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Welcome to the latest edition of Corporate Update, our fortnightly bulletin offering a five-minute read of the latest developments which we consider relevant to corporate counsel. Please get in touch with your usual contact if you want to explore any of the topics covered in more detail. If you would like to subscribe to this bulletin as a regular email, please click here.
In this issue:
NEWS
DBT publishes framework for creating UK Sustainability Disclosure Standards
On 2 August 2023, the Department for Business and Trade (DBT) published a website providing information on the government’s framework for creating the UK Sustainability Disclosure Standards (UK SDS). UK SDS will be based on the IFRS Sustainability Disclosure Standards (ISSB Standards), the first two standards (IFRS S1 and S2) of which was issued in June 2023. The government has committed to endorsing the ISSB Standards by July 2024.
UK SDS will set out disclosure requirements on the risks and opportunities relating to sustainability matters that companies face and will form the basis of any future legislative and regulatory reporting requirements. The government has stated that the UK SDS will only divert from the global corporate reporting baseline established by the ISSB Standards if necessary for UK specific matters.
The government also highlighted the establishment of two committees (as set out in its Green Finance Strategy 2023) to assist with the assessment of IFRS S1 and S2 for endorsement in the UK. The UK Technical Advisory Committee will assess the ISSB Standards on a technical basis and provide independent recommendations on endorsement to the Business and Trade Secretary while the Policy and Implementation Committee will analyse interactions between these two standards and existing UK legislation and regulation, and, if endorsed, will coordinate implementation of UK SDS by the government and the Financial Conduct Authority.
European Commission adopts Regulation on first set of EU sustainability reporting standards
On 31 July 2023, the European Commission adopted the Commission Delegated Regulation (the Regulation) setting out the first set of EU sustainability reporting standards (ESRS). The Regulation sets out the sustainability reporting standards that apply to all undertakings within scope of the EU Corporate Sustainability Reporting Directive (CSRD), which introduced requirements for in-scope companies to report against the ESRS. The CSRD has extra-territorial application and may apply to non-EU (including UK) undertakings which are EU-listed or which have significant activity in the EU. The Commission will send the adopted Regulation in the second half of August to the European Parliament and the European Council for a period of scrutiny, which runs for two months (extendable by a further two months).
LSE publishes 2024 Dividend Procedure Timetable
The London Stock Exchange has published its 2024 Dividend Procedure Timetable. The Procedure Timetable serves as a guide for UK-listed companies (including AIM companies) on setting their interim and final dividend programmes.
FCA amends DTRs on structured digital reporting of financial statements
On 28 July 2023, the Financial Conduct Authority (FCA) published Handbook Notice 111, which, among other things, summarises feedback received in relation to its proposals in Consultation Paper 23/2 (CP 23/2) to simplify rules that require in-scope listed companies to publish their annual financial reports in a structured digital reporting format.
The FCA had proposed streamlining its existing rules by revoking the on-shored Technical Standard for the European single electronic reporting format and incorporating the substantive requirements into DTR 4.1, while also removing unnecessary provisions and making minor amendments and clarifications. The FCA is also introducing a new rule (DTR 4.1.18R) requiring issuers to tag their annual financial statements using a ‘generally accepted taxonomy’ for annual corporate reporting in UK regulated markets. The final rules came into effect on 28 July 2023 and apply to financial years starting on or after 1 January 2022.
FRC publishes review of disclosures on climate-related metrics and targets
On 26 July 2023, the Financial Reporting Council (FRC) published its Thematic Review: Climate-related metrics and targets assessing the quality and maturity of disclosures on climate-related metrics and targets by listed companies. The review is based on an analysis of TCFD disclosures in the 2022 annual reports of 20 listed companies across four sectors: asset managers, banks, energy and materials and buildings. Overall, the FRC found that companies’ reporting of climate-related metrics and targets has improved since the first year of TCFD reporting, although there was variation in practice. Key findings include the following:
- Most companies have set net zero and other climate-related targets though the metrics to track progress against these targets are sometimes unclear. The FRC recommends that listed companies consider the Transition Plan Taskforce’s draft guidance published at COP27 when preparing disclosures explaining their targets and transition plans.
- While most companies mentioned the effects of climate change in their financial statements, fewer outlined the judgments and estimates applied when considering the impact on financial statements.
The FRC encourages companies to focus on clearer and more concise explanations about their targets, actions and any impacts on financial statements. Further, to address concerns about greenwashing, the review emphasises that the FRC will challenge companies where it considers climate-related reporting is unclear or potentially misleading.
Draft Statement of Recommended Practice on Accounting by LLPs published
On 4 August 2023, the Consultative Committee of Accounting Bodies (CCAB), which regularly reviews the Statement of Recommended Practice (SORP) for LLPs, published for comment a draft SORP on accounting for LLPs. The draft proposed changes to the current edition of the SORP for LLPs include:
- Reflecting the new requirements for certain LLPs to provide climate-related financial disclosures in either the strategic report or energy and carbon report.
- Adding guidance on the sharing of group profits where a parent LLP has a subsidiary that is also an LLP.
- Adding guidance on the automatic division of profits to members who do not provide any substantive services to the LLP.
The CCAB intends that these proposed changes come into effect for periods commencing on or after 1 January 2024. Comments on the draft are to be submitted by 27 October 2023.
Consultation on proposed International Standard on Sustainability Assurance Engagements
On 2 August 2023, the International Auditing and Assurance Standards Board (IAASB) published an exposure draft of proposed International Sustainability Assurance 5000, General Requirements for Sustainability Assurance Engagements. The proposed standard is aimed at enhancing the trust and confidence that investors, regulators and other stakeholders have in sustainability information and applies to an assurance practitioner in undertaking an assurance engagement on sustainability information. It remains for individual jurisdictions to decide whether assurance engagements on sustainability information are required and whether they must comply with the proposed standards.
CASE LAW
McGaughey v Universities Superannuation Scheme Ltd [2023] EWCA Civ 873
Appeal to continue multiple derivative claims against directors of pension scheme trustee company dismissed
On 21 July 2023, the Court of Appeal dismissed an appeal brought by two members of the Universities Superannuation Scheme (USS) to continue several multiple derivative claims on behalf of a pension trustee company (USSL) against certain of its directors and former directors. The claimants had alleged, among other things, that the directors had breached their general duties by failing to plan adequately for divesting from fossil fuels. The Court dismissed the appeal and upheld the judgment of Leech J on all grounds, noting the following:
- to bring a multiple derivative claim, the company in question must have suffered a loss or harm which the claim seeks to remedy, and the would-be claimant must have suffered harm or loss reflective of it;
- a claimant relying on the ‘fraud on the minority’ exception must identify both the alleged fraud and the directors’ improper benefit; and
- a claimant makes out a prima facie case only where the Court is satisfied that there are issues of fact on which it would be wrong to accept the company’s evidence without cross-examination.
The judge found that the claimants failed to make out the required prima facie cases and that the fossil fuels claim was more well suited to be brought as a direct claim. The Court also stressed that the derivative claim procedure is available only in exceptional circumstances.
ClientEarth v Shell plc [2023] EWHC 1897 (Ch)
High Court confirms earlier decision to refuse permission to continue derivative claim in respect of alleged breach of directors’ duties in connection with the management of climate change risk
On 24 July 2023, the High Court (Trower J) released a judgment reaffirming its earlier (on papers alone) decision that ClientEarth had failed to make out a prima facie case for permission to continue its derivative claim that Shell plc’s directors had acted in breach of their duties under sections 172 and 174 of the Companies Act 2006 in relation to their management of Shell's climate change risk. The judgment is notable for the guidance it contains regarding the application of the prima facie test and of the principles relating to directors' duties and supports the fundamental proposition that it is for the directors themselves to determine, in good faith, how best to promote the success of the company for the benefit of its members as a whole. In this judgment, Trower J stood by all the points made in his earlier decision and found:
- ClientEarth’s case that the directors were subject to additional ‘incidental’ duties (which ClientEarth argued necessarily arose once the directors had identified its climate strategy as a commercial objective and likely to promote the success of the company) was inconsistent with the well-established principle that it is for directors themselves to determine, in good faith, how best to fulfil their section 172 duty. The Court was not well-equipped to assess how best to proceed, as the weighing of considerations under the section 172 duty was essentially a commercial decision. Under the section 174 duty, the directors also had to have regard to a range of competing considerations in managing Shell’s business. The directors' adoption of a climate strategy could not change the nature of the underlying duties in sections 172 and 174.
- ClientEarth's argument that the directors were in breach of their section 172 duty on the basis of irrationality had incorrectly conflated the concepts of irrationality and good faith.
- As noted in its earlier decision, the Court could place very little weight on the evidence submitted by ClientEarth, which largely consisted of opinions of ClientEarth’s senior in-house lawyer. The Court found the evidence relied on by ClientEarth was not supported by expert analysis explaining why the directors' strategy was so flawed as to be actionable.
We will be taking a short break in August and there will be no Corporate Update on 24 August. Our next edition will be published in September 2023.