During the summer, the UK Government released its long-awaited response to the March 2021 consultation on strengthening the UK’s audit, corporate reporting and corporate governance landscape. Shortly after, the FRC published a response - a Position Paper setting out its next steps. The Government will now publish the final requirements either through primary or secondary legislation and the FRC will complete work in a number of areas, including updating the UK Corporate Governance Code.
What we know so far?
The Government is concerned that dividends have been paid, and will continue to be paid, without companies having sufficient reserves. There have been high-profile cases of significant dividends paid in advance of profits warnings and insolvencies. Focus and change is required to improve current practice.
As a result, in relation to dividend and capital maintenance, the Government will require:
a. new disclosures on distributable reserves for qualifying companies or, in the case of a UK Group, the parent company only;
b. an explicit statement from the directors on the legality of dividends; and
c. an explanation of the board’s long-term approach to the amount and timing of returns to shareholders and how the policy has been applied during the year.
The Government would encourage, rather than require, the disclosure of the dividend paying capacity of a group as a whole. The Government has dropped the requirement of directors’ assurance on the dividend not jeopardising the future solvency of the company over a period of two years.
The new requirements will apply to Public Interest Entities (PIEs) with 750 or more employees and £750 million or more in annual turnover. The Government will give ARGA, a regulatory body to be formed to replace the FRC, formal responsibility for issuing guidance on what should be treated as ‘realised’ profits and losses.
So with the forthcoming requirements of greater disclosure and more accountability, what are the key questions that you should consider?
1) What do you want to pay and how do you explain this?
Prepare a dividend and capital maintenance policy considering the board’s long-term approach of returns to shareholders. This will require consultation with various stakeholders and an assessment of any legal, financial or other risks in delivering the policy. Companies will have to link disclosures in relation to dividend and capital maintenance to the new Resilience Statement which may require commentary on the sustainability of the dividend policy.
2) What can you currently payand is it auditable?
Perform a distributable reserves review of the qualifying entities or in case of a UK Group, the ultimate UK parent company of the group, and keep it up to date at each period end. This may not be easy if the entity has not issued a dividend recently. Companies with a long corporate history or complex intragroup transactions may face particular challenges when determining the level of reserves available for distribution. These disclosures are likely to be part of audited information which will require the development of robust processes and supporting documentation.
3) How can you pay future dividends?
Review and simplify complexity across the group to aid cash extraction to the parent company to support its long-term approach to the amount and timing of returns to shareholders. This may require the release of trapped cash by clearing dividend blocks or easing the dividend flows by reducing the number of companies within the dividend chain.
