Preparing for the 2016 AGM and reporting season

Corporate Alert

As the 2016 AGM and reporting season gets underway, this bulletin gives an overview of the key changes affecting listed companies.

Viability statements

Following updates to the Corporate Governance Code applicable to financial years beginning on or after 1 October 2014 and an update to the Listing Rules in October 2015, this will be the first reporting season that most companies will have to make, in addition to the going concern statement, a statement in relation to the viability of the company. The statement requires directors to explain how they have assessed the prospects of the company, over what period they have done so and why they consider that period to be appropriate.

In addition, the directors should state whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the specified period. Other than an indication that the viability statement period should be significantly longer than 12 months, there is no formal guidance as to its duration. The Pensions and Lifetime Savings Association (formerly the National Association of Pension Funds) has stated that "there are no hard and fast rules over what the right time period is for these viability statements; it is however, important that companies are clear about why they think the period chosen makes sense for their circumstances". 

Analysing the limited number of companies that have published a viability statement to date, the period covered by the statement has ranged from 2 years to 5 years. Companies should therefore consider what period is appropriate for them and prepare a viability statement relating to that period for inclusion in their forthcoming annual report.

Disapplication of pre-emption rights  

In March 2015, the Pre‑Emption Group published a revised statement of principles for the disapplication of pre‑emption rights which allow a company to seek authority to issue up to 5 per cent of the issued ordinary share capital of the company in any one year in connection with an acquisition or specified capital investment. This authority is in addition to the general authority to disapply pre‑emption rights up to 5 per cent. 

From an analysis of FTSE 350 companies which published their 2015 AGM notices after the publication of the revised statement of principles, 77 have utilised this additional authority and it is expected that further companies will seek approval for this additional authority in the 2016 AGM season. Listed companies which did not utilise the additional authority at their last AGM should therefore consider whether to do so in their forthcoming AGM.

Negative votes

This will be the first reporting season in which companies are required to explain, when a significant proportion of the votes have been cast against a resolution at any general meeting, what action it intends to take to understand the reasons behind the vote result. Significant dissent has not been defined in the Corporate Governance Code although the ISS (Institutional Shareholder Services) indicates that dissent levels of 20% to 30% should be regarded as "significant". This is consistent with the GC100 and Investor Group's Directors' Remuneration Reporting Guidance. The Pensions and Lifetime Savings Association indicates that "where a significant proportion of votes have not been cast in favour of a resolution, the board should acknowledge this in its RIS statement and should communicate as soon as reasonable possible following the AGM how it intends to engage with shareholders in order to understand the reasons for dissent. Subsequently, the company should explain in the following year's annual report the steps it has taken, or will be taking, to resolve concerns." Therefore, a listed company should plan in advance of its AGM the steps it would take to engage with shareholders in the event that a negative vote is received on any AGM resolution.

Directors' time commitment 

Recent guidelines issued by both the Pensions and Lifetime Savings Association and the ISS seek to limit the number of directorships an individual can hold, to combat director "overboarding". For example, the guidelines recommend that a non-executive director should hold no more than four non-executive directorships. The Pensions and Lifetime Savings Association and ISS indicate that shareholders may wish to consider voting against the re‑election of an over‑committed director. Nomination committees should be mindful of these guidelines when considering the appointment of directors and where there are exceptional circumstances, these should be set out in the annual report so as to avoid shareholders voting against the re‑appointment of a director investor bodies may perceive to be over‑committed.

Modern slavery 

While not required to be included in the annual report, companies with a turnover of £36 million or more with a financial year ending on or after 31 March 2016 are obliged to publish a statement which describes the steps the company has taken during that year to ensure that slavery and human trafficking are not taking place in its business or in any of its supply chains.

For more information, please see "The Modern Slavery Act: what it means for your business".

Payment practices 

With effect from April 2016, large companies will be required to publish information twice a year about their payment practices and policies, such information including, amongst other things, their standard payment terms, the average time taken to pay invoices, details of any financial incentives required of suppliers and whether they are members of any industry codes of practice relating to payment.

Future developments 

FTSE 350 companies are now required by law to put their statutory audit engagement out to tender at least every ten years. Changes in EU regulation, which will apply to member states from June 2016, will require a mandatory change to auditors every ten years, which may be extended by a further ten years if a tender process is undertaken. Once implemented, these regulations will apply to all listed companies (not just those in the FTSE 350).