Governance Readout

Following the consultations earlier this year (covered in our January edition), the FCA introduced their new Listing Rules which came into effect on 29 July. These rules see a complete rewrite of the rules and any previous rules not carried over will immediately fall away.

The new rules (which include the majority of those contained within the consultations) include:

• Removing the need for shareholder votes in relation to significant/class 1 transactions
• Related party transactions no longer requiring shareholder votes
• Removing the need for mandatory controlling shareholder agreements

Other changes will see the eligibility requirements for IPOs significantly alter; moving to a disclosure-based rather than rules-based regime and permitting institutions to be eligible to hold enhanced voting rights within a dual share class structure.

From 26 July, premium listed companies will have migrated to the new Equity Shares (Commercial Companies) category automatically. Standard listed companies will be moved to a transition category and overseas companies with a secondary London listing will be allocated into their own category.

FTSE Russell have confirmed that from the date of the new rules being implemented, companies within the ESCC category or the Closed Ended Investment Fund category will be eligible for inclusion in the FTSE UK Index.

Whereas those companies that were within the premium segment will be mapped to either of the above categories and those that were within the standard segment will be mapped to the Equity Shares (Transition), (International Secondary Listing) or Shell Companies categories. If a company wishes to transfer to the ESCC or Closed Ended Investment Fund category they will have to be admitted to the relevant category by 6 August so that they can be included in the next FTSE quarterly review.

Computershare’s view

Many commentators within the market have hailed these changes as game changing in boosting the popularity of the UK equity market. It may make some issuers more inclined to list in the UK as raising secondary capital could be easier and founders can retain greater control of the company. Time will tell if the changes to the structure of the standard and premium listed segments of the market, act as a strong driver to increase the volume of companies listing in the UK.

As the ESCC category retains a lot of the premium company requirements, there is a question as to how these changes will impact smaller companies who previously would have followed the standard segment longer term. It is also worth highlighting that these changes alone will not be a silver bullet to unlocking value within the UK.

For those issuers already listed, they need to be mindful as they carry out their day-to-day business how such activities are impacted by the new rules, and it would be prudent to cross reference back to the new rules to ensure what you used to do is still required or even compliant. Please do get in touch should you like to discuss these changes and the impact with our Governance Services team.

As the government’s Dormant Assets Scheme continues to expand beyond the financial services sector, they are now able to push forward with the expansion into the securities sector.

With this in mind, the government has released a participant pack for PLCs that may wish to participate in the scheme. The pack includes draft explanatory notes for a notice of meeting that may be needed where issuers must amend their articles of association to facilitate their participation, and draft articles that amend the definitions of dormancy for shares and unclaimed monies so that they align to the Dormant Assets Act 2022. These permit issuers the ability to sell those assets and transfer the proceeds to the Reclaim Fund.

To participate, issuers will still be required to enter into a separate agreement with the Reclaim Fund that will commit them to providing regular data on the assets they have or will be submitting to the scheme, confirming the process for investors to reclaim their assets and the frequency such reclaims will be handled.

Computershare’s View

The expansion into the securities sector is far weaker than was originally envisaged by the first Industry Champion and their working group, the current scheme gives those issuers who are listed on the main market an option to provide dormant assets to a central fund that through legislation have three areas in which they can identify charitable causes.

Most companies are already able to forfeit dormant assets under their articles and reclaim unclaimed dividend payments, but each will have different criteria under their articles or relevant legislation, by participating in the scheme issuers will be aligning these differences so that anyone who is deemed dormant for at least the last 12 years can have their assets provided to the scheme.

Issuers need to consider if they wish to update their articles or simply rely on their existing provisions. Therefore, they need to look at their existing articles to determine what triggers dormancy, and over what period of time. Also consider if you’d be happy for money you have passed into the scheme to be given to charitable causes that may not align with your strategic and ESG goals or would be it better to rely on your current article provisions and then give to your own charitable causes or pass the forfeited assets to a charitable organisation such as ShareGift to facilitate donations. It should also be noted as we have mentioned in our Readout previously that once an issuer begins participating if they wish to leave the scheme, they are committed to perform any future forfeiture activities in the same manner as if they were part of the scheme (i.e., allowing the opportunity for an investor to reclaim in perpetuity)  

The UK Listing Review made recommendations to reform the prospectus regime which in turn saw the introduction of the Public Offers and Admissions to Trading Regulations 2024 (POATR) in January this year. These regulations created a new framework for public offers and admissions to a trading regime.

The FCA published a consultation on the rules that will contain the requirements when a prospectus is required and the content of it. The current proposals seek to reduce the costs of listing in the UK, make capital raising easier and remove barriers for retail participation. Once implemented the new rules will be set out in a new rule book (Prospectus Rules: Admission to Trading on a Regulated Market sourcebook (PRM)) that will replace the existing Prospectus Regulation Rules.

A useful summary of the rules include:

• IPOs must still have a prospectus that contains sufficient detail to meet the ‘necessary information’ test.
• Existing exemptions on the whole have been retained – for example those related to offers to 150 people or fewer, offers to ‘qualified investors’.
• Further issuance to existing investors will generally not require a prospectus unless there is a clear reason to have one or the offer is for 75% of existing share capital.
• Private companies will be required to make any offer through a public offer platform operated by an authorised firm.

The consultation closes on 18 October and the FCA plans to make the final rules by the first half of 2025, before a period of implementation.

The Governance Institute of Australia has released a new paper entitled Artificial Intelligence and board minutes. This paper is useful to all companies and considering the increased focus on AI and its uses in the governance sphere at recent events, it is worth a review.

The paper aims to impart several principles and key considerations on how to utilise AI to generate Board and Board committee minutes and well as its use for per-meeting summaries based on agenda and planned actions. It also considers less widely publicised risks such as the potential for the behaviour board members and the nature of the dialogue to be impacted because the meeting is being recorded.

The paper also provides use cases for governance professionals that may pose minimal risk when managed appropriately.

Computershare’s view

Through our Insight Boards, the subject of AI crops up regularly. We have set up an AI Working Group for Company Secretaries to consider these issues further. In general, we have heard that whilst AI has the potential to support in the drafting of Board and committee minutes, that the technology is not yet nuanced enough to make a meaningful impact on drafting times. Boards, particularly those of regulated companies, are in general rightly cautious of allowing recording in meetings due to the recoverability of the recordings, security concerns and potential impact on Director behaviours in meetings.

However, Company Secretaries are identifying many smaller use cases for AI across the function to facilitate efficiencies and we will be sharing our findings from the AI Working Group in due course. If you would like to find out more, please contact our Governance Services team.

Since its initial adoption in 2010, the FRC continues to evolve and tweak the UK Stewardship code to ensure its relevance and promote long term value creation for clients and beneficiaries. Following its considerable revision in 2020, The FRC has announced some immediate changes in 2024, aimed at reducing the reporting burden for current signatories. These changes are the first step in addressing the outcome of extensive engagement with over 1,500 stakeholders conducted throughout 2024.

Over the last few months, the FRC has engaged with over 1,500 stakeholders and this has led to them identifying their five priorities as areas of focus for the next stage of the Code’s review.

• Purpose – the Council will set out its expectations of effective stewardship, what it looks like in practice and how reporting against the Code helps deliver such stewardship.
• Principles – determine what reporting is necessary to deliver on the renewed Code.
• Proxy Advisors – carefully consider how the Code might support greater transparency of their activities.
• Process – move forward with proposals to reduce reporting burdens for signatories of the Code to ensure information contained in reports is useful and accessible for all investors and stakeholders.
• Positioning – work closely with other regulators (e.g., DWP, TRP and the FCA) to support understanding of the Code and ensure its successful implementation.

There are immediate changes for existing signatories that are being made to reduce the reporting burden which will:

• Remove the requirement to annually disclose all ‘Context’ reporting expectations, except for new reports or material changes.
• Remove the requirement to annually disclose against ‘Activity’ and ‘Outcome’ reporting expectations.
• Explicitly allow use of content from previous reporting and cross-referencing.
• Set clear expectations of what is considered an ‘outcome’ for stewardship purposes.

Georgeson’s view

These changes will be welcomed by stewardship teams who have seen considerable focus over the years to report and seek approval on more purpose driven disclosure which in the past may have led to less resource in conducting effective long-term engagements. Reporting on how asset managers are working with their investee companies and implementing active escalation should give a clearer indication of effective stewardship.

The FRC also clarified that reporting against principles 10 and 11 is only required where necessary, a change that could be aimed at asset managers who struggle to collaborate with others due to potentially breaching anti-trust laws. The risk in this update is that asset managers may report that collaboration and escalation is no longer necessary for their stewardship approach.

Allowing existing signatories to cross-reference certain disclosures in previously approved stewardship reports, especially where there are no material changes, will also be a welcome but potentially controversial move by the FRC. In prior years, many asset managers have failed approval due to cross-referencing throughout their submissions. As the FRC is continuing to allow signatories to submit full statements on all 12 principles, previously unsuccessful asset managers may not feel comfortable submitting a report in a format previously declined by the independent regulator.

Current signatories of the Stewardship will welcome changes to reduce the reporting burden and continue to promote transparency and accountability. Signatories will be aware of the importance of their stamp of approval from the FRC and while supportive of these changes, would not want to dilute the messaging of their signatory status.