows the Commission’s publication of its 2012 action plan

on European company law and corporate governance. Responses will be

taken into account in assessing the need for and impact of a possible new EU

instrument.

The consultation takes the form of a questionnaire covering:

> respondents’ experiences in relation to the expansion of SMEs’

business by setting up branches or subsidiaries across the EU and the

problems encountered in doing so;

> whether a specific EU instrument to harmonise requirements for single-

member private limited liability companies would facilitate an increase

in cross-border activity of SMEs, and whether such an instrument

should also cover single-member public limited liability companies;

UK Corporate Update 14

Author: Sarah Debney

This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you

have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact

the editors.

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Contacts

For further information

please contact:

Lucy Fergusson

Partner

(+44) 20 7456 3386

lucy.fergusson@linklaters.com

Sarah Debney

Managing Associate

(+44) 20 7456 4945

sarah.debney@linklaters.com

One Silk Street

London EC2Y 8HQ

Telephone (+44) 20 7456 2000

Facsimile (+44) 20 7456 2222

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> whether the potential instrument should include rules to ease the

administrative burden on single-member private limited companies

including rules allowing companies to register on-line with a single,

common registration form throughout the EU;

> whether a limit should be placed on the number of single-member

private limited liability companies one person can create; and

> whether a new common abbreviation for all single-member private

limited liability companies in the EU should be created to increase trust

in foreign company legal forms.

Responses to the consultation are requested by 15 September 2013.

To access the questionnaire, click here.