- within Energy and Natural Resources topic(s)
This week:
- The Government confirms its intentions to amend the mandatory notification sectors under the UK's national security and investment regime
- The Financial Reporting Council publishes updated guidance on "comply or explain" reporting
Government sets out changes to mandatory notification sectors under national security and investment regime
The Government has set out its intended changes to the requirement to notify transactions in "sensitive sectors" under the UK's national security and investment (NSI) regime.
Under the NSI regime (which is set out in the National Security and Investment Act 2021), the Government has the power to intervene in and, ultimately, block certain acquisitions of shares or assets if it believes the acquisition poses a risk to the UK's national security.
Certain types of acquisition in 17 so-called "sensitive sectors" trigger mandatory notification, in which case the buyer may not proceed with the acquisition until it has received approval from the UK Government. (Transactions outside of these sectors can be notified on a voluntary basis, which buyers may consider doing to avoid the possibility of proactive intervention by the Government.)
In July 2015, the Government launched a consultation on the sensitive sectors, in which it proposed to update, refine and reorganise certain sectors, including creating new sectors for Semiconductors and Critical Minerals (which currently fall within the Advanced Materials sector) and for Water.
The Government has now confirmed it intends to proceed as follows.
- A new sector for Semiconductors will be created out of parts of the existing Advanced Materials sector and merged with the current Computing Hardware sector. The new sector will include additional activities, such as advanced packaging techniques and advanced chip designs.
- A new sector for Critical Minerals will also be created out of parts of the existing Advanced Materials sector. The new sector will cover minerals classed as "critical" by the UK Critical Minerals Intelligence Sector. It will also be framed to ensure that "low-risk activities" are not caught by the mandatory notification regime.
- The remainder of the Advanced Materials sector will continue to exist as is.
- A new sector for Water will be created. This will include existing water and sewerage operations, as well as new operations that meet a minimum threshold.
- The scope of the Artificial Intelligence sector will be narrowed so that certain non-consumer and licensed systems, as well as certain modifications to AI systems and AI testing, fall outside the mandatory notification obligations.
- There will be other clarificatory changes to other sectors, including Communications, Critical Suppliers to Government, Data Infrastructure, Energy, and Suppliers to Emergency Services.
The changes will require secondary legislation, which the Government intends to bring before Parliament in due course.
FRC publishes new guidance on "comply or explain" reporting
The Financial Reporting Council (FRC) has published updated guidance to assist businesses with reporting on a "comply or explain" basis.
The guidance is squarely aimed at reporting under the FRC's UK Corporate Governance Code. However, aspects of the guidance may be useful for companies reporting under other codes.
Commercial companies with a primary listing in the UK are required under the UK Listing Rules to comply or explain against the Code. Other companies that are required to report against a recognised corporate governance may adopt the UK Corporate Governance Code or some other code (such as the QCA Corporate Governance Code or a sector-specific code of governance).
What is "comply or explain"?
Several codes of corporate governance or reporting in the UK operate on a comply or explain basis. In essence, this requires that entity reporting against the code in question to adopt and implement the provisions of the code, or to explain any respects in which it has not done so.
For example, Provision 9 of the UK Corporate Governance Code states that the chair and chief executive of a company should not be the same person. A company reporting under the code must, therefore, allocate these roles to two different individuals ("comply") or explain why it has decided not to do so ("explain").
The following codes (among others) adopt a "comply or explain" basis of reporting.
- UK Corporate Governance Code. Aimed at larger publicly traded companies, this sets out standards of governance and reporting in relation to leadership and purpose, division of responsibilities, composition and succession, audit and risk, and remuneration. Commercial companies with a primary listing in the UK are required to report against this code.
- QCA Corporate Governance Code. Published by the Quoted Companies Alliance and aimed at small and mid-sized publicly traded companies, such as those admitted to AIM or the AQSE Growth Market (which are required by their exchange rules to report against a recognised corporate governance code). More digestible and fluid than the UK Corporate Governance Code, the QCA Code operates based on 10 principles.
- AIC Code of Corporate Governance. Designed by the Association of Investment Companies and endorsed by the FRC and its counterparts in Jersey and Guernsey, this code sets out principles of governance aimed specifically at investment companies. The AIC Code is similar in many respects to the UK Corporate Governance Code, identifying similar areas of focus.
- UK Stewardship Code. A code of conduct and reporting aimed at institutional asset owners and asset managers. Covers investments in both publicly traded companies and private capital. The specific provisions of the Stewardship Code operate on a "comply or explain" basis.
- TCFD Recommendations. The Recommendations of the Taskforce on Climate-related Financial Disclosures set out disclosures companies may make to enhance transparency in relation to climate risks that may impact their business. Currently, commercial companies with a primary listing in the UK are required to report against the TCFD Recommendations on a "comply or explain" basis. (The TCFD was disbanded in October 2023. The TCFD Recommendations will be superseded by the new UK Sustainability Reporting Standards. The FCA is proposing to require listed companies to report against UK SRS on a quasi-comply or explain basis.)
Certain codes operate on an apply and explain basis. Subtly different from "comply or explain", the "apply and explain" approach requires the reporting entity to adopt a particular principle but gives the entity significant latitude and flexibility in how to implement the principle.
"Apply and explain" usually applies to more high-level, principles-based governance, where the code in question does not set out detailed requirements but rather a general concept to be translated into practice. Consequently, entities that adopt an "apply and explain" code are generally expected to provide more detail on how they have implemented the code, rather than merely explaining the ways in which they have departed from it.
The following codes (among others) adopt an "apply and explain" basis of reporting.
- Wates Principles. Aimed at very large private companies, these set out six key principles designed to guide private companies towards good corporate governance. The principles revolve around purpose and leadership, board composition, director responsibilities, opportunity and risk, remuneration, and stakeholder relationships.
- UK Stewardship Code. As noted above, the Stewardship Code contains detailed provisions that operate on a "comply or explain" basis. The general principles of the Code may be said to operate on more of an "apply and explain" basis.
Although compliance with the UK Corporate Governance Code is considered good practice, the FRC reminds companies and investors that departing from the code is not a "red flag" if a well-reasoned explanation is given. To the contrary, it may provide evidence that a board is thinking seriously about what good governance means for its company.
The guidance counsels against a culture of considering departures from the Code to be suspicious, warning that this could lead to companies declaring full compliance where an alternative approach would better serve shareholders and stakeholders.
Read the FRC's announcement of its updated guidance on "comply or explain" reporting
Read the FRC's updated guidance on "comply or explain" reporting (opens PDF)
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