In Counsel - July 2012

Welcome to the latest edition of our In Counsel publication for in-house counsel, compliance officers, finance directors and company secretaries.

We are here to update you on some significant legal developments affecting your business. Top of the political agenda is the Government's new proposals on executive pay. We consider whether the payment of break fees might constitute unlawful financial assistance and whether unlawful financial assistance can be rendered enforceable by a later variation of the transaction; whether a party caught in a legal dispute is able to refuse mediation; and the landmark Supreme Court decision in Seldon v Clarkson Wright and Jakes (A Partnership) which considers whether it is possible after all to require employees to retire at 65. We also look at the new requirement for "quoted companies" to report on greenhouse gas emissions in their directors' report and accounts, and the decision of the ECJ that non-textual copying of the functionality of software does not infringe copyright – good news for competitors who are looking to develop programs with the same functionality as existing products (but bad news for authors of software hoping for greater protection for their products!). Finally we consider the extent to which rights to early retirement pensions transfer under TUPE and the implications of a recent HM Treasury and HM Revenue & Customs consultation for the tax status of non-executive directors.

We want to keep you updated on these and other relevant developments as and when they happen. If you would like to know more about any of the topics covered in this update please get in touch.

CORPORATE

The Government's New Proposals on Executive Pay

By Marlies Braun

The Government's proposals on executive pay have changed slightly since we last reported on this topic in April (see our April 2012 update). The new proposals1published on 20 June 2012 which were widely reported in the financial press constitute a good compromise between giving shareholders more influence on executive pay and avoiding shareholders micromanaging their companies.

In our April 2012 update we reported that the directors' remuneration report is proposed to be split into a forward-and a backward-looking section with:

the forward-looking section (referred to as the policy report) outlining the future remuneration policy and potential exit payments, and the backward-looking section (referred to as the implementation report) explaining how the remuneration policy was implemented in the previous financial year. The policy report

Back in March 2012, the Department for Business Innovation & Skills (BIS) proposed that the policy report be made subject to an annual binding shareholder vote requiring a higher than 50% majority. The Government's new proposal is that this section of the directors' report be subject to an annual binding vote only if the company intends to change its remuneration policy. If no such change is suggested, a binding shareholder vote would only be required once every three years. The required majority for this vote now appears to be a simple 50% majority of shareholders rather than a majority of between 50 and 75% as was suggested earlier this year.

If a company fails the binding vote it will be required to follow the existing remuneration policy until the shareholders approve a revised policy.

The implementation report

The backward-looking section of the directors' report is currently subject to an advisory shareholder vote only and this is suggested to remain unchanged. If a company fails the advisory vote it will be required in the following year to seek the shareholders' binding vote on its overall remuneration policy.

The implementation report will have to include a single figure of each director's total remuneration. A methodology for calculating this single figure has been developed by BIS together with the Financial Reporting Council's (FRC) Reporting Lab, companies and investors which "will reflect actual pay earned rather than potential pay awarded."

Proposed changes to the UK Corporate Governance Code

Where a substantial minority of shareholders votes against the company's remuneration policy or against its implementation, the company may be required to publish a statement setting out how it intends to address shareholder concerns. The FRC will consult on the necessary changes to the UK Corporate Governance Code to reflect this new requirement.

What next?

The Government is expected to publish amendments to the Enterprise and Regulatory Reform Bill shortly to reflect these proposals. BIS will also publish draft regulations setting out the format and content of the directors' remuneration report.

These reforms are due to come into force in October 2013.

Comment

We welcome the new proposal of making the future remuneration policy and potential exit payments subject to a binding 50% majority vote every three years (unless such policy is due to be changed) rather than an annual supermajority vote. It strikes a good balance between giving shareholders more influence on executive pay and avoiding shareholders micromanaging their companies.

Although we have not yet seen the proposed methodology for how the single figure of each director's remuneration shall be calculated, we expect the proposed requirement to publish such a single figure to increase transparency and induce remuneration packages to be less complex and more closely align director pay and performance. It will also enable investors to more readily compare and evaluate remuneration packages across companies.

Consultation on the Stewardship Code

By Shveta Nehra

On 20 April 2012, the Financial Reporting Council (FRC) published a consultation paper2proposing changes to the UK Stewardship Code (the Code). The Code was first published in 2010 and, at the time, was subject to criticism in certain areas. The Financial Reporting Council have waited for the principles of the Code to be adopted and implemented before making any proposals for change.

The Code

Seven principles form the basis for the Code which are directed at institutional investors who hold shares in UK companies. The Code's principal aim is to ensure institutional investors are active and engage in corporate governance in the interests of their beneficiaries.

Changes to the Code

The FRC stated that the purpose of the proposed changes3is not to broaden the scope of or change the seven principles but to reinforce them where necessary.

The proposed revisions to the Code include the following:

Definition of stewardship. Changes have been made to the introductory paragraph of the guidance to the Code to clarify and confirm the meaning of stewardship. The changes provide that stewardship activities include monitoring and engaging with companies on matters such as strategy, performance, risk, remuneration and corporate governance, as well as voting. Engagement is defined as "purposeful dialogue with companies on those matters as well as on issues that are the immediate subject of votes at general meetings". Roles of asset owners/managers. The proposed changes seek to provide clarity on the different roles and responsibilities of asset managers and asset owners. The changes include an explicit recognition that asset owners have a stewardship obligation to their beneficiaries, while recognising that the specific stewardship activities carried out by owners and managers will vary depending on their circumstances. Conflict of interest policies. Changes have been made to principle 2 to encourage institutional investors to prepare, implement and disclose a policy which sets out the process adopted to deal with conflicts of interest. The proposed changes recognise that the interests of clients may vary. Collective engagement. Principle 5 was initially introduced to establish whether the signatory is willing and able to join forces with other investors. However, the FRC feels that the principle, as originally drafted, has not fully achieved its purpose. The revisions to this principle are therefore designed to encourage investors to provide an indication on the sorts of circumstances in which the investors may participate in collective engagement. Use of proxy voting or other voting advisory services. Revisions are proposed to the guidance to principle 6 to encourage disclosure on the extent to which signatories use, rely upon and follow the recommendations of their advisors. Stock lending. The proposals include the insertion of a reference to stock lending to the guidance to principle 6. The revisions seek for disclosure by signatories of their policy on stock lending and specifically whether signatories recall lent stock for voting purposes. Other asset classes. The changes proposed to the introductory section to the Code are to encourage disclosure of whether the signatory applies its stewardship approach to other asset classes including overseas equities. The initial focus of the Code has been on UK equities but the FRC acknowledge that such equities may only be a small part of an institutional investor's portfolio and certain clients and beneficiaries may wish to apply the Code to other sections of the portfolio. Assurance reports. The FRC is seeking to strengthen the language in principle 7 by proposing that managers 'should obtain' assurance reports rather than consider obtaining such reports. In addition, if requested, clients should also be provided access to such assurance reports. Policy updates. The proposed changes to the Code provide that signatories review their policy statements annually, update them as necessary and indicate the date of the last review. Other

There are other substantive changes to the Code, including:

the removal of any suggestion or inference that institutional investors should not become insiders; and an emphasis on the role of support providers in promoting stewardship and clarification on the definition of support providers. The...