In the wake of the financial crisis and the so-called ‘shareholder-spring’ of 2012 (a period during which many shareholders refused to endorse directors’ remuneration policies), the government has introduced new rules on directors’ remuneration reporting. The new rules: (i) increase the compliance burdens regarding the reporting of directors’ remuneration policies; (ii) increase shareholder control over remuneration and termination packages; and (iii) introduce potential personal liability for directors who authorise payments in violation of an approved policy.
These changes bound certain UK-incorporated quoted Life Sciences companies with effect from 1 October 2013. The government estimates that around 900 companies have been affected.
Which Life Sciences companies will be affected?
UK incorporated Life Sciences companies with shares listed on the Official List in the UK, officially listed in an EEA member state or admitted to dealing on the New York Stock Exchange or NASDAQ should seek advice as to whether they fall within the remit of the new rules.
Life Sciences companies with shares admitted to AIM and non-UK incorporated companies will not be affected.
What requirements have been introduced under the new regime?
The new rules introduce a new format for the directors’ remuneration report, with expanded and prescribed content requirements and standardised methodologies for the disclosure and presentation of information. In particular, the directors’ remuneration report will need to include:
a) Director’s Remuneration Policy
A directors’ remuneration policy, which sets out the company’s forward-looking policy on all aspects of directors’ remuneration, including recruitment, service contracts and payments for loss of office. The policy must be approved by a binding shareholder vote at least once every three years, or earlier if a company wishes to change its policy.
Once a remuneration policy is approved, companies may only make payments to directors in accordance with the policy (or, alternatively, they must obtain shareholder approval for a particular payment that is not in line with the policy). Directors are at risk of personal liability if payments are made outside of the approved policy, and any provisions in directors’ employment contracts obliging the company to make non-compliant payments will be unenforceable.
When drafting the policy, an appropriate balance will need to be struck between ensuring sufficient details are included to satisfy the legal requirements (and shareholder/potential investors’ concerns), while ensuring the company has enough flexibility to make payments without having to seek further shareholder approval.
b) Annual Remuneration Report
A report on the directors’ remuneration in the relevant financial year setting out, among other factors:
- a statement by the chair of the remuneration committee summarising how the remuneration policy was implemented, details of any substantial changes relating to directors’ remuneration, and the context in which those changes and decisions occurred or were taken;
- a single total figure of remuneration for each director;
- a prescribed table providing a more detailed breakdown of all types of remuneration (e.g. fixed and variable elements, taxable benefits and pension provision);
- details of any money or assets that have been clawed-back;
- details of any payments made to departing directors;
- details of payments made during the year to any person who had, at any time previously, been a director of the company;
- a statement setting out the voting record of the shareholders at the last annual general meeting, both in relation to the remuneration policy and the annual remuneration report; and
- a statement describing how the company intends to implement the approved directors’ remuneration policy in the next financial year.
This report will need to be put to an annual, advisory (non-binding) shareholder vote.
Also, if a director leaves office (for any reason), companies will need to issue a statement on their website setting out: (i) the name of the person concerned; and (ii) details of any loss of office payment that the director has received or may receive in the future. This statement must be published as soon as reasonably practicable after the exit payment has been agreed.
Deadline for compliance?
The first Life Sciences companies to be affected by the new requirements are those with a 30 September 2013 year end. However, under transitional provisions, the requirement for a payment to be in line with an approved policy does not apply to remuneration payments or loss of office payments made by a company before the earlier of:
- the end of the company’s first financial year commencing on or after 1 October 2013; or
- the date from which the company’s first approved remuneration policy takes effect.
So, for example, companies whose financial year ended on 30 September 2013 will need to seek approval of their remuneration policy at their annual general meeting in early 2014, with the long-stop date for receiving such approval being the end of September 2014.
Life Sciences companies should consider whether they wish to start their new remuneration policy from the date of the annual general meeting at which it is approved, or whether they will take advantage of the transitional provisions for as long as they are able.