Primary Market Bulletin 49

During 2023 we reviewed 25 premium listed commercial companies over a three-year period. We assessed:  

• Their compliance with their listing obligations under the Listing Rules (LR) in relation to Long Term Incentive Plans (LTIPs), which are long term incentive arrangements designed to align the financial interests of senior executives with those of shareholders.
• The nature of the metrics and performance conditions tied to the LTIPs. 

We found: 

• All 25 companies had complied with LR 9.4.1 R (2), which requires requires (subject to the exceptions at LR 9.4.2 (R)) the long-term incentive scheme to be approved by an ordinary resolution of the shareholders of the listed company in general meeting before it is adopted. 
• All 14 companies proposing a new LTIP released a circular to shareholders in accordance with LR 13.8.11 R (1) with a description of its principal terms of the LTIP. 
• There were resolutions at all 14 companies proposing a new LTIP contained in the notice of meeting accompanying the circular, referring either to the scheme itself which was circulated to shareholders or the summary of its principal terms included in the circular, as required under LR 13.8.12 R. 
• All 11 companies proposing amendments to an LTIP released a circular providing an explanation of the effect of the proposed amendments together with a statement that the full text of the scheme as amended would be available for the inspection before the shareholder vote, as required by LR 13.8.14R.   
• Financial metrics such as total shareholder return, return on capital employed, and earnings per share were the most commonly used LTIP performance metrics. 
• Whilst there are no specific requirements under the Listing Rules for LTIPs to include non-financial metrics, the use of these metrics doubled between 2020 and 2022. 

Listing Rules 9.4 and 13.8 affect the design, implementation, and operation of long-term incentive plans. The rules are intended to increase the transparency, through disclosure, of the links between senior executive remuneration and company performance. This greater transparency should enable shareholders to play a greater role in corporate decision-making. We therefore conducted this review to assess premium listed commercial companies’ compliance with these obligations.

We reviewed annual financial reports and relevant corporate documentation published between 2020-2023 by 25 UK incorporated premium listed companies in scope of the Listing Rules. 

The 25 companies included 14 proposing a new LTIP and 11 proposing amendments to an LTIP.

We contacted a small number of the listed companies in the sample to understand what market practice was and their level of awareness of the specific listing obligations in relation to LTIPs. 

To understand the types of performance conditions companies were embedding into their LTIPs, we looked at the LTIP metrics disclosed in the annual financial reports of the 25 companies we reviewed. 

We also considered remuneration reports. We looked at whether there were changes to the types of performance metrics companies were using.

1. LTIP Disclosures  

i. LR 9.4.1 R: Approval of LTIPs and shareholder voting patterns   

There appeared to be high levels of compliance with LR 9.4.1 (2) R. All of the 25 companies had sought shareholder approval at the next available Annual General Meeting (AGM) before adopting their LTIPs. A large proportion of the LTIPs were approved by a majority greater than 90%, and only 2 received votes lower than 70%. 

ii. LR 13.8.11 R: LTIP disclosures 

We found high levels of compliance with LR 13.8.11 R (1). This rule provides requirements in relation to circulars to shareholders about the approval of new LTIPs. The rule requires the circular to include either the full text of the scheme or a description of its principal terms. All 14 companies proposing a new LTIP released a Notice of AGM which contained a description of the principal terms of the LTIP prior to the shareholder vote. We note that for this purpose the definition of a circular includes a notice of meeting. 

iii. LR 13.8.12 R: Notice of general meeting   

All of the 14 companies proposing a new LTIP appeared to be compliant with LR 13.8.12 R. This requires the resolution contained in the notice of meeting accompanying the circular to refer to either the scheme itself (if circulated to shareholders) or the summary of its principal terms included in the circular.

iv. LR 13.8.14 R: LTIP amendments  

There appeared to be high levels of compliance with LR 13.8.14 R (1) and (2) (a). All 11 companies proposing amendments to an LTIP released a Notice of AGM which contained an explanation of the effect of the proposed amendments together with a statement that the full text of the scheme as amended would be available for inspection prior to the shareholder vote. We note that for this purpose the definition of a circular includes a notice of meeting.

2. LTIP performance metrics  

a. Financial metrics   

Our review of remuneration reports found that the most commonly used LTIP financial metrics are total shareholder return (TSR), return on capital employed (ROCE), and earnings per share (EPS). TSR measures the returns generated from all capital gains and dividends from a company’s shares during a holding period. This can be an absolute measure, or a relative measure where the TSR of the company’s shares is compared with the TSR of a comparator eg, an index or a group of competitor companies.  

b. Non-financial metrics

Whilst not required by the Listing Rules, we found that 8 of the 25 companies we reviewed had included non-financial metrics in their LTIPs in 2022, up from 7 in 2021 and 3 in 2020. Almost all of the companies that linked non-financial metrics to their LTIPs had business operations within sectors focused on sustainability. The non-financial metrics tended to therefore focus on matters, such as CO2 emissions reduction, water conservation, pollution, waste, employee safety and customer satisfaction.  

We found that for the majority of the companies who had not included non-financial metrics in their LTIPs, non-financial metrics had been linked to their annual bonus awards instead. 

The findings of this review are relevant to premium listed companies incorporated in the UK. We expect these companies to know the compliance framework around long-term incentive plans. We remind companies of:  

• Listing Principle 1 which requires listed companies to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable them to comply with their obligations. This extends to the procedures, systems and controls needed to meet your obligations under the Listing Rules.  
• Their obligation under LR 9.4.1 R (2) to ensure that a long-term incentive scheme is approved by an ordinary resolution of the shareholders of the listed company in general meeting before it is adopted.  
• LR 13.8.11 R (1) which states that a circular to shareholders about the approval of a long-term incentive scheme must include either the full text of the scheme or a description of its principal terms. 
• LR 13.8.11 R (5) which states that if the scheme is not circulated to shareholders, the circular must include a statement that it will be available for inspection at the place of the general meeting for at least 15 minutes before and during the meeting; and on the national storage mechanism from the date of sending the circular.  
• LR 13.8.14 R which states that a circular to shareholders about proposed amendments to a long-term incentive scheme must include:

1. an explanation of the effect of the proposed amendments; and
2. the full terms of the proposed amendments, or a statement that the full text of the scheme as amended will be available for inspection:
   
   1. at the place of the general meeting for at least 15 minutes before and during the meeting; and
   2. on the national storage mechanism from the date of sending the circular.

We envisage continuing to use thematic reviews to assess how companies have complied with these requirements.   

Global Depositary Receipts (GDRs) are certificates that represent ownership of a certain number of a company’s securities, usually shares, but the depositary receipts themselves are separate instruments from the underlying shares.  

The purpose of this thematic review was to assess whether issuers of the shares underlying GDRs listed on the standard segment of the FCA’s Official List were meeting certain continuing obligations. The companies considered in our review covered 10 industry sectors. Most of these operated in the financial sector, with the smallest number in the industrials and basic resources sectors. The population of GDR issuers represented 21 different countries of incorporation. The top four countries of incorporation were India, Egypt, Republic of Korea and China.  

For most GDR issuers, we found that more information was published in home jurisdictions than in the UK. This presented a risk of lower levels of information being available to UK investors.   

We observed some examples of good practice; however, we would like to remind issuers of GDRs of the continuing obligations that apply to them. 

A GDR functions via a depositary bank that buys shares in a company and issues GDRs representing those shares to investors. Typically, an overseas company deposits the share certificates with a local custodian bank in its home jurisdiction. The custodian bank acts as custodian for the depositary bank and holds the share certificates for it. The shares are registered in the depositary bank's name, so the depositary bank has voting rights attaching to the shares, which it usually exercises in accordance with the wishes of the holders of the depositary receipts.

Chapter 18 of the Listing Rules contains continuing obligations applicable to issuers of listed GDRs. In addition, where GDRs are admitted to trading on a regulated market the Disclosure Guidance and Transparency Rules (DTRs) and Regulation (EU) 596/2014 as amended by The Market Abuse (Amendment) (EU Exit) Regulation 2019 (UK MAR) apply. 

In this report we consider levels of compliance in 2021 and 2022 with the following continuing obligations:  

A. LR 18.4.3A R (Annual accounts continuing obligations)   
B. DTR 7.2 (Corporate governance statements)  
C. Article 17 UK MAR (Public disclosure of inside information) and   
D. Article 19 UK MAR (Managers’ transactions)

We compiled a list of the GDR population of issuers with securities on the Official List in January 2023. We identified and then removed 20 of the GDRs. We did this because the trading of the securities on the London Stock Exchange was suspended throughout the period under review (mostly because of circumstances arising from the Russian invasion of Ukraine and the sanctions regime subsequently put in place). Noting that a number of issuers have both ‘Rule 144A’ (US persons) and ‘Regulation S' (non-US persons) GDR securities admitted to the Official List, we identified a review population of 52 ‘unique’ GDR issuers.   

We present our findings below with regards to levels of compliance with continuing obligation A. for the whole of this population and for continuing obligations B. to D. for a smaller targeted sample of 26 GDR issuers. This targeted sample was selected to ensure an even representation of GDR issuers across industry sectors. 

A. Annual Reports (LR 18.4.3A R (2)
LR 18.4.3AR (2) requires GDR issuers to approve and publish their annual report and accounts within six months of the end of the financial period to which they relate. These must be published and uploaded to the FCA’s National Storage Mechanism (NSM) under LR 14.3.6R and a notification sent to a Regulatory Information Service (RIS) as soon as possible when a document has been forwarded to the FCA for upload to the NSM under LR 14.3.7R.   

We considered compliance with LR14.3.6R and LR 14.3.7R for the 2020 and 2021 annual reports for our full population of 52 GDR issuers and the results are set out in figures 1 and 2 below.  

GDR issuers seemed to consistently release their annual reports on their company websites locally. We noted some inconsistency, however, with annual reports published on the NSM and/or via RIS one year and not the following year.

B. Corporate Governance Statement (DTR 7.2)  
DTR 7.2.1R requires a GDR issuer to include a corporate governance statement in its annual report which refers, where applicable, to the corporate governance code to which it is subject or may have voluntarily decided to apply (DTR 7.2.2 R (1) and (2)). We reviewed the 2020 and 2021 annual reports published by the 26 GDR issuers in our targeted sample to assess compliance with this requirement.   

We found that the annual reports of 19 GDR issuers appeared to contain compliant corporate governance statements, while the annual reports of 7 did not. For those 7, the reasons behind this were that: 

• no annual report(s) could be located either on the NSM or local websites, or 
• a corporate governance statement was made but that statement did not contain the full information required by DTR 7.2.2R (1) and (2). 

C. Article 17 UK MAR (Public disclosure of inside information)

Article 17 UK MAR requires an issuer in scope to inform the public as soon as possible of any inside information which directly concerns that GDR issuer. The GDR issuer shall ensure that the inside information is made public in a manner which enables fast access and complete and timely assessment of the information by the public and, where applicable, in an officially appointed mechanism for the central storage of information.

We reviewed the number of local regulatory filings and disclosures of material information and the number of UK announcements made via a RIS and filed with the NSM. There was an inconsistency between the two, with more announcements being made in the local market. While this is not determinative of any breach, this discrepancy might indicate that there is a heightened risk that inside information in relation to GDR issuers may not have been made public in accordance with Article 17 UK MAR.  

As a result, we reviewed regulatory filings and disclosures of material information displayed on the corporate websites of GDR issuers and announcements made via an RIS and filed to the NSM over a two-year period.  

We found that:  

1. 25 of the 26 GDR issuers in our targeted sample appeared to have made regular trading performance, project- and event-based announcements in 2021 and 2022 for local purposes
2. 24 of the 26 GDR issuers in our targeted sample appeared to have announced trading performance updates (usually in quarterly reports) in 2021 and 2022 via a RIS and filed these announcements to the NSM  
3. only 15 of the 26 of GDR issuers in our targeted sample appeared to have announced any projects and/or events in 2021 and 2022 via a RIS and filed these announcements to the NSM   
4. no GDR issuers within our targeted sample filed a Delayed Disclosure of Inside Information (DDII) Notification with the FCA pursuant to Article 17(4) UK MAR in 2021 or 2022 

We are considering in more detail the absence of UK project- and event-based announcements and of DDII Notifications highlighted in 3. and 4. Above. We may take action as appropriate.   

We are mindful that GDR issuers with equity shares traded on overseas exchanges are likely to be subject to their own local securities and exchange laws rules governing the determination of price sensitive information or inside information. As such, the presence of local announcements and lack of UK equivalents does not necessarily indicate any breach of UK MAR. However, the discrepancy is such that we feel it necessary to remind GDR issuers that they are in scope of UK MAR and are required to meet their obligations under Article 17 UK MAR.

D. Article 19 UK MAR (Managers’ Transactions)  
Article 19 UK MAR requires persons discharging managerial responsibilities (PDMRs) within certain issuers, and persons closely associated with them (PCAs), to notify the FCA and the issuer of relevant personal transactions undertaken in the issuer’s shares or debt instruments, or derivatives or other linked financial instruments, if the total amount of transactions per calendar year has reached €5,000. GDRs and the underlying shares they represent are financial instruments within the scope of the Article 19 MAR. Under this review we found a low number of PDMR transaction notifications had been notified to the FCA via our Electronic Submission System in connection with the GDR issuers in our targeted sample population. Specifically, we found 23 out of the 26 GDR issuers in our targeted sample had not submitted any PDMR transaction notifications.

The findings of this review are relevant to GDR issuers. We expect GDR issuers to know and comply with their continuing obligations, including:   

• Listing Principle 1 which requires listed companies to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable them to comply with their obligations. This extends to the procedures, systems and controls needed to meet their obligations under the Listing Rules, the Disclosure Guidance and Transparency Rules and applicable corporate governance rules.   
• LR 18.4 (Continuing Obligations)  
• DTR 7.2 (Corporate governance statements)  
• Article 17 UK MAR (Public disclosure of inside information)   
• Article 18 UK MAR (Insider Lists)  
• Article 19 UK MAR (Managers’ transactions)  

We plan to continue to use thematic reviews to assess how GDR issuers have complied with their continuing obligations. This will include repeating the assessments undertaken as part of this review to assess whether compliance rates have improved. 

An issuer with transferable securities admitted to trading on a UK regulated market must comply with DTR 4.1.3R by publishing its annual financial report at the latest four months after the end of each financial year, unless the issuer falls within one of the exemptions set out in DTR 4.4. and DTR TP1 19. An annual financial report must be made public, at the latest, four months after the end of each financial year pursuant with DTR 4.1.3R and submitted in Extensible Hypertext Markup Language (XHTML) format in accordance with DTR 4.1.15R.

Compliant with DTR 6.2.10R, the annual financial report must be filed with the FCA by uploading it to the National Storage Mechanism (NSM). 

Issuers should be mindful of DTR 6.2.11G when filing their annual financial report as the NSM may reject the report if it is not prepared in accordance with DTR 4.1.15R to DTR 4.1.22R. Please be aware that, in accordance with DTR 6.2.11G (4) if a report is rejected an issuer is expected to resubmit the report within the required timeline as prescribed under DTR 4.1.3R. 

Our requirements for annual financial reports being published and information being shared are set out in DTR 6.3. We monitor the compliance of issuers with this. We have noticed instances of:

• Annual financial reports that have been made public via a regulatory announcement, but the report has not been filed on the NSM. 
• Announcements of annual financial reports that do not contain a statement to indicate that the full report is available on the NSM as required under DTR 6.3.5R(1A)(1)(c). Announcements that do not contain a statement indicating the website on which the report is available as required under DTR 6.3.5R(3)(a).

Including links in an announcement to other hosting sites such as the London Stock Exchange’s website to provide access to a pdf of the report without also uploading it to the NSM does not meet the filing requirement in DTR 6.2.10R.
Please see here for the NSM user guide. 

Issuers who are required to comply with DTR 4.1 must ensure their annual financial reports are prepared in Extensible Hypertext Markup Language (XHTML) format pursuant to DTR 4.1.15R. 

Issuers with consolidated financial statements must prepare the statements in accordance with UK-adopted IFRS (subject to any exemptions in DTR 4.4 as noted above) and are required to tag the report using digital classification (in accordance with DTR 4.1.17-4.1.18). For more details, please visit our webpage on Company annual financial reporting in electric format and see DTR 4.1.17R. We published a Technical Note in July 2023 as a supplement to DTR 4.1 on the preparation and publication of annual financial reports.

We have noticed a low compliance rate with preparation and filing that meets the disclosure requirement for annual financial reports. For example, we have seen:

• annual financial reports that contain consolidated financial statements that have not been correctly tagged in accordance with DTR 4.1.18R
• annual financial reports that have been filed on the NSM in accordance with DTR 6.2.10R but not in XHTML format as required by DTR 4.1.15R

We temporarily suspend the listings of securities where issuers are unable to publish and file their annual financial report by the prescribed timeline set out in DTR 4.1.3R. We do this until the issuer is able to comply with its periodic financial reporting obligations (in accordance with LR 5.1.1R). Issuers who determine they are unlikely to meet the deadline under DTR 4.1.3R should contact the Primary Market Monitoring Team ([email protected]) to discuss arrangements for requesting a suspension under LR 5.3.1R. We will only restore the listing once we are satisfied that the issuer has met its disclosure obligations relating to the annual financial report, including compliance with DTR 4.1.15R where applicable. 
We will continue to closely monitor issuers’ compliance with annual financial reporting obligations and take supervisory action in respect of non-compliance as appropriate. 

We would like to draw your attention to FRC Lab (the Lab) Structured digital reporting – 2023 insights, published on 7 December 2023. This sets outs areas of focus for companies and gives suggestions to optimise reporting to meet the needs of investors and other users.
The report is based on a review of 50 annual financial reports filed to the FCA’s NSM. 

Investment professionals were also asked about their use of structured digital reports. The Lab report includes good practice tips in areas including:

• tagging – correct usage of tags
• design and usability – formatting and practical functionality in a structured digital format (iXBRL)
• process – taking ownership for the quality of annual financial report 
• growing investor use -understanding who is using this data

In PS 22/3 we finalised rules requiring listed companies to report information and to disclose against targets on the representation of women and ethnic minorities on their boards and executive management. This makes it easier for investors to see the diversity of their senior leadership team.

We explained in PS 22/3 that we consider that alignment with ONS categories on ethnicity would assist the comparability of reported data.  The ONS published revised recommended ethnicity categories for the 2021 census. Previously the Other Ethnic Group, included the guidance ‘including Arab’. From 2021, this qualification was removed. We have engaged with the ONS and other relevant groups to better understand views on the changes and how these groups can report their ethnicity. 

As a result, we propose therefore to make a change to the Other Ethnic Group category in our board diversity rules to align it with the ONS Other Ethnic Group category description.

If we proceed, we aim to make this change in the summer alongside wider Listing Rule changes and apply these revised rules to companies shortly after that.  

We note also that the ONS 2021 census questions gave respondents the opportunity to identify themselves against a much wider range of ethnicities and to use an open ‘Other’ box to provide further details if they wished to do so. 

Given this, we encourage companies in scope of our diversity and inclusion requirements to give flexibility to allow individuals to use the Other Ethnic Group category to identify themselves within a broad range of groups, including religious groups.  

We committed to reviewing our rules for listed company disclosures within 3 years of publication of PS 22/3 to assess their impact. At that time, we will consider and seek views on whether to revise the nature of data reported and whether to consider targets on other aspects of diversity.