UK: Recent Changes In Reporting Directors´ Interests In Shares

There have been a number of changes this year affecting how companies report interests in shares held by their directors and senior executives.

This Law-Now summarises the current position for private, AIM and listed companies. It also explains some related changes which have been made to the Model Code.

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There have been a number of changes this year affecting how companies report interests in shares held by their directors and senior executives.

This Law-Now summarises the current position for private, AIM and Official List companies. It also explains some related changes which have been made to the Model Code.

As part of the company law simplification project, the Companies Act 2006 has removed long-standing legal requirements from company law for:

• directors to notify their company of the extent of their interests in the securities of the company and of certain subsidiaries, and
• the directors’ report to contain relevant information on directors’ holdings of securities in the company.

These were welcome deregulatory changes and took effect on 6 April 2007, ahead of many of the other changes to be made by the Companies Act 2006. At the same time some further company law restrictions were removed, including the prohibition on directors buying options to purchase shares and companies making tax-free payments to their directors.

Partly stemming from the relaxation of the disclosure requirements, the UKLA has been reviewing the Listing Rules and the Disclosure and Transparency Rules (DTRs). Although a set of changes took effect on 7 August, the UKLA has agreed that further changes are necessary to remove unintended and omitted changes, and intends to make those amendments in September. It is also going to consult further on some outstanding issues. It is therefore likely that the final position has not yet emerged.

The current provisions affecting private, AIM and Official List companies are best considered separately.

Although there is now no company law requirement to include directors’ shareholdings in the annual report, oddly there is still a requirement to report on whether the highest-paid director exercised options or received shares under a long-term incentive scheme during the period under review.

This is a bizarre result – readers of private company accounts will be able to see whether the highest-paid director received shares under an option or award, but not the actual amount and - crucially, given the changes made in company law - not whether the directors actually hold any shares.

AIM companies have slightly more onerous requirements under company law than private companies in terms of what they have to put in their directors’ report about directors’ interests. They just have to report the total amount received by all directors by way of gains (in the case of the exercise of share options) or shares/cash (in the case of long-term incentive awards).

Interestingly, there is no requirement in the AIM rules for annual reports to include directors’ option/LTIP awards as directors’ shareholdings, or apportion the realised gains between directors. However, although AIM companies will no doubt continue to report this extra information voluntarily in their annual reports, it may be that it is only a matter of time before the AIM rules are changed to make this mandatory in case a company chooses to challenge market practice on this point.

AIM companies are required under the AIM rules to announce any changes in their directors’ (and certain connected persons’) holdings as and when they occur – although only insofar as the company has the information.

In contrast, companies legislation for Official List companies imposes very high disclosure standards for option/long-term incentive plan awards held by directors and any and gains they have made.

Since 2002, companies legislation, as amended by the Directors’ Remuneration Report Regulations, has required an annual remuneration report to be produced, tabulating all awards held and exercised on a director by director basis, together with information on the size of awards and the conditions which are required to be met before shares can be received. Policy statements are also required. Verifiable information is required to be audited. The report must be put to a non-binding vote at the annual general meeting. The report still does not apply to the interests of non-director Persons Discharging Managerial Responsibilities (PDMRs).

Although companies legislation does not now require the annual report to contain details of directors’ actual holdings, the UKLA felt that listed companies should still have that obligation. The Listing Rules now impose a free-standing requirement and interests held (both actual and prospective e.g. under employees share scheme awards) by directors - including persons who have been directors during the period under review - and by their connected persons must be reported, stating the dates of any changes. Interestingly, non-director PDMR interests still do not have to be reported on an annual basis.

The previous Listing Rule reporting requirement was defined by reference to companies legislation, which allowed certain types of interest to be disregarded. These carve-outs have not been carried over into the new free-standing Listing Rule requirement, which therefore ostensibly requires all interests to be reported. However, the UKLA has confirmed that it does not intend to impose a higher reporting requirement than was previously the case, although it is clearly still considering the position. It will consult before any changes are made. One area where a change might usefully be made is to the requirement, where an employee trust has directors as beneficiaries, to report each acquisition and disposal by the trust as if that were a dealing by the director. This relaxation would follow the policy behind what the UKLA has already announced for non-director PDMRs, where the dealings are not considered "own account" dealings and so do not have to be reported.

As and when directors and other persons who are PDMRs (and their connected persons) deal in shares on their own account, the DTRs require them to notify the company, and the company must make an announcement. To some extent, therefore, the DTRs will assist in collating the information about directors’ interests needed for the annual financial report, although own-account dealings is a narrower category.

Nonetheless, given the limited ability companies now have to require directors to supply the full relevant details, Official List companies should therefore (if they have not already done so) require directors in their service contracts or terms of appointment to report their (and their connected persons’) interests to the company so that its annual financial report will comply with the Listing Rules.

There have also been a number of changes to the Model Code, which applies to Official List companies.

• Up until now, all group employees – if they had access to inside information – were required to comply with the Model Code, but now only PDMRs are caught. All employees will still potentially be subject to the much more severe market abuse regime, so companies may not wish to highlight this relaxation to their employees and may decide to continue as before in terms of regulating employees’ own dealings.
• The Model Code now at last refers to Share Incentive Plans (some seven years after they were introduced) as an example of an all-employee plan where dealings (other than sales of shares by PDMRs) can take place in a close period.
• Dealing in treasury shares for the purposes of a HM Revenue and Customs approved SAYE option scheme or share incentive plan or similar schemes is now permitted, even where the Model Code would prevent directors from dealing. The narrower previous exemption had been quite a considerable limitation on the use of treasury shares as opposed to using an employee trust for these types of employee share plans. However, as there is still the requirement to make an announcement each time treasury shares are transferred, and employee trusts can also be used during prohibited periods for executive schemes for non-PDMRs, it is still normally easier for companies to deliver existing shares through employee trusts rather than as treasury shares.
• The Chairman and Chief Executive can seek clearance to deal from another board member designated for the purpose if the other is away – the absence of one could previously be awkward for the other

Finally, companies whose current financial year started before 20 January 2007 should bear in mind that the published version of the Model Code reflects changes made in January 2007 – in particular, to the definition of "close period" – that do not apply to them until the start of their next financial year. Companies with later year ends have had to apply the new Model Code immediately.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 20/08/2007.