Audit, Meetings and Listing Regime

Question 1

Which Reports need to be filed based on the Company Type?

Answer 1

Question 2

What is the Role of External Auditors?

Answer 2

Role of External Auditors

• All companies, annual accounts must be audited (CA2006 s. 475) unless the company qualifies as exempt from audit:
• as a small company (CA2006 s. 477);
• as a subsidiary company (CA2006 s. 479A); or
• as a dormant company (CA2006 s. 480).
• The auditor’s function is to report to the company’s members on the statutory accounts prepared by the directors in accordance with CA2006 ss. 394 or 399, for individual company accounts and group accounts respectively (CA2006 s. 475).
• Article 25a of the Statutory Audit Directive seeks to clarify the scope and purpose of the statutory audit. In particular, it notes that the statutory audit does not contain any assessment of the future viability of the company nor any judgement on current or future efficiency or effectiveness of the management.
• The directors of a company that is exempt from audit may still chose to have the accounts audited. The members holding between them at least 10% in nominal value of the company’s share capital, or for a company without shares 10% of the membership, may require an audit to be carried out (CA2006 s. 476). Any notice must be given during the period commencing at the start of the financial year the notice relates to and one month before that financial year ends.
• Directors of large companies are under a obligation to provide details and evidence of how the directors have complied with their obligations under CA2006 s. 172.
• It is an offence (punishable by fine and/or imprisonment) for an officer of the company, in conveying information and explanations required by the company’s auditors, to make a statement that they know contains misleading, false or deceptive information (CA2006 s. 501).

Audit Objectives

• Auditor’s objectives are to obtain reasonable assurance about whether the financial statements, prepared by the company’s directors, overall are free from material misstatement, whether due to misunderstanding, error or fraud, and to issue a report to the members of the company.
• Misstatements in the financial statements can be caused by error or deliberate fraud. During the course of an audit, the auditor exercises professional judgement and should maintain professional scepticism throughout the audit. At the conclusion of the audit, the auditor must make a report to the company’s members. For private companies, the audit report must be sent to members; for public companies, the audit report must be laid before the members in general meeting.

Question 3

What are the Duties of Auditors, and Auditor Liability?

Answer 3

Duties of auditor

• An auditor must carry out sufficient investigations to form an opinion as to whether:
  
  • adequate accounting records have been maintained;
  • the accounts are consistent with the accounting records; and
  • in the case of a quoted company, the auditable part of the directors’ remuneration report is consistent with the accounting records.
• If, in the opinion of the auditor, one or more of these statements cannot be made, that fact must be stated in their report to members.
• If the auditor does not obtain all the information or explanations they require, this fact must be stated in their report. If the accounts do not contain the details of directors’ remuneration, pensions and/or compensation for loss of office, or, in the case of a quoted company, relating to the auditable part of the directors’ remuneration report, the missing information must be contained within the auditor’s report.
• If the directors have prepared accounts taking advantage of the regime available to small companies and, in the opinion of the auditor, the company does not qualify as a small company, this fact must be stated in the auditor’s report.

Auditor Liability

• A company may indemnify their auditor against any liability incurred (CA2006 s. 533):
  
  • in defending proceedings (whether civil or criminal) in which judgment is given in favour of the auditor or they are acquitted; or
  • in connection with an application under CA2006 s. 1157 in which relief is granted to the auditor by the court.
  • A company may enter into a liability limitation agreement to limit the amount of liability owed to a company by its auditor in respect of any negligence, default, breach of duty or breach of trust, occurring in the course of the audit of accounts provided it (CA2006 ss. 534–8):
    
    • relates to only one financial year; and
    • is authorised by ordinary resolution of the members of the company. A private company may waive the requirement for the agreement to be approved.

Question 4

What are the Rights of Auditors?

Answer 4

Auditor Rights- Access to documents

• A company’s auditor has the right in the Act to information in connection with the exercise of their duties and this includes the following:
  
  • the right of access at all times to the company’s books, accounts and records (CA2006 s. 499(1)(a));
  • to require from the company’s directors and officers such information and explanations as the auditor thinks necessary (CA2006 s. 499(1))(b);
  • every UK incorporated subsidiary undertaking and their auditors must provide the auditors of the parent company such information and explanations as those auditors may reasonably require (CA2006 s. 499(2));
  • a parent company, having an overseas subsidiary undertaking shall, if its auditors require, take all such steps as are reasonably open to it to obtain from the subsidiary such information and explanations as its auditors may reasonably require (CA2006 s. 500);
  • an auditor is entitled to receive all notices and other communications relating to any general meeting (CA2006 s. 502(2)); and
  • an auditor is entitled to attend general meetings of the company and has the right to speak on any business of the meeting that concerns them as auditor (CA2006 s. 502(3)).
  • Right to minutes of board and committees; copies of papers; copies of policies; copies of registers

Question 5

What are the Rights of Auditors who are removed or not re-appointed?

Answer 5

Rights of Auditors who are removed or not reappointed

• Where a resolution is to be proposed at a general meeting or by written resolution for removing an auditor before the expiration of their term of office, or for appointing as auditor a person other than a retiring auditor, the following requirements must be adhered to:
  
  • Copies of the special notice or of the written resolution must be sent as soon as practical by the company to the person proposed to be appointed as auditor and to the retiring auditor, as appropriate
  • The auditor proposed to be removed or not reappointed may make representations in writing to the company on the proposed resolution and may ask the company to circulate that representation to the shareholders of the company
  • The company must comply with that request. If it is too late to include the representation with the notice of the meeting, a note that a representation has been made should be included and a copy of the representations should then be sent to all the shareholders entitled to receive notice of the meeting
  • If the representation is received too late to be circulated to shareholders, or if the representation is not sent out, the auditor concerned may require the representation to be read out at the meeting
  • The auditor proposed to be removed or not reappointed is also entitled to receive notice of, and to attend and speak at, the general meeting at which the resolution for their removal or non-reappointment is to be considered.
• The representations need not be sent out or be read at the meeting if, on the application of either the company or any other person claiming to be aggrieved, the court is satisfied that the rights conferred on the auditor proposed to be removed or not reappointed are being abused to secure needless publicity of a defamatory nature. In these circumstances, the court may also direct that the company’s costs in making the application be met in whole or in part by the auditor.

If the auditor is not notified within 21 days that an application is to be made to the court, pursuant to they must send a copy of their statement to the Registrar within the next seven days. If an application to the court is made and rejected, the auditor must send a copy of their statement to the Registrar within seven days of being notified of the court’s decision by the company. If an auditor sends a statement under to the company, they must at the same time send a copy of their statement to the appropriate audit authority

Question 6

Process for Appointment of Auditors

Answer 6

Appointment of Auditors
Any contractual clauses that restrict the choice of auditor have no legal effect

• Exempt companies: A company that is exempt from having its accounts audited is also exempt from the obligation to appoint auditors. However, a private company becoming exempt from the audit requirement does not automatically terminate the appointment of existing auditors, and in such circumstances the directors should resolve that no auditors be appointed for the financial year.

Private company that is not a PIE

• Auditors must be appointed before end of period allowed for sending accounts to members
  
  • Directors must appoint first auditor of company.
  • Where no auditor has been appointed by the end of the next period allowed for appointing auditors, the auditor in office immediately before that time is deemed to have been reappointed unless:
    
    • their appointment was made by the directors;
    • the company’s Articles require actual reappointment;
    • deemed reappointment is prevented by members under CA2006 s. 488;
    • a resolution to reappoint the auditors is lost; or the directors have resolved that no auditor should be appointed for the financial year in question

Audit of PIE

• A PIE is defined in CA2006 s. 519A as a company, which meets at least one of the following criteria:
• an issuer with any transferable securities admitted to trading on a regulated market;
• a credit institution; or
• an insurance undertaking.
• PIE must undertake a public tender process.
• The maximum term of office for the auditor of a PIE is the longer of:
• 10 years from the first day of the first financial year in respect of which the auditor was appointed (CA2006 ss. 487(1C) (a) and 491(1C) (a));
• 20 years from the first day of the first financial year in respect of which the auditor was appointed, provided that a tender process has been held for at least one financial year which begins every 10 years in that period (CA2006 ss. 487(1C)(b) and 491(1C)(b)); or
• such other period not exceeding 20 years beginning with the first day of the first financial year in respect of which the auditor was appointed and ending on the last day of the relevant 10-year period (CA2006 ss. 487(1C) (c) and 491(1C)(c)).
• Unless statement to the contrary, the appointment of a partnership as auditor is an appointment of the partnership and not the individual partners- firms have legal personality and it is the corporate body that is appointed.

Appointment of auditors may be terminated by resignation of auditor, removal by the members or on application to the court or by not being re-appointed by the members.

Question 7

Process for Resignation of Auditor

Answer 7

Resignation of auditors

• An auditor may resign their office by giving notice to the company, with the notice taking effect on the date it is given or such later date as may be contained in the notice.
• If the company is a PIE the notice has no effect unless it is accompanied with a statement setting out the reasons for their resignation and any matters connected with their resignation that they wish to be brought to the attention of the members or creditors of the company.
• Resigning Auditor may lodge a requisition calling on the directors to convene a general meeting of the company to consider the explanation of the circumstances connected with their resignation. The directors must convene this meeting within 21 days of the deposit of the requisition, to be held on a date not more than 28 days from the date of the notice convening the meeting (CA2006 s. 518). In addition, the auditor’s statement must be sent to the members of the company with the notice of the meeting.
• All companies including PIE receiving a statement from an auditor ceasing to hold office which contain reasons or matters that the auditor wishes to bring to the attention of the members or creditors must within 14 days of receipt of the statement either:
• send a copy of the statement to every person entitled under CA2006 s. 423 to receive a copy or the audited accounts; or
• apply to the court for an order that it need not do so.
• Company is not a PIE; the auditor must send a statement to the company setting out the reasons for their resignation unless:
• either:
  
  • in the case of a private company, at the end of a period for appointing auditors;
  • in the case of a public company, at the end of an accounts meeting;
• or:
  
  • the auditor’s reasons for ceasing to hold office are all exempt reasons; and
• there are no matters connected with the auditor’s ceasing to hold office that the auditor considers need to be brought to the attention of members or creditors of the company
• Examples of Exempt Reasons: the auditor is ceasing to carry out statutory audit work within the meaning of the Act; the company is, or is to become, exempt from audit
  
  • the company is being wound up under IA1986 or I(NI)O1989, whether voluntarily or by the court, or a petition for the winding up of the company has been presented and not finally dealt with or withdrawn.

Question 8

Actions which need to be taken in respect of the resolutions passed and after an AGM for a PLC

Answer 8

Announce the results of resolutions [as soon as possible following the AGM]: The listing rules require the results of each resolution to be released via a Regulatory Information Service This should include:

• date of the AGM;
• text or description of each resolution;
• number of votes cast;
• proportion of the issued capital represented by votes;
• number of votes cast in favour and against;
• any abstentions; and
• confirmation as to whether each resolution was passed or not.

Additional requirements are also contained in s.341(1A)) CA 2006 as traded companies must ensure that when a poll vote is taken similar information to the above is made available on the company’s website as soon as possible and then retained on the website for at least two years (s.353 CA 2006). A traded company must make the information available within 16 days of the AGM, or the day following the declaration of the result, if later (s.341(B) CA 2006).

Prepare minutes of AGM [as soon as possible after the AGM]: Minutes of the AGM should be prepared promptly for the Chair’s approval and signature. Once signed the minutes should be included in the minute book for general meetings. Minutes should be prepared promptly for several reasons. For example, the Chair’s signature is prima facie evidence that the AGM has been properly constituted and conducted. A company is required by the CA 2006 to keep the minutes of its general meetings at its registered office and make them available for inspection by the members. Members also have a right under the CA 2006 to be supplied with a copy of any minutes of a general meeting within 14 days of making the request. As any special resolutions passed at the meeting will also need to be filed with the Registrar of Companies, it is preferable if the minutes and the special resolutions to be filed have been prepared in good time.

Confirm director re-elections [as soon as possible after AGM]: Although not required by law, many companies consider it good practice to write a short confirmation letter to each director confirming that they were re-appointed at the AGM.

Approve the annual report on directors remuneration (the Implementation report): The resolution is advisory in nature and is not binding

Deliver the Annual Report & Accounts to the Registrar of Companies [By Due Date]: The annual report must be filed with the Registrar of Companies within six months of the financial year end. The version filed with the Registrar of Companies must contain the original manual signatures of the authorised director(s) on the balance sheet, the annual report on remuneration, the directors report and the senior auditor must sign the Auditor’s report. The version filed should be capable of electronic capture by the Registrar of Companies and meet the requirements in respect of document size (A4) and minimum font size etc.

Disapplication of pre-emption rights [within 15 days of AGM]: As the disapplication of pre-emption rights is a special resolution, a copy of the resolution must be filed at Companies House within 15 days after the date it was passed. The authority will only be needed if an allotment of shares is needed for cash other than pro-rata to existing holdings (with the exception of employee share schemes). This is essentially a reserve authority which is usually passed every year by a company in case it is needed, and no further action is required unless the disapplication authority is needed.

Question 9

Can you not have an AGM? What technology can you use.

Answer 9

The only companies which are exempted from having to hold an AGM are private companies. The directors have authority under Companies Act 2006 to convene an AGM, however, if not held the court has power to order that an AGM be held. There is an inevitable cost associated with providing the AGM. One of the duties of the Company Secretary is to book an appropriate venue for the AGM, which should take into account an estimate of likely attendance. Technology may be used to help support an AGM, particularly where the members are not in all one place. Company can hold an ‘electronic-only’ AGM. However, the technology must enable the participating members to be able:

• to see and hear the Chair of the meeting and any other person speaking;
• and · to ask questions and to lodge a vote.

Whilst it is therefore acceptable to use electronic methods, it must be designed to facilitate two-way communication.

Question 10

Can you give a Summary of the Listing Process?

Answer 10

Involves issue of a prospectus approved by FCA, with professional advisors (Lawyers, Reporting Accountant- Report for investors, Financial PR Consultants) engaged, followed by an application

Sponsor

• Mandatory for premium listing - need to appoint a sponsor to submit application, lodge documents and act as channel for communications (typically an investment bank)

Prospectus

• Single document or three-part, Single document: mandatory sections introduction and warnings; issuer and any guarantor; securities; risks; and Offer.
• contains information about the company and its shares to enable prospective investors to make an informed decision. This includes a share security note outlining the risks, terms and conditions, working capital statement, details of the securities and reason for offer/use of proceeds. The Registration document includes information on the business overview, risk factors to the industry, stakeholder information, organisation information, Governance information, major shareholders.
• care over confidentiality - should meet requirements for disclosure while not disclosing sensitive material
• once issued, make available to public and lodge with National Storage Mechanism

Application

• made in respect of Official List (for admission of securities) and to London Stock Exchange (for admission to trading)
• before submitting, contact FCA to agree date for FCA considering application
• hold board meeting and submit the ’48-hour documents’ to FCA two days before FCA considers
  
  • Official List application
  • London Stock exchange application
  • prospectus
  • any published circular
  • copy of board resolution allotting the securities
• completed shareholder statement signed by sponsor to be submitted to FCA by 9am on day FCA considers application
• After approved for release by FCA, prospectus filed with FCA and made available to public in accordance with Prospectus Rules

Question 11

Sale of Shares and Hiring Advisors for Listing when a Company was Private

Answer 11

In order to promote market liquidity, the Listing Rules require a minimum number of shares for a listed company to be a ‘free float’ (i.e. shares which are readily available in public hands for dealing in the market). The Listing Rules require a 25% minimum free float for each class of shares.

There are considerable regulatory requirements which a company must adhere to should it decide to apply for a listing regulated market on the London Stock Exchange’s (LSE) Main Market. Given this, a company seeking a listing will use advisors to ensure that the correct requirements, documents and procedures have been observed.

• Sponsor / Corporate broker: A sponsor is a mandatory appointment and the sponsor will be required to act as the link between the Company, the Financial Conduct Authority, the UK Listing Authority and the London Stock Exchange during the listing process. New potential investors will be required as part of a listing and the Company may also decide to appoint a corporate broker to also help actively market the shares and to act as a link between the Company and the other potential investors. Many firms can act as both sponsor and broker in order to keep the number of advisor firms to a minimum.
• Lawyers: A law firm familiar with listing requirements will be required to help draft and verify the formal documents for the listing.
• Reporting accountant: A reporting accountant will be needed to prepare a formal report on the Company for the benefit of potential investors. This can also be the external auditor in order to keep the number of advisor firms to a minimum.
• Financial Public Relations consultants: Some companies hire specialist firms who have the role to raise a company’s profile in the run up to a flotation and this helps increase overall interest in potentially subscribing for the shares. This may be worthy of consideration as some shares must be sold in order to achieve the minimum free float.

Question 12

What are the different types of Companies in relation to their turnover, balance sheet and Number of Employees?

Answer 12

Question 13

What are the Listing Principles and Listing Conditions?

Answer 13

Listing Principles

Listing Principle 1: Listed Company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligation.

Listing Principle 2: Deal with the FCA in an open and co-operative manner.

Premium Listing Principle 1: Reasonable steps to enable its directors to understand their responsibility and obligations as directors

Premium Listing Principle 2: Act with integrity towards the holders and potential holders of its premium listed securities

Premium Listing Principle 3: All equity shares in a class admitted to premium listing must carry and equal number of votes on any shareholder votes- share certificate representing shares the same applies.

Premium Listing Principle 4: Listed Company has more than one class of securities, the aggregate voting rights of the securities in each class should be broadly proportion to the relative interests

Premium Listing Principle 5: Ensure it treats all holders of the same class, premium listed securities and listed equity shares equally in respect of the rights attaching to those premium listed securities.

Premium Listing Principle 6: Communicate information to holders and potential holders in such a way as to avoid the creation or continuation of a false mark in those securities.

Listing Conditions- Premium Listing FSMA

• Company must be incorporated and be acting in accordance with its Articles
• Audited accounts filed for last three years, in most cases (and always for ‘premium listing’)
• At least 75% of business supported by historic revenue-earning record
• Current key executives played significant role in company’s activities
• Company to be capable of making decisions independent of any controlling shareholder
• Shares to be fully paid, and free from liens or restrictions
• First shares to be listed must have at least £700,000 capital
• At least 25% of share capital to be in public hands
• For ‘premium listing’, must meet FCA’s capital requirements
• Shares must be eligible for electronic settlement (CREST)
• Company must be plc

Question 14

What is a Listed Company and what must it comply with?

Answer 14

Securities Exchange Listing Regime

• A Listed company is one whose shares have been admitted to the Official List maintained by the FCA in accordance with FSMA2000 s. 74.
• Once listed, a company will apply for its shares to be admitted to trading on a regulated market. The largest regulated market operating in the UK is the London Stock Exchange’s (LSE) Main Market.
• FCA under the UK Listing Authority (UKLA) exercises the powers regulating the admission of securities to official listing.

Listed companies, and those applying for listing, must comply with the UKLA’s Listing Regime

UKLA has regard to:

• balancing access to the market and investor protection
• promoting standards of disclosure
• facilitating open and efficient market
• giving time for holders to consider changes in the company’s operations

Three sets of rules:

• Listing Rules - listing process & principles, continuing obligations
• DTRs - disclosure of financial reporting and other notifications
• Prospectus Rules

Advantages of Listing

• access to refined and regulated stock market
• prestige of full listing
• considerable ability to raise finance (debt & equity)

Disadvantages of Listing

• costs of maintaining a listing
• additional employment resource to meet continuing obligations
• additional disclosure requirements
• management time & effort to satisfy best practice for corporate governance