Corporate Update Bulletin - 12 December 2024

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
• Legislation
• Case Law
• Publications

News

FRC publishes annual review of corporate governance reporting

The Financial Reporting Council (FRC) has published its 2024 annual review of corporate governance reporting against the Corporate Governance Code (the Code). The review emphasises the Code's flexible 'comply or explain' approach, which allows companies to depart from provisions where appropriate, and the FRC supports departures where high quality explanations are given. The review continues to highlight that there is room for improvement in the quality of explanations for departures from the Code. Other findings include:

• Risk management and internal controls: This continues to be an area of focus. A significant minority reviewed in the sample (25 out of 130) failed to report, or did not report clearly, on the effectiveness of their risk management and internal control systems. There were no early adopters of updated Provision 29 of the revised 2024 Code (which strengthens the requirement to monitor and review all material controls including those relating to reporting and a board declaration as to the effectiveness of those controls) which will apply to financial years beginning on or after 1 January 2026, although encouragingly, a number of companies referred to the new provision and set out how they were preparing for its implementation.
• Risk reporting: Many companies have updated their reporting on principal risks, particularly in relation to risk mitigations. Companies are however reminded to focus on the most significant risks to the company to ensure the reporting is useful, rather than provide a long list of principal risks.
• Shareholder and stakeholder engagement: While many companies did report on their engagement with shareholders, the review found little improvement in the quality of reporting, with few details on the nature of the engagement, feedback received from shareholders or examples of outcomes. Interestingly, reporting on other stakeholder and workforce engagement was found to be generally of high quality.
• Over-boarding: Reporting in this area has been good, with companies generally providing specific information on their directors' external commitments.

Government publishes response to consultation on regulations made under the Digital Markets, Competition and Consumers Act 2024

On 29 November 2024, the Department for Business and Trade published its response to its consultation on three sets of draft regulations made under the Digital Markets, Competition and Consumers Act 2024 (“DMCCA”): (i) the Competition Act 1998 (Determination of Turnover for Penalties) Regulations 2024; (ii) the Enterprise Act 2002 (Mergers and Market Investigations) (Determination of Control and Turnover for Penalties) Regulations 2024; and (iii) the Digital Markets, Competition and Consumers Act 2024 and Consumer Rights Act 2015 (Turnover and Control) Regulations 2024 (together the “Regulations”).

The consultation sought views on how turnover should be estimated or calculated in order to assess whether a digital business should be designated as having strategic market status under the new regulatory regime and to determine the maximum penalties that may be imposed under DMCCA for non-compliance with the new digital markets regime, as well as breaches of wider competition and consumer protection law as set out in those Regulations. Responses were broadly in line which the government’s expectations. The Regulations, which are in substantially the same form as the drafts, have now been laid before parliament and will bring into force the following provisions on 1 January 2025:

• Part 1 (Digital Markets): this will introduce a new framework for regulating the largest firms involved in digital activities, creating a specific regime to encourage competition in digital markets and conferring statutory powers on the CMA’s specialist Digital Markets Unit to enforce it.
• Part 2 (Competition) changes will be made to the existing thresholds in the Enterprise Act 2002 and broad reforms will be introduced to the UK competition framework which, among other things, will strengthen the CMA’s information gathering and enforcement powers.
• Chapters 1 and 2 of Part 5 (Miscellaneous: this will include miscellaneous provisions, for example in respect of aiding overseas regulators.

Government launches Fair Payment Code

On 3 December 2024, the Department for Business and Trade announced the launch of the Fair Payment Code, a voluntary best practice code launched to tackle late payments, reward good practices, ensure small and medium enterprises are paid on time and generally promote a more responsible payment culture. The Fair Payment Code will replace the Prompt Payment Code (introduced in 2008) and will include a gold, silver and bronze system to reward best payment practices (with the ‘Gold’ category being obtained if a business pays 95% of suppliers within 30 days). The Fair Payment Code is also intended to help smaller firms to identify reliable and trusted partners and every business which is granted an award under the code must agree to abide by a set of fair payment principles.

Senior executive fined for breaching article 19 MAR

The Financial Conduct Authority (FCA) has issued a final notice imposing a fine on a former senior employee and PDMR (person discharging managerial responsibilities) of Wizz Air Holdings plc for: (i) failing to notify the company and the FCA of 115 transactions in the company's shares, worth over £4 million, in breach of article 19(1) of the Market Abuse Regulations (MAR); and (ii) trading during closed periods, in breach of article 19(11). He also failed to seek prior authorisation from the company under its share dealing code. This the first time the FCA has fined a PDMR for dealing during a closed period, and only the second time it has fined a PDMR for failing to disclose dealings under article 19(1).

Legislation

Regulations on reform to non-financial reporting requirements published

On 10 December 2024, the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 were laid before Parliament, together with an Explanatory Memorandum. The new legislation reduces reporting burdens on companies: (i) by increasing the turnover and balance sheet criteria that help determine whether a company is a micro-entity or small, or medium-sized or large for the purposes of reporting and audit requirements under the Companies Act 2006; and (ii) removing several reporting requirements from the Directors’ Report which overlap with other reporting requirements or which provide little material value to investors and other users of company reporting. In particular, the Regulations increase the turnover and balance sheet total (BST) thresholds for determining a company's size for reporting and audit purposes as follows:

• Micro entities: turnover of not more than £1 million and BST of not more than £500,000.
• Small companies: turnover of not more than £15 million and BST of not more than £7.5 million BST.
• Small groups: aggregate turnover of not more than £15 million net (£18 million gross) and aggregate BST not more than £7.5 million net (£9 million gross) aggregate BST.
• Medium-sized companies: turnover of not more than £54 million turnover and BST of not more than £27 million BST.
• Medium-sized groups: aggregate turnover of not more than £54 million net (£64 million gross) aggregate turnover and aggregate BST of not more than £27 million net (£32 million gross).

The Regulations will apply to financial years beginning on or after 6 April 2025. The Regulations also include transitional arrangements such that when determining the size of a company by reference to a previous financial year, the amendments are treated as having applied in those previous years. Companies and groups will need to consider these thresholds and how they apply to as they prepare to report for the financial year beginning on or after that date.

Draft Register of Overseas Entities (Protection and Trusts) (Amendment) Regulations 2025 published

On 6 December 2024, the draft Register of Overseas Entities (Protection and Trusts) (Amendment) Regulations 2025 were laid before Parliament, along with a draft Explanatory Memorandum. The draft legislation expands the category of individuals who can apply to Companies House to have their information protected in a case where it may otherwise be disclosed under the Register of Overseas Entities (established under the Economic Crime (Transparency and Enforcement) Act 2022 to enhance transparency regarding the beneficial ownership of overseas entities holding land in the UK). The draft legislation will also allow trust information on the Register that is currently restricted from public inspection to be accessed by application, subject to certain requirements.

Case Law

Aabar Holdings SARL v Glencore PLC & Ors [2024] EWHC 3046 (Comm)

Commercial Court decides that shareholders have no freestanding right to inspect company’s privileged documents

In this landmark judgment, the Commercial Court has decided that a company’s shareholders have no freestanding entitlement to see the company’s privileged documents. The case centred around a number of institutional investors who have brought claims against a company (Glencore) under section 90 and section 90A/ Sch.10A of Financial Services and Markets Act 2000, seeking compensation for allegedly misleading statements and/or omissions in prospectuses and other market publications.

The judgment revisits what many considered a long-established rule of English law that a shareholder has the right to inspect a company’s privileged material (the so-called “shareholder rule”) and could have wide ramifications for companies of all kinds, not least listed companies defending shareholder securities law claims. As the first systematic analysis of the shareholder rule, the judgment builds on recent judgments that were sceptical of its basis and existence, leading the judge(Mr Justice Picken) to conclude that the shareholder rule is “unjustifiable” and “should no longer be applied”. For more detail on this case, see Publications below.

In the matter of KRF Services (UK) Ltd [2024] EWC 2978 (Ch)

Court considers interaction between Model Articles provisions and whether sole director can validly pass a resolution

This case involved an application for administration given by a sole director, Mr Paillardon. Mr Paillardon occupied the position of sole director as other directors had resigned and, due to the position of the company (the company was connected to a person designated under the relevant sanctions legislation), it had not been possible to find other individuals willing to act as directors.

In making the order to appoint administrators, the High Court clarified the position of sole directors under the Model Articles for private limited companies by ruling that a sole director can validly pass board resolutions, regardless of whether they have always been the sole director or were previously part of a multi-member board. This interpretation resolves conflicts between article 7(2) and article 11(2) of the Model Articles. The judge distinguished the case of Re Fore Fitness Investments Holdings Ltd [2022] EWHC 191 (Ch)as that case involved a bespoke article which meant that two directors were always required. There was no similar requirement under the Model Articles as adopted in the present case and to treat article 11(2) (which provides that quorum for directors’ meetings should be not less than two) as if it contained a requirement that there be at least two directors would deprive article 7(2) of any effect.

Publications

Companies can claim privilege against their shareholders

Slaughter and May has published a briefing on the judgment in Aabar Holdings SARL v Glencore PLC & Ors [2024] EWHC 3046 (Comm), in which the Commercial Court decided that a company’s shareholders have no freestanding entitlement to see the company’s privileged documents. The briefing considers the key points of the judgment and its implications for companies.