DTR 7.1 Audit committees

Audit committees and their functions

DTR 7.1.1 R RP

1An issuer must have a body or bodies4 responsible for performing the functions set out in DTR 7.1.3 R.4

DTR 7.1.1A R RP
  1. (1)

    4A majority of the members of the relevant body must be independent.

  2. (2)

    At least one member of the relevant body must have competence in accounting or auditing, or both.

  3. (3)

    The members of the relevant body as a whole must have competence relevant to the sector in which the issuer is operating.

[Note: article 39(1) of the Audit Directive]

DTR 7.1.2 G RP

The requirements for independence and competence in accounting and/or auditing may be satisfied by the same members4 or by different members of the relevant body.

DTR 7.1.2A R RP

4The chairman of the relevant body must be:

  1. (1)

    independent; and

  2. (2)

    appointed by the members of the relevant body or by the administrative or supervisory body of the issuer.

[Note: article 39(1) of the Audit Directive]

DTR 7.1.3 R RP

An issuer must ensure that, as a minimum, the relevant body must:

  1. (1)

    monitor the financial reporting process and submit recommendations or proposals to ensure its integrity4;

  2. (2)

    monitor the effectiveness of the issuer’s internal quality control4 and risk management systems and, where applicable, its internal audit, regarding the financial reporting of the issuer, without breaching its independence4;

  3. (3)

    monitor the statutory audit of the annual and consolidated financial statements, in particular, its performance, taking into account any findings and conclusions by the Financial Reporting Council under article 26(6) of the Audit Regulation4;

  4. (4)

    review and monitor the independence of the statutory auditor in accordance with paragraphs 2(3), 2(4), 3 to 8 and 10 to 12 of Schedule 1 to the Statutory Auditors and Third Country Auditors Regulations 2016 (SI 2016/649) and article 6 of the Audit Regulation, and in particular the appropriateness of the provision of non-audit services to the issuer in accordance with article 5 of the Audit Regulation4;

  5. (5)

    inform the administrative or supervisory body of the issuer of the outcome of the statutory audit and explain how the statutory audit contributed to the integrity of financial reporting and what the role of the relevant body was in that process; and4

  6. (6)

    except when article 16(8) of the Audit Regulation is applied, be responsible for the procedure for the selection of statutory auditor(s) and recommend the statutory auditor(s) to be appointed in accordance with article 16 of the Audit Regulation.4

[Note: article 39(6) of the Audit Directive]4

DTR 7.1.4 R

[deleted]4

DTR 7.1.5 R RP

An4issuer must make a statement available to the public disclosing which body carries out the functions required by DTR 7.1.3 R and how it is composed.

[Note: article 39(4)4 (part) of the Audit Directive]

DTR 7.1.6 G RP

An issuer may include the statement required by DTR 7.1.5 R in any statement it is required to make under DTR 7.2 (Corporate governance statements).

DTR 7.1.7 G RP

In the FCA's view, compliance with provisions A.1.2, C.3.1, C.3.2, C.3.3 and C.3.83 of the UK Corporate Governance Code2 will result in compliance with DTR 7.1.1 R to DTR 7.1.5 R.

3 2

DTR 7.2 Corporate governance statements

DTR 7.2.1 R RP

An issuer to which this section applies must include a corporate governance statement in its directors’ report. That statement must be included as a specific section of the directors’ report and must contain at least the information set out in DTR 7.2.2 R to DTR 7.2.7 R and, where applicable, DTR 7.2.8AR and6DTR 7.2.10 R.

DTR 7.2.2 R RP

The corporate governance statement must contain a reference to the following, where applicable4:

  1. (1)

    the corporate governance code to which the issuer is subject; 4

  2. (2)

    the corporate governance code which the issuer may have voluntarily decided to apply; and4

  3. (3)

    all relevant information about the corporate governance practices applied over and above 4the requirements of 4national law.

[Note: article 20(1)(a) first paragraph of the Accounting Directive4]

DTR 7.2.3 R RP
  1. (1)

    An issuer which is complying with DTR 7.2.2 R (1) or DTR 7.2.2 R (2) must:

    1. (a)

      state in its directors’ report where the relevant corporate governance code is publicly available; and

    2. (b)

      where 4it departs from that corporate governance code, explain which parts of the corporate governance code it departs from and the reasons for doing so.

  2. (2)

    Where DTR 7.2.2 R (3) applies, the issuer must make details of 4its corporate governance practices publicly available and state in its directors’ report where they can be found.

  3. (3)

    If an issuer has decided not to refer to 4any provisions of a corporate governance code referred to under DTR 7.2.2 R (1) and DTR 7.2.2 R (2), it must explain its reasons for that decision.

[Note: article 20(1)(a) second paragraph and article 20(1)(b) of the Accounting Directive4]

DTR 7.2.4 G RP

A listed company which complies with LR 9.8.6R (6) (the comply or explain rule in relation to theUK Corporate Governance Code1) will satisfy the requirements of DTR 7.2.2 R and DTR 7.2.3 R.

1
DTR 7.2.5 R RP

The corporate governance statement must contain a description of the main features of the issuer's internal control and risk management systems in relation to the financial reporting process.

[Note: article 20(1)(c) of the Accounting Directive4]

DTR 7.2.6 R RP

The corporate governance statement must contain the information required by paragraph 13(2)(c), (d), (f), (h) and (i) of Schedule 7 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) (information about share capital required under Directive 2004/25/EC (the Takeover Directive)) where the issuer is subject to the requirements of that paragraph.

[Note: article 20(1)(d) of the Accounting Directive4]

DTR 7.2.7 R RP

The corporate governance statement must contain a description of the composition and operation of the issuer's administrative, management and supervisory bodies and their committees.

[Note: article 20(1)(f) of the Accounting Directive4]

DTR 7.2.8 G RP

In the FCA's view, the information specified in provisions A.1.1, A.1.2, B.2.4,1C.3.3, C.3.8 and D.2.13 of the2UK Corporate Governance Code1 will satisfy the requirements of DTR 7.2.7 R.

1 1 1 2 2 1
DTR 7.2.8A R RP
  1. (1)

    5The corporate governance statement must contain a description of:

    1. (a)

      the diversity policy applied to the issuer’s administrative, management and supervisory bodies with regard to aspects such as, for instance, age, gender, or educational and professional backgrounds;

    2. (b)

      the objectives of the diversity policy in (a);

    3. (c)

      how the diversity policy in (a) has been implemented; and

    4. (d)

      the results in the reporting period.

  2. (2)

    If no diversity policy is applied by the issuer, the corporate governance statement must contain an explanation as to why this is the case.

[Note: article 20(1)(g) of the Accounting Directive]

DTR 7.2.8B G RP

5 DTR 7.2.8AR does not apply to an issuer which qualifies as a small or medium company under DTR 1B.1.7R.

DTR 7.2.9 R RP

An issuer may elect that, instead of including its corporate governance statement in its directors’ report, the information required by DTR 7.2.1 R to DTR 7.2.8AR6 may be set out in4:

  1. (1)

    4a separate report published together with and in the same manner as its annual report4; or

  2. (2)

    a4 document publicly available on the issuer's website to which reference is made in the directors’ report4.

    4

4Under (1) or (2), the corporate governance statement must contain the information required by DTR 7.2.6R or a reference to the directors’ report where that information is made available.

[Note: article 20(2) of the Accounting Directive4]

DTR 7.2.10 R RP

Subject to DTR 7.2.11 R, an issuer which is required to prepare a group directors’ report within the meaning of section 415(2) of the Companies Act 2006 must include in that report a description of the main features of the group’s internal control and risk management systems in relation to the financial reporting process for the undertakings included in the consolidation, taken as a whole4. In the event that the issuer presents its own annual report and its consolidated annual report as a single report, this information must be included in the corporate governance statement required by DTR 7.2.1 R.

[Note: article 29(2)(b) of the Accounting Directive4]

DTR 7.2.11 R RP
  1. (1)

    4An issuer that elects to include its corporate governance statement in a separate report as permitted by DTR 7.2.9R(1) must provide the information required by DTR 7.2.10R in that report.

  2. (2)

    4An issuer that elects to include its corporate governance statement in a document publicly available on the issuer's website to which reference is made in the directors’ report as permitted by DTR 7.2.9R(2) must provide the information required by DTR 7.2.10R in that document.

DTR 7.3 Related party transactions

Transaction

DTR 7.3.1 R

1A reference in this section:

  1. (1)

    to a transaction or arrangement by an issuer includes a transaction or arrangement by its subsidiary undertaking; and

  2. (2)

    to a transaction is, unless the contrary intention appears, a reference to the entering into of the agreement for the transaction.

[Note: article 9c(7) of the Shareholder Rights Directive]

Definition of related party

DTR 7.3.2 R

In DTR, a “related party” has the meaning in IFRS.

[Note: article 2(h) of the Shareholder Rights Directive]

Definition of related party transaction

DTR 7.3.3 R

In DTR, a “related party transaction” means:

  1. (1)

    a transaction (other than a transaction in the ordinary course of business and concluded on normal market terms) between an issuer and a related party; or

  2. (2)

    an arrangement (other than an arrangement in the ordinary course of business and concluded on normal market terms) pursuant to which an issuer and a related party each invests in, or provides finance to, another undertaking or asset; or

  3. (3)

    any other similar transaction or arrangement (other than a transaction or arrangement in the ordinary course of business and concluded on normal market terms) between an issuer and any other person the purpose and effect of which is to benefit a related party.

[Note: article 9c(5) of the Shareholder Rights Directive]

DTR 7.3.4 R

An issuer must establish and maintain adequate procedures, systems and controls to enable it to assess whether a transaction or arrangement with a related party is in the ordinary course of business and has been concluded on normal market terms. An issuer must ensure that the related party and any person who is an associate, director or employee of the related party does not take part in any such assessment.

[Note: article 9c(5) of the Shareholder Rights Directive]

Transactions to which this section does not apply

DTR 7.3.5 R

DTR 7.3.8R does not apply to any related party transaction which is:

  1. (1)

    a transaction or arrangement between the issuer and its subsidiary undertaking provided that:

    1. (a)

      the subsidiary undertaking is wholly owned; or

    2. (b)

      no other related party of the issuer has an interest in the subsidiary undertaking; or

  2. (2)

    a transaction or arrangement regarding remuneration, or certain elements of remuneration, of a director of the issuer, where the remuneration to be awarded or due to the director is in accordance with the issuer’s directors’ remuneration policy as approved by the shareholders of the issuer in accordance with section 439A of the Companies Act 2006 and paid in accordance with section 226B of the Companies Act 2006; or

  3. (3)

    a transaction offered to all shareholders of the issuer on the same terms where equal treatment of all shareholders and protection of the interests of the issuer is ensured.

[Note: article 9c(6) of the Shareholder Rights Directive]

Material related party transactions

DTR 7.3.6 G

Whether a related party transaction is a material related party transaction is determined by assessing its size relative to that of the issuer proposing to make it. The comparison of size is made by using the percentage ratios resulting from applying the related party test calculations to a transaction or arrangement. The related party tests are set out in DTR 7 Annex 1.

[Note: article 9c(1) of the Shareholder Rights Directive]

DTR 7.3.7 R

In DTR:

  1. (1)

    percentage ratio” means (in relation to a transaction or arrangement) the figure, expressed as a percentage, that results from applying a calculation under a related party test to the transaction or arrangement;

  2. (2)

    related party tests” means the tests set out in DTR 7 Annex 1, which are used to determine whether a transaction or arrangement is a material related party transaction; and

  3. (3)

    material related party transaction” means a related party transaction where any percentage ratio is 5% or more.

[Note: article 9c(1) of the Shareholder Rights Directive]

Requirements for material related party transactions

DTR 7.3.8 R

If an issuer enters into a material related party transaction, the issuer must:

  1. (1)

    no later than the time when the terms of the transaction or arrangement are agreed, publish an announcement on a RIS which sets out:

    1. (a)

      the nature of the related party relationship;

    2. (b)

      the name of the related party;

    3. (c)

      the date and the value of the transaction or arrangement; and

    4. (d)

      any other information necessary to assess whether the transaction or arrangement is fair and reasonable from the perspective of the issuer and of the shareholders who are not a related party, including minority shareholders;

  2. (2)

    obtain the approval of its board for the transaction or arrangement before it is entered into; and

  3. (3)

    ensure that any director who is, or an associate of whom is, the related party, or who is a director of the related party, does not take part in the board’s consideration of the transaction or arrangement and does not vote on the relevant board resolution.

[Note: article 9c(2) and 9c(4) of the Shareholder Rights Directive]

DTR 7.3.9 R

If, after obtaining board approval but before the completion of a material related party transaction, there is a material change to the terms of the transaction or arrangement, the issuer must comply again separately with DTR 7.3.8R in relation to the transaction or arrangement.

DTR 7.3.10 G

The FCA would (amongst other things) generally consider an increase of 10% or more in the consideration payable to be a material change to the terms of the transaction.

DTR 7.3.11 G
  1. (1)

    An issuer which complies with LR 11.1.7R (Requirements for related party transactions) in relation to a material related party transaction will satisfy the requirements of DTR 7.3.8R in respect of that transaction or arrangement.

  2. (2)

    An issuer which complies with LR 11.1.10R (Modified requirements for smaller related party transactions) in relation to a material related party transaction will satisfy the requirements of DTR 7.3.8R(1) in respect of that transaction or arrangement.

  3. (3)

    An issuer which complies with LR 11.1.7R as modified by LR 21.5.2R (Transactions with related parties: Equity shares) or LR 21.10.4R (Transactions with related parties: certificates representing shares) in relation to a material related party transaction will satisfy the requirements of DTR 7.3.8R(1) in respect of that transaction or arrangement.

  4. (4)

    An issuer which complies with LR 11.1.10R as modified by LR 21.5.2R or LR 21.10.4R in relation to a material related party transaction will satisfy the requirements of DTR 7.3.8R(1) in respect of that transaction or arrangement.

DTR 7.3.12 G

DTR 7.3.8R applies to the variation or novation of an existing agreement between the issuer and a related party whether or not, at the time the original agreement was entered into, that party was a related party.

Aggregation of transactions in any 12-month period

DTR 7.3.13 R
  1. (1)

    If an issuer enters into transactions or arrangements with the same related party (and any of its associates) in any 12-month period, and the issuer has not been required to comply with DTR 7.3.8R in respect of the transactions or arrangements, the transactions or arrangements must be aggregated.

  2. (2)

    If any percentage ratio is 5% or more for the aggregated transactions or arrangements, the issuer must comply with DTR 7.3.8R in respect of each of the aggregated transactions or arrangements.

[Note: article 9c(8) of the Shareholder Rights Directive]

Compliance with the disclosure requirements

DTR 7.3.14 G

An issuer should consider its obligations under the disclosure requirements in relation to a related party transaction.

[Note: article 9c(9) of the Shareholder Rights Directive]

DTR 7 Annex 1 The related party tests

Related party tests

DTR 7 Annex 1 G

1This Annex sets out the following related party tests:

  1. (1)

    the gross assets test;

  2. (2)

    the profits test;

  3. (3)

    the consideration test; and

  4. (4)

    the gross capital test.

The gross assets test

DTR 7 Annex 2 R
  1. (1)

    The gross assets test is calculated by dividing the gross assets the subject of the transaction by the gross assets of the issuer.

  2. (2)

    The “gross assets” of the issuer means the total non-current assets, plus the total current assets, of the issuer.

  3. (3)

    For:

    1. (a)

      an acquisition of an interest in an undertaking which will result in consolidation of the assets of that undertaking in the accounts of the issuer; or

    2. (b)

      a disposal of an interest in an undertaking which will result in the assets of that undertaking no longer being consolidated in the accounts of the issuer,

    the “gross assets the subject of the transaction” means the value of 100% of that undertaking’s assets irrespective of what interest is acquired or disposed of.

  4. (4)

    For an acquisition or disposal of an interest in an undertaking which does not fall within paragraph (3), the “gross assets the subject of the transaction” means:

    1. (a)

      for an acquisition, the consideration together with liabilities assumed (if any); and

    2. (b)

      for a disposal, the assets attributed to that interest in the issuer’s accounts.

  5. (5)

    If there is an acquisition of assets other than an interest in an undertaking, the “assets the subject of the transaction” means the consideration or, if greater, the book value of those assets as they will be included in the issuer’s balance sheet.

  6. (6)

    If there is a disposal of assets other than an interest in an undertaking, the assets the subject of the transaction means the book value of the assets in the issuer’s balance sheet.

DTR 7 Annex 3 G

The issuer should consider, when calculating the assets the subject of the transaction, whether further amounts, such as contingent assets or arrangements referred to in LR 10.2.4R (indemnities and similar arrangements), should be included to ensure that the size of the transaction is properly reflected in the calculation.

The profits test

DTR 7 Annex 4 R
  1. (1)

    The profits test is calculated by dividing the profits attributable to the assets the subject of the transaction by the profits of the issuer.

  2. (2)

    For the purposes of paragraph (1), “profits” means:

    1. (a)

      profits after deducting all charges except taxation; and

    2. (b)

      for an acquisition or disposal of an interest in an undertaking referred to in paragraph 2R(3)(a) or (b), 100% of the profits of the undertaking (irrespective of what interest is acquired or disposed of).

  3. (3)

    If the acquisition or disposal of the interest will not result in consolidation or deconsolidation of the target then the profits test is not applicable.

DTR 7 Annex 5 G

The amount of loss is relevant in calculating the impact of a proposed transaction under the profits test. An issuer should include the amount of the losses of the issuer or target, i.e. the issuer should disregard the negative when calculating the test.

The consideration test

DTR 7 Annex 6 R
  1. (1)

    The consideration test is calculated by taking the consideration for the transaction as a percentage of the aggregate market value of all the ordinary shares (excluding treasury shares) of the issuer.

  2. (2)

    For the purposes of paragraph (1):

    1. (a)

      the consideration is the amount paid to the contracting party;

    2. (b)

      if all or part of the consideration is in the form of securities to be traded on a market, the consideration attributable to those securities is the aggregate market value of those securities; and

    3. (c)

      if deferred consideration is or may be payable or receivable by the issuer in the future, the consideration is the maximum total consideration payable or receivable under the agreement.

  3. (3)

    If the total consideration is not subject to any maximum (and the other related party tests indicate the transaction to be a transaction where all the percentage ratios are less than 5%) the transaction is to be treated as a material related party transaction.

  4. (4)

    For the purposes of sub-paragraph (2)(b), the figures used to determine consideration consisting of:

    1. (a)

      securities of a class already admitted to trading, must be the aggregate market value of all those securities on the last business day before the announcement; and

    2. (b)

      a new class of securities for which an application for admission to trading will be made, must be the expected aggregate market value of all those securities.

  5. (5)

    For the purposes of paragraph (1), the figure used to determine market capitalisation is the aggregate market value of all the ordinary shares (excluding treasury shares) of the issuer at the close of business on the last business day before the announcement.

DTR 7 Annex 7 G

The issuer should consider whether further amounts should be included in the calculation of the consideration to ensure that the size of the transaction is properly reflected in the calculation. For example, if the purchaser agrees to discharge any liabilities, including the repayment of inter-company or third-party debt, whether actual or contingent, as part of the terms of the transaction.

The gross capital test

DTR 7 Annex 8 R
  1. (1)

    The gross capital test is calculated by dividing the gross capital of the company or business being acquired by the gross capital of the issuer.

  2. (2)

    The test in paragraph (1) is only to be applied for an acquisition of a company or business.

  3. (3)

    For the purposes of paragraph (1), the “gross capital of the company or business being acquired” means the aggregate of:

    1. (a)

      the consideration (as calculated under paragraph 6R);

    2. (b)

      if a company, any of its shares and debt securities which are not being acquired;

    3. (c)

      all other liabilities (other than current liabilities) including for this purpose minority interests and deferred taxation; and

    4. (d)

      any excess of current liabilities over current assets.

  4. (4)

    For the purposes of paragraph (1), the “gross capital of the issuer” means the aggregate of:

    1. (a)

      the market value of its shares (excluding treasury shares) and the issue amount of the debt security;

    2. (b)

      all other liabilities (other than current liabilities), including for this purpose minority interests and deferred taxation; and

    3. (c)

      any excess of current liabilities over current assets.

  5. (5)

    For the purposes of paragraph (1):

    1. (a)

      figures used must be, for shares and debt security aggregated for the purposes of the gross capital percentage ratio, the aggregate market value of all those shares (or if not available before the announcement, their nominal value) and the issue amount of the debt security; and

    2. (b)

      for shares and debt security aggregated for the purposes of paragraph (3)(b), any treasury shares held by the company are not to be taken into account.

Figures used to classify assets and profits

DTR 7 Annex 9 R
  1. (1)

    For the purposes of calculating the tests in this Annex, except as otherwise stated in paragraphs (2) to (7), the figures used to classify assets and profits must be the figures shown in the latest published audited consolidated accounts or, if an issuer has, or will have, published a preliminary statement of later annual results at the time the terms of a transaction are agreed, the figures shown in that preliminary statement.

  2. (2)

    If a balance sheet has been published in a subsequently published interim statement then gross assets and gross capital should be taken from the balance sheet published in the interim statement.

  3. (3)
    1. (a)

      The figures of the issuer must be adjusted to take account of transactions completed during the period to which the figures referred to in (1) or (2) relate, and subsequent completed transactions which the issuer would have been required to notify to a RIS under LR 10.4 or LR 10.5 if the issuer had a premium listing, provided that for such subsequent completed transactions the figures for the transactions are reasonably available to the issuer.

    2. (b)

      The figures of the target company or business must be adjusted to take account of transactions completed during the period to which the figures referred to in (1) or (2) relate, and subsequent completed transactions which would have been a class 2 transaction or greater for the purposes of the listing rules when classified against the target as a whole, provided that for such subsequent completed transactions the figures for the transactions are reasonably available to the target.

  4. (4)

    Figures on which the auditors are unable to report without modification must be disregarded.

  5. (5)

    When applying the percentage ratios to an acquisition by a company whose assets consist wholly or predominantly of cash or short-dated securities, the cash and short-dated securities must be excluded in calculating its assets and market capitalisation.

  6. (6)

    The principles in this paragraph also apply (to the extent relevant) to calculating the assets and profits of the target company or business.

DTR 7 Annex 10 G

The FCA may modify paragraph 9R(4) in appropriate cases to permit figures to be taken into account.

Anomalous results

DTR 7 Annex 11 G

If a calculation under any of the related party tests produces an anomalous result, or if a calculation is inappropriate to the activities of the issuer, the FCA may modify the relevant rule to substitute other relevant indicators of size, including industry-specific tests.

Adjustments to figures

DTR 7 Annex 12 G

Where an issuer wishes to make adjustments to the figures used in calculating the related party tests pursuant to 11G they should discuss this with the FCA before the related party tests crystallise.

The profits test: anomalous results

DTR 7 Annex 13 R

Paragraph 14R applies to an issuer where the calculation under the profits test produces a percentage ratio of 5% or more and this result is anomalous.

DTR 7 Annex 14 R

An issuer may, where each of the other applicable percentage ratios are less than 5%, disregard the profits test for the purposes of classifying the transaction.