Remuneration-related restrictions on government financing arrangements

The government yesterday announced updates to the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Covid Corporate Financing Facility (CCFF).

In the case of the CLBILS the maximum loan size is to be increased from £50 million to £200 million. However, any companies that wish to borrow more than £50 million will “be subject to restrictions on dividend payments, senior pay and share buy-backs during the period of the loan, including a ban on dividend payments and cash bonuses, except where they were previously agreed.”

The announcement added that borrowers “cannot pay any cash bonuses or award any pay rises to senior management (including the board) except where they were a) declared before the CLBILS loan was taken out, b) is in keeping with similar payments made in the preceding 12 months, and c) does not have a material negative impact on the borrower’s ability to repay the loan.”

A similar announcement was made by HM Treasury that companies wishing to draw from the CCFF for a term longer than 12 months will also be required to sign a letter “that commits to showing restraint on the payment of dividends and other capital distributions and on senior pay during the period in which their commercial paper is outstanding”.

HM Treasury and the Bank of England have also decided to publish the names of any businesses that have drawn under the CCFF.

FIT comment

These announcements echo the pressure that the government put on regulated financial services businesses to demonstrate restraint regarding dividends, share buyback and cash bonuses in late March. It is therefore not surprising that similar expectations have now been set for the CLBILS and CCFF (albeit subject to a number of caveats). Perhaps the only surprise is that these new conditions have only just been announced in mid-May, two months after the arrangements were first announced.

Further details are expected to be announced next week, but it is also worth noting some of the details set out in the announcements:

• The announcements specifically refers to “cash bonuses”. This suggests (as is certainly the case with guidance given to banks) that share awards (settled through new issue) would not be subject to the same restrictions. Could cash bonuses be deferred into shares until the loan is repaid?
• In the case of the CLBILS there appears to be a notable exception for previously declared pay awards/ increases (albeit subject to additional requirements that such awards/ increases are consistent with recent practice and will not materially affect repayment of the loan). For companies with a December year-end most significant pay announcements will already have been made and should be acceptable (as long as they are modest), although they will be challenged when it comes to consideration of any 2020 bonuses. Further, March and June year-end companies will potentially need to address this issue sooner.
• The CCFF announcement provides less detail and simply refers to “showing restraint” on senior pay while the commercial paper is outstanding. We understand that companies will be asked to provide details of how they intend to meet this requirement, evidenced in a signed letter (HM Treasury may publish this letter, if it considers the terms have not been complied with). However, the requirement to sign the letter will only apply to companies that require funding for more than 12 months; presumably any companies that use the facility for a shorter period would not be required to sign such a letter.
• Both announcements appear to place restrictions on “senior” remuneration, but it remains to be seen what this means in practice, particularly in the case of companies unlikely to pay 2020 bonuses in any event. The implication is that this would extend beyond the board, but how far down the organisation? Each company will be different, but the suggestion is that it would include the ExCo and possibly the next tier of management.

These are just some of the questions that could be raised and, until the detailed requirements are determined, it is difficult to assess to what extent these new restrictions will ‘bite’. That said, the political intent is clear – companies using the CLBILS or CCFF for large amounts or longer periods will be expected to demonstrate constraint on senior executive pay.

In reality, most remuneration committees will already be well aware of the political pressure surrounding executive pay in the context of the Covid pandemic (in particular see our recent briefing regarding the recently issued Investment Association guidance). Any company considering using either the CLBILS or CCFF would be well advised to consider the ramifications for executive pay before using either funding arrangement. Even for companies not seeking such finance, this perhaps heightens the increasingly unsympathetic attitude coming from various institutional shareholders in recent weeks.

These announcements also raise the question of whether similar conditions might be applied to other forms of government support, such as the Job Retention Scheme (JRS). We understand that such requirements were included when the financing of private hospitals was passed to the NHS. We are not aware of any plans to do so, but some commentators have already raised this and it would not be entirely surprising if this condition was added for further extensions of the JRS.  

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com.

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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