Corporate Governance 2024 Comparisons

Anyone choosing to set up a business in the UK may choose between a broad range of business structures. 

The most common type of company in England and Wales is a private company limited by shares. A company limited by shares is one in which, in the event that the company goes into liquidation, the liability of its shareholders is limited to the amount paid or payable when subscribing for those shares (that is, limited liability). Private limited companies are not able to offer shares to the public, meaning they cannot offer shares if they consider those shares might become available to anyone other than those receiving the offer. 

Companies that wish to offer securities to the public are most commonly registered as a public company limited by shares. UK legislation also affords limited liability to shareholders in public companies but imposes certain additional restrictions and requirements for the protection of shareholders and creditors. More detail on public companies can be found in 3. Management of the Company.

Other less frequently used forms of company structure include the following.

• Private unlimited companies, which do not have any limit on the members’ liability in the event of the company going into liquidation and being unable to pay its debts.
• Companies limited by guarantee, in which the liability of the subscribers is limited to the amount they have agreed to guarantee. These are commonly used by non-profit making organisations. 
• Partnerships, whereby persons come together to carry on a business with a view to a profit. A general partnership does not have its own legal personality and therefore cannot hold assets other than in the name of the partners. Other forms of partnership in England and Wales are limited partnerships (LP) and limited liability partnerships (LLP). In an LP, one or more partners have limited liability and one or more partners have unlimited liability. An LLP has a separate legal personality and all partners have limited liability.

The key sources of law governing the operation of a company incorporated in England and Wales include the following.

• Companies Act 2006 (the “Companies Act”) – the UK company law regime is set out in the Companies Act, which is the principal body of legislation governing the formation and management of companies in the UK. The Companies Act has been fully in force since 1 October 2009 and has been amended numerous times since then, most recently by the Economic Crime and Corporate Transparency Act 2023 (ECCTA). The ECCTA became law in October 2023, but its provisions are being commenced in stages.
• Insolvency Act 1986 – this Act contains provisions relating to the insolvency and winding-up of companies.
• Common law – this includes the parts of the law relating to English companies that have no statutory basis but have been established by judges through case law. This body of case law is known as the common law. 
• Financial Services and Markets Act 2000 (FSMA) – this Act sets out the UK regime for financial services and securities law. In particular, there are restrictions on offering securities and a requirement for companies to produce a prospectus when they offer their securities to the public (subject to certain exceptions). Again, this Act has been amended since it came into force. In June 2023, the new Financial Services and Markets Act 2023 became law. It will be brought into force on a phased basis and will implement significant reforms to the UK’s financial services regulatory regime, including revoking EU-derived law relating to financial services and granting enhanced rule-making powers to UK financial services regulators (including the Financial Conduct Authority (FCA), the main regulator of UK listed commercial companies).

In addition, general partnerships, LPs and LLPs are governed by the Partnerships Act 1890, the Limited Partnerships Act 1907 and the Limited Liability Partnerships Act 2000, respectively.

A key source of a company’s corporate governance requirements is its articles of association. The articles of association govern the internal affairs of the company and regulate a great range of matters (subject to the requirements of the Companies Act). These include the rights attached to the company’s shares (including voting rights), the powers of the directors, the regulation of shareholders’ and directors’ meetings, the alteration of capital and the transfer of shares.

The key corporate governance codes and principles in the UK include the following.

• The UK Corporate Governance Code (the “Governance Code”), which is produced and overseen by the Financial Reporting Council (FRC) (see 1.3 Corporate Governance Requirements for Companies With Publicly Traded Shares for further details on the Governance Code and its application). The current edition was published in July 2018. Following a consultation in 2023, in January 2024, the FRC published an updated Governance Code, which will replace the 2018 edition as from financial years starting on or after 1 January 2025 (except for amendments to one of the reporting provisions which will apply from financial years commencing on or after 1 January 2026). Except where otherwise stated in this chapter, the provisions of the 2018 Governance Code remain substantively the same in the 2024 Governance Code.
• The Wates Corporate Governance Principles for Large Private Companies (the “Wates Principles”), which sets out corporate governance principles for non-listed companies in the UK. They provide private companies with a framework for complying with reporting requirements imposed on very large UK-incorporated companies to state which corporate governance code, if any, they have applied and how that corporate governance code was applied. The most recent edition was published in December 2018.

In addition to the requirements of the sources identified in 1.2 Sources of Corporate Governance Requirements, companies whose shares are publicly traded need to consider the following.

• The Governance Code, which applies to premium listed companies, although other companies may also choose to apply it (see below on the changes being introduced by the listing regime review in summer 2024 and the impact this is expected to have on the application of the Governance Code). It sets out principles and provisions relating to board leadership and company purpose; division of responsibilities; composition, succession and evaluation; audit, risk and internal control; and remuneration. The provisions of the Governance Code apply on a “comply-or-explain” basis that allows for flexibility in the implementation of the provisions by listed companies. However, in practice, the majority of companies to which the Governance Code applies comply with all, or nearly all, of the provisions. The FRC has issued a number of publications which sit alongside the Governance Code:

a) Guidance on Board Effectiveness, which aims to assist companies implementing the Governance Code and includes guidance on the role of the chair, the executive directors and non-executive directors, as well as on issues including board composition and board evaluation;

b) Guidance on Audit Committees, which contains best practice guidelines relating to audit committees and the provisions of the Governance Code relating to audit;

c) Guidance on Risk Management, Internal Control and Related Financial and Business Reporting;

d) the Stewardship Code, which aims to improve long-term returns to beneficiaries by enhancing the quality and quantity of engagement between investors and companies (last updated in 2020 and being reviewed in 2024); and

e) the Minimum Standard for audit committees in relation to the external audit process and relations with the external auditor, which was adopted on a comply-or-explain basis for FTSE 350 companies with immediate effect in May 2023. 

In January 2024, the FRC published updated guidance which will replace the publications listed in (a) to (c) above, when the 2018 Governance Code is replaced by the 2024 Governance Code.

• The Listing Rules, which are issued by the FCA. They set out the requirements for obtaining a listing of securities on the Official List and the mandatory continuing obligations that apply once a company is listed. The listing requirements and continuing obligations which apply to a company depend on which listing category it is admitted to. The Listing Rules also govern the requirements in relation to transactions undertaken by a listed company and the disclosure of relevant information to investors. All companies with a premium listing of equity shares, regardless of where they are incorporated, are required under the Listing Rules to disclose how they have applied the principles of the Governance Code and to confirm that they have complied with the provisions of the Governance Code, or to the extent that they have not complied, explain what has not been complied with and the reasons for this. 

As part of a full-scale review of the UK listing regime, the FCA has proposed and consulted on significant changes to the eligibility requirements for listing and the continuing obligations for listed companies. In particular, the premium and standard listing segments are to be replaced with a single listing segment (the “equity shares (commercial companies)” category or “ESCC”), with one set of continuing obligations for listed commercial companies with equity shares (including the requirement outlined above to report against the Governance Code on a “comply-or-explain” basis); shareholder votes would no longer be required for significant transactions; and the Listing Rules overall would move from a more rules-based to a more disclosure-based regime. The final rules are expected to be published in the summer of 2024 and come into force shortly thereafter.

• The Transparency Rules, which are also issued by the FCA. They require companies to include a corporate governance statement in their annual report, setting out certain prescribed information. They also contain requirements in relation to audit committees (or the body responsible for performing similar functions), setting out the minimum functions the body must carry out and requirements as to the composition of that body. For the most part, the requirements contained in the Transparency Rules derive from the EU Transparency Directives in force when the UK was an EU member state.
• The UK version of the EU Market Abuse Regulation (UK MAR), which is part of UK law by virtue of the European Union (Withdrawal) Act 2018. UK MAR sets out requirements relating to the disclosure of inside information by listed companies and governs the related offences of insider dealing and unlawful disclosure of inside information. It also restricts when directors may deal in the company’s securities and requires directors (and persons closely associated with them) to disclose their share dealings to the relevant company. As noted in 1.2 Sources of Corporate Governance Requirements, the new Financial Services and Markets Act 2023 will, when the relevant sections are brought into force, revoke UK MAR, making way for the FCA to set the rules on the definition and disclosure of inside information. It should be noted though that it is not anticipated that significant changes will be made to the existing regime and that changes will not be proposed in the near future.
• The AIM Rules, which are published by the London Stock Exchange (LSE), apply to companies with shares admitted to trading on AIM (the market for smaller growing companies in the UK). Additional corporate governance requirements were introduced into the AIM Rules in 2018, requiring AIM companies to state on their website which recognised corporate governance code they apply and to report, on a “comply-or-explain” basis, against that code.

A number of institutional investor bodies, including The Investment Association and the Pensions and Lifetime Savings Association, produce their own corporate governance guidelines that listed companies need to be aware of, and The Chartered Governance Institute UK & Ireland also regularly publishes guidance notes on corporate governance issues.

The impact companies have on the environment (and vice versa) continues to be one of the dominant topics in corporate governance in the UK (see 2.2 Environmental, Social and Governance (ESG) Considerations). 

With many companies in the UK now required to make climate-related financial disclosures, focus is turning to transition plans, with the UK Transition Plan Taskforce (TPT) having published a comprehensive framework to help companies formulate and report on their transition plans.

There are also growing concerns among investors about “greenwashing”, which is becoming an increasing focus area for regulators.

Diversity and inclusion at board and senior management levels are also issues that the largest companies in the UK are being requested to focus on, in order to seek to improve how reflective these bodies are of society at large (see 4.3 Board Composition Requirements/Recommendations).

Executive compensation, and in particular pay gaps between executive and employee pay, is another major focus area for shareholders and other stakeholders (see 4.10 Approvals and Restrictions Concerning Payments to Directors/Officers and 4.11 Disclosure of Payments to Directors/Officers).

Environmental, social and governance (ESG) issues remain an area of significant focus for regulators, investors and other stakeholders in the UK.

Listed companies are required to include a statement in their annual financial report which sets out whether the report contains disclosures consistent with the recommendations and recommended disclosures of the Task Force on Climate-related Financial Disclosures (TCFD) and to explain why, if they do not. Separately, the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 amended the Companies Act to place requirements on certain publicly quoted companies and large private companies to incorporate TCFD-aligned climate disclosures in the non-financial and sustainability information statement which forms part of the strategic report in their annual report and accounts (see 6.1 Financial Reporting for more information on the strategic report).

The International Sustainability Standards Board (ISSB) issued sustainability disclosure standards (SDSs) in the summer of 2023, and the UK government is expected to endorse these to create UK SDSs during Q1 2025. The FCA will then consider the application of UK SDSs and the TPT’s framework for companies listed in the UK.

These climate-related disclosures supplement the existing requirements for certain listed companies to include prescribed non-financial information, including on environmental, workforce and social matters and respect for human rights, in their annual report (see 6.1 Financial Reporting for more information). 

Companies subject to the Governance Code or the Wates Principles are also required to report on certain non-financial aspects of their business and stakeholders. 

There are a number of other reporting requirements for companies relating to ESG issues. Companies that meet certain thresholds must publish statements explaining:

• how their directors have performed their duty under Section 172 of the Companies Act to have regard to the various stakeholder factors listed in Section 172(1) (including employees, customers and suppliers, the community and environment);
• how their directors have engaged with employees and had regard to UK employee interests, and the effect of that regard, including on the principal decisions taken by the company; and
• how their directors have 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.

For a number of years, commercial organisations operating in the UK that meet certain size requirements have been required under the Modern Slavery Act 2015 to publish a statement discussing the steps they have taken to ensure that slavery and human trafficking is not taking place in their business or supply chain. The UK government has indicated that it intends to strengthen this reporting obligation, including by mandating certain content requirements and requiring publication on a government-sponsored website, though the timing for any changes is not known.

The principal bodies and functions involved in the governance and management of a company in the UK are set out below.

• The board of directors – as discussed in 4.3 Board Composition Requirements/Recommendations, a company is required to appoint directors. The articles of association of the company will typically delegate management of the company to the directors, enabling them to execute all the powers of the company. The composition and activities of a board of directors will vary depending on the company’s circumstances. Publicly listed company boards will include a number of non-executive directors in accordance with the provisions of the Governance Code. For companies which are not listed, the board is usually comprised of executive directors who are involved in the day-to-day management of the business. An unlisted company may appoint non-executive directors to the board, and the Wates Principles encourage large private companies to consider this.
• The company secretary – it is a requirement under the Companies Act for a public company to have a company secretary. Private companies are not required to have a company secretary. The role of the company secretary is to support the board and advise on corporate governance issues.
• The executive management team – the responsibility of the executive team is to implement the board’s decisions and policies, and deal with the day-to-day management of the company. In unlisted companies, the executive team will often comprise of the same individuals as the board of directors. In a publicly listed company, the CEO and CFO will usually be directors of the company, with the remaining members of the executive team forming/sitting on an executive committee or equivalent.
• Shareholders – the shareholders are the owners of the company, and those who hold the board of directors to account. The articles of association and the Companies Act provide that a number of decisions are reserved for shareholders (see 3.2 Decisions Made by Particular Bodies).

Decision-making by a company is generally delegated to the board of directors in the company’s articles of association (although there are some decisions that are reserved for the shareholders). The key decisions made at each level of the management of a company are as follows.

• The board of directors – most decisions are made by the board of directors and will typically relate to the strategy and general management of the company. 
• The management team – where the management team is different to the board of directors, it will make decisions on the day-to-day business of the company pursuant to powers delegated by the board of directors. 
• Shareholders – under the Companies Act, there are a number of decisions (eg, amending the articles of association and certain share capital matters) that are reserved for shareholders and can only be passed by shareholder resolution. In some cases, these decisions can be delegated to the board of directors under a company’s articles of association.

The board of directors, management team and shareholders make decisions in the following ways.

• The board of directors – decisions by the board are taken in the form of board resolutions and are typically taken at a board meeting. The procedures for board meetings and the voting requirements for board resolutions are set out in the company’s articles of association. Resolutions are typically passed by a simple majority. Board resolutions may also take the form of written resolutions, meaning a board meeting does not have to be physically convened. When making decisions, the directors must have regard to their general duties under the Companies Act (see 4.6 Legal Duties of Directors/Officers).
• The management team – the management team implements decisions made by the board but acts through delegated authorities from the board. As such, decisions must be made within the terms of the delegation.
• Shareholders – decisions by shareholders are taken in the form of shareholder resolutions at a general meeting (or for private companies only, they may be taken by written resolution, in which case a physical meeting will not be required). In order to convene a general meeting to pass a shareholder resolution, a company must provide shareholders with notice of the meeting, including information about the issues that are to be resolved. The Companies Act stipulates the approval threshold for each type of shareholder decision to be passed, which is typically either a simple majority (required to pass an ordinary resolution) or a majority of not less than 75% (required to pass a special resolution). Most shareholder resolutions can be passed by an ordinary resolution though some, such as an amendment to the articles of association or a disapplication of pre-emption rights on an allotment of shares, require a special resolution. Public companies, but not private companies, are required under the Companies Act to hold an annual general meeting of shareholders (AGM). Standard business for an AGM includes the re-election of directors, appointment of an auditor and authorisation of certain matters in relation to a company’s share capital.

Requirements in Law

In terms of board structure, companies have a single-tier, unitary board. Executive and non-executive directors are both members of the board, in contrast to other jurisdictions where non-executive directors sit on a separate supervisory body.

Under the Companies Act, private companies must have at least one director, and public companies at least two directors and a company secretary. For all companies, directors must be over 16 years of age.

Once the relevant provisions of the ECCTA are brought into force, all directors will need to have their identity verified and it will be an offence for an unverified person to act as a director of a company.

Requirements Under the Governance Code

The Governance Code provides that at least half the board, excluding the chair, should be comprised of independent non-executive directors. The Governance Code also provides that companies should form three committees: a nomination committee, a remuneration committee and an audit committee. The nomination committee should lead the process for making and recommending appointments to the board. The main role of the audit committee is to monitor the integrity of the company’s financial statements and review the company’s internal controls. The remuneration committee should have responsibility for determining the policy for executive director remuneration and setting remuneration for the chair, executive directors and senior management. The remuneration and audit committees should be comprised entirely of independent non-executive directors and the nomination committee should have a majority of independent non-executive directors.

Directors can be executive (with a service contract) or non-executive. The board of directors will typically comprise the following.

• Chair of the board – their role is to chair board meetings and take on a leadership role to ensure the effectiveness of the board. The Governance Code states that the chair should not be the same person as the CEO, to ensure independence.
• Non-executive directors – the Governance Code provides that at least half the board, excluding the chair, should be independent as assessed by reference to various criteria set out therein. The Governance Code says that the role of non-executive directors is to challenge and advise the board on the company’s strategy and policies. The Wates Principles state that privately held companies should have due regard to the benefits independent non-executive directors can bring.
• Senior independent director (SID) – the Governance Code provides that the board should appoint one of the independent non-executive directors to be the SID, who should provide a sounding board for the chair and serve as an intermediary for the other directors and shareholders.
• Executive directors – executive directors on the board may include a CEO, CFO and chief operating officer (COO). There are no specific legal requirements regarding which executive directors a company should appoint. The number and type of executive directors appointed will depend on the business needs of the company. The role of the executive directors is to implement the decisions made by the whole board and to discharge overall managerial responsibilities. For example, a CEO is typically responsible for the overall management of the company, while a CFO is responsible for the company’s accounts and finances, and a COO is responsible for the overall operations and administration of the company. The executive directors will be supported in their role by members of the executive team, who are not part of the board.

Subject to the provisions of the Companies Act, the articles of association may prescribe a maximum or minimum number of directors. Subject to certain requirements, corporate directors are currently permitted, but at least one director must be an individual. However, an ECCTA commencement order will bring into force a prohibition on the use of corporate directors, except in limited circumstances. 

There are no formal qualifications required under the Companies Act in order to be appointed as a director. The Governance Code provides that the directors have appropriate skills, experience, independence and knowledge of the business to discharge their responsibilities properly and effectively. The Governance Code also contains provisions on diversity and inclusion with regard to both board appointments and succession plans.

There has been a focus on board diversity for a number of years in the UK and various initiatives have been launched in this area. These include the FTSE Women Leaders Review, which recommends that by 2025, for FTSE 350 companies, a minimum of 40% of both the board of directors and leadership team should be female. In addition, the Parker Review set a target for listed companies to have at least one director from an ethnic minority background. For FTSE 100 companies the target date set was the end of 2021; for FTSE 250 companies this target should be met by the end of 2024. The Parker Review also requested FTSE 350 companies to set themselves a target for the percentage of their senior management which self-identifies as being from an ethnic minority group, which they should meet by December 2027. Aligning with these reviews, under the Listing Rules, listed companies are required to make certain disclosures in relation to gender and ethnic diversity at board and executive management level, including reporting on a “comply-or-explain” basis against diversity targets for the representation of women and minority ethnic groups on the board and providing numerical disclosures on the diversity of the board and executive management. Both the FTSE Women Leaders Review and the Parker Review have extended their recommendations regarding board diversity to the top 50 private companies in the UK (as determined by sales).

The Companies Act sets out the requirements for appointing directors upon incorporation of a company but is silent on subsequent appointments. Therefore, the process will be set out in the company’s articles of association, which usually stipulate that directors can be appointed by a decision of the board of directors or by shareholders, in each case by simple majority. 

In line with the provisions of the Governance Code, listed companies typically have a nomination committee that has responsibility for recommending board appointments. Under the Governance Code, all directors should stand for re-election annually at the company’s AGM, regardless of the size of the company (see 1.3 Corporate Governance Requirements for Companies with Publicly Traded Shares for details of the application of the Governance Code). 

There are a number of ways a director can be removed from office. The Companies Act provides that a director may be removed by ordinary resolution (before the expiration of the director’s term). If a director is to be removed before the expiration of their term, the Companies Act sets out a number of protections that must be complied with, including that the ordinary resolution cannot be a written resolution and that the director has the right to be heard by the shareholders at the general meeting. In addition, a company’s articles of association typically set out grounds for removal.

Independence

There are no requirements at law regarding independence of directors. However, the Governance Code provides that at least half the members of the board should comprise independent non-executive directors, determined in accordance with the Governance Code (see 1.3 Corporate Governance Requirements for Companies with Publicly Traded Shares for details of the application of the Governance Code). Circumstances which the Governance Code considers are likely to impair, or appear to impair, non-executive directors’ independence include whether they:

• have been employees of the company or group within the last five years;
• have had a material relationship with the company in the last three years;
• have close family ties with any of the company’s advisers, directors or senior employees;
• have served on the board of the company for more than nine years; or
• represent a significant shareholding. 

However, a company may, notwithstanding the existence of these circumstances, determine a director to be independent. If they do so, this should be explained in the company’s annual report.

Conflicts of Interest

Under the Companies Act, directors have a duty to avoid situations in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. The duty is stated to apply, in particular, to the exploitation of any property, information or opportunity. A director will therefore need to consider carefully whether an opportunity rightfully belongs to the company before exploiting it personally.

There are a number of exceptions to this duty, including where the matter has been authorised by the company’s directors, where the company has given authority to the directors for something to be done or where the articles of association contain a provision for dealing with conflicts and the directors are acting in accordance with that provision.

Directors have three related duties, including the duty not to accept benefits from third parties, the duty to declare any interest in a proposed transaction and the duty to declare an interest in an existing transaction (see 4.6 Legal Duties of Directors/Officers). These interests would typically be declared at the board meeting authorising the transaction.

The rules governing directors’ duties are set out in the Companies Act.

The Companies Act includes a statutory statement of the duties a director owes to the company. The statutory directors’ duties are: 

• to act within the powers conferred by the company’s constitution; 
• to promote the success of the company for the benefit of the members as a whole; 
• to exercise independent judgment; 
• to exercise reasonable care, skill and diligence; 
• to avoid conflicts of interest; 
• not to accept benefits from third parties; and 
• to disclose an interest in a proposed transaction with the company. 

The duties apply to all the directors of a company. However, the statutory statement of duties does not cover all the obligations of a director. Other obligations are contained throughout the Companies Act, such as the duty to deliver accounts and the obligation to disclose an interest in an existing transaction with the company. There are also obligations contained in other statutes; for example, the Insolvency Act 1986. In addition, directors have a general fiduciary duty to their shareholders that arises from the relationship of trust and confidence between them and their shareholders.

The directors՚ statutory duties as set out in the Companies Act are owed directly to the company (not to any individual shareholder(s) or to any stakeholder(s)). However, embedded within them is a requirement to have regard to the interests of a number of stakeholders. The duty to promote the success of the company requires directors to have regard to the interests of its employees, community and the environment, and to foster the company’s relationships with suppliers, customers and others when considering this duty.

In addition, the directors owe a fiduciary duty under the common law to shareholders to provide them with information that is sufficient, clear and not misleading, to enable them to make an informed decision as to how to vote at a shareholder meeting. Directors also have a common law duty to consider the interests of the company’s creditors when a company is facing actual, imminent or probable insolvency (ie, the “creditor duty”), which was affirmed by the Supreme Court in a 2022 court judgment.

As a general rule, a company is the only person able to bring a claim against one of its directors for breach of duty, since the duty is owed by the directors to the company itself. This means that a shareholder (acting on their own behalf) cannot bring an action against a director for breach of duty. This results in practical difficulties, in so far as the board is unlikely to approve the company bringing an action against one of its own for breach of duty. To mitigate this, the Companies Act contains a statutory procedure pursuant to which a shareholder may, in certain circumstances, bring a derivative claim on behalf of the company. Further detail on such actions is set out in 5.4 Shareholder Claims.

In addition to liability relating to breaches of duty, directors may also be liable for breaches of statutory provisions within the Companies Act, such as those relating to unlawful distributions or unlawful directors’ remuneration payments. In certain circumstances, directors may also be subject to criminal penalties, particularly in relation to health, safety and environmental matters; competition and anti-competitive behaviour; and bribery, corruption and fraud.

Directors can, to an extent, protect themselves from the liabilities arising from their role; however, there are some limitations on public policy grounds. A company may generally indemnify directors against liability incurred towards a third party in the performance of their role. However, companies may not indemnify their directors for breaches of duties or negligence. Similarly, there are limitations to the extent to which a company can indemnify directors in circumstances where criminal proceedings are being brought against them. 

A company may also purchase D&O insurance for directors.

At law, approval by shareholders is required for any director’s service contract for which the guaranteed term is longer than two years. Failure to obtain approval makes the relevant contractual provision void and allows the company to terminate the service contract at any time by giving reasonable notice.

A quoted company (that is, a company whose equity share capital is listed on the Official List in the UK, a company officially listed in an EEA state or admitted to dealing on NASDAQ or the NYSE) may not make any remuneration payment to a director or former director unless that payment is in accordance with its latest remuneration policy approved by shareholders (or the payment has been separately approved by shareholders). The directors’ remuneration policy is a binding policy and must be approved by an ordinary resolution of shareholders at least once every three years. In addition, shareholders are required to vote annually on a statement disclosing the directors’ remuneration for the previous year. This vote is indicative and does not have the effect of clawing back any payment that has already been made. However, if the directors’ remuneration report is not approved by shareholders, the company is required to table a new remuneration policy the following year. These requirements also apply to non-quoted traded companies, that is, companies with voting shares admitted to trading on a UK regulated market or an EU regulated market.

The Governance Code also places additional reporting requirements on a company’s remuneration committee in relation to the pay of directors and senior managers. The remuneration committee is required to provide a full description of its work in the annual report, including an explanation of the strategic rationale for remuneration decisions, the application of discretion to remuneration outcomes and details of shareholder and workforce engagement on the remuneration policy.

A quoted company must also publish the pay difference between its CEO and its average UK employee.

A shareholder’s relationship with the company in which they hold shares is a contractual one. Under the Companies Act, the articles of association bind the company and its members to the same extent as if they were covenants on the part of the company and each member to observe the provisions. The articles of association therefore constitute a form of contract between the company and its shareholders, and between the shareholders themselves. The shares held by the members give a right of participation in the company on the terms of the articles of association. 

A shareholder does not have a proprietary interest in the underlying assets of a company. Shareholders are entitled in proportion to their respective shareholdings to a share of the distributed profits of the company and, on a winding-up, to the surplus assets of the company after the company’s creditors have been repaid in full. Shareholders are not liable for the acts of the company, except in very limited circumstances when the corporate veil can be pierced, where a company’s limited liability status is set aside and a shareholder is liable for the company’s acts.

The articles of association usually delegate to the directors the exercise of the powers of the company, save for those powers that are required by the articles or the Companies Act to be exercised by the shareholders in a general meeting or by shareholder resolution. Therefore, it is rare for shareholders in their capacity as such to have involvement in the day-to-day running of the company. Shareholders in joint venture companies may agree contractually that certain actions will not be taken by the company unless agreed by a particular number, or majority, of shareholders.

If desired, shareholders can direct the management of a company to take, or refrain from taking, certain actions in the business by directing the directors to call a general meeting. Shareholders must hold more that 5% of the voting rights to make this request and must explain the general nature of the issues they wish to raise at the meeting. Directors will not be required to table a resolution if it is defamatory, frivolous or vexatious, or if it would not be effective if passed.

A public company is required to hold an AGM every year within six months of its financial year-end. There is no statutory requirement for a private company to hold an AGM (unless they are traded companies) but there may be an express requirement to hold one in the company’s articles of association. For public companies, 21 clear days’ notice of the AGM is required, unless all who are entitled to attend and vote consent to shorter notice being given.

Any shareholder meeting other than an AGM is a general meeting. The minimum statutory notice period required for a general meeting of a private company (which is not a traded company) is 14 clear days. For public companies, the minimum statutory notice period for general meetings other than AGMs is 14 clear days, however it is 21 clear days for public companies which are traded companies. Traded companies can reduce the minimum notice period for these meetings to 14 clear days if (i) shareholders have passed an annual resolution to shorten the notice period to 14 clear days, and (ii) the company allows shareholders to appoint a proxy by electronic means via a website. 

Shareholders holding 90% (in the case of private companies) or 95% (in the case of public companies) of the nominal value of shares giving a right to attend and vote may agree to shorter notice of general meetings. The articles of association may specify a longer notice period (but the articles of association cannot specify a shorter period).

Until recently, shareholder meetings were almost exclusively physical meetings and there were very few examples of virtual-only meetings (that is, a shareholder meeting held exclusively through the use of online technology, with no physical meeting) or hybrid shareholder meetings (that is, a physical shareholder meeting with the option for electronic participation through the use of online technology). 

Whilst certain relaxations were accepted during the COVID-19 pandemic, these relaxations no longer apply and, in the absence of such relaxations, there are questions as to the validity of virtual-only shareholder meetings under English law. Investor bodies, such as the Investment Association, have expressed concerns over virtual-only meetings. These bodies are generally more amenable to hybrid meetings, though there are practical issues with hybrid meetings which limit their popularity with companies. In all instances, companies are required to comply with the provisions of their articles of association in relation to proceedings at shareholder meetings. Many companies have therefore amended their articles of association in order to facilitate the holding of hybrid shareholder meetings should the need for such flexibility arise again in the future.

As noted in 4.8 Consequences and Enforcement of Breach of Directors’ Duties, as a general rule, a company is the right person to bring a claim against one of its directors for breach of duty, since the duty is owed to the company. However, the Companies Act contains a statutory procedure under which a shareholder may bring a derivative claim – that is, proceedings on behalf of a company – against a director for negligence, default, breach of duty or breach of trust.

The factors that the court will look at when deciding whether to allow a derivative claim include whether a director who is acting to promote the success of the company would proceed with it, whether the relevant act or omission was previously authorised by the company, whether the breach has been ratified, and the views of independent shareholders.

In addition, shareholders can apply to the court for protection against unfair prejudice if they believe the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members or a group of its members. 

Claims against the company may also arise if a publicly traded company does not behave properly in relation to the treatment of the release of information to the market. In particular, under Section 90A of the FSMA, a company may be liable to pay compensation to a person who acquires, continues to hold or disposes of the company’s securities in reliance on information disclosed by the company using recognised means and who suffers loss in respect of the securities as a result of either any untrue or misleading statement in that published information, or the omission from that published information of any information required to be included in it. The company is only liable, however, if a person discharging managerial responsibilities knew that the statement was untrue or misleading, or was reckless as to whether it was, or knew the omission was a dishonest concealment of a material fact. 

Any shareholder whose interest in the voting rights of a publicly traded company reaches, exceeds or falls below 3%, 4%, 5% and each 1% threshold thereafter must disclose this to the company, which must notify the market. Where the company is listed on the LSE’s Main Market, the shareholder must also send a notification to the FCA.

The Takeover Code (which governs takeovers and mergers in the UK) requires that for any public listed company, if any person, or group of persons acting in concert, acquires 30% or more of the company’s voting rights, they will trigger an obligation to make a general takeover bid to acquire the remainder of the shares.

All companies incorporated in the UK are required to maintain a register of persons with significant control (PSCs), which is effectively a register of beneficial ownership, and register the details of its PSCs with Companies House. It is worth noting that the ECCTA will, when the relevant provisions are brought into force, introduce identity verification requirements for all existing and new PSCs and new duties for companies to collect and report information about their PSCs, with a view to improving transparency around ownership and control in UK corporate structures. Disclosure obligations have also been extended in relation to the beneficial ownership of overseas companies which own, or wish to own, land or property in the UK and which are now required to be entered on a register held by Companies House.

Companies are required to publish an annual report and accounts for each financial year, unless an exemption applies. A public company must do so within six months of the end of its financial year, whereas a private company must do so within nine months. The Companies Act sets out the content requirements of the annual report and accounts, which is supplemented by various regulations, including The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended). Generally, the Companies Act requires the annual report and accounts to comprise a directors’ report, financial statements and, for companies above a certain size threshold, a strategic report. Quoted companies and traded companies are also required to include a directors’ remuneration report. Listed companies also include a corporate governance statement discussing their corporate governance arrangements. 

The purpose of the strategic report is to inform members of the company and help them assess how the directors have performed their duty under Section 172 (duty to promote the success of the company). It must contain a fair review of the company’s business and a description of the principal risks and uncertainties facing the company. It must also contain an analysis of the development and performance of the company’s business during the financial year and the position of the company’s business at the end of the year, consistent with the size and complexity of the business. Certain companies must also include in the report a statement of how the directors applied the principles of Section 172 during the financial year, information on their environmental impact, workforce gender diversity statistics, and board consideration of employee and supplier matters. The strategic report may also contain key performance indicators on various financial and non-financial matters. Companies which are “public interest entities” (that is, companies whose transferable securities are admitted to trading on a regulated market, insurers and credit institutions) with more than 500 employees, are required to include prescribed non-financial information in their strategic report. The required information includes: 

• disclosures in relation to anti-corruption and anti-bribery matters, environmental matters, employees, social matters and respect for human rights; 
• a description of the company’s policies in relation to the non-financial matters; 
• the principal risks relating to the non-financial matters arising in connection with the company’s operations; and
• TCFD-aligned climate-related financial disclosures.

The climate-related financial disclosure requirements also apply to all companies with a turnover of more than GBP500 million and over 500 employees. 

The directors’ report is now, in practice, a repository for a number of miscellaneous statutory disclosures, including in relation to the directors, company constitution, share capital and political donations. 

See 4.11 Disclosure of Payments to Directors/Officers for discussion of the content requirements of the directors’ remuneration report; and see 6.2 Disclosure of Corporate Governance Arrangements for discussion of the content requirements of the corporate governance statement. 

For listed companies, the content requirements set out above are supplemented by the provisions contained in the Transparency Rules. In particular, these provide that the annual report must include consolidated audited accounts, a management report and a responsibility statement. The Transparency Rules require a company to publish an annual report as soon as possible and in any event within four months of the end of each financial year. The Transparency Rules also require listed companies to produce a half-yearly report within three months of the half-year end comprising a condensed set of financial statements, an interim management report and responsibility statements. The Transparency Rules also set out the requirements in respect of the format for annual reports, which include that the annual report must be prepared and published in structured electronic format.

The Governance Code does not have the force of law but, as noted in 1.3 Corporate Governance Requirements for Companies With Publicly Traded Shares, pursuant to the Listing Rules, premium listed companies are required to report annually on how they have applied the principles of the Governance Code in a manner that would enable shareholders to evaluate that application and state whether they have complied with the provisions of the Governance Code, and if not, explain the reasons for this.

This disclosure obligation will apply to all companies in the ESCC category under the FCA’s proposals once this category replaces the premium listing category.

The Governance Code also sets out certain information that should be included in the corporate governance statement contained in the annual report. This includes discussion of matters such as board composition, the remuneration of directors and the relationship between a company and its auditor.

Private companies over a certain size are required to include in their annual report a statement on the company’s governance arrangements. 

A company must notify Companies House (the registrar of companies) as and when there are any changes to its particulars, such as the registered office, directors or changes in share capital. In addition, all special resolutions must be filed at Companies House within 15 days of being passed, and the Companies Act specifies certain ordinary resolutions that are also required to be filed at Companies House (eg, an ordinary resolution authorising directors to allot shares). All documents filed with Companies House are publicly available for free online.

A company must also file certain information with Companies House, on an annual basis. This includes the annual report and accounts. The annual filing requirements also include a confirmation statement confirming information in respect of its shareholders, directors and PSCs and confirming that the intended future activities of the company are lawful.

A company is required to appoint an external auditor when preparing its annual accounts unless it is subject to an exemption. Small and dormant companies are exempt from audit unless a sufficient number of members require an audit. A company will be classed as small if it is not exempt and meets two of the following three thresholds:

• it must have an annual turnover of not more than GBP10.2 million;
• it must have a balance sheet total of not more than GBP5.1 million; or
• its average number of employees must be not more than 50.

It is worth noting that the government has announced that it intends to introduce legislation in the summer of 2024 to raise the monetary threshold used for the classification of companies by approximately 50%.

Directors are responsible for the preparation of the company accounts in accordance with all relevant law and regulations. Auditors report on whether the accounts meet the requirements as asserted by the directors, but this does not relieve the directors of their responsibilities.

There are additional requirements that govern the relationship between companies which are “public interest entities” (that is, companies whose transferable securities are admitted to trading on a regulated market, insurers and credit institutions) and their auditors, such as the mandatory rotation of auditors after a maximum of 20 years, the requirement to run a tender process of audit services and the auditor being prevented from undertaking certain non-audit services for the company.

The Governance Code places requirements on premium listed companies to confirm within their annual report that they have carried out a robust assessment of the company’s emerging and principal risks. This disclosure obligation will apply to all companies in the ESCC category under the FCA’s proposals once this category replaces the premium listing category. Directors are also required to:

• explain how risks are being managed or mitigated;
• explain how they have assessed the prospects of the company; and
• state whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of the board’s assessment.

In addition, to assess the company’s financial risks and controls, listed companies are required to appoint an audit committee of non-executive directors, whose role is to ensure that shareholder interests are properly protected in relation to financial reporting.