Background
The Department for Business, Energy & Industrial Strategy and The Insolvency Service has published the Government's response to its consultation on insolvency and corporate governance (26 August 2018). Amongst other goals, these measures aim to strengthen the UK’s framework relating to dividend payments. The changes however have a broader application than just companies that are approaching insolvency.
The consultation raised concerns that current dividend policy and practice is too opaque across the board. There is a demand from institutional investors for more transparency around capital allocation decisions, as this is considered a vital determinant of a company’s long-term success.
The Government is looking to ensure best practice disclosure relating to:
- The allocation of surplus revenue to pay dividends
- Investment and (research and development (R&D)
- Rewards for employees
- Defined benefit (DB) pension schemes
- Other demands.
It believes that investor pressure will play a role in increasing transparency. It has also previously proposed new reporting requirements for directors under the draft legislation: Companies (Miscellaneous Reporting) Regulations 2018 (2018 Regulations) due to come into force on 1 January 2019, once they have parliamentary approval.
A summary of these new reporting obligations is set out at the end of this note.
The Government’s general response to the consultation
The Government has said it will legislate to require companies to disclose and explain their capital allocation decisions, if investor pressure and the new Section 172 reporting requirements do not deliver progress in ensuring best practice disclosure.
More generally, the Government is looking at further options to strengthen the existing dividend framework such as a requirement for companies to disclose the audited figure for available reserves and distributable profits in their annual report and accounts, and ways in which the definition of “net assets” might be tightened, such as a more critical look at the valuation of “goodwill”. It may even extend to a review of the case for more significant change, such as considering the merits of a solvency based system and whether adopting this system, or elements of this system, would be beneficial, proportionate and business friendly.
Dividends and pension schemes
In relation to dividends and pension schemes, the Government noted respondents views about dividend payments where a company’s pension scheme is in a significant deficit - not defined. The Government agrees that there should be no automatic bar on companies paying dividends in these circumstances. However, it has said it will give further consideration to ways in which directors can provide stronger reassurances for shareholders, and stakeholders that proposed dividends will not undermine the affordability of any deficit reduction payments agreed with pension fund trustees. This will be looked at as part of the consideration of fuller disclosure of capital allocation decisions and the case for a full review of the UK’s dividend regime. In the meantime, The Pensions Regulator has stepped in with further statements about what dividends should be paid compared to the level of pension contributions.
New Section 172 reporting obligations
The 2018 Regulations introduce an obligation for all companies of significant size (private as well as public) to explain how their directors have had regard to the employee and other non-shareholder interests set out in Section 172 of the Companies Act 2006. Currently, large companies are required to publish a strategic report. Large companies being those which meet 2 out of 3 of the following criteria:
- Turnover of more than £36 million
- Balance sheet total of more than £18 million
- More than 250 employees.
The 2018 Regulations would require the strategic report to:
- Include a statement (a ‘Section 172 Statement’) describing how the directors had had regard to the matters set out in section 172(1)(a) – (f) when performing their duty under Section 172
- Summarise how the directors had engaged with UK employees and how they had had regard to UK employees’ interests, and the effect of that regard, including on the principal decisions taken by the company during the financial year
- Summarise how the directors had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the effect of that regard, including on the principal decisions taken by the company during the financial year, unless disclosure would be seriously prejudicial to the company’s interests
- Provide a statement of corporate governance arrangements setting out: which corporate governance code, if any, the company applied in the financial year in questions, how the company applied the code, and if the company departed from the code, how and why.
Additional requirements for quoted companies relate to the directors’ remuneration report and require it to include:
- Any discretion exercised in the award of directors' remuneration
- The amount (or an estimate of the amount) of an incentive award attributable to share price appreciation and whether any discretion in respect of that award has been exercised as a result of share price appreciation or depreciation
- A table showing the ratio of CEO pay to the median remuneration of UK employees as well as the 25th and 75th percentiles of their UK employee population
- For each executive director in relation to performance targets or measures relating to more than one financial year, an indication of the maximum remuneration receivable assuming company share price appreciation of 50% over the performance period.
Published: October 2018
Pensions Law Update - October 2018
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