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Appendix 1

about the authors

ADAM O EMMERICHWachtell, Lipton, Rosen & KatzAdam O Emmerich practises in the corporate department of Wachtell, Lipton, Rosen & Katz, focusing primarily on mergers and acquisitions, securities law matters, and corporate governance. His practice has included a broad and varied representation of public and private corporations and other entities in a variety of industries throughout the United States and abroad in connection with mergers and acquisitions, divestitures, spin-offs, joint ventures and financing transactions. He also has extensive experience in takeover defence. Mr Emmerich is recognised as one of 500 leading lawyers in America by Lawdragon; as one of the world’s leading lawyers in the field of mergers and acquisitions in the Chambers Global guide to the world’s leading lawyers; as an expert in each of M&A, corporate governance and M&A in the real estate field by Who’s Who Legal; and as an expert in M&A and in corporate governance by Euromoney Institutional Investor’s Guides to the world’s leading mergers and acquisitions and corporate governance lawyers.

WILLIAM SAVITTWachtell, Lipton, Rosen & KatzWilliam Savitt is a  partner in the litigation department of Wachtell, Lipton, Rosen & Katz. He focuses on representing corporations and directors in litigation involving mergers and acquisitions, proxy contests, corporate governance disputes, class actions involving allegations of breach of fiduciary duty, and regulatory enforcement actions relating to corporate transactions. Mr Savitt writes and speaks extensively on corporate and securities law topics and has developed and teaches a course at Columbia Law School on transactional litigation.

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iii

Editor’s Preface ..................................................................................................viiWillem J L Calkoen

Chapter 1 AUSTRALIA ...............................................................................1John Williamson-Noble and Tim Gordon

Chapter 2 AUSTRIA .................................................................................13Wolfgang Thomas Graf

Chapter 3 BELGIUM ................................................................................24Elke Janssens and Virginie Ciers

Chapter 4 CANADA .................................................................................49Andrew MacDougall, Robert Yalden and Elizabeth Walker

Chapter 5 DENMARK ..............................................................................62Jacob Christensen, Søren Toft Bjerreskov and Nicholas William Boe Stenderup

Chapter 6 FINLAND ................................................................................75Klaus Ilmonen, Micaela Thorström, Antti Kuha and Anniina Järvinen

Chapter 7 FRANCE ..................................................................................87Didier Martin

Chapter 8 GERMANY ............................................................................102Carsten van de Sande

Chapter 9 GREECE ................................................................................118Evy C Kyttari and Sofia Kizantidi

ConTenTs

iv

Contents

Chapter 10 GUATEMALA ........................................................................129Rodolfo Alegría and Christian Michelangeli

Chapter 11 HONG KONG ......................................................................139Lai Voon Keat, Victor Lee and Fiona Cheng

Chapter 12 INDIA ....................................................................................161Murali Ananthasivan and Lalit Kumar

Chapter 13 INDONESIA ..........................................................................172Wahyuni Bahar and Melanie Hadeli

Chapter 14 IRELAND...............................................................................185Paul White

Chapter 15 ITALY .....................................................................................200Gregorio Gitti, Diego Riva, Camilla Ferrari and Luca Bernini

Chapter 16 JAPAN ....................................................................................214Mitsuhiro Harada and Tatsuya Nakayama

Chapter 17 LUXEMBOURG ....................................................................227Margaretha Wilkenhuysen and Louisa Silcox

Chapter 18 NETHERLANDS ..................................................................248Geert Raaijmakers and Marlies Stek

Chapter 19 PORTUGAL ...........................................................................273Francisco Brito e Abreu and Joana Torres Ereio

Chapter 20 ROMANIA .............................................................................291Cristian Radu

Chapter 21 SPAIN .....................................................................................307Carlos Paredes and Rafael Núñez-Lagos

v

Contents

Chapter 22 SWEDEN ...............................................................................319Hans Petersson and Emma Kratz

Chapter 23 SWITzERLAND ...................................................................334Rolf Watter and Katja Roth Pellanda

Chapter 24 TAIWAN ................................................................................351Stephen C Wu, Benjamin Y Li and Derrick C Yang

Chapter 25 TURKEY ................................................................................363Ümit Hergüner and Zeynep Ahu Sazci

Chapter 26 UNITED KINGDOM ...........................................................376Andy Ryde and Murray Cox

Chapter 27 UNITED STATES .................................................................389Adam O Emmerich, William Savitt, Sabastian V Niles and S Iliana Ongun

Chapter 28 UNITED STATES: DELAWARE ..........................................403Ellisa O Habbart and Lisa R Stark

Appendix 1 ABOUT THE AUTHORS .....................................................415

Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS ...435

vii

EDITOR’S PREFACE

I am proud to present this new edition of The Corporate Governance Review to you.In this fourth edition, we can see that corporate governance is becoming a more vital

and all-encompassing topic with each year. We all realise that the modern corporation is one of the most ingenious concepts ever devised. Our lives are dominated by corporations. We eat and breathe through them, we travel with them, we are entertained by them, most of us work there. Most corporations aim to add value to society and they very often do. Some, however, are exploiting, polluting, poisoning and impoverishing us. A lot depends on the commitment, direction and aims of a corporation’s founders, shareholders, boards and vital staff members. Do they show commitment to all stakeholders or to long-term shareholders only, or mainly to short-term shareholders? There are many variations of structure of corporations and boards within each country and between countries. All will agree that much depends on the personalities and commitment of the persons of influence in the corporation.

We see that everyone wants to be involved in ‘better corporate governance’: parliaments, governments, the European Commission, the SEC, the OECD, the UN’s Ruggie reports, the media, supervising national banks, shareholder activists and other stakeholders. The business world is getting more complex and overregulated, and there are more black swans, while good strategies can quite quickly become outdated. Most directors are working diligently, many with even more diligence. Nevertheless, there have been failures in some sectors, so trust has to be regained. How can directors do all their increasingly complex work and communicate with all the parties mentioned above?

What should executive directors know? What should outside directors know? What systems should they set up for better enterprise risk management? How can chairs create a balance against imperial CEOs? Can lead or senior directors create sufficient balance? Should most outside directors understand the business? How much time should they spend on the function? How independent must they be? What about diversity? Should their pay be lower? What are the stewardship responsibilities of shareholders?

Editor’s Preface

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Governments, the European Commission and the SEC are all pressing for more formal inflexible legislative acts, especially in the area of remuneration. Acts set minimum standards, while codes of best practice set aspirational standards.

More international investors, voting advisory associations and shareholder activists want to be involved in dialogue with boards about strategy, succession and income. Indeed, wise boards have ‘selected engagements’ with stewardship shareholders to create trust. What more can they do to show all stakeholders that they are improving their enterprises other than through setting a better ‘tone from the top’? Should they put big signs on the buildings emphasising integrity, stewardship and respect?

Interest in corporate governance has been increasing since 1992, when shareholder activists forced out the CEO at General Motors and the first corporate governance code – the Cadbury Code – was written. The OECD produced a model code and many countries produced national versions along the lines of the Cadbury ‘comply or explain’ model. This has generally led to more transparency, accountability, fairness and responsibility. However, there have been instances where CEOs gradually amassed too much power or companies have not developed new strategies and have fallen into bad results – and sometimes even failure. More are failing in the financial crisis than in other times, hence the increased outside interest in legislation, further supervision and new corporate governance codes for boards, and stewardship codes for shareholders and shareholder activists.

This all implies that executive and non-executive directors should work harder and more as a team on policy, strategy and entrepreneurship. It remains a fact that more money is lost through lax directorship than through mistakes. On the other hand, corporate risk management is an essential part of directors’ responsibilities, and sets the tone from the top.

Each country has its own measures; however, the chapters of this book show a  convergence. The concept underlying the book is of a  one-volume text containing a series of reasonably short, but sufficiently detailed, jurisdictional overviews that permit convenient comparisons, where a  quick ‘first look’ at key issues would be helpful to general counsel and their clients.

My aim as editor has been to achieve a high quality of content so that The Corporate Governance Review will be seen, in time, as an essential reference work in our field.

To meet the all-important content quality objective, it was a condition sine qua non to attract as contributors colleagues who are among the recognised leaders in the field of corporate governance law from each jurisdiction.

I thank all the contributors who helped with this project. I hope that this book will give the reader food for thought; you always learn about your own law by reading about the laws of others.

Further editions of this work will obviously benefit from the thoughts and suggestions of our readers. We will be extremely grateful to receive comments and proposals on how we might improve the next edition.

Willem J L CalkoenNautaDutilhRotterdamMarch 2014

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Chapter 26

UNITED KINGDOM

Andy Ryde and Murray Cox1

I OVERVIEW OF GOVERNANCE REGIME

The UK system of corporate governance is generally seen as an effective model that has influenced many other jurisdictions in Europe and Asia. This helps to attract international companies wishing to gain access to a wide pool of investors, who are reassured by the governance obligations placed on issuers regardless of where their key business operations are located. In this chapter we focus on UK-incorporated companies with a premium listing on the Main Market of the London Stock Exchange. Requirements are relaxed to a degree for companies that are only able (or only choose) to obtain a standard listing, or that are not UK-incorporated companies.

The UK’s corporate governance system comprises laws, codes of practice and market guidance. Mandatory and default rules and legal standards derive from common law, from statute (notably the Companies Act 2006 (the Companies Act)) and from regulation (notably the Listing Rules and the Disclosure and Transparency Rules published by the Financial Conduct Authority (FCA), which is a statutory body). Some of these laws and regulations derive from European law, but some are specific to the UK. The City Code on Takeovers and Mergers (the Takeover Code) also has an important role to play in control transactions; it now also has statutory force. Each company’s constitution, which will also impose governance requirements, has legal effect as a statutory contract.

The most important code of practice is the UK Corporate Governance Code (the Code), which is published and updated periodically by the Financial Reporting Council (FRC), which is also a  statutory body. The latest edition of the Code was published in 2012. Responding to concerns that institutional investors (particularly asset managers) had failed in their role as responsible, engaged shareowners during the

1 Andy Ryde is a partner and Murray Cox is an associate at Slaughter and May.

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recent financial crisis, the FRC also published (in 2010) the UK Stewardship Code (the Stewardship Code), which applies to the institutional investor community and not to companies directly.

Finally, guidelines from the key supervisory bodies and from the institutional investor community supplement these laws, regulations and codes of practice. The UK’s institutional investor community also regularly publishes and updates guidance on a range of matters, particularly those where a shareholder vote is required.

The bedrock of best practice corporate governance in the UK is the single board collectively responsible for the long-term success of each company including:a separate chairman and CEO;b a balance of executive and independent non-executive directors;c strong, independent audit and remuneration committees;d annual evaluation by the board of its performance;e transparency on appointments and remuneration; andf effective rights for shareholders, who are encouraged to engage with the companies

in which they invest.

These key features largely derive from the reactions to a  number of high-profile scandals associated with corporate governance failures. The Maxwell scandal (misuse of staff pensions) and BCCI scandal (accountancy fraud) prompted the government to commission the 1992 Cadbury Report, which resulted in the UK’s first code of corporate governance. The recent financial crisis also prompted fresh scrutiny of the adequacy of existing corporate governance measures and companies’ compliance with both the spirit and the letter of the regime. A series of reviews in the wake of the financial crisis led to substantial adjustments to the Code and associated guidance during 2010 to 2012. The Walker Review (2009) was concerned with corporate governance failings within banks during the financial crisis but has influenced developments more broadly. More recently, the ‘shareholder spring’ during 2012, which saw a  number of CEOs stand down, has focused attention on the ‘pay without performance’ problem, even though government had already proposed to legislate for a mandatory, binding shareholder vote on executive directors’ pay.

One defining feature of the Code is the ‘comply or explain’ approach: stock exchange rules require all companies either to comply with the Code or explain why they do not. Unlike laws, regulations and each company’s constitution, the Code is issued with an acknowledgement of flexibility; this is in recognition of the principle that no single governance regime would be appropriate, in its entirety, for all companies. This approach does, however, rely on shareholder engagement to challenge non-compliance where appropriate. Nevertheless, in its December 2013 report on recent developments in corporate governance, the FRC noted that just under 60 per cent of all FTSE350 companies (the 350 largest UK-listed companies, by market capitalisation) reported full compliance with the Code, and that with respect to all 53 provisions of the Code there was a compliance rate of 85 per cent. In many cases, non-compliance is due to circumstances rather than deliberate choice. This confirms that the provisions of the Code are widely adopted by companies despite the comply or explain philosophy.

The Code states that an explanation for non-compliance should set out the background, provide a clear rationale that is specific to the company, indicate whether

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the deviation from the Code’s provisions is limited in time and state what alternative measures the company is taking to deliver on the principles set out in the Code and to mitigate any additional risk. The FRC’s review of explanations given by non-compliant companies during 2013 suggests that many explanations continue to be inadequate and that companies could do more to explain why they consider their actions and governance arrangements to be in the best interests of shareholders.

II CORPORATE LEADERSHIP

i Board structure and practices

The UK system features a unitary board with collective responsibility for the company’s successes and failures. There is no two-tier structure – executive directors and independent, non-executive directors instead act as one board. The company’s powers may be exercised by its board acting collectively, with a small number of decisions subject to shareholder approval. In practice, substantial managerial authority with respect to day-to-day management is delegated by the board to the company’s executives; the board appoints the executives and exercises an oversight function by approving substantial decisions that do not require shareholder approval. There is no co-determination principle in the United Kingdom requiring seats on the board to be reserved for employee representatives.

The Code recommends that the board and its committees should have an appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. Except for smaller companies (being those below the FTSE350), at least half of the board, excluding the chairman, is required to comprise individuals determined by the board to be independent. A  smaller company is required to have at least two independent directors. This way, no individual or small group of individuals can dominate the board’s decision-making. It is the CEO, though, who is responsible for running the company’s business, in consultation with the board.

The Code requires that the board constitute a nomination committee, an audit committee and a  remuneration committee. The strength and independence of these committees – whose particular duties are addressed in the Code and in recommended terms of reference published by the Institute of Chartered Secretaries and Administrators (ICSA) – is a key factor in ensuring effective corporate governance, although ultimate responsibility for areas addressed by such committees remains with the board collectively. The Walker Review also recommended a risk committee that is separate from the audit committee and responsible for overseeing risk exposure and future risk strategy for boards of FTSE100 banks and other financial institutions. The financial crisis has led to increased interest in such risk committees beyond financial institutions, and their role in advising the board on the company’s risk appetite, tolerance and strategy, and some companies have moved to introduce separate risk committees.

The Code recommends that the audit committee should comprise at least three (or in the case of smaller companies, two) independent directors, one of whom should have ‘recent and relevant financial experience’. The chairman of the board should not be a member of the audit committee unless the company falls below the FTSE350, in which case the chairman may be a member (but not chair) of the audit committee, provided he

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or she was independent on appointment. The nomination committee should comprise a  majority of independent directors and be chaired by an independent director. The chairman of the board can be a  member of (and chair) the nomination committee. The remuneration committee should comprise at least three (or, in the case of smaller companies, two) independent directors. The chairman of the board may sit on (but not chair) the remuneration committee, provided he or she was independent on appointment.

The role of chairman has become increasingly important under later editions of the Code. The Code states that he or she is responsible for leadership of the board and ensuring its effectiveness in all aspects of its role. The chairman is now also encouraged to report personally on governance. The FRC’s Guidance on Board Effectiveness (2011) emphasises the role of the chairman in creating the right conditions for the effectiveness of board and individual director. It lists a number of matters included in the role, such as demonstrating ethical leadership and ensuring a timely flow of high-quality supporting information. The chairman should, on appointment, meet independence criteria, but thereafter the test of independence is not appropriate in relation to the chairman.

The separation of chairman and CEO is one of the key ‘checks and balances’ of the UK system. To combine these roles had been permissible under earlier versions of the Code, but it has for some time been recognised that combining the roles increases the likelihood of one individual having unfettered decision-making powers. The Code recommends splitting the role of chairman and CEO, and that the division of responsibilities between the two positions should be clearly established. If the roles of chairman and CEO are combined (or if the CEO succeeds as chairman), this must be publicly justified in accordance with the comply or explain principle, and the company should expect close questioning from institutional investors. Stuart Rose, for instance, who was CEO of Marks and Spencer plc from May 2004 until May 2010, created major controversy when he also became executive chairman in June 2008 and he was eventually forced to abandon the position of CEO before retiring from the company completely in May 2010.

Executive payThe Code states that levels of pay should be sufficient (but not higher than necessary) to attract, retain and motivate directors of the quality required to run the company. A significant proportion of executive directors’ pay should be structured to link rewards to corporate and individual performance (but pay for non-executive directors should not include performance-related elements).

Levels of executive pay have been heavily criticised by the public and in the media, in the context of both the recent financial crisis and the ensuing economic austerity measures. The Enterprise and Regulatory Reform Act 2013, which came into force on 1 October 2013, gives shareholders of listed companies a  binding vote on executive directors’ pay. In broad terms, at least every three years shareholders are required to approve a policy setting limits and conditions for executive directors’ pay. If payments and awards made by the company to its executive directors are not consistent with the shareholder-approved policy, they are recoverable from the director in question and the directors responsible for approving the unauthorised payment or award are liable to compensate the company. Shareholders have, in addition, retained their annual advisory (i.e., non-binding) vote on the implementation of the approved policy during

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the previous year. Companies are also obliged to publish a  report on the directors’ remuneration in their annual report, including the remuneration policy in the years it is being put forward for approval.

ii Directors

The role of the independent director is seen as essential in providing a balance on the boards of listed companies and both the Walker Review and the FRC emphasise the need for independent directors to be suitably experienced, committed and prepared to challenge the executive directors.

The primary function of independent directors, according to the Code, is to scrutinise the performance of management and monitor the reporting of performance. The board should appoint an independent director to be the ‘senior independent director’, to provide a sounding board for the chairman and to serve as an intermediary for the other directors when necessary. The senior independent director should be available to shareholders if they have concerns that contact through the normal channels of chairman, CEO or other executive directors has failed to resolve a  matter, or for which such contact is inappropriate. The FRC’s Guidance on Board Effectiveness (2011) further emphasises the critical role of the senior independent director to help resolve significant issues when the board is under periods of stress. Independent directors should hold meetings without the executives present both with the chairman and, at least annually, without the chairman (led by the senior independent director) to appraise the chairman’s performance.

In practice, independent directors generally meet with the other directors for board meetings at least eight times per year in addition to attending committee meetings. They should (and often do) have direct access to all staff below board level and all advisers and operations, and receive information at an early stage (before executive directors have made key decisions). The Code provides that, as part of their role as members of a unitary board, independent directors should constructively challenge and help develop proposals on strategy. On the other hand, a ‘conscientious and independent standard of judgement, free of involvement in the daily affairs of the company’ is seen as an independent director’s key contribution to the boardroom. In this regard, the board is required to determine annually whether a director is independent in character and judgement and whether there are relationships or circumstances that are likely to affect the director’s judgement.

Independent directors should also monitor the performance of management in meeting agreed goals and objectives, and the reporting of performance. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. They are responsible for determining appropriate levels of remuneration of executive directors and have a  prime role in appointing and, where necessary, removing executive directors and in succession planning.

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Directors’ dutiesAll directors, both executive and non-executive, owe fiduciary duties and a duty of care and skill to the company. These duties are derived from common law but have now been largely codified under the Companies Act. These statutory duties are:a to act within their powers (i.e., in accordance with the company’s constitution);b to promote the success of the company;c to exercise independent judgement;d to exercise reasonable care, skill and diligence;e to avoid conflicts of interest;f not to accept benefits from third parties; andg to declare any interest in a proposed transaction or arrangement with the company.

These statutory duties must still, however, be interpreted and applied in accordance with the pre-existing common law duties. Indeed, in respect of some directors’ duties that have not been codified under the Companies Act, the common law rules remain the only relevant law. These include the duties not to fetter their discretion, not to make a secret profit, and to keep the affairs of the company confidential.

UK law has adopted the ‘enlightened shareholder approach’ to the orientation of its directors’ duties. The Companies Act requires directors, when deciding how to exercise the powers of the company, to have regard to:

the likely consequences of any decision in the long term, the interests of the company’s employees, the need to foster the company’s business relationships with suppliers, customers and others, the impact of the company’s operations on the community and the environment, the desirability of the company maintaining a reputation for high standards of business conduct, and the need to act fairly as between members of the company.

UK law takes a  relatively strict approach to the enforcement of directors’ duties. For example, unauthorised self-dealing is not reviewed ex post against an ‘entire fairness’ standard, as it might be in the United States; rather, the transaction is in principle voidable at the instigation of the company without any inquiry into its fairness. Similarly, disgorgement of profits is generally available as a remedy for breach of fiduciary duty, as of right. Breach of duty is in principle actionable only by the company to which the duty is owed, and not by shareholders. While a shareholder may bring a derivative action on behalf of the company in relation to actual or threatened breaches of duty, the UK legal system is not well suited to private enforcement of directors’ duties outside formal bankruptcy proceedings, so litigation by shareholders of a listed company alleging breach of duty by its directors is extremely rare.

In relation to control transactions (i.e., any proposed acquisition of 30 per cent or more of the voting rights), the Takeover Code requires shareholder approval for any action by the directors that may result in any offer (or expected offer) for the company being frustrated, or in shareholders being denied the opportunity to accept or reject the offer on its merits. Viewed in isolation, this prohibition against ‘frustrating action’ seems draconian; however, potential prejudice to the target company’s shareholders is mitigated to a degree by the Takeover Code’s relatively intrusive regulation of the terms and timing of any proposed control transaction.

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Other legislation imposes criminal and civil liability on directors, including health and workplace safety laws, environmental laws and competition and securities laws.

Appointment, nomination, term of office and successionThe Code provides that there should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. The search for candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender. A nomination committee should lead the process for board appointments and make recommendations to the board. Independent directors should be appointed for specified terms subject to annual re-election. The Code refers to the need to ensure progressive refreshing of the board so that any term beyond six years for an independent director should be subject to particularly stringent review.

The Code states that all directors of FTSE350 companies should be re-elected annually by shareholders. Directors of other companies should be put up for re-election at intervals of no more than three years. Each director’s election is voted on separately, with statute requiring majority rather than plurality voting (i.e., an ordinary majority of shareholders can vote against – and hence block – a director’s election). While in theory an ordinary majority of shareholders also has a statutory right under the Companies Act to remove a director at any time and without cause, regular re-election renders this right largely irrelevant in practice.

The board should satisfy itself that plans are in place for orderly succession of appointments to the board and to senior management, so as to maintain an appropriate balance of skills and experience within the company and on the board and to ensure progressive refreshing of the board. FRC guidance in 2011 emphasised that a  senior independent director might take responsibility for an orderly succession process for the chairman.

Gender balanceWhile diversity in its broadest terms is encouraged, it is clear that in the UK gender balance on boards is gaining a  higher profile. The Davies Review (2011) was an important milestone in this regard, and encouraged companies to set targets for gender balance and to improve disclosure about their diversity policies and progress towards their diversity goals.

While government supported the recommendation of the Davies Review that quotas be rejected in favour of a business-led approach, it has, however, indicated that such quotas could be imposed if progress towards gender balance is not achieved. The European Commission has recently moved closer to a quota solution by proposing to introduce legislation that would, in effect, impose penalties on companies that failed to achieve gender balance among independent directors (defined as at least 40 per cent of each gender) at supervisory board level by 2020.

Change has also been visible in other areas. In July 2011, in response to the Davies Review, the executive search community published a voluntary code of conduct to address gender diversity on corporate boards and best practice for the related search processes.

The most recent statistics provided by the Professional Boards Forum BoardWatch indicate that as at January 2014, among FTSE100 companies, women accounted for

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20.4 per cent of all directors (up from 12.5 per cent in 2010), of which 25.1 per cent were independent directors (up from 15.6 per cent) and 7.2 per cent were executive directors (up from 5.5 per cent). Moreover, among FTSE100 companies, there are now only two all-male boards (down from 21 in 2010) and 27 per cent of board appointments since 1 March 2013 have been women, including 31 per cent of all new independent directors and 13 per cent of new executives.

III DISCLOSURE

Listed companies are subject to a wide range of periodic and ad hoc disclosure obligations, many of which derive from, or have been harmonised under, EU law, and which relate to the following key areas:a financial and operating results of the company, together with certain elements of

narrative reporting;b share capital and voting rights;c members of the board and key executives;d directors’ remuneration;e price-sensitive information (inside information);f share dealing by insiders and significant shareholders;g governance structure and policies (comply or explain);h significant transactions; andi related-party transactions.

Companies are required to prepare and publish audited annual financial statements (prepared in accordance with international financial reporting standards) and to make these available to shareholders within four months of the financial year end and in time for the annual general meeting. These form part of the company’s annual report, which must include elements of narrative reporting along with the audited financial statements. Following the introduction of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 on 1 October 2013, the annual report must now include a strategic report in addition to the directors’ report, the purpose of which is ‘to inform [shareholders] and help them assess how the directors have performed their duty’ to promote the success of the company. The strategic report has replaced the business review that was previously required for the annual report. In addition to ‘a balanced and comprehensive analysis of both the development and the performance of the company’s business during the financial year, and the position of the company’s business at the end of that year’, the strategic report must contain a description of the principal risks and uncertainties affecting the company’s business, information about the gender split for its directors, managers and employees, trend information and disclosure about certain environmental matters. The Code recommends that it also include a description of the company’s business model and strategy.

Although not mandatory, most companies publish an unaudited preliminary statement of their annual results before publishing their annual report, partly to satisfy market expectations and also to shorten the period during which insiders are prevented from dealing in the company’s securities.

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Stock exchange rules require the publication of a  half-year report within two months of the end of the relevant six-month period, containing a  condensed set of (unaudited) financial statements and an interim management report. The interim management report must include details of any important events in the relevant period, the principal risks and uncertainties for the remaining six months and details of related party transactions.

Stock exchange rules also require companies that do not already report quarterly to publish an ‘interim management statement’ (between 10 weeks after the beginning and six weeks before the end of the relevant six-month period) containing information about material events and transactions that have taken place since the start of that period and their impact on the issuer’s and its group’s financial position. The interim management statement must also describe the financial position and performance of the issuer and its group during that time. Widespread criticism of short-termism in equity markets and evidence that compliance with this requirement is burdensome (particularly for smaller listed companies) has resulted in proposals by the European Commission to abolish the requirement for quarterly reporting, an initiative the United Kingdom supports.

Companies are required to disclose promptly all dealings in their securities (including non-voting securities) by ‘persons discharging managerial responsibilities’ (PDMRs) and certain connected persons. In any event, companies are also required to take all reasonable steps to ensure that their PDMRs and persons connected with them comply with the Model Code on dealings in securities, which is annexed to the Listing Rules. In general, this prohibits all dealings during defined ‘close periods’ (in the run-up to the publication of quarterly, half-yearly or annual results) and at any time when a company is in possession of price-sensitive information, subject to certain exceptions. Even when not absolutely prohibited, dealings by PDMRs and their connected persons must be cleared in advance by a director. Dealings are, however, permitted under the terms of an approved trading plan, provided it meets certain requirements.

As well as giving rise to civil liability, insider dealing is also a criminal offence; moreover, it is not restricted to dealings by corporate insiders and advisers but can extend to anyone dealing on the basis of price-sensitive information, regardless of its source. A company is in any event required by stock exchange rules to disclose all price-sensitive information to the market promptly, subject to certain recognised exceptions (e.g., commercially sensitive negotiations still in progress).

A person acquiring 3 per cent of the voting rights in a company must notify the company, which is in turn required to make prompt disclosure to the market. Disclosure is also required thereafter whenever that person reaches, exceeds or falls below each additional 1 per cent threshold. During any period in which a  takeover offer for the company is pending, all dealings by the offeror and persons acting in concert with it are disclosable. Companies are also required to publish their total outstanding voting rights monthly. Finally, a tool is available to companies under the Companies Act to enable them to force disclosure by any person suspected of having a beneficial interest in their shares: this is commonly used in hostile takeover situations.

Stock exchange rules require ‘significant transactions’ to be disclosed to shareholders. Moreover, Class 1 (i.e., large, measured by reference to profits, assets, gross capital or consideration) transactions require not only disclosure but also shareholder approval by ordinary resolution (i.e., 50 per cent of voting shares).

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In addition to shareholder approval requirements under the Companies Act, stock exchange rules require independent shareholder approval by ordinary resolution for related-party transactions, unless they fall within certain exceptions (e.g., small related-party transactions). ‘Related parties’ include PDMRs and shareholders holding more than 10 per cent of the voting rights. Stock exchange rules also require a proposal for a related-party transaction to be accompanied by an independent ‘fair and reasonable’ opinion, typically from an investment bank.

IV CORPORATE RESPONSIBILITY

The need for companies to be held accountable for their actions by shareholders, the government and the general public has gained even greater significance in light of the financial crisis and subsequent recession, and arguably with more moral force than before.

From an internal company perspective, effective corporate responsibility means high standards of risk management, disclosure and transparency, compliance with best practice and effective monitoring. Risk management systems, particularly in the banking industry, were critically and urgently reviewed in the aftermath of the credit crisis at national, European and international levels. In the UK, a  key principle of the Code requires a board to maintain sound systems for managing risk and internal control. It suggests that the board should review these systems at least annually, and consider how much risk the company can, and should, take. The implementation of the Bribery Act 2010 in June 2011 brought about yet more focus on this area, particularly because of the establishment of the new corporate offence of failure to prevent bribery.

Corporate responsibility also encompasses a  company’s duty to its external environment; corporate social responsibility has become a  hot topic in recent years, as businesses have responded to the growing demand from governments, shareholders and the general public for companies to ‘give something back’ to the society in which they operate.

V SHAREHOLDERS

i Shareholder rights and powers

Under the Companies Act, shareholders have the power to challenge a board in several ways. As few as 100 shareholders or shareholders holding as little as 5 per cent of the voting rights (whichever is less) can requisition a meeting and add any item to the agenda or add any item to the agenda for the company’s AGM; moreover, there is no minimum holding period to qualify. In practice, however, boards are relatively responsive to shareholder concerns and such requisitions are rare because each director must submit to annual re-election and because directors are in any event required to obtain shareholder approval for a  number of matters, requiring relatively frequent engagement with the company’s main shareholders.

Under the Companies Act, shareholders must approve secondary share offerings by ordinary resolution (i.e., 50 per cent of voting shares), and in any event they have statutory pre-emption rights on all secondary share offerings for cash, although they can approve the disapplication of these pre-emption rights by special resolution (i.e.,

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75 per cent of voting shares). In practice, shareholders typically give directors general authority to issue further shares for cash and on a non pre-emptive basis (e.g., no more than 5 per cent of the company’s share capital in any year, and no more than 7.5 per cent on a rolling three-year basis, and then subject to restrictions on the price at which the shares may be issued). Authority to issue further shares is typically renewed at each AGM or sought in relation to a specific transaction where equity funding is required.

Shareholders are also required to approve the terms of share incentive plans and Class 1 transactions (in each case by ordinary resolution), related-party transactions (by ordinary resolution of independent shareholders), as well as any changes to the company’s constitution or the rights attaching to their shares (by special resolution). Any proposal to acquire control of a company (defined as 30 per cent of voting rights) in effect requires an offer to be made to all shareholders on the same terms unless minority shareholders waive the requirement, thus resulting in proposed control transactions in effect being put to an independent shareholder vote. Finally, shareholder approval (by way of ordinary resolution) is required under the Companies Act for loans and other credit transactions, and for ‘substantial property transactions’ with directors and their connected persons.

A general shareholder equality principle pervades both UK company law and stock exchange rules. There is a ‘one-share, one-vote requirement’, and distributions to shareholders (dividends, share repurchases etc.) are required to be made anonymously ‘on market’ and on tightly regulated terms unless shareholders waive these requirements. In principle, information must be made available simultaneously to all shareholders, although in practice it is possible to inform shareholders of significant developments to take ‘soundings’ on a confidential basis although this precludes them from dealing until the information has been made public or ceases to be price-sensitive.

ii Shareholders’ duties and responsibilities

English law imposes little in the way of active duties or liabilities on shareholders. For example, a person acquiring 30 per cent of the voting rights in a company is required to make an offer to buy out the minorities, unless a majority of the minority shareholders waive the requirement. But having acquired control, a majority shareholder does not owe any fiduciary duty to the company as such and is free to exercise its voting rights to advance its own interests, except where it is barred from doing so because of its interest in a  proposed transaction (e.g., a  related-party transaction) and provided it exercises its vote in good faith.

Certain responsibilities are placed on investors by institutional guidelines, by the Code and by the Stewardship Code, reflecting the belief that self-interest of investors, and of the companies themselves, is necessary to ensure effective governance. The new Stewardship Code for institutional investors encourages them to be more proactive in their role as shareholders. Under the Stewardship Code, institutional investors are required to exercise their votes in respect of all the shares they hold and not to support the board automatically. Institutional investors are expected to disclose on their websites how they have applied the Stewardship Code or, if they have not, to explain why not. It remains to be seen, however, how the Stewardship Code will influence behaviour by asset managers, asset owners and companies themselves.

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In November 2013, the FCA announced that it would be making changes to the stock exchange rules to reintroduce the concept of a ‘controlling shareholder’. This is in large part a  response to some high-profile corporate governance failures within companies having a controlling shareholder. Once carried into effect, these proposals will require companies with controlling shareholders to enter into ‘relationship agreements’ with them, the substance of which is intended to ensure that the board is capable of managing the company independently and to the benefit of all shareholders. Companies with a  controlling shareholder will also be subject to additional disclosures in their annual reports and ongoing obligations.

The Kay Review (2012) focused attention on the problem of short-termism in UK equity markets, emphasising the responsibilities of share-ownership and highlighting the misalignment of the interests between ultimate asset owners and those managing the investments on their behalf. While to some extent the recommendations in the Kay Review are little more than a  counsel of virtue, the government has indicated that it intends to carry forward some specific recommendations, such as the endorsement of a ‘good practice statement’ for the directors of listed companies and the formation of an ‘investor forum’ to ‘accommodate general discussion of issues of company strategy and corporate governance, and also specific issues arising at particular companies’.

iii Shareholder activism

While institutional investors have traditionally been reluctant to act as the policemen of the corporate governance regime, an increasing number have recently become more vocal. Where institutional investors do have criticisms, they are more likely to engage in private dialogue with the directors. What distinguishes shareholder ‘activists’ is that they are prepared to air issues publicly to achieve change.

During 2012, the ‘shareholder spring’ saw a  number of CEOs stand down as some companies saw strong opposition to their executive pay practices from traditional institutional investors exercising their advisory vote. However, KPMG’s most recent Guide to Directors’ Remuneration (2013) indicates that while in 2011 as many as 34 FTSE100 companies received at least 20 per cent shareholder opposition to their executive pay practices (defined as ‘no’ votes or abstention on the advisory vote), only four companies actually suffered this indignity during 2013. In addition, directors have in some recent cases misjudged investors’ appetite for high-profile M&A transactions and have had to either withdraw their proposals or substantially modify their terms. Examples include the proposals to combine Glencore and Xstrata (which succeeded after last-minute intervention by former prime minister Tony Blair and a revised retention package for Xstrata’s executives) and, before that, G4S’s proposal to acquire ISS (which failed after G4S shareholder opposition).

Shareholder activism may have been hampered to some extent by the requirement for persons ‘acting in concert’ to make a mandatory offer to buy out minorities when their combined holdings reach 30 per cent, despite reassurances to the contrary by the Takeover Panel during 2009.

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iv Contact with shareholders

A company’s relations with its shareholders are also specifically addressed in the Code by providing for a dialogue with shareholders based on the mutual understanding of objectives and that the board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. The board should keep in touch with shareholder opinion in whatever ways are most practical and efficient, using the AGM to communicate with investors and encourage their participation.

VI OUTLOOK

As can be seen from recent developments, the financial crisis has prompted fresh scrutiny of corporate governance practices, bringing about a number of changes. Underlying these criticisms and concerns, there is some consensus that a cultural change is needed to shift from a focus on short-term gains to one that favours long-term success and stability. The long-debated issue of shareholder responsibility has also featured in these reforms, with investors seen as a potentially key influence on company boards in promoting long-term stability and value creation.

The most important innovation in the UK during the period under review has undoubtedly been the introduction of a binding ‘say on pay’ in October 2013. Both UK and European regulators may well focus their attention on removing or reducing barriers to effective and responsible shareholder engagement, bearing in mind that some shareholders can be just as short-sighted in their investment objectives as the executives whose performance is invariably the subject of shareholders’ most vocal criticism.

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about the authors

ANDY RYDESlaughter and MayAndy Ryde is a partner at Slaughter and May. He is active in all fields of company and commercial law, including private acquisitions and disposals, public takeovers and joint ventures, private equity investments and international equity offerings.

MURRAY COXSlaughter and MayMurray Cox is an associate at Slaughter and May. He is active in all fields of company and commercial law, including private acquisitions and disposals, public takeovers and joint ventures, private equity investments and international equity offerings.

SLAUGHTER AND MAYOne Bunhill RowLondonEC1Y 8YYUnited KingdomTel: +44 20 7600 1200Fax: +44 20 7090 5000andy.ryde@slaughterandmay.commurray.cox@slaughterandmay.comwww.slaughterandmay.com