Directors’ report
The directors present their report and the financial statements for the year ended 31st December 2009.
Business review
The information required by section 417 of the Companies Act 2006 and by rules 4.1.8 to 4.1.11 of the Disclosure and Transparency Rules is given on the pages within the Overview, Strategy, Performance and Responsibility sections of the annual report. These sections should be read in conjunction with this report and are incorporated into the directors’ report by reference.
The disclosures in respect of the use of financial instruments are given in note 26 and note 27 of the financial statements.
Share capital
As at 17th March 2010, the company’s issued share capital comprised a single class of 5p ordinary shares. Details of the ordinary share capital and shares issued during the year can be found in note 29 to the financial statements.
Rights and restrictions attaching to shares
Subject to applicable statutes, any resolution passed by the company and other shareholders’ rights, shares may be issued with such rights and restrictions as the company may by ordinary resolution decide, or (if there is no such resolution or so far as it does not make specific provision) as the board may decide. Subject to the articles, the Companies Acts and other shareholders’ rights, unissued shares are at the disposal of the board.
Voting
Every member and every duly appointed proxy present at a general meeting or class meeting has, upon a show of hands, one vote and every member present in person or by proxy has, upon a poll, one vote for every share held by him. In the case of joint holders of a share the vote of the senior shareholder who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders and, for this purpose, seniority shall be determined by the order in which the names stand in the register in respect of the joint holding.
Restrictions on voting
No member shall be entitled to vote at any general meeting or class meeting in respect of any share held by him if any call or other sum then payable by him in respect of that share remains unpaid or if a member has been served with a restriction notice (as defined in the articles of association) after failure to provide the company with information concerning interests in those shares required to be provided under the Companies Acts. The company is not aware of any agreements between shareholders that may result in restrictions on voting rights.
Restrictions on transfer of securities in the company
There are no restrictions on the transfer of securities in the company, except:
- that certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws); and
- pursuant to the Listing Rules of the Financial Services Authority whereby certain employees of the company require the approval of the company to deal in the company’s ordinary shares.
The company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities.
Variation of rights
Subject to the Companies Acts, rights attached to any class of shares may be varied with the written consent of the holders of not less than three-quarters of the issued shares of that class (calculated excluding any shares held as treasury shares), or with the sanction of a special resolution passed at a separate class meeting of the holders of the relevant class of shares. At every such separate class meeting (except an adjourned meeting) the quorum shall be two persons holding or representing by proxy not less than one-third in amount of the issued shares of the class (calculated excluding any shares held as treasury shares).
The rights conferred upon the holders of any shares shall not, unless otherwise expressly provided in the rights attaching to those shares, be deemed to be varied by the creation or issue of further shares ranking pari passu with them.
No person holds securities in the company carrying special rights with regard to control of the company.
Powers in relation to the company issuing or buying back its own shares
The directors were granted authority at the last annual general meeting (AGM) held in 2009 to allot relevant securities up to a nominal amount of £1,680,119. That authority will apply until the conclusion of this year’s AGM. At this year’s AGM, shareholders will be asked to grant an authority to allot relevant securities (i) up to a nominal amount of £1,686,346, and (ii) comprising equity securities up to a nominal amount of £3,372,693 (after deducting from such limit any relevant securities allotted under (i)), in connection with an offer by way of a rights issue, (the ‘section 551 authority’), such section 551 authority to apply until the end of next year’s AGM.
A special resolution will also be proposed to renew the directors’ power to make non-pre-emptive issues for cash in connection with rights issues and otherwise up to a nominal amount of £252,951.
A special resolution will also be proposed to renew the directors’ authority to repurchase the company’s ordinary shares in the market. The authority will be limited to a maximum of 10,118,080 ordinary shares and sets the minimum and maximum prices which may be paid.
Substantial shareholders
In addition to those of the directors disclosed in the Directors section below, the company has been notified of the following interests in the issued ordinary share capital as at 17th March 2010.
| Percentage | ||
|---|---|---|
| Number | of issued | |
| of shares | share capital | |
| Withers Trust Corporation | 6,217,444 | 6.16 |
| Withers Trust Corporation Ltd and James McCarthy |
5,548,731 | 5.50 |
| Blackrock Investment Management (UK) Ltd | 5,183,709 | 5.13 |
| Cohen & Steers Capital Management Inc | 4,970,225 | 4.92 |
| Standard Life Investment Ltd | 4,284,390 | 4.24 |
| Third Avenue Management LLC | 3,944,764 | 3.91 |
| Lady Jane Rayne | 3,593,838 | 3.56 |
| Legal & General Investment Management | 3,482,391 | 3.45 |
Amendment of articles of association
Unless expressly specified to the contrary in the articles of association of the company, the company’s articles of association may be amended by a special resolution of the company’s shareholders. A special resolution will be proposed at this year’s AGM making a number of changes to the company’s articles arising from the Companies Act 2006 and the Companies (Shareholders’ Rights) Regulations 2009.
Significant agreements
There are no agreements between the company and its directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid, except that, under the rules of the group’s equity-settled remuneration schemes some awards may vest following a change of control. Some of the group’s banking arrangements are terminable upon a change of control of the company.
As a REIT, a tax charge may be levied on the company if it makes a distribution to another company which is beneficially entitled to 10% or more of the shares or dividends in the company or controls 10% or more of the voting rights in the company, (a substantial shareholder), unless the company has taken reasonable steps to avoid such a distribution being made. The company’s articles of association give the directors power to take such steps, including the power:
- to identify a substantial shareholder;
- to withhold the payment of dividends to a substantial shareholder; and
- to require the disposal of shares forming part of a substantial shareholding.
There is no person with whom the group has a contractual or other arrangement which is essential to the business of the company.
Fixed assets
The group’s freehold and leasehold investment properties were professionally revalued at 31st December 2009, resulting in a deficit of £72.5m, before deducting the lease incentive adjustment of £8.6m. The freehold and leasehold investment properties are included in the group balance sheet at a carrying value of £1,888.6m. Further details are given in note 17 of the financial statements.
Post balance sheet events
Details of post balance sheet events are given in note 39 of the financial statements.
Corporate Governance
Compliance
The board supports the principles of good governance and believes that the company has, except as noted, complied with the main and supporting principle of the Combined Code on Corporate Governance published by the Financial Reporting Council. The company has not complied with code provision A.2.2, concerning the independence of the chairman on appointment. The company’s position is described in the following section. A number of other code provisions were not applicable in the current year.
The board
At the start of the year, the board comprised Mr Rayne, the non-executive chairman, six executive directors, Messrs Burns, Silver, Odom, George, Williams and Silverman, and six non-executive directors, Mrs de Moller and Messrs Ivey, Neathercoat, Farnes, Corbyn and Newell. On 1st February 2010, Mr Odom resigned as a director and was replaced as finance director by Mr Wisniewski.
The board assesses the independence of the non-executive directors with regard to the guidance on independence contained in code provision A.3.1, and notes that Messrs Rayne, Ivey and Neathercoat cannot automatically be deemed independent. The board is also aware that code provision A.2.2 requires a new chairman to be independent on appointment. In accordance with principle A.6 of the code, the board has carried out the annual review of the roles and performance of all directors which included reconsidering the independence of the non-executive directors.
Mr Rayne served in an executive capacity at London Merchant Securities plc prior to the acquisition and consequently is not deemed independent. However, in view of his significant contribution as chairman of the board, the board continues to consider that his position is justified.
Mr Ivey has served on the board for more than nine years and is therefore not deemed independent. Having considered his expertise and the manner in which he carried out his duties during the year, the board has no concern that his independent judgement is in any way impaired. Mr Neathercoat is also not deemed independent, having served as a non-executive director for more than nine years. The board has reviewed his independence and concluded that he continues to show strong independence in both judgement and in the performance of his duties as a director. Neither director has any association with management that might compromise his independence.
The directors also considered the composition of the board and continue to believe that it is suitably structured to satisfy the requirements of good corporate governance. In addition, during the year the nominations committee reviewed the timing and other issues relating to potential changes to the composition of the board and its committees with a view to ensuring an orderly change process. As a result of this review, on 1st January 2010, Mr Corbyn became chairman of the nominations committee replacing Mr Ivey and Mr Farnes took over as senior independent director from Mr Neathercoat. In addition, the committee agreed to commence a process of refreshment. This is likely to run for three years and will commence by recruiting a new, independent non-executive director during 2010 who, in due course, will take over as chairman of the audit committee. At the AGM in 2011, one of the group’s long-serving non-executive directors will retire.
A formal schedule, which has been approved by the board, sets out the division of responsibilities between the Chairman, who is responsible for the effectiveness of the board, and the chief executive officer, who is responsible for the day-to-day operations of the business. Biographies of the directors are given on the Board of directors page.
The board is responsible for setting the company’s strategic aims, ensuring that adequate resources are available to meet its objectives and reviewing management performance. The formal list of matters reserved for the full board’s approval is maintained and reviewed periodically. The full board met six times during the year and six meetings are scheduled for 2010. Extra meetings will be arranged if necessary. Additionally, the executive board, which consists of the executive directors met 10 times in 2009. The board is provided with comprehensive papers in a timely manner to ensure that the directors are fully briefed on matters to be discussed at these meetings.
Since 1993, the board has maintained a number of board committees. The terms of reference of each committee are available on the group’s website. Set out below are details of the membership and duties of the three principal committees:
Remuneration committee
The committee comprises of Mrs de Moller and Messrs Neathercoat, Corbyn and Newell under the chairmanship of Mr Farnes. It is responsible for establishing the company’s remuneration policy and individual remuneration packages for the executive directors. There were four meetings of the committee in 2009. The report on directors’ remuneration is set out here.
Audit committee
This committee is chaired by Mr Neathercoat and is served by Messrs Corbyn, Farnes and Newell and Mrs de Moller. The committee is responsible for considering the application of financial reporting and internal control principles and for maintaining an appropriate relationship with the company’s auditors. The committee met four times during 2009. The report of the audit committee can be seen here.
Nominations committee
Mr Ivey chaired this committee until 1st January 2010 when Mr Corbyn took over this role. The committee consists of all of the non-executive directors, except the chairman. Its responsibilities include identifying external candidates for appointment as directors and, subsequently, recommending their appointment to the board and, if requested, making a recommendation concerning an appointment to the board from within the company. The committee also carries out the annual appraisal of the performance and effectiveness of the board and its three committees. The committee met only once during the period under review. The nominations committee report can be seen here.
The directors’ attendance at board and committee meetings during the year was as follows:
| Full | Executive | Remuneration | Audit | Nominations | |
|---|---|---|---|---|---|
| board | board | committee | committee | committee | |
| No. of meetings | 6 | 10 | 4 | 4 | 1 |
| Executive directors | |||||
| J.D. Burns | 6 | 10 | – | – | – |
| S.P. Silver | 6 | 8 | – | – | – |
| C.J. Odom | 6 | 9 | – | – | – |
| P.M. Williams | 6 | 10 | – | – | – |
| N.Q. George | 6 | 9 | – | – | – |
| D.G. Silverman | 6 | 9 | – | – | – |
| Non-executive directors | |||||
| R.A. Rayne | 6 | – | – | – | – |
| J.C. Ivey | 6 | – | – | – | 1 |
| S.J. Neathercoat | 6 | – | 4 | 3 | 1 |
| R.A. Farnes | 6 | – | 4 | 4 | 1 |
| S.A. Corbyn | 6 | – | 4 | 4 | 1 |
| D. Newell | 6 | – | 4 | 4 | 1 |
| J. de Moller | 6 | – | 3 | 4 | 1 |
Performance evaluation
During the year, the nominations committee carried out a formal appraisal of the performance of the board and its committees. The remuneration committee performed appraisals of each of the executive directors, as part of the salary review process. The performance of the chairman was evaluated by the non-executive directors under the chairmanship of the senior independent director. All of the appraisals were conducted internally based on the guidance contained in the Higgs Report.
Directors
The appointment of a director from outside the company is on the recommendation of the nominations committee, whilst internal promotion is a matter decided by the board unless it is considered appropriate for a recommendation to be requested from the nominations committee.
Appointment and replacement of directors
The directors shall be not less than two and not more than 15 in number. The company may by ordinary resolution vary the minimum and/or maximum number of directors. Other than as required by the remuneration committee, a director shall not be required to hold any shares in the company. Directors may be appointed by the company by ordinary resolution or by the board. A director appointed by the board holds office only until the next AGM of the company and is then eligible for re-appointment. The board or any committee authorised by the board may from time to time appoint one or more directors to hold any employment or executive office for such period and on such terms as they may determine and may also revoke or terminate any such appointment.
At every AGM of the company any director who has been appointed by the board since the last AGM, or who held office at the time of the two preceding AGMs and who did not retire at either of them, or who has held office with the company, other than employment or executive office, for a continuous period of nine years or more at the date of the meeting, shall retire from office and may offer himself for re-appointment by the members. The company may by special resolution remove any director before the expiration of his period of office. The office of a director shall be vacated if:
- he resigns or offers to resign and the board resolves to accept such offer;
- his resignation is requested by all of the other directors and all of the other directors are not less than three in number;
- he is or has been suffering from mental or physical ill health and the board resolves that his office be vacated;
- he is absent without the permission of the board from meetings of the board (whether or not an alternate director appointed by him attends) for six consecutive months and the board resolves that his office is vacated;
- he becomes bankrupt or compounds with his creditors generally;
- he is prohibited by law from being a director;
- he ceases to be a director by virtue of the Companies Acts; or
- he is removed from office pursuant to the company’s articles.
If considered appropriate, new directors are sent on an external training course addressing their role and duties as a director of a quoted public company. Existing directors monitor their own continued professional development and are encouraged to attend those courses that keep their market and regulatory knowledge current.
All directors have access to the services of the company secretary and any director may instigate an agreed procedure whereby independent professional advice may be sought at the company’s expense. Directors and officers liability insurance is maintained by the company.
Powers of the directors
Subject to the company’s memorandum of association, its articles, the Companies Acts and any directions given by the company by special resolution, the business of the company will be managed by the board who may exercise all the powers of the company, whether relating to the management of the business of the company or not. In particular, the board may exercise all the powers of the company to borrow money, to guarantee, to indemnify, to mortgage or charge any of its undertaking, property, assets (present and future) and uncalled capital and to issue debentures and other securities and to give security for any debt, liability or obligation of the company or of any third party.
Directors
The directors of the company during the year and their interests in the share capital of the company, including shares over which options have been granted, either under the executive share option scheme or the performance share plan, are shown below. All of these interests are held beneficially.
| Ordinary shares of 5p each | Options | ||||
|---|---|---|---|---|---|
| 31 Dec 2009 | 31 Dec 2008 | 31 Dec 2009 | 31 Dec 2008 | ||
| R.A. Rayne | 4,350,017 | 4,350,017 | 382,746 | 382,746 | |
| J.C. Ivey | 79,072 | 79,072 | – | – | |
| J.D. Burns | 784,669 | 775,201 | 243,800 | 187,740 | |
| S.P. Silver | 377,687 | 377,687 | 171,240 | 102,700 | |
| C.J. Odom (resigned 1st February 2010) |
47,952 | 41,867 | 137,075 | 137,995 | |
| N.Q. George | 24,482 | 22,820 | 162,955 | 132,645 | |
| P.M. Williams | 29,302 | 25,977 | 140,455 | 132,395 | |
| D.G. Silverman | – | – | 97,450 | 54,750 | |
| D.M.A. Wisniewski (appointed 1st February 2010) |
–* | n/a | –* | n/a | |
| S.J. Neathercoat | 8,000 | 8,000 | – | – | |
| R.A. Farnes | 6,838 | 6,838 | – | – | |
| S.A. Corbyn | 1,000 | 1,000 | – | – | |
| J. de Moller | 2,985 | 2,985 | – | – | |
| D. Newell | 1,492 | 1,492 | – | – | |
*As at date of appointment
On 18th January 2010 directors exercised options over 118,000 shares following which the number of options held by those directors was as follows: Mr Odom 111,075; Mr George 105,705 and Mr Williams 105,705. There have been no other changes in any of the directors’ interests between the year-end and 17th March 2010.
During the year, directors exercised options over 105,250 shares. The exercise prices were as follows: 13,000 shares at £5.015; 8,750 shares at £5.53; 39,000 at £6.725 and 44,500 at £7.235. No new options were granted to directors under the Executive Share Option Scheme. A conditional grant of 405,100 shares was made to directors under the Performance Share Plan whilst 34,713 shares vested to the directors from an earlier conditional award at a zero exercise price. The remaining 60,387 shares of this award lapsed.
In accordance with the articles of association, at the next AGM Messrs Rayne, George, Corbyn and Newell retire by rotation and, being eligible, offer themselves for re-election. In addition, having been appointed since the last AGM and being eligible, Mr Wisniewski offers himself for re-election. In accordance with the principles of good corporate governance, Messrs Neathercoat and Ivey retire, both having served on the board for more than nine years and, being eligible, offer themselves for re-election. Biographies of all the directors are given on the Board of directors page.
Other than as disclosed in note 41, the directors have no interest in any material contracts of the company.
Communication with shareholders
The company has always recognised the importance of clear communication with shareholders. Regular contact with institutional shareholders and fund managers is maintained, principally by the executive directors, through the giving of presentations and organising visits to the group’s property assets. The board receives regular reports of these meetings. The annual report, which is available to all shareholders, reinforces this communication. The AGM provides an opportunity for shareholders to question the directors and, in particular, the chairman of each of the board committees. An alternative channel of communication to the board is available through the senior independent director.
Risk management and internal control
The principal risks and uncertainties facing the group in 2010, together with the controls and mitigating factors are set out on the Risk management page. The systems that control the risks form the group’s system of internal control. The key elements of the group’s financial control framework are:
- an approved schedule of matters reserved for decision by the board supported by defined responsibilities and levels of authority;
- the day-to-day involvement of the executive directors in all aspects of the group’s business;
- a comprehensive system of financial reporting and forecasting including both sensitivity and variance analysis;
- maintenance and regular review and updating of the group’s risk register; and
- a formal whistleblowing policy.
The effectiveness of this system and the operation of the key components thereof have been reviewed for the accounting year and the period to the date of approval of the financial statements.
The board has considered the need for an internal audit function but continues to believe that this is unnecessary given the size and complexity of the group.
Going concern
Having made due enquiries, the directors have reasonable expectation that the company has adequate resources to continue in operational existence for the foreseeable future. Therefore, the board continues to adopt the going concern basis in preparing the accounts.
Disclosure of information to auditors
The directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the company’s auditors are unaware; and each director has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information.
Auditors
BDO LLP have expressed their willingness to continue in office and accordingly, resolutions to re-appoint them and to authorise the directors to determine their remuneration will be proposed at the AGM. These are resolutions 11 and 12 set out in the notice of meeting that accompanies the report and accounts.
Annual general meeting
The notice of meeting contained in the circular to shareholders that accompanies the report and accounts includes five special resolutions to be considered.
Resolution 13 will renew the authority of the directors under Section 551 of the Companies Act 2006 to allot shares. Paragraph A of the resolution gives the directors authority to allot ordinary shares up to an aggregate nominal amount of £1,686,346 which represents about one-third of the issued ordinary share capital (excluding treasury shares) of the company as at the latest practicable date prior to the publication of this document.
In line with guidance issued by the Association of British Insurers, paragraph B of the resolution gives the directors authority to allot ordinary shares in connection with a rights issue in favour of ordinary shareholders up to an aggregate nominal amount of £3,372,693, as reduced by the nominal amount of any shares issued under paragraph A of the resolution. This amount (before any reduction) represents approximately two-thirds of the issued ordinary share capital (excluding treasury shares) of the company as at the latest practicable date prior to the publication of this document.
The directors have no present intention of issuing shares except on the exercise of options under the company’s share option scheme or on the vesting of shares under the company’s performance share plan. The authority will expire at the conclusion of the next AGM after the passing of the resolution or, if earlier, the close of business on 25th August 2011.
Resolution 14 is a special resolution, proposed annually, and will renew the directors’ authority under section 571 of the Companies Act 2006. The resolution empowers the directors to allot or, now that the company may hold shares as treasury shares (as further described below), sell shares for cash in connection with pre-emptive offers with modifications to the requirements set out in section 561 of the Companies Act 2006. The resolution further empowers the directors to allot or, in the case of treasury shares, sell shares for cash, otherwise than on a pre-emptive basis, up to an aggregate nominal value of £252,951 which is equivalent to approximately 5% of the issued share capital as at the latest practicable date prior to the publication of this document.
In respect of this aggregate nominal amount, the directors confirm their intention to follow the provisions of the Pre-Emption Group’s statement of principles regarding cumulative usage of authorities within a rolling three-year period where the principles provide that usage in excess of 7.5% should not take place without prior consultation with shareholders.
Allotments made under the authorisation in paragraph (B) of resolution 13 would be limited to allotments by way of a rights issue only (subject to the right of the board to impose necessary or appropriate limitations to deal with, for example, fractional entitlements and regulatory matters).
The authority will expire at the conclusion of the next AGM after the passing of the resolution or, if earlier, the close of business on 25th August 2011.
Resolution 15 is proposed to renew the authority enabling the company to purchase its own shares. This authority enables the directors to act quickly, if, having taken account of all major factors such as the effect on earnings and net asset value per share, gearing levels and alternative investment opportunities, such purchases are considered to be in the company’s and shareholders’ best interest while maintaining an efficient capital structure. The special resolution gives the directors authority to purchase up to 10% of the company’s ordinary shares and specifies the maximum and minimum prices at which shares may be bought.
The Companies Act 2006 permits the company to hold any such repurchased shares as treasury shares with a view to possible re-issue at a future date, as an alternative to immediately cancelling them (as had previously been required under the relevant legislation). Accordingly, if the company purchases any of its shares pursuant to resolution 15, the company may cancel those shares or hold them in treasury. Such a decision will be made by the directors at the time of purchase on the basis of the company’s and shareholders’ best interests. As at the date of the notice of meeting, the company held no treasury shares.
The total number of options to subscribe for ordinary shares outstanding at 17th March 2010 was 1,374,166, which represented 1.36% of the issued share capital (excluding treasury shares) at that date. If the company were to purchase the maximum number of ordinary shares permitted by this resolution, the options outstanding at 17th March 2010 would represent 1.68% of the issued share capital (excluding treasury shares).
Resolution 16 is proposed to adopt new articles of association in order to update the company’s current articles of association primarily to take account of the coming into force of the Companies (Shareholders’ Rights) Regulations 2009 and the implementation of the last parts of the Companies Act 2006.
Resolution 17 is required to reflect the implementation of the Shareholder Rights Directive, which increased the notice period for general meetings of the company to 21 days. The company is currently able to call general meetings (other than an AGM) on 14 clear days’ notice and would like to preserve this ability. The approval will be effective until the company’s next AGM when it is intended that a similar resolution will be proposed.
By order of the board
T.J. Kite ACA
Secretary
17th March 2010