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Doing Business in the UK? Here are some of your most asked question Regarding Corporate Law.

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Read the frequently asked questions and their answers regarding Corporate Law and other legal matters in the United Kingdom.

 

1. What are the main legislative regulatory and other sources regulating corporate practices?

Corporate governance in the UK is influenced by a number of legislative, regulatory and other sources:

  • The main legislation is set out in the Companies Act 2006 (the “Companies Act”), together with the Listing Rules and the Disclosure Guidance and Transparency Rules (the “DTRs”) made by the Financial Conduct Authority (the “FCA”).  
  • The main governance-focused regulations are the UK Corporate Governance Code (the “UKCG Code”) that came into force on 1 January 2019 for companies and the UK Stewardship Code for institutional investors that came on the 1st of January 2020, each of which is currently issued and administered by the Financial Reporting Council (the “FRC”), the FRC is soon to be replaced by a new regulator. 
  • The Takeover Code might also be relevant if the corporate is or may be the subject of a takeover or merger transaction.  
  • Companies should also consider the application of guidelines produced by investor protection groups, such as the Investment Association.
2. To what extent Brexit will affect Corporate Practices and their regulation?

The UK left the European Union (“EU”) on January 31, 2020, marking the beginning of the transition period, which is expected to last until December 31, 2020. During this period, most EU legislation (including any new or revised laws during the transition period) will continue to apply to the UK. The British government has stated that it will not extend this transition period, and the British Parliament has passed legislation for this purpose. The EU (Exit) Act 2018 (as amended by the EU (Exit Agreement) Act of 2020) stipulates that the main body of EU law (the so-called “reserved EU law”) will be directly incorporated into UK law from the end of 2007. Transition period.

A series of auxiliary legislation was passed to address the shortcomings in retained EU law caused by the departure of the United Kingdom. The full impact of Brexit on corporate governance in the UK remains to be seen, but the impact on companies will be obvious in the 2019 reporting season. 37% of the companies in the (FTSE 350) with 37% of FTSE 350 companies referring to Brexit in the viability statements in their 2019 annual reports, compared with 14% in 2018.

3. What other main changes/challenges could Challenge Corporate governance during 2021?

These are some of the Challenges that corporates might encounter in 2021

  • Diversity of the board: In recent years, the public has paid more and more attention to the composition of the board of directors, especially in terms of the balance between skills and gender, ethnic and cultural diversity. This has led to several independent reports that set many diversification goals for the FTSE 350 company. The 2016 Hampton-Alexander Review report recommended that by 2020, all boards of FTSE 350 companies should have 33% female representatives. Although this goal has not yet been achieved. Progress in this area is relatively slow. By 2019, 37% of FTSE 100 companies and 69% of FTSE 250 companies have not reached the target. Although these goals are not legally mandatory, from the perspective of corporate governance, a growing number of boards lacking diversity is unacceptable. Investor Surveillance Service Voting Information Services (“IVIS”) is increasingly advertising companies that have failed to achieve board diversity goals.
  • Issues related to Stakeholders: The British board and management are paying more and more attention to the interaction with shareholders and other stakeholders. At the same time, they are also paying more and more attention to the company’s public reporting on matters other than financial indicators (including environmental, social and governance (ESG)). Companies must establish specific mechanisms for interaction with employees, and we will soon see the first “Article 172(1) Statement” 
  • The integrity of the Audit: The government has confirmed that the new regulatory agency, Reporting and Governance Agency (“ARGA”), will replace the FRC. On par with the recent scandals (including the collapse of Carillion and Thomas Cook), ARGA will have broader powers than FRC, and it is expected that auditors will be more rigorously scrutinized. The revised “Ethics Standard 2019” will be applied to auditors from March 15, 2020. It will prohibit auditors from contributing to the decision-making of client entities or providing them with recruitment or compensation services. 

And finally, the Covid-19 Outbreak and its effects seem to be significant and wide-ranging.

4. What Roles could shareholders have in the management or strategic direction of the entity they have invested in?

Active shareholders of listed companies in the UK usually influence the company’s operations through interaction with the company’s board of directors, or ultimately by exercising voting rights at a general meeting of shareholders. Various corporate matters require shareholder approval, which allows shareholders (especially major shareholders) to use leverage to exert pressure on the board. These matters include adopting new company articles of association (or revising them), re-electing all board members every year, approving directors’ remuneration policy (which must be reviewed and approved every three years), approving major company transactions, and granting the power to issue new shares, Cancel the statutory pre-emption right and approve related party transactions.

5. What responsibility does a shareholder have in regards to the entity he has invested in?

Generally, shareholders are not liable for the company or other shareholders related to corporate governance. Although the “Management Code” does impose obligations on the signatory, the compliance obligation is voluntary, and the obligation is applied on the basis of “compliance or interpretation.” The “Management Code” puts forward a series of general expectations on how the signatories supervise the invested company, are willing to act collectively with shareholders, disclose their voting policies and report voting activities. The latest version of the standard has been expanded from asset managers to asset owners and service providers and includes a new requirement that management results must be reported annually in a management report. Now, it also puts forward additional expectations, including the requirement that ESG factors must be considered when making investment decisions, to ensure that investment decisions are consistent with customer requirements, and to explain how to implement management principles in addition to other asset classes. Listed equity (such as private equity), and explain the culture and strategy of the signatory’s organization. The FRC believes that the Management Code and the UKCG Code are complementary.

6. Do Shareholders owe any duty to the entity or the other shareholders of the entity he has invested in?
  • A UK company is a legal person, not the same as a shareholder. Shareholders (also called “members”) have rights and obligations to the company and to each other. The relationship between the company and its members is based on its articles of association (mainly its articles of association), which constitutes a legal contract between the company and its members and between the members according to the “Company Law”.
  • Generally, the shareholders of a British company are not responsible for the company’s actions or omissions. British law recognizes the concept of a “corporate veil”, which separates the legal personality (and liability) of a company from the legal personality of shareholders. The limited exception to this principle is that shareholders abuse the company’s independent legal personality (to “shame” the company) for illegal purposes. Under normal circumstances, the liability of shareholders is limited to the amount (if any) that they have agreed to contribute capital to the company but have not yet contributed (for example, any unpaid amount that should be paid when subscribing for shares).
  • The “Management Code” defines “management” as “responsibly allocate, manage and supervise capital to create long-term value for customers and beneficiaries, thereby bringing sustainable benefits to the economy, environment and society.” The definition will involve activities including: conducting adequate analysis before investing; requiring the issuer to be responsible for major issues, and cooperating with others to influence the issuer.
7. Are indemnities, insurance permitted in relation to members of the management body?

The company can compensate its directors for the costs incurred in successfully defending the company’s claims and the liability to third parties (excluding fines and regulatory fines). Companies can also purchase and maintain director and senior management (D&O) insurance policies for their directors.

However, the “Company Law” prohibits the company from compensating its directors for negligence, breach of contract, breach of duty or breach of fiduciary duty related to the company. Any provision in this clause aimed at granting such compensation will be invalid. The reason for this is that directors should not be able to effectively exempt themselves from their fiduciary responsibilities. (These restrictions do not apply to non-director employees.)

8. Under the UK jurisdiction, can shareholders seek enforcement against the entity he invests in and/ or members of the management?

According to the principle that the company is an independent legal person independent of the shareholders, the duties of the directors should be borne by the company rather than the shareholders. Therefore, shareholders have no right to directly sue the directors for breach of the company’s obligations. The articles of association constitute a contract between the company and its members but do not constitute a contract between the company and its directors.

However, in certain limited circumstances, shareholders can (often requiring court approval) take steps to perform the duties of a director or force the company to take certain steps. Shareholders can also take action against the company (in accordance with the common law) to prohibit conduct that may constitute a violation of the company’s articles of association and/or correct the director’s abuse of his trust power.

Under the UK jurisdiction who manages a corporate/ business entity and how?

The board of directors is ultimately responsible for the management of the company, and the daily operation of the company’s operations is usually taken care of by an executive management team led by the CEO (usually a director). The executive management team should report to the board of directors (and hold it accountable).

9. How are the management and its members appointed and removed in a business entity under the UK legislation?

Directors are appointed or removed through “ordinary resolutions”: “ordinary resolutions” are resolutions passed by a simple majority of shareholders attending and voting at the general meeting of shareholders. The UKCG Code and the usual articles of association stipulate that every director must retire immediately before each annual general meeting in order to seek re-election at the annual general meeting. The board of directors can temporarily appoint other directors, but these directors are usually required to retire with other directors immediately before the next annual general meeting and be re-elected by shareholders. board.

10. What are the main responsibilities of the management body in corporate governance?

The main challenges faced by management agencies include determining effective methods for companies seeking to solve current key issues in corporate governance. According to the “Company Law”, directors must prepare a salary report for each financial year of the company. This report is a retrospective summary of directors’ compensation for the previous fiscal year. It requires an advisory (non-binding) vote from shareholders. Directors must also submit a forward-looking compensation policy (which forms part of the compensation report) to shareholders every three years. This policy stipulates the framework and restrictions on future directors’ remuneration. Subject to a binding vote of shareholders. Both votes were passed by ordinary resolutions.

11. Are employees concerned by Corporate governance under the UK legislation? If so, what are their responsibilities?

The latest amendments to the UKCG Code require that the board of directors adopt one of the following three methods of employee participation: directors appointed by employees, formal staff advisory groups or designated non-executive directors. Or, if the board does not choose any of the above three methods, the board can adopt other alternative methods for employee engagement and explain why these methods are considered effective.

The UKCG specification specifically uses the term “workforce” instead of the term “employee” in order to include not only full-time employees but also part-time employees and flexible agency employees. In addition, the UKCG guidelines recommend that companies establish adequate procedures to enable employees to confidently ask questions and investigate these issues in an appropriate manner.

12. Is there any law or regulation concerning corporate’s social responsibility under Uk Legislation? If so, what is it?

Stakeholders are putting increasing pressure on companies to improve the accessibility and accuracy of data that can be used to assess compliance with ESG requirements. Listed companies have been required to disclose their global greenhouse gas emissions and energy use. In addition, at the time of writing this article, the FCA is negotiating with the Financial Stability Board’s Climate Change Financial Disclosure Task Force on the disclosure of financial risks related to climate change by requiring high-quality listed commercial companies to make disclosures. Explain any failure to do so.

Directors are increasingly expected to consider the impact of company operations on the wider community. Therefore, it has become a common practice for companies to produce annual corporate social responsibility (“CSR”) reports that outline annual considerations. The company must also include certain CSR information in the annual report.

13. Who is responsible for disclosure and Transparency in the corporate under the UK jurisdiction?

The board of directors is responsible for regular disclosure in the form of annual reports and semi-annual reports and releases relevant announcements to the market when necessary. Although the entire board of directors is responsible for this, if the necessary disclosures are not made, enforcement actions may be taken against individual directors “knowingly concerned”.

14. What is the role of audits and auditors in such disclosures?

Auditors must review the reports generated with the audited financial statements and any separate corporate governance statements, and present their own reports to confirm the adequacy of the disclosure, whether it meets relevant legal requirements, and whether the disclosure contains any material misstatements.

Do you have any questions regarding Construction Law in the UK? Check out our last FAQ responding to your questions regarding the matter : Construction Law in the UK.

 

 

 

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