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Directors' know how is a monthly article, which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.

London Stock Exchange confirms it wants AIM to be an EU SME Growth Market

London Stock Exchange has announced that it has applied for AIM to be granted SME Growth Market status in time for when MiFID II comes into force on 3 January 2018. 

As a result, London Stock Exchange has also stated that it will make minor consequential changes to AIM Rule 26 – Company information disclosure, as the eligibility requirements for SME Growth Markets require certain regulatory information to remain available for five years after publication.

AIM Rule 26 will therefore be amended so that the five year requirements apply to:

  • Any prospectus an AIM company has published;
  • Annual financial reports and half yearly financial reports; and
  • Regulatory notifications made public containing inside information for the purposes of MAR.

The changes will take effect from 3 January 2018.

London Stock Exchange publishes Feedback Statement to AIM Rules Review Discussion Paper and consults on changes to the AIM Rules for both Companies and Nominated Advisers

London Stock Exchange has published a Feedback Statement to its Discussion Paper on its AIM Rules Review, as well as a consultation on its proposals to change the AIM Rules for Companies and the AIM Rules for Nominated Advisers.

Specifically, London Stock Exchange is consulting on:

  • Corporate governance – It proposes to change AIM Rule 26 so that AIM companies are required to state which recognised industry code (such as the QCA Code) the board has decided to apply, thus removing the option for an AIM company to state that it has not adopted a corporate governance code and requiring the company to comply or explain against its chosen code.
  • Formalising an early notification process for nominated advisers – It proposes to change AIM Rule 2 so that an applicant's nominated adviser must submit an early notification to London Stock Exchange before submission of the information required by Schedule One to the AIM Rules. However, the specific timing of the early notification will be at the discretion of the nominated adviser.
  • Guidance to nominated advisers on considering appropriateness and London Stock Exchange’s AIM Rule 9 powers – It proposes to include a non-exhaustive list of factors that a nominated adviser should consider when assessing an applicant's appropriateness for admission. Factors to be included are: questions about the character, skills, experience or history of a director, key manager, senior executive, consultant or major shareholder; concerns relating to an applicant's corporate structure or business model; and the lack of clarity over the reason for admission to AIM.

London Stock Exchange confirmed that it will not be proposing any changes in respect of prescriptive criteria regarding free floats; a minimum fund raise upon admission for AIM applicants; or automatic fines for certain breaches of the AIM Rules.

The Quoted Companies Alliance will be responding to this consultation. If you have any views that you would like to see included in our response, please contact Callum Anderson at or 020 7600 3745.

FRC consults on its proposals to revise the UK Corporate Governance Code

The Financial Reporting Council (FRC) has published its proposals for a revised UK Corporate Governance Code.

The revisions focus on the importance of long-term success and sustainability, address the issue of a lack of public trust in business and seek to maintain the attractiveness of UK capital markets to global investors for the years ahead.

The revised UK Corporate Governance Code is now composed of 17 Principles and 41 Provisions and is divided into five sections:

  • Section 1 – Leadership and Purpose;
  • Section 2 – Division of Responsibilities;
  • Section 3 – Composition, succession and evaluation;
  • Section 4 – Audit, risk and internal control; and
  • Section 5 – Remuneration.

The Guidance on Board Effectiveness has also been amended to support the proposed changes to the revised UK Corporate Governance Code. This will be subject to comments received on the proposed revisions to the UK Corporate Governance Code.

You can read:

  • The full consultation here;
  • Appendix A – Revised UK Corporate Governance Code here;
  • Appendix B – Revised Guidance on Board Effectiveness here; and
  • Appendix C – Summary of Changes from 2016 UK Corporate Governance Code here.

The Quoted Companies Alliance Corporate Governance Expert Group is currently reviewing the proposals in preparation for drafting a response. If you have any views that you would like to see included in our response, please contact Callum Anderson at or 020 7600 3745.

FRC Financial Reporting Lab publishes report on risk and viability reporting

The FRC's Financial Reporting Lab has published a report on risk and viability reporting, which examines the views of 25 companies and 27 of the investment community on the key attributes of principal risk and viability reporting, their value and use.

Principal risk reporting

Investors unanimously agreed that understanding a company’s principal risks played an important role in deciding whether to make an investment, as well as during the holding of that investment. The report noted that investors have noticed an improvement in the reporting of principal risks. Risk disclosures have become more comprehensive since the financial crisis, with boards and management becoming more focused and better able to explain how they identify and manage risk, in order to protect the sustainability of the company.

The report encourages companies to ensure that principal risk reporting is specific to the company and avoids the use of boilerplate statements and jargon. Furthermore, companies should ensure that any risks identified by management is clearly linked to the company’s business model, highlights any changes in risk year on year and indicates the potential impact of risks occurring.

Viability statement reporting

Companies agree that the introduction of viability statements has led to the boards at most companies focussing on risk management to a greater degree. Performing stress and scenario analyses provides helpful information on a company’s resilience to risk, as well as help companies determine their risk appetite. Investors will support companies that take appropriate risks if they are well considered and managed.

However, investors want companies to more clearly explain their long-term prospects in the viability statement. Currently, they are often prepared as longer term going concern statements focussing on liquidity rather than as a means to communicate how the company will maintain relevance and solvency in the long-term, as well as how it intends to adapt to emerging risks.

Accordingly, the report encourages company directors to adopt a two-stage process when writing the viability statement:

  1. Consider and report on the company’s prospects, taking into account its current position and principal risks.
  2. State whether there is 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.

FRC issues FAQs on Non-Financial Reporting

The FRC has also issued a set of frequently asked questions on non-financial reporting topics to help companies apply the Non-Financial Reporting Regulations, while it finalises its revised Guidance on the Strategic Report – expected in March 2018.

The major new disclosures for quoted companies subject to the new requirements are:

  • Reporting on the external impact of the company's activities – Boards should consider the impact of the company’s activities on matters relating to Section 414CB (Contents of non-financial information statement) and report on aspects which are material to the long-term success of the company. This includes the impact of the company's activities on employees, social matters, human rights and anti-bribery and anti-corruption. Companies should also focus on the disclosures relating to the business model, policies, the principal risks and the KPIs of the business.
  • Disclosing business relationships, products and services – Companies should describe the relevant relationships, products and services if they are principal risks, or likely to contribute to principal risks;
  • Disclosures relating to policies in Section 414CB – These should be clear, concise and proportionate to the risks to the company and potential impact of its activities.
  • Due diligence disclosures – Not only should companies explain the outcome of the due diligence, but they should also describe the steps they have taken to ensure that its policies are adhered to.

It should be noted that as non-financial information comprises part of the strategic report, the company’s auditor will be required to read the whole report – including the non-financial information – and confirm whether the information provided is consistent with the financial statements and if the strategic report complies with the legal requirements.

ISS updates its UK benchmark proxy voting policies for 2018

ISS has published updates to its 2018 UK benchmark proxy voting policies.

ISS has added a new policy on virtual meetings, whereby it will generally recommend voting for proposals allowing for the convening of hybrid shareholder meetings so long as it is clear that there is no intention to hold virtual-only AGMs. Accordingly, it will recommend voting against any proposal to hold virtual-only shareholder meetings.

Other amended policies include:

  • Overboarding of chairs – There will be negative voting recommendations applied towards the chair position, if the individual concerned has three or more chair positions, or if the chair holds an outside executive position.
  • Composition of audit and remuneration committees These committees should only be composed of independent directors.
  • Threshold vesting levels for long-term incentive plans (LTIPs) – A 25% vesting threshold may be considered inappropriate if LTIP grants represent large multiples of salary. Other issues – such as how challenging the threshold targets are and general remuneration levels – will also be taken into account, when analysing LTIP award vesting levels.
  • Share issuances without pre-emption rights – The example of using a cash-box structure to issue more than the authority approved at the previous AGM will be added as an abuse of the authority.

The updated policies will apply to all shareholder meetings taking place from 1 February 2018 onwards.

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