Corporate Governance 2020 Comparisons

Last Updated June 22, 2020

Contributed By Herbert Smith Freehills

Law and Practice


Herbert Smith Freehills operates from 27 offices across Asia Pacific, Europe, the Middle East, Africa and North America. The firm is at the heart of the new global business landscape, providing premium quality, full-service legal advice. Herbert Smith Freehills provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors, including banks, consumer products, energy, financial buyers, infrastructure and transport, mining, pharmaceuticals and healthcare, real estate, TMT, and manufacturing and industrials. The dedicated corporate governance advisory team comprises governance specialists with technical expertise who provide practical advice to clients on the full spectrum of governance issues. The team advises listed and privately held companies on the regulatory, reporting and governance standards applicable to them. The firm draws on its wide-ranging experience to advise on legal and regulatory requirements, emerging trends and market best practice.

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 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.
  • Societas Europaea (SE), which can be used by companies or groups with operations in more than one member state of the European Economic Area (EEA). Following the UK’s departure from the EU, at the end of the transition period, all existing SEs registered in the UK will have the option to convert into "United Kingdom Societates" or re-register with another EU jurisdiction, and it will not be possible to form new SEs in the UK.
  • Partnerships, whereby persons come together to carry on a business with a view to a profit. It does not have its own legal personality and therefore cannot hold assets other than in the name of the partners. Other forms of partnership include a limited partnership (LP) or a limited liability partnership (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 legislation governing the operation of a company incorporated in England and Wales includes the following.

  • Companies Act 2006 (Companies Act) – the UK company law regime is set out in the Companies Act 2006, 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.
  • 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 has no statutory basis but has 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).

In addition, 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 will be 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 include the following:

  • the UK Corporate Governance Code (the "Governance Code"), which applies to premium listed companies (see 1.3 Corporate Governance Requirements for Companies with Publicly Traded Shares for further details); and
  • the Wates Corporate Governance Principles for Large Private Companies (the "Wates Principles"), which provide a framework for large privately owned companies to consider and report on their corporate governance arrangements (see 2.1 Key Corporate Governance Rules and Requirements for further details).

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 is produced and overseen by the Financial Reporting Council (FRC). The Governance Code applies to premium listed companies and 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 Listing Rules (described below) require premium listed companies to explain how they have applied the principles set out in the Governance Code and so, to that extent, the principles contained in the Governance Code are compulsory for premium listed companies. In contrast, the provisions of the Governance Code apply on a "comply or explain" basis that allows for some flexibility in the implementation of the provisions by listed companies. In practice, the majority of companies to which the Governance Code applies comply with all, or nearly all, of its provisions.
  • The Listing Rules, which are issued by the Financial Conduct Authority (FCA). They set out the requirements for obtaining a listing of securities on the Official List and mandatory continuing obligations that apply once a company is listed. These rules also govern the need for shareholder approval of significant transactions and the disclosure of relevant information to investors. The listing and continuing obligations which apply to a company depend on whether it has a premium or standard listing. All companies with a premium listing of equity shares, regardless of where they are incorporated, are required under the Listing Rules to make a two-part statement in relation to the Governance Code in their annual report. In the first part of the statement, companies must disclose how they have applied the principles of the Governance Code and in the second part of the statement, companies need 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 company's reasons for non-compliance.
  • The Transparency Rules, which are also issued by the FCA. For the most part, the Transparency Rules implement the provisions of the EU Transparency Directives. 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.
  • The EU Market Abuse Regulation (MAR), which 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. MAR 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. Following the UK’s departure from the EU at the end of the transition period, it is expected that the substantive provisions of MAR will apply through domestic UK legislation.
  • The AIM Rules, which are published by the London Stock Exchange (LSE). These 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.

Listed Companies

A number of organisations produce guidance on listed company corporate governance issues in the UK. In particular, the FRC has issued:

  • 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;
  • Guidance on Audit Committees, which contains best practice guidelines relating to audit committees and the provisions of the Governance Code relating to audit;
  • Guidance on Risk Management, Internal Control and Related Financial and Business Reporting; and 
  • the Stewardship Code, which aims to improve long-term returns to beneficiaries by enhancing the quality and quantity of engagement between investors and companies.

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 ICSA: The Chartered Governance Institute regularly issues guidance notes on corporate governance issues.

Large Privately Held Companies

The Wates Principles provide very large private companies with a framework for complying with reporting requirements, which apply to accounting periods that began on or after 1 January 2019. The reporting requirements require very large UK-incorporated companies to state which corporate governance code, if any, they have applied and how that corporate governance code was applied. This is the first attempt to introduce governance code provisions for non-listed companies in the UK.

There has been considerable focus in the UK on the purpose and effectiveness of the statutory audit process and the regulation of the audit market in the UK. This has been driven by a number of corporate failures as well as the perceived widening of the "audit expectations gap", that is the difference between what users expect from an audit and the reality of what an audit entails. As a result, a number of high-profile reviews have been commissioned into the operation and regulation of the statutory audit market including the following.

  • The Kingman Review: In December 2018, Sir John Kingman published an Independent Review of the FRC, the body which regulates the UK audit sector. The review discussed the strengths and weaknesses of the FRC including in relation to its structure, culture and processes, and its powers and resources. It sets out 83 recommendations, including that the FRC be replaced with an independent statutory regulator called the Audit, Reporting and Governance Authority (ARGA).
  • Competition and Markets Authority (CMA) Review: In April 2019, the CMA published its final report on its statutory audit services market study. The report identified a number of issues with the operation of the statutory audit market. It proposed a number of remedies including an operational split between the audit and non-audit practices of the biggest UK audit firms, joint audits for listed companies in the FTSE 350 index and more oversight and regulation of audit committees by ARGA.
  • The Brydon Review: Sir Donald Brydon’s independent review into UK audit market considered a range of issues including the scope and purpose of audit; the audit product; and the legal responsibilities and liabilities of the company and the auditor. His report was published in December 2019 and made recommendations including in relation to: the audit process and audit report; the role of shareholders and other stakeholders; and assurance, resilience and internal controls. 

The UK government has consulted on these recommendations, and legislation to implement the proposals is expected in due course.

Environmental, social and governance (ESG) issues are becoming increasingly high profile in the UK. Institutional investors and stakeholders alike are focussed on ESG issues including climate-change, workforce and supply chain issues. Recent amendments to the UK Stewardship Code, which aims to improve long-term returns to beneficiaries by enhancing the quality and quantity of engagement between investors and companies, place considerable emphasis on ensuring that environmental, social and governance factors, including climate change, are taken into account.

Climate-related matters and disclosures are a significant focus for investors, regulators and others, in particular following the Paris Climate Agreement and publication of the recommendations produced by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) in June 2017 to help businesses disclose climate-related financial information in their financial reports (the TCFD Recommendations). The FCA is consulting on rules that would introduce a new disclosure requirement based on the TCFD Recommendations for listed companies. This is in addition to the existing requirements for certain listed companies to include prescribed non-financial information, including on environmental matters, employees, 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. Workforce and social matters are also an area of considerable investor focus, and even more so in light of the COVID-19 pandemic (see 2.4 The Impact of COVID-19 on Governance), in particular regarding the ways in which boards consider and assess workforce matters. Workforce engagement was a key theme when the Governance Code was updated. ESG issues relating to supply chain management, in particular regarding human rights, also remain an area of focus. For a number of years commercial organisations operating in the UK that meet certain size requirements have been required 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, as required by the Modern Slavery Act 2015. 

New reporting requirements for companies relating to ESG issues were recently introduced in the UK. Companies that meet certain thresholds must now 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 how the directors have had regard to UK employee interests, and the effect of that regard, including on the principal decisions; 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.

The consequences of the COVID-19 pandemic and the associated public health measures introduced in the UK present a number of challenges from a corporate governance perspective. Business as usual decision making, disclosures and corporate reporting continue to be disrupted. Companies need to ensure in particular that robust and effective decision-making processes remain in place and that they fulfil their legal and regulatory obligations to investors and other stakeholders.

The duties of directors discussed in 4.6 Legal Duties of Directors/Officers remain in force and effect, however satisfying these duties given the uncertainties arising from the pandemic continues to be a challenge for directors. Given the restrictions on movement and social distancing rules, physical board meetings have been replaced by virtual meetings or decisions in writing.

The restrictions on travel, movement and gatherings have also led to challenges for companies calling and holding shareholder meetings (see 5.3 Shareholder Meetings). Most company meetings are taking place with the minimum quorum necessary (typically directors or employees who are shareholders or appointed as proxies) to consider and dispatch necessary business, with voting on a poll to take account of all shareholder proxy votes. Shareholders are referred to the restrictions on gatherings, which precludes their attendance, and are encouraged to vote by way of proxy. The government has proposed legislation which would in effect codify these practices for a limited time. In lieu of a physical shareholder meeting, companies are putting in place a variety of mechanisms for shareholder engagement.

There has also been disruption to usual corporate reporting cycles (as described in 6Corporate Reporting and Other Disclosures). The UK Registrar of Companies has said that, upon request, it will grant extensions to the filing deadline for annual reports and accounts. For listed companies, the FCA has published guidance which in effect extends the period in which companies can publish their annual report and accounts and half-yearly reports. It is not yet clear how long these dispensations will be in place for.

The principal bodies and functions involved in the governance and management of a company in the UK are as follows.

  • 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 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 the same individuals as the board of directors. In a publicly listed company, the chief executive officer (CEO) and chief financial officer (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).

The decision-making of a company is generally delegated to the board of directors (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 (for example amending the articles of association and certain share capital matters) that are reserved for shareholders and that 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 voting requirements for board resolutions are set out in the company's articles of association and 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, 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 not less than 75% of shareholders (required to pass a special resolution). Most shareholder resolutions can be passed by an ordinary resolution while others, such as a disapplication of pre-emption rights on an allotment of shares, require a special resolution. Public companies are required to hold an annual general meeting of its shareholders (AGM). Standard business for an AGM includes the re-election of directors, appointment of an auditor and authorising certain matters in relation to a company's share capital.

Requirements in Law

Under the Companies Act, private companies must have at least one director and public companies at least two directors and a company secretary.

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.

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 – the role of the chair is to chair board meetings and take on a leadership role to ensure the effectiveness of the board. The Governance Code recommends that the chair must not be the same person as the chief executive officer, to ensure independence.
  • Non-executive directors – the Governance Code provides that at least half the board, excluding the chair, 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 – the Governance Code provides that the board should appoint one of the independent non-executive directors to be the senior independent director, who should provide a sounding board for the chair and serve as an intermediary for the other directors and shareholders.
  • Executive directors – executive directors may include a chief executive officer (CEO), chief financial officer (CFO) and chief operational officer (COO). All or some of these may be board members. There are no specific legal requirements regarding which executive directors a company should appoint and the number or type of executive directors will depend on the business needs of a company. The role of the executive directors is to implement the decisions made by the board of directors 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.

Subject to the provisions of the Companies Act, the articles of association may prescribe a maximum or minimum number of directors. Corporate directors are currently permitted, but at least one director must be an individual.

The Governance Code recommends that the directors have appropriate skills, experience, independence and knowledge of the business to discharge their responsibilities properly and effectively. The Governance Code also recommends that directors are appointed with regards to the benefits of diversity, including diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.

There has been a focus on board diversity for a number of years in the UK and a number of initiatives launched in this area including the Hampton-Alexander Review, which recommends that by 2020 a minimum of 33% of a FTSE 350 company's board of directors should be female and a minimum of 33% of a FTSE 100 company's executive committee and direct reports to the executive committee should be female, and the Parker Review which recommends that each FTSE 100 board should have at least one director of colour by 2021 and each FTSE 250 company board should have one by 2024.

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.

Listed companies typically have a nomination committee that has responsibility for recommending board appointments. The Governance Code recommends that all directors of premium listed companies stand for re-election annually at the company's annual general meeting regardless of the size of the company.

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 his or her 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.


There are no requirements at law regarding independence of directors. However, the Governance Code provides that at least half the members of the board of a premium listed company should comprise independent non-executive directors, determined in accordance with the Governance Code. Independent non-executive directors should not have been an employee of the company or group within the last five years, should not have had a material relationship with the company in the last three years, should not have close family ties with any of the company's advisers, directors or senior employees and should not 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.


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.

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:

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

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, which results in practical difficulties, in so far as the board is unlikely to approve the company bringing an action against one of their own for breach 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 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 have recently been extended to non-quoted traded companies, that is companies with voting share admitted to trading on a regulated market in an EEA state.

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 strategic rationale in making remuneration decisions, including explaining why the remuneration is appropriate; how the committee addressed issues such as clarity, risk and proportionality; and whether any shareholder engagement or workforce engagement has been sought. 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 he holds 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.

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. The 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 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).

Shareholder meetings are almost exclusively physical meetings. There are very few examples of virtual, or electronic, shareholder meetings (that is, a shareholder meeting held exclusively through the use of online technology, with no physical meeting). Increasingly articles of association permit companies to hold virtual shareholder meetings, that is, a physical meeting where shareholders can also participate online as an alternative to attending the physical location in person, though these are rare in practice.

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 Financial Services and Markets Act 2000, a company is liable to pay compensation to a person who acquires, continues to hold or disposes of the 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 then only liable 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.

The Takeover Code requires that for any public listed companies, 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.

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, for example, 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, a strategic report and financial statements. 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 greenhouse gas emissions and energy consumption, 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. Following implementation of the EU Non-Financial Reporting Directive in the UK, "public interest entities" (that is, companies whose transferable securities are admitted to trading on an EU-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; and the principal risks relating to the non-financial matters arising in connection with the company's operations.

The directors' report is now effectively 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 after 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.

A company must also file certain information with the UK companies registry, 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 persons who have significant control over the company.

Pursuant to the Listing Rules, companies are required to state how they have applied the principles of the Governance Code in a manner that would enable shareholders to evaluate how the principles have been applied and state whether they have complied with the provisions of the Governance Code, and if not, explain why.

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 including board composition, the remuneration of directors and the relationship between a company and its auditor. The Governance Code does not have the force of law but premium listed companies are required to report annually on their compliance and explain any extent to which they have not complied, providing reasons for that non-compliance.

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 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 required to be filed at Companies House (eg, an ordinary resolution authorising directors to allot shares). All documents filed with Companies House will be publicly available for free online.

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; and
  • its average number of employees must be not more than 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.

The EU Audit Regulation also governs the relationship between public listed companies and their auditors, and applies additional requirements to the relationship between auditors and the companies, such as the mandatory rotation of auditors after a maximum of 20 years and the requirement to run a tender process of audit services. These requirements are expected to remain substantively the same notwithstanding the UK’s exit from the EU.

See 2.2 Current Corporate Governance Issues and Developments for anticipated future developments in this area.

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 risks. In particular, directors must include a statement explaining how they have had regard to the need to foster the company's business relationships with suppliers, customers and others, and a statement explaining how the directors have engaged with employees and have regard to employee interests. Directors are also required to confirm that they have assessed the company's "emerging risks" in addition to its principal risks and that they have assessed the prospects of the company, and have a reasonable expectation that it will continue in operation and meet its liabilities as they fall due over the period of its assessment.

In addition, to assess the company's financial risks and controls functionally, premium 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.

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Herbert Smith Freehills operates from 27 offices across Asia Pacific, Europe, the Middle East, Africa and North America. The firm is at the heart of the new global business landscape, providing premium quality, full-service legal advice. Herbert Smith Freehills provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors, including banks, consumer products, energy, financial buyers, infrastructure and transport, mining, pharmaceuticals and healthcare, real estate, TMT, and manufacturing and industrials. The dedicated corporate governance advisory team comprises governance specialists with technical expertise who provide practical advice to clients on the full spectrum of governance issues. The team advises listed and privately held companies on the regulatory, reporting and governance standards applicable to them. The firm draws on its wide-ranging experience to advise on legal and regulatory requirements, emerging trends and market best practice.