The Law Debenture Corporation
Annual Report 2019

Plain-text annual report

A N N U A L R E P O R T 2019 The Law Debenture Corporation p.l.c. A T A G L A N C E A differentiated investment proposition A PROUD HISTORY 131 years of value creation for shareholders STRENGTH AND DIVERSITY OF INCOME 32.8% LONG-TERM DIVIDEND GROWTH of total 2019 dividend funded by our Independent Professional Services business 41 years of increasing or maintaining dividends to shareholders (113.1% increase in dividend over the last ten years) CONSISTENT LONG-TERM OUTPERFORMANCE OF BENCHMARK 53.4% outperformance of benchmark over ten years, 12.8% over five years and 25.5% over three years Key statistics for the year ended 31 December 2019 702.2p NAV per share (2018: 614.1p) 37.6% 19.4% 17.9% Proposed increase in 2019 NAV total return for the year NAV total return for the year dividend per share (2018: 9.2%) (with debt at par) (2018: (6.6)%) (with debt at fair value) (2018: (5.8)%) 830.1m1 Net Asset Value (2018: 725.9m) 44.3% 19.2% 21.0%2 Increase in revenue return Benchmark total return Growth in fair valuation per share for the year (2018:(9.5)%) of IPS (2018: 13.1%) 1 Please refer to page 38 for calculation of net asset value. 2 Increase in annual valuation of IPS business, excluding change in surplus net assets. lawdebenture.com Law Debenture is an investment trust and a leading provider of independent professional services, listed on the London Stock Exchange. From its origins in 1889, it has diversified to become a Group with a unique range of activities in the financial and professional services sectors. The Group has two distinct areas of business: Investment Portfolio c. 85% of NAV Independent Professional Services (IPS) business c. 15% of NAV Managed by James Henderson and Laura Foll of Janus Henderson OBJECTIVE: LONG-TERM CAPITAL GROWTH IN REAL TERMS & STEADILY INCREASING INCOME – Focused on long-term returns – Low ongoing charges ratio at 0.48%1 compared to industry average of 1.04%2 – Contrarian investment style: – Out of favour equities standing at valuation discounts to their long-term historical average – High quality companies with strong competitive advantage at attractive valuations – Selective, bottom-up approach – Diversified portfolio by sector (predominant UK weighting) PENSIONS The longest established and largest UK provider of independent pension trustees CORPORATE TRUST A leading independent corporate trustee across international capital markets CORPORATE SERVICES Range of outsourced solutions to corporates internationally INTERNATIONAL PRESENCE: United Kingdom, New York, Ireland, Hong Kong, Delaware, and Channel Islands All divisions have further potential for growth through the overall market growth for these services and market share gains, alongside better leveraging technology, strong relationships and a high quality brand Significant, consistent income contribution from IPS gives greater flexibility in stock selection 1 Calculated based on data held by Law Debenture for the year ended 31 December 2019. 2 Source: Association of Investment Companies industry average (excluding 3i) as at 31 December 2019. A T A G L A N C E 1 A T A G L A N C E Contents A T A G L A N C E C O R P O R A T E G O V E R N A N C E Financial summary and performance 3 Directors’ report S T R A T E G I C I N F O R M A T I O N Chairman’s statement Q&A with Denis Jackson, CEO Q&A with James Henderson and Laura Foll, investment managers Chief Executive Officer’s review Investment managers’ review Fifteen largest holdings Classification of investments Investment portfolio valuation Changes in geographical distribution Strategic report Calculation of net asset value (NAV) per share Long-term performance record 4-5 6-7 8-10 12-17 18-23 24-25 26 28-31 31 32-37 38 39 Corporate governance report Audit Committee report Annual remuneration report Company advisers and information The Board F I N A N C I A L S T A T E M E N T S Independent auditor’s report Group income statement Statement of comprehensive income Statement of financial position Statement of changes in equity Statements of cash flows Notes to the accounts C O R P O R A T E I N F O R M A T I O N Alternative performance measures Financial calendar Subsidiary company details 40-42 43-46 48-49 50-70 71 72-73 75-79 80 80 81 82-83 84 85-113 115 116 116 Notice of annual general meeting (AGM) 117-118 Notes to the notice of AGM AGM venue 119-120 121 2 lawdebenture.com A T A G L A N C E Change +14.4% +14.3% +67.6% +8.5% n/a +44.3% n/a +37.6% +20.4% 31 December 2019 £000 31 December 2018 £000 725,863 Pence 614.07 13.23 7.87 0.16 21.26 (71.85) 18.90 540.00 % 0.43 3 (12.1) 830,139 Pence 702.17 22.18 8.54 (0.04) 30.68 79.27 26.00 650.00 % 0.48 9 (7.4) 1 year % 19.4 17.9 19.2 24.5 3 years % 5 years % 10 years % 27.6 27.6 22.0 34.6 9.3 52.4 49.4 43.8 43.5 13.4 192.4 181.5 118.3 217.8 33.9 Financial summary Net assets1 Net Asset Value (NAV) per share at fair value1* Revenue return per share Investment portfolio Independent professional services Group charges Group revenue return per share5 Capital (loss)/return per share5 Dividends per share Share price Ongoing charges3* Gearing3 Discount* Performance NAV total return2* (with debt at par) NAV total return2* (with debt at fair value) FTSE Actuaries All-Share Index Total Return4 Share price total return4* Change in Retail Price Index4 2.2 * Items marked “*” are considered to be alternative performance measures and are described in more detail on page 115. 1 Please refer to page 38 for calculation of net asset value. 2 NAV is calculated in accordance with the Association of Investment Companies (AIC) methodology, based on performance data held by Law Debenture including fair value of IPS business and long-term borrowings. NAV is shown with debt measured at par and with debt measured at fair value. 3 Source: AIC. Ongoing charges are based on the costs of the investment trust and include the Janus Henderson Investors management fee of 0.30% of NAV of the investment trust. There is no performance related element to the fee. Gearing is described in the strategic report on page 34. 4 Source: Bloomberg. 5 Effective from 1 January 2019, allocation of finance costs and investment management fees in the income statement is split 25% to revenue and 75% to capital (2018: 100% to revenue) in order to better reflect the expected split of future returns between revenue and capital. This change in allocations is not a change in accounting policy. 3 S T R A T E G I C I N F O R M A T I O N Chairman’s statement Law Debenture has a very well diversified equity portfolio which aims to be a one-stop-shop for investors seeking largely UK quoted market exposure to high quality companies. Our investment managers have a strong record of long term outperformance and a proven ability to seek out attractive and undervalued stocks. The team continue to view the UK market as attractive on a relative valuation basis as it has underperformed other global equity markets over the last five years despite a strong absolute showing in 2019. Dividend Law Debenture has increased or maintained its dividend in each of the last 41 years. Since becoming Chairman, I, along with your Board, have been looking carefully at the balance we provide between our objectives of long-term capital growth and steadily increasing income. Our IPS business provides us with a unique advantage: we are far less reliant on the level of dividends paid by our underlying investments than other funds and trusts. Indeed, 35%4 of our dividends in the ten years to 31 December 2019 have been funded by our IPS business and we are confident that the new management team can continue to deliver growth in the longer term. We have listened to the feedback from our shareholders, alongside our own observations of our dividend yield compared to peers. The combination of strong profit growth in both our IPS business and our investment trust portfolio, the opportunity for greater flexibility of payment caused by the adjustment of our expense allocation and the strength of our reserves has provided the Board with a unique opportunity to reset our dividend to a level closer to our peers and to In what has been a year of significant progress for Law Debenture, I am delighted to introduce our 2019 annual report. Performance Our aim is to produce long-term capital growth and steadily increasing income for our shareholders. Against those two aims, 2019 proved a very successful year for Law Debenture, seeing a share price total return of 24.5%. We are proud to have generated almost the wider market. £157m of value for our shareholders over the course of last year and to see the share price end the year at £6.50, up from £5.40 at the end of 2018. Following an easing of negative sentiment towards the UK, 2019 saw something of a reversal of fortunes for the UK market. Our benchmark, the FTSE Actuaries All-Share Index, delivered a 19.2% total return, following a 9.5% decline in 2018. Our aim, as we say, is long-term capital growth. We take an active management approach, meaning shareholders should not expect our investment performance to directly track the market. We are pleased that, against that back-drop, the Company’s NAV total return (with debt at par) marginally outperformed the benchmark, with a total return of 19.4% for 2019. Including debt at fair value, the total return for the year was 17.9%. This follows a performance in 2018 which reflected only 60% of the market decline. Over the longer term, we have outperformed our index by 25.5% over three years, 12.8% over five years and 53.4% over ten years1, demonstrating our ability to consistently outperform the market over time. £1,000 invested in Law Debenture ten years ago would have been worth £3,178 2 at the end of 2019. Looking back further still to the start of 1993, when James Henderson first became involved in the management of the portfolio, the trust has outperformed the FTSE All-share by 230%3. Subject to your approval, we propose to pay a final dividend of 19.4 pence per share, an increase of 50% on the 2018 final dividend of 12.9 pence per share. The dividend will be paid on 16 April 2020 to holders on the register on the record date of 13 March 2020. This will provide shareholders with a total dividend of 26.0 pence per share for 2019, compared to 18.9 pence in 2018, an increase of 38%. We are happy to make this recommendation in the context of £62.5m of consolidated retained earnings and a revenue profit for the year of £36.3m. This enhanced payment represents a dividend yield of 4.4% based on our share price of 592 pence on 25 February 2020, compared to 3.5% yield at 31 December 2018. If approved, we will have increased the dividends paid to shareholders by more than 100% over the past ten years, with an annualised dividend growth of 7.9%5. We have given careful consideration to the long-term sustainability of this increase and are confident we can deliver a closer to market yield without restricting Janus Henderson’s investment approach. Looking to 2020 and beyond, we will aim to continue to deliver gradually increasing income payments in excess of inflation over time, subject to unforeseen circumstances. We are also taking this opportunity to move to a schedule of quarterly dividend payments. We hope that increasing the amount, predictability and regularity of our dividends will prove attractive for both new and existing shareholders. 1 Calculated on a total return basis with debt at fair value. 2 Calculated on a total return basis assuming dividend re-investment between 31 December 2009 and 31 December 2019. 3 Source: Bloomberg, total return analysis from first available data point on Bloomberg of Law Debenture NAV (measured ex income with debt at par) as at 1 February 1994, measured to 31 December 2019. FTSE Actuaries All Share Total Return measured over the same performance period. Bloomberg data includes the adjustment to the fair value of the investment trust in respect of the IPS business from 29 February 2016. 4 lawdebenture.com 4 Calculated based on dividends paid in respect of the financial years between 2010 and 2019. 5 Calculated on an annualised basis on dividend payments in respect of accounting years between 1 January 2010 and 31 December 2019. S T R A T E G I C I N F O R M A T I O N Investment portfolio 2019 has been a significant year for the investment trust and the The capital valuation of the business has increased by 21.0% over portfolio. In May, we completed our transfer from the AIC’s Global the course of 2019, details of which can be found on page 38. We sector to the UK Equity Income Sector, better reflecting the reality of are confident that this unique business can continue to support our long-term portfolio construction, which has seen at least a 70% both of our objectives of long-term capital growth and steadily allocation to UK stocks over the past decade. increasing income. Over the course of 2019, our UK exposure has increased to 80.7% from 74.5% at the end of 2018. The conviction to increase our exposure to the UK ahead of the election result by our fund managers, James Henderson and Laura Foll of Janus Henderson, proved astute. Combined with their methodical long-term approach to stock selection, this lead to a robust 19.4% NAV total return (with debt at par) for 2019. Laura’s appointment as co-manager came into effect from 1 August, changing little from an operational perspective, but better reflecting Laura’s contribution to the overall running of the portfolio. You can read more from James and Laura in their investment review on pages 18 to 22, where we continue to enhance disclosure to help our shareholders better understand how they approach managing the portfolio. We have also introduced a question and answer section on pages 8 to 10 where you can read in their own words what has worked well for the portfolio in 2019 and what has them excited from an investment perspective for 2020. Your Company’s Board Having welcomed Katie Thorpe our Chief Financial Officer to the Board from 1 January 2019, we were delighted to appoint Claire Finn to the Board on 2 September 2019. Claire has in-depth knowledge of the UK asset management, pensions and insurance landscape, having had a career spanning over 18 years in financial services. We have a Board which is diverse in terms of its skill set and is well placed to guide your Company going forwards. Report and accounts Following the modernisation of the look and feel of the report and accounts in 2018, we have continued to evolve and improve our disclosure to investors. You will find numerous points of enhanced disclosure throughout this document, including an expansion of our thought process around Environmental, Social and Governance Our on-going charges ratio for 2019 of 0.48% for the investment (ESG), additional disclosure on the investment rationale behind our trust remains significantly lower than the average for UK investment trusts of 1.04%1. This, in turn, means shareholders are experiencing a significantly reduced drag on their on-going investment performance than may be the case for other trusts. largest investments and improved reporting on our IPS business and how we calculate its value. In response to shareholder feedback, we will be publishing a full portfolio listing every month, rather than simply publishing our top 10 investments. We aim to continue to evolve our reporting into 2020 and beyond. Independent professional services (IPS) 2019 was another solid year for our IPS business. We provided Looking forwards forward guidance for our shareholders for the first time in respect For our investment portfolio, James and Laura remain net investors of 2019, stating our commitment to achieving mid to high single- into the market on days of weakness, using their disciplined and digit growth. In that context, I am pleased to report revenue growth of 7.5%2 and an increase in earnings per share of 8.5%. We have been able to achieve this despite a difficult market backdrop, with continued Brexit uncertainty, fears of globally escalating trade wars and reduced levels of investment banking activity, all of which have negatively affected our capital markets facing businesses. Work continues to lay the foundations for future growth. We are confident that we are still at the early stages of growth and believe we can continue to grow our revenue and earnings significantly over contrarian approach to identify stocks with strong fundamentals currently overlooked by the market. For our IPS business, we believe we remain in the early stages of a re- invigorated growth cycle and that there is great value to be created for our shareholders as we remain focussed on growing our revenues while controlling our cost base. time. The belief in this growth was a key factor in the determination of an increased dividend to shareholders. Our aim is for our IPS business again to deliver mid to high single-digit growth for our investors over Robert Hingley Chairman 26 February 2020 the course of 2020. As we continue to drive growth and improve the transparency of the nature and operations of our business, we are starting to see the investor community pay increasing attention to this business. 1 Law Debenture’s on-going charges of 0.48% has been calculated based on guidance provided by the AIC and includes the Janus Henderson management fee of 0.3% of the NAV of the investment trust. There is no performance related element to the fee. The average on-going charges ratio for UK investment trusts of 1.04% as at 31 December 2019 has been sourced from the AIC website. 2 Revenue growth for the IPS business for 2019, after the deduction of costs of sales, which comprises solely of legal fees that we incur on behalf of and then recharge to clients. 5 S T R A T E G I C I N F O R M A T I O N Q&A with Denis Jackson, Chief Executive Officer What is the Board’s view of the 2019 investment performance and what do you believe are the prospects for the portfolio in 2020? Having sheltered our investors from approximately 40% of our benchmark’s decline in 2018, it was very pleasing to participate fully in the upside for 2019. The sands are shifting quickly under many traditional business models. Newsfeeds are littered with tales of investor losses as companies fail to adapt to rapidly changing consumer behaviours and investor demands. While James and Laura didn’t avoid every stock that had a challenging year, on balance we remain very pleased with both the short-term and long-term performance. As we start 2020, we are reminded of our need to focus on creating value for our shareholders in the long term. Short-term sentiment is being weighed on heavily by the rapidly spreading Coronavirus in China, an event that was not flagged by anyone in their 2020 Investment Outlooks. James and Laura invest in great companies that (in almost every case) produce real cash profits. We are optimistic that, as 2020 unfolds and the UK’s trading relationships with both the EU and the major economies becomes clearer, the relative cheapness of UK equities will start to reverse. James and Laura provide further context on this in the investment managers’ review. Why do you think it was important for Law Debenture to move from AIC’s Global to the UK Equity Income sector? During my first year of investor meetings we often received feedback that our ‘Global’ classification was causing some confusion among investors, particularly as they tried to reconcile this label to our historically UK-biased portfolio. Post the change, this distraction has fallen away and our investors are rightly focused on how we are executing rather than how we are categorised. You inherited a great business in IPS, but growth had stalled. What have you done differently to inject growth back in to the business? I think there are three simple changes that we continue to work on that have had the largest impact. First, we have endeavoured to raise the ambition of each of our great businesses. Secondly, we are gradually becoming much more outwardly rather than inwardly focused; put simply we listen more keenly to understanding the commercial problems that our clients are trying to solve in order to evolve our products. Thirdly, we have attracted new talent to our business, broadening the diversity of our skill set and encouraging innovation. 6 lawdebenture.com One thing we have not changed is the focus on quality of client Given our role as a bridge between bond investors and corporate experience. This remains very much top of the agenda for issuers (corporate trust), pension investors and allocation of every employee. You provided forward guidance to shareholders on the growth prospects of the IPS business for the first time last year. Were you pleased with this year’s performance? I am pleased with the excellent momentum that our Pensions and Whistleblowing businesses continue to build. The strong regulatory tail-winds that are accelerating their growth are also very welcome. The Capital Markets facing businesses, however, had a tougher year. Given that we started acting as a bond trustee over 130 years ago, it is difficult to argue that we are not operating in very mature markets. We need to use our competitive advantages of speed and technical excellence together to grow market share in more complex transactions. capital (pensions), and whistle-blowers and their employer (Safecall). We are well placed to grow our market share in a market we believe will expand significantly over the next few years. What do you think the biggest challenge is for the IPS business in 2020 and what excites you most about the year to come? We have touched on this several times elsewhere, but following a tough year for our capital markets facing businesses in 2019, our biggest challenge will be to accelerate our growth in this highly competitive space. We are investing in new people and skills to upgrade our offerings and will play to our strengths. I am most excited about our Monday morning management meetings. We start each week by reviewing client activities of note across our businesses from the prior and coming week. Do you believe you can sustainably grow all three divisions of the IPS business? I never cease to be energised by the quality of clients, and the successful outcomes that a firm of around 140 people can generate week in and week out. S T R A T E G I C I N F O R M A T I O N Yes. If we didn’t believe that, we should exit any business that we felt would be dilutive to shareholders. Our investment objective is simple: long-term capital gains and steadily increasing income. One of the great things about having permanent capital is that we are able to invest for the long term. We remain alert to any prospective acquisitions that would enhance our businesses and offer value to our shareholders. What key themes are you thinking about across all aspects of your business? Law Debenture’s reputation is built on independence and trust. We are extremely careful every day to protect these values. The increasing use of technology and evolution of ESG initiatives are the two main themes that permeate all of our divisions. Like many professional services firms, we had been relatively slow adopters of technology. This is rapidly changing. We have significantly added depth and breadth to the technology team that we employ. This in turn has galvanised many initiatives that enhance the way that we interact with our clients. That said, we are still at the early stages of this journey. Critical to our long- term success will be our ability to adopt best-in-class third party software solutions that increase control, build scale, and enhance our clients’ experience. Turning to ESG, our professional service businesses all form part of the “G” in the ESG lexicon. The rapid, and still accelerating adoption by investors globally of ESG factors when making capital allocation decisions is an irresistible force. 7 S T R A T E G I C I N F O R M A T I O N Q&A with James Henderson & Laura Foll investment managers Can you sum up your approach to investing for our shareholders? James: The approach is to look for excellent quality, often globally competitive companies, and invest at the point at which the valuation is low. This could be for a variety of reasons; short term results might have been disappointing; there might have been a change of management team; it could simply be that (and this is often the case with small and medium sized companies) the company is not well known and potentially misunderstood. We are investors for the long term. The approach is to start with a small position and gradually increase it as confidence in the investment case builds. We will then often hold the position for five years or longer. Where we go overseas for holdings it is where You have been working as a team for nearly ten years now. Can you explain to shareholders how that partnership works in practice? Laura: The blend of our complementary skills has served the portfolio exceptionally well, both in terms of experience and sector knowledge. James has a long history of successful investing through previous cycles, as well as in depth knowledge of sectors that are a material portion of the portfolio such as industrials and insurance. James: Laura has offered a great deal of valuable insight since joining me in 2011. Her significant expertise in pharmaceuticals there is no UK equivalent. The best example of this is Microsoft is just one example of where Laura’s insight has been a real asset where there is, unfortunately, no UK company that is comparable. as we looked for high quality stocks that are somewhat out of favour but have significant potential for growth and attractive valuations. I’m delighted by the Board’s decision to appoint her as co-manager and look forward to many more years of successful delivery for our stakeholders. 8 lawdebenture.com S T R A T E G I C I N F O R M A T I O N How do you think about and manage risk in the portfolio? What stock are you currently most excited about? James: Primarily through position-sizing and a relatively long list of holdings, meaning the capital at risk and the income being James: Our portfolio aims to be balanced in its exposure, which means that no individual stock or ‘theme’ will be the sole driver provided by any one stock is comparatively low as a proportion of performance. That said, there are of course stocks that we are of the total. The IPS business also provides an additional layer particularly excited about. of diversification for the portfolio, so we are less exposed to any potential dividend cuts from the equity holdings. What do you enjoy most about running the Law Debenture portfolio? Laura: The unique advantage of Law Debenture is the combination of the professional services business with the investment trust. What this allows James and me to do is run the portfolio with less of an income constraint, while knowing that the yield of the overall Company will still be attractive for shareholders. The UK has been out of fashion with investors in recent years, particular since the country voted to leave the European Union. How has this impacted the portfolio? James: Domestically focused UK companies were effectively discounted by the market following the EU referendum. This discount has only very recently begun to close, from the fourth quarter of 2019 onwards. For Law Debenture this de-valuation of ‘domestic UK’ (along with the devaluation of Sterling) has meant that its overseas weighting has been a material positive contributor to performance as overseas markets, particularly the US, have outperformed. It has also meant a number of attractive valuation opportunities became available in the UK. Dunelm, for example, was added to the portfolio at what looked like a very low valuation, partly because it is entirely domestic in its exposure. This is now one of our largest 15 investments for the investment trust and has generated a 144% share price total return since the investment was added in August 2018. What was the best decision you made for the portfolio in 2019? Laura: Being a net investor in the market and increasing the gearing level steadily during the year. The fourth quarter of 2018 was a weak period for equity markets globally with concerns about a potential global slowdown and even a US recession in 2019 (that did not ultimately materialise). This presented a valuation opportunity for those with a longer time horizon and we were net investors of over £60m during the calendar year. At the moment one of those stocks is insurance company Hiscox. The holding has been in the Law Debenture portfolio since I started running it in 2002. The share price of Hiscox has gone up around ten times since then and has also delivered a strong stream of dividends. There have been times we have reduced the holding on portfolio balance and valuation considerations, and others when we have put money in when they have had a capital raise. The holding has added very considerable value over time as the company has grown to be a substantial global insurance company. Recently it has experienced some share price weakness as insurance claims have been running at a high level. The company has the same disciplined culture that has served it well over many years, meaning we expect it to move forward again when insurance rates rise and profitable growth resumes. We will be adding to the holding when we see the evidence for this coming through. Where do you sit on the ESG debate and how will this affect the Law Debenture portfolio going forwards? Laura: ESG has long been an integral part of our investment process, for the key reason that we are long-term investors and therefore any material ESG factors are also material to the investment case. It is, however, a very broad topic, and while governance is comparatively easy to measure (and there has already been substantial improvement in this area), environmental and social concerns are both broader and more difficult to measure quantitatively. Therefore the approach we have is pragmatic. While we do have quantitative metrics on ESG available for the portfolio, we are not going down the route of explicitly screening companies out on ESG ratings as the data quality is sometimes poor. The route we go down instead is any material issues flagged are discussed directly with the company and monitored for improvement. We are not afraid to exit positions where management fail to deliver expected improvements. ESG issues are considered both directly by James and I, and also by the experienced responsible investing team at Janus Henderson. We recognise that many of these issues are complex and, in some cases, subjective. Therefore we need both the internal resource at Janus Henderson and external data providers such as Sustainalytics, to reach an informed decision on companies. This includes how they compare versus listed peers, whether they are improving and what the material controversies 9 Q&A with James Henderson & Laura Foll investment managers continued are. We consider our own discussions with companies, the views • Will UK economic growth start to accelerate? Consensus of the internal responsible investing team and Sustainalytics, but expectations for economic growth in the UK this year could, ultimately the investment decisions fall to us as Fund Managers. we think, look too low. This would benefit some of the more We will always vote at company AGMs; we see this as a key part of our role as institutional shareholders. Where we have concerns (for example regarding executive pay) we will flag these for discussion ahead of the vote, with the hope that changes will be made and domestic UK holdings (for example Dunelm and Johnson Service Group). If the UK economy were to materially slow, this would be a modest negative for the portfolio, as we have increased the domestic UK exposure. a compromise reached. Therefore in ideal circumstances votes • How do we position the portfolio for the transition to a lower against companies will be rare, but if we do not see evidence carbon economy? There is undoubtedly a desire to shift the of adequate change we absolutely are prepared to vote against global economy away from fossil fuels at an accelerating pace. that resolution. The Board has stated their ambition to increase the yield paid to investors. Were you supportive of that decision and do you think it is sustainable in the longer term? In recent years we have purchased a number of positions such as Ceres Power and ITM that will benefit from this shift and this is an area we will continue to monitor closely. This area is not only an opportunity for these new portfolio companies but also a challenge for the more traditional fossil fuel companies, such as Royal Dutch Shell and BP. Laura: We were fully supportive of the decision and are very pleased with the dividend increase as both shareholders and What do you believe the outlook is for the UK economy? fund managers. James: The investment income grew strongly year on year. Partly because the gearing level increased but also due to good Laura: The UK economy has a number of long-term positives that have been lost in the ‘fog’ of political uncertainty. We have an excellent corporate governance framework, a relatively open underlying income growth and a number of special dividends market for corporate activity, good demographics (the UK is not (many of which we think will recur in 2020). When we review the next Japan) and relatively low levels of red tape. The UK equity the dividend forecast, we are comfortable with the durability of market is also starting from a point where valuation is low relative the dividend. From an equity portfolio perspective we are less to other global equity markets and sentiment (while improving) is reliant than the Index on a few large companies because of the still relatively poor. Putting all of this together makes us positive on long, diverse list of holdings. From a shareholder perspective, the the UK equity market, so we are happy with our current allocation professional services business brings another layer of diversity to of around 80% of the portfolio to the UK. the income that is unique to this Company. Therefore we think this Company is well placed to be an attractive income holding for shareholders and are pleased to see the Board making full use of the opportunity to grow the dividend materially. What key themes in 2020 will drive the performance of the portfolio and what do you think the key challenges will be? James: The investment portfolio is deliberately diverse in its exposure and therefore there is not any one key theme that will drive performance. That being said, there are a number of key considerations that we are thinking about this year. These considerations are both an opportunity and, potentially, a challenge: • Will the global economy continue to grow at a modest pace? The portfolio has a material portion invested in industrial and financial companies, both of which would benefit if the global economy continues to grow modestly. Conversely, if the global economy materially slows, this would be a difficult backdrop for these companies to grow earnings. Current economic data would suggest that industrial activity is bottoming out with modest signs of improvement. 10 lawdebenture.com S T R A T E G I C I N F O R M A T I O N 11 11 Our IPS business is a key differentiator between us and other investment trusts. As James Henderson and Laura Foll explain in their investment review, the reliable nature of the IPS earnings have covered around 35% of total annual dividend payments in the past ten years, allowing James and Laura increased flexibility in portfolio construction. S T R A T E G I C I N F O R M A T I O N Chief Executive Officer’s review Over the past three quarters of 2019, their confidence in the attractive valuation opportunities within the UK market could have been considered by many as a contrarian play, in light of continued uncertainties over Brexit and the uncertain outcome of the general election. Ultimately the judgement to reposition the portfolio by reducing certain overseas holdings and increasing leverage proved profitable for shareholders in 2019. While not every call will be right, their depth of knowledge and experience continue to deliver outstanding results for our shareholders year on year. I would like on behalf of our Board to extend our sincere thanks to James and Laura for the expert way in which they continue to guide the portfolio. Our independent professional services business (IPS) Our IPS business remains a key differentiator between us and other investment trusts. As we continue to grow that business, the contribution we are able to make to the income paid out to our shareholders increases. At the start of 2019, we committed to shareholders that we would grow the IPS business by mid to high single-digits, and that is exactly what we have achieved. In the face of significant headwinds in capital markets, we were able to grow our full- year revenues by 7.5% in 2019. This emphasises the strength of the diversification of our revenue streams, particularly in the context of difficult trading results reported by many capital At the core of Law Debenture’s financial objectives are two keys aims; the first is to achieve long-term capital growth, the second is to steadily increase income for our shareholders. markets facing businesses. It is of critical importance that this increase in revenue growth translates to greater rewards for our shareholders. We were able to increase our earnings per share from our IPS business by 8.5% in 2019, supporting a third of the proposed dividend payment. IPS earnings have covered 35% of total annual dividend payments in the past ten years, allowing James and Laura increased flexibility in portfolio construction. It is this diversification, coupled with our on-going growth agenda for the IPS business, which I believe makes us uniquely placed to support the step change in dividend payments the Board is proposing. We remain confident we can grow the IPS business considerably over time, while preserving our quality of product, outstanding client outcomes and our hard won reputation. Introduction As you have heard from our Chairman, at the core of Law Debenture’s financial objectives are two keys aims; the first is to achieve long-term capital growth, the second is to steadily increase income for our shareholders. Our investment portfolio appreciated by over £100m in 2019, our investment portfolio income increased by 25.9% and the earnings per share generated by our IPS business increased by 8.5% showing significant progress across all of those metrics. Our investment trust The strength of our investment return continues to build. As CEO of the Group, I see the enormous benefit for our shareholders in the long-term partnership between James Henderson and Laura Foll of Janus Henderson Investors. I take great comfort in observing the passion James and Laura have for the portfolio. As we step up our efforts to meet investors, they speak with great clarity and conviction Our leading independent professional services business is built on three excellent foundations; our pension, corporate trust and around their investment thesis, coupled with a depth of long-term corporate services businesses. understanding about the companies in which we invest. 12 lawdebenture.com S T R A T E G I C I N F O R M A T I O N 2019 may well come to be seen as the year in which discussion about ESG swung from being a niche question about ‘ethical’ investment to a mainstream recognition that these factors can and do affect the financial performance of pension scheme assets. The table below sets out the revenue by division for the past we have been required to take to discharge our duties as trustees, three years, alongside a percentage growth number for 2019 where the cost of this advice has ultimately been charged to compared to prior year. This number is presented net of cost of our client. We believe this provides our shareholders with a true sales. This means we have deducted the cost of any legal advice representation of the growth of our business. DIVISION Pensions Corporate trust Corporate services Total Taking each business in turn: Pensions Our pensions business is now more than 50 years old and continues to go from strength to strength. Our team of trustees grew by 10% over the course of 2019 and is now supporting in excess of 200 clients, with oversight of over £350bn of assets, providing pension benefits to more than three million families. Market dynamics The trend towards consolidation among the UK’s 5,500 defined benefit pension schemes is now firmly established. Consolidation provides an opportunity for smaller schemes to enhance governance, improving outcomes for pensioners as well as for the companies funding these schemes. This in turn presents the opportunity for Law Debenture to increase market share, with larger schemes having the appetite and financial resources to employ a professional trustee. Indeed, we have won some significant new mandates in light of this trend. Stewardship and ESG Over the 50 years that we have acted as independent trustees, our primary duty has been to act in the best interests of beneficiaries. This duty remains the cornerstone of the trustee role; however, 2019 has also seen a significant extension of that role, with an increasing focus on stewardship and environmental, social and governance (ESG) factors. This presents us with an opportunity to expand our product offering in what we expect will be a fast growing market over the short, medium and longer term. Net revenue 2017 £000 Net revenue 2018 £000 Net revenue 2019 £000 Growth 2018/2019 % 8,270 7,900 10,977 27,147 9,488 8,362 11,734 29,584 10,598 9,024 12,167 31,789 11.7 7.9 3.7 7.5 The Pensions Regulator has broadened the definition of stewardship to consider the sustainability of value creation by pension schemes, not only for beneficiaries but for the economy and wider society. From October 2019, trustees have been required to explain how they engage with debt and equity holders on not only investment performance, strategy and risk, but also on the environmental, social and governance impact of those businesses. 2019 may well come to be seen as the year in which discussion about ESG swung from being a niche question about ‘ethical’ investment to a mainstream recognition that these factors can and do affect the financial performance of pension scheme assets. Some of our schemes have carried out surveys of their membership and have found that an ESG investment focus can carry considerable support and can be a way of engaging younger members who have grown up amid the reality of climate change. We are not complacent about the challenges presented by ESG: this is an emerging area, and both climate science and the response of financial institutions to it are evolving. But we do believe there are opportunities for us as professional trustees to provide valuable assistance to our clients to help them to address those challenges. Professional trusteeship In 2019, the Pensions Regulator consulted on a range of proposals, including a suggestion that all trustees should be required to have a professional trustee on Board. Whilst they did not support a mandatory requirement, we expect it to be a question they ask frequently moving forward. We think that will lead to an increasing demand for our professional trustee services. 13 S T R A T E G I C I N F O R M A T I O N Chief Executive Officer’s review continued The consultation also focused on the ‘sole trustee’ model, which In order to grow our business, we are always searching for the is becoming increasingly popular as employers are distanced best possible staff. We have critically challenged our recruitment from legacy pension schemes, and it becomes even harder to processes over the course of 2019 to support our agenda of find member representatives willing to serve on the pension increasing diversity. We are delighted that we contracted four trust board. We were pleased to be able to meet the Pensions outstanding women to join our business over the course of 2019 Regulator to discuss our approach to sole trusteeship, which and the start of 2020, helping the continued evolution over time provides a robust governance and decision-making framework for from a largely male trustee population. The demand for diversity pension schemes. A further area of focus from the Regulator is the requirement for trustees and employers to have a workable road map to get their scheme into a position of long-term sustainability. This could be through buy-out, a low dependency model or transfer of the is not just one of gender; by encouraging diversity in all of its forms we weave a richer web of experience with which to deliver innovative and insightful thinking to our clients. Our clients in turn are thinking hard about diversity, so it is vital we continue to expand our team in a way that meets our clients demands. scheme to a consolidator. The Pensions Regulator’s long-awaited 2019 saw further excellent progress in our Pension’s Governance consultation on a new defined benefit funding code is expected Service business, Pegasus. Investment in the expansion of our in March 2020. Risk Transfer to the Insurance Sector The last few years have seen a significant increase in company pension schemes looking to reduce risk through risk transfer to the insurance sector. Law Debenture has played an important role in many of these deals. 2019 saw the largest bulk annuity transaction to date of £4.7bn by Telent’s GEC 1972 Plan, which we supported through our role on the trustee board. We were involved in a further third of all other large bulk annuity deals transacted in 2019, which collectively amounted to an additional £5bn+ team delivered a 55% increase in revenue in 2019, with a very strong pipeline of prospective clients promising an even higher level of growth for 2020. Outlook for our pension business Our defined benefit scheme clients continue to represent the majority of our revenues. The combination of our excellent team and reputation, leaves us well placed to continue to grow our market share. At the same time, we have an eye to the future where we believe that the growth in importance of our defined contribution (DC) work relative to our total revenues will continue. We are confident too in our ability to grow our Pegasus business over time. of value. This included the deal between Legal & General I would like to thank Mark, Michael and their team for their and Tate & Lyle, where we have acted as trustee for more persistent pursuit of superior outcomes for their clients. than 10 years. The longevity swap market (which transfers longevity risk from company pension schemes to the insurance market) has also seen some very large deals being transacted. We were involved as part of the trustee team in the £10bn longevity swap recently completed by the Lloyds Banking Group pension schemes. Involvement in these important market-leading deals puts our trustees in an excellent position to support other schemes wishing to undertake these material risk- reducing transactions, as well as increasing the security of members’ benefits in the schemes undertaking the transactions. Highlights Our pension’s team goes from strength to strength under the leadership of Michael Chatterton and Mark Ashworth. Our results in 2019 continue to build on strong growth in 2018, Corporate trust Our corporate trust business led to the creation of Law Debenture over 130 years ago and happily one of our first appointments as a trustee remains in place today. Our duty as a corporate trustee is to act as a bridge between bondholders and a bond issuer. Over the course of 2019, we acted as trustee for more than £60bn of new bond issues. We are currently acting as trustee for bonds with a collective face value of more than £600bn across almost 8,700 live appointments. As a trustee, we are typically paid an inflation linked annual fee to discharge our duties throughout the lifetime of a bond. We started 2019 with almost two thirds of our £9.0m annual revenue contractually secured, with an overall inflation linked increase of 1.9% on those same contracted revenues in 2018. We also earn revenue when amendments to documentation or other actions with revenue up 11.7% from £9.5m to £10.6m. One of our key are required. This will often be separately remunerated and differentiators is the quality and diversity of skill sets within our provides us with an additional income stream, which represented team. By appointing Law Debenture, our clients access not just 15% of our corporate trust revenue for 2019. one highly commercial and qualified individual, but a collective 400 years of knowledge and experience of the pensions industry. As we continue to lead the market in supporting and innovating for our clients, we have an exciting pipeline of new business for 2020 and beyond. The revenue and risk profile of the trustee can shift substantially in instances where a bond goes into default. In these scenarios, the trustee may be required to perform material extra work that, given an optimum result, can lead to significant additional income. However, default scenarios may involve the business incurring cost and can take years to play out. 14 lawdebenture.com Our corporate trust team are conservative and careful in taking The combination of significant demand and political will to create on new business, operating in an environment that has long new affordable housing will, we believe, lead to an expansion in prioritised these qualities. This highly disciplined approach has this market. We are well placed to grow our market share in light produced consistent profits for over a century. Our shareholders of that expected expansion. should understand that swings in our revenue (and in turn profit) can result from adopting a prudent approach to provisioning, as long-term defaults work their way to a conclusion. Market dynamics 2019 proved a difficult year for capital markets-facing businesses. Investment banking revenue was down 4% globally, with Europe the weakest region, down 14%1. We have fought hard to maintain our market share in a highly competitive market place and are pleased to report revenue growth of 7.9% over the course of 2019 Highlights We took on 265 trustee engagements in 2019, booking revenues of £0.6m in 2019 for these contracts, a small fraction of the full value over their life cycle of around £6.0m. In light of the challenging conditions across capital markets, fees from new business were slightly lower than in 2018. The multi-year impact of new business wins, coupled with a release of reserves of £0.4m lead to an overall increase in year-on-year revenue of £0.7m. from £8.4m to £9.0m. Key client appointments include: S T R A T E G I C I N F O R M A T I O N Clean Energy We have deep expertise and experience in green energy project finance. For example, in 2019 we were appointed as trustee on a €200m note issuance by Alerion Clean Power S.p.A., an Italian company whose principal activity is managing a portfolio of wind farms. The proceeds of this note will be used to finance wind farm projects, which comply with the International Capital Markets Association Green 2019 saw a number of senior hires to re-invigorate the Hong Bond Principals 2018. Eliot Solarz continues to lead a team with a market reputation for outstanding technical knowledge, speed, quality of service and willingness to innovate. We are privileged to have been appointed by many of the UK’s best known brands such as Lloyds, M&G, Sainsbury’s and Next, during the year for Investment Grade corporate bond issues. We continue to play very much to our strengths. Our depth of Kong branch of our business. While social unrest and latterly the outbreak of the coronavirus has made it more challenging to do business, we were delighted to see a strong turnout of both our long-term and new clients to our celebration to re-launch Law Debenture Asia in October. As a Company, we are building for the long term, we are confident that the quality of our team in Asia will bear significant fruit for shareholders over time. Outlook for our corporate trust business The long-term nature of appointments in the corporate trust market knowledge, coupled with the absence of bureaucracy, universe provides a desirable stable and index-linked source of provides us with a distinct competitive advantage when revenue for the Group. As highlighted above, only a small fraction competing against global banks for more complex products. of the value of contracts won in a given financial year will benefit We often have an edge in long-dated ‘real asset’ financings, an that year’s profit and loss account. Our aim is to consistently win example of which is given below: new business in both the standard investment grade space and Social Housing One in ten people lives in a Housing Association home.2 We have long standing relationships with many players in this sector and social purpose lies at the core of what they do. Our appointments include bond trustee, security, trustee, note holder representative and loan agency roles. A chronic shortage of social housing was highlighted by all sides during the December election campaign. The new Government has pledged to bring forward publication of a Social Housing White Paper and also pledged to simplify our planning laws. We are hopeful that these initiatives will be followed through and in turn accelerate investment in much needed projects. We are actively engaged with both existing and new clients and investors to help facilitate vital growth in our nation’s housing infrastructure. 2 Source: English Housing Survey 2016/7 1 Source: Dealogic 15 S T R A T E G I C I N F O R M A T I O N Chief Executive Officer’s review continued niches where our speed and deep expertise provide us with a significant advantage. With the possibility of some of the Brexit clouds finally starting to clear, 2020 has started with improved sentiment among our customers. We will continue to pursue new opportunities to lock in multi-year index-linked revenue streams. Highlights Revenue from these businesses grew from £11.7m in 2018 to £12.2m in 2019, an increase of 3.7%. Our traditional corporate services businesses were able to achieve a moderate level of growth, notwithstanding the difficult conditions within capital markets highlighted above. Corporate services By contrast and again showing the benefit of the diversity of our income, the market for our whistleblowing service continues to expand significantly. Headed up by Graham Long, he and his Corporate services provide outsourced solutions across a range team have delivered a 20% increase in revenue in 2019 and a 50% of company secretarial, accounting and facility agent services. increase in revenue over the past three years. These services are provided largely, but by no means exclusively, to corporates and special purpose vehicles. Market dynamics The traditional credit card, mortgage and asset backed Today, Safecall has over 500 clients. We work with businesses with as few as 25 staff, right the way to multinationals with 80,000 staff, where we are able to assist them in more than 100 languages. securitisation aspect of this market remains below its pre-financial Key client wins for this year include: crisis peak and the marketplace remains fiercely competitive. In the short term, over-capacity (in part underwritten by private equity money) needs to work its way through to a conclusion. In the meantime, we continue to put great effort into building our relationships with arrangers, advisers, sponsors and end users. We are confident over time that, as with all of our businesses, our high-quality service, underpinned by outstanding technical knowledge, focus on client delivery and willingness to innovate will yield an incremental stream of repeatable earnings. We provide a highly-regarded global service of process business that had a solid year in 2019 despite tough investment banking conditions. Led by Anne Hills, it has a market-leading reputation with law firms in London, New York and Hong Kong. We also provide independent whistleblowing services, through our subsidiary Safecall, in what is a dynamic and fast growing industry. Safecall provides an independent, confidential, anonymous (if desired) route to raise issues to the highest levels of organisations. In addition to providing a service which allows the whistle-blower to feel supported and listened to, the reporting mechanism to our clients provides members of senior management and the Board with increased confidence that a robust independent process is in place to uncover and address potential wrongdoing before it has further negative impact on their company. Governments continue to legislate in this area. The EU Whistleblowing Directive was adopted in April 2019 with a two year implementation period. The start of 2020 saw the first reading of the ‘Office of the Whistleblower Bill’ in the House of Lords, calling for the creation of legislative frameworks to underpin citizen and workers’ rights. Safecall is helping to develop ISO37002 Whistleblowing Management Systems to standardise best practice within businesses, which is due for publication in 2021. In a world where ESG has become an integral part of good business practice, the demand for our services is set to increase. 16 lawdebenture.com S T R A T E G I C I N F O R M A T I O N Between our exceptional investment managers and our talented and hardworking IPS team, we generated £157m of value for our shareholders in 2019. While our team feels justifiably proud of that achievement, rest assured that our focus remains firmly on our clients and on 2020. Outlook Premises We believe the team at Safecall offers a product superior to their competitors at a competitive price. We continue to think long- term for this business, building the right technological solutions and products for our clients today that we can continue to evolve for many years to come. The lease on our London office expires in July of this year. We are currently exploring options as to whether to renew our current lease or seek accommodation elsewhere. Any decision we make will be balanced between our key stakeholders, our clients, our staff and our shareholders. Red Tractor: supporting welfare improvements in our supply chains Our client Red Tractor provides a quality assurance standard for food and drink sourced in the UK. Their challenge was to have a greater understanding of potential wrongdoing within the farms accredited under their standard. Possible users of the service ranged from farm workers, vets and suppliers, as well as the general public. We provided a customised online solution that allows anyone who witness wrongdoing to inform Safecall of their concerns. By using our service, Red Tractor has the tools to identify and address instances of unacceptable behaviour taking place in the food chain. Prospects 2019 was a very successful year for Law Debenture with the share price rising by 24.5% and a proposed increase in the final dividend of 50%. Regarding income, the Group’s aim is also to continue to deliver gradually increasing dividend payments in excess of inflation over time. We are encouraged that IPS has delivered on its ambitions with a second year of mid to high single-digit growth despite a challenging backdrop for capital market activity. We remain in the early stages of a re-invigorated growth cycle and continue to see opportunities to grow revenue and earnings significantly over time. IPS has very attractive financial characteristics and we continue to invest in talent and technology to take advantage of material market share opportunities. We are also alert to opportunities presented by acquisitions, where we believe we The need to tackle a broad range of issues including animal could utilise our balance sheet to accelerate the growth in returns welfare, environmental protection and modern slavery are for our shareholders. rapidly rising up the agenda for governments, companies and individuals. In light of this, we expect the market for our services to continue to grow rapidly. More information is available at www.safecall.co.uk. Both the long and short-term performance of our investment portfolio remains strong. We have an excellent investment management team, who the Board is confident are well placed to continue to position the equity portfolio for future longer-term growth. They continue to see opportunities to seek out quality Investment in technology stocks with high entry barriers. Towards the end of 2018, we appointed David Williams as Chief Technology Officer (CTO). David brought with him a great wealth and depth of experience as the former CTO of Marshall Wace LLP and Tibra Trading. Building on our successes in 2018, David has hired a further seven full-time technical experts to facilitate delivery of high quality technical solutions. We are a people business, but, in today’s world, it is critical that we are smart users of technology. David and his team are working tirelessly to improve the services that we provide to our clients, be that introducing additional functionality, enhancing security or reducing costs by delivering efficiencies in our operations. Many more valuable initiatives are at various stages of delivery across a rolling two year plan. Our differentiated business model allows increased flexibility in portfolio construction. We are confident that our unique combined businesses are well placed for the future and continued delivery of long term capital growth and steadily increasing income. Denis Jackson Chief Executive Officer 26 February 2020 17 S T R A T E G I C I N F O R M A T I O N Investment managers’ review Following the intention flagged to our shareholders at the start of 2019, the Company completed the transition from the AIC’s Global sector to the UK Equity Income sector in May. We believe this sector provides a much more relevant comparator to what your portfolio is aiming to deliver, while retaining flexibility for us to allocate a portion of the portfolio outside of the UK, as we have done successfully over many years. Our investment process We take a bottom-up approach, spending a great deal of time with the management teams of our portfolio companies, conducting detailed analysis of the strengths, weaknesses and growth prospects of those companies into which we invest your money. Responsible investing (incorporating environmental, social and governance issues) has always been an integral feature of the investment process as we are long-term investors. Therefore, any material responsible environmental issues are also material to the investment case. These issues are of growing prominence to both investors and companies. We increased our leverage and repositioned our holdings over the course of the year to take advantage of comparatively low valuations within the UK market, particularly for domestic stocks. Therefore, while they have always been an implicit part of the investment process, we are now explicitly both monitoring internally and discussing with company management teams any particular issues or areas of concern. We have decided not to explicitly exclude any sectors, partly because on the more difficult to measure environmental and social area the data quality remains, in some cases, poor and partly because in our view it is better to engage with companies on better practices rather than to sell the shares. We often buy stocks at the point at which they have either fallen out of favour or are relatively unknown, but importantly that we believe have significant potential for earnings growth. They will typically be world class brands selling globally, that operate in an industry with high barriers to entry that therefore enables them to generate a good operating margin. One such example, where we added The equity portfolio We have a diversified portfolio which aims to be a one-stop-shop for investors seeking quoted market exposure to quality companies. The majority of the portfolio, 80.7%, was invested in UK stocks at the year end, of which around 55% was invested in the FTSE 100, with the remainder in mid and small cap stocks. This allocation to the UK is a notable increase from 74.5% at the end of 2018, driven by a net investment of £102m into the UK during the year. We increased our leverage and repositioned our holdings over the course of the year to take advantage of comparatively low valuations within the UK market, particularly for domestic stocks. Although our focus is, and will remain, the UK, we confidently go to other geographies for companies that do not have a credible UK equivalent. Microsoft remains the largest overseas position, having been held in the portfolio for the last eight years. There is, unfortunately, no UK equivalent. While we have reduced the position in recent years on valuation grounds, the organic growth being achieved, considering the scale of the company, remains impressive and we therefore remain happy with a modest position. At the end of 2018, 9.9% of your portfolio was invested in North America, 8.6% in Europe and 7.0% in the rest of almost £9m to the holding during 2019, was GlaxoSmithKline. The business was trading at a material valuation discount to the global pharmaceutical sector despite having within the Group world-class consumer healthcare and vaccines businesses. We are patient with our positions and invest for the long term. We the world. This had fallen to 8.3% in North America, 7.8% in Europe build up positions gradually. Having taken the decision to invest and 3.1% in the rest of the world by the end of 2019 as a result of the portfolio repositioning. Overall, we were net investors of £60m across the portfolio in 2019. The Company’s benchmark is the FTSE Actuaries All-Share Index Total Return and it is against this benchmark that we assess the relative success of the performance of your portfolio. in a stock, we typically begin by investing around 30bps of overall net asset value, which we add to over time dependent upon the risk profile of an individual stock. Our long list of stocks allows us to moderate our position size where we perceive the investment case is higher risk than may be the case elsewhere in the portfolio. This means that we take a risk-based approach to our position sizing, while ensuring that, if we get something right, the sizing 18 lawdebenture.com NAV total return with debt at par1 NAV total return with debt at fair value1 FTSE Actuaries All-Share Index total return2 1 year % 19.4 17.9 19.2 3 years % 27.6 27.6 22.0 5 years % 10 years % 52.4 49.4 43.8 192.4 181.5 118.3 1 NAV is calculated in accordance with AIC methodology, based on performance data held by Law Debenture including fair value of IPS business. NAV total return with debt at par excludes the fair value of long-term borrowings, where NAV total return with debt at fair value includes the fair value adjustment. 2 Source: Bloomberg, all references to ‘FTSE All-Share’ and ‘benchmark’ in this review refer to the FTSE Actuaries All-Share Index total return. is sufficient to influence the portfolio performance as a whole. More information on our investment approach can be found on Our patience keeps our portfolio turnover low, reducing the pages 32 to 33 of the strategic report. drag of dealing costs on returns to our investors. That patience has rewarded our shareholders; over 10 years, the portfolio has outperformed the benchmark index by 53.4%. Review of 2019 S T R A T E G I C I N F O R M A T I O N The Company has paid £196m to its shareholders in dividends over the past ten years, of which £68m, or 35%, has been funded by the IPS business3. We are supportive of the Board using the growth in the IPS business, the increase in investment 2019 was a year of strong performance for the Law Debenture portfolio. Overall, the Company generated a total return of 19.4% (with debt at par), creating £141m of value for our shareholders. income and the change in the allocation of investment management fees and interest to substantially increase the final dividend to be paid to shareholders for 2019. We are confident (subject to unforeseen circumstances) that this dividend is sustainable in the longer term. We retain the historical freedom afforded to us by the contribution of the IPS business to bypass stocks which do not fit our investment criteria, but which that others seeking to provide a yield to shareholders may be forced to buy. We are encouraged to see the growth in the normalised earnings per share of the IPS business and believe that the plans Denis and his team have will create exciting opportunities for shareholders over time for both income and capital growth. We regularly interact with private shareholders who hold Law Debenture as their only equity investment. We often think about them when making investment decisions, balancing the need to achieve long-term capital growth with the risk of exposing those investors to significant volatility. It is our firm belief that, if we focus on growing capital, it will 2019 was a year of strong performance for the Law Debenture portfolio. Overall, the Company generated a total return of 19.4% (with debt at par), creating £141m of value for our shareholders. Investment income grew by 25.9%, affording the Board greater flexibility on its approach to dividends. Investment income grew by 25.9%, affording the Board greater flexibility on its approach to dividends. Over that same period, the FTSE Actuaries All-Share Index total return was 19.2%. This means we were able to capture the market increase, having protected the portfolio from 40% of the overall market decline in 2018. Economic backdrop The good returns generated by global equity markets (including the UK equity market) in 2019 need to be considered in the context of a weak period for equities in the fourth quarter of 2018. Towards the end of 2018 there was concern, led by the escalating trade war between the US and China, that there would be a synchronised global economic downturn and, in a worst case scenario, a US recession. This meant that towards the end of 2018 market expectations for earnings growth in 2019 were revised downwards. Therefore, when the global economy continued to grow at a modest pace in 2019 there was scope, from low expectations, for earnings to positively surprise and for valuations to move upwards. result in increased dividend income from that capital. This is the cornerstone of our investment philosophy and is unaffected by the development of the Company’s dividend policy. After a difficult and volatile 2018, 2019 proved fruitful for those who kept faith with the UK economy. We are pleased to report that our patient approach continues to see your portfolio (with debt at par) outperform its benchmark on a one, three, five and ten year basis. The UK economy continued to grow modestly during 2019, with real economic growth of just over 1%. This placed UK economic growth roughly in line with much of the Eurozone, despite the political uncertainty that created an overhang on business investment and consumer confidence. At the time of writing, consensus expectations are that the UK economy will grow at a similar pace (1.1%) in 2020, with an acceleration in growth towards the end of the year. This could in our view look pessimistic. Pent-up business investment may go ahead this year and the UK consumer could, having had decent 19 S T R A T E G I C I N F O R M A T I O N Investment managers’ review continued levels of real wage growth, choose to spend the extra income The valuation discount and attractive dividend yield on the UK rather than increase their savings. Market review While the UK equity market performed well in 2019, on a longer market should be seen in the context of a number of structural positives for the UK economy including an excellent corporate governance framework, a relatively open market for corporate activity and low red tape. In our view, the long-term positives of term basis it has underperformed other global equity markets. the UK market have been forgotten with the political uncertainty in recent years, but continue to represent a valuation opportunity for long-term investors. We therefore remain happy with approximately 80% of the portfolio invested in the UK as at the end of December. Portfolio attribution The best performer during the year was Johnson Service Group, a UK textile rental company that operates across workwear, hotel linen and restaurant linen. The shares performed well on a combination of strong earnings growth (earnings per share are forecast to have grown a low-teens percentage during 2019) and a revaluation upwards of the shares. The share price total return for the year was 71.3%. On a longer term basis, Johnson Service Group has performed well by providing a continually high level of service and reliability for customers. They have also undertaken selective acquisitions, often in adjacent regions in the UK where they did not historically have a presence. Another of the best performers was homeware retailer Dunelm, which was first purchased for the portfolio when Dunelm listed on the market in 2006. We added to the position materially in the final quarter of 2018 when the shares were trading on a low valuation. Dunelm is the market leader in homeware in the UK, and is benefitting from store closures from some competitors (such as Debenhams), as well as its own internal initiatives under a new management team, such as substantially improving the website and adding features such as Click & Collect. The share price total return for 2019 was 129.5%. Top five contributors The following five stocks produced the largest absolute contribution for 2019: Stock Johnson Service Group Dunelm Marshalls Microsoft Ceres Power Share price total return (%) Contribution (£m) 71.3 129.5 89.7 51.4 59.8 7.1 6.2 4.9 4.5 4.1 Source: Share price total returns from Bloomberg, all in £ The UK equity market has underperformed other global equity markets over the last five years UK Europe ex UK World US 250 200 150 100 50 0 D ec 2 014 Ju n e 2 015 D ec 2 015 Ju n e 2 016 D ec 2 016 Ju n e 2 017 D ec 2 017 Ju n e 2 018 D ec 2 018 Ju n e 2 019 D ec 2 019 Source: Datastream as at 31st December 2019. Rebased to 100 as at 31st December 2014. Total Return, £. UK – FTSE All Share, World – MSCI World, Europe ex UK – MSCI World ex UK, US – S&P 500. This underperformance has meant the UK continues to look attractive on a relative valuation basis, with an attractive, over 4%, dividend yield: Estimated 2020 dividend yield (%) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 UK MSCI Europe (ex UK) US 12 month forward P/E 22 20 18 16 14 12 10 UK MSCI Europe (ex UK) US Source: Bloomberg as at 31 December 2019 20 lawdebenture.com S T R A T E G I C I N F O R M A T I O N Top five detractors The following five stocks produced the largest negative impact on the portfolio valuation for 2019: Stock Eddie Stobart Logistics Kier Rolls Royce Tullow Oil IP Group Share price total return (%) Contribution (£m) N/A1 -76.1 -16.5 -63.4 -34.6 -7.1 -3.8 -2.4 -2.3 -1.8 Source: Share price total returns from Bloomberg, all in £ 1 Shares in Eddie Stobart Logistics are suspended and the valuation has been substantially written down from the last traded price. Eddie Stobart Logistics is suspended from share dealing. The company’s auditors have found irregularities, which has meant the group has so far failed to produce its report and accounts for last year. There has been a cash injection that has diluted existing shareholders but may ensure the company remains trading. Kier is a major contractor in the UK. The level of debt has become a great concern of investors. The company is taking action by focusing the business and selling the housing division. Rolls Royce has had a difficult period as its major customer, Boeing, has had to suspend manufacturing of it’s best-selling plane. The long-term demand for Rolls Royce’s Trent engine remains in place. Portfolio activity What we’ve been buying The two largest new positions during the year were Lloyds and RBS. This represented quite a shift in the portfolio, having held no domestic banks since the financial crisis (we have held two internationally focused banks – HSBC and Standard Chartered). What changed was a confluence of factors coming together. The ongoing capital requirement is now clearer following a period of capital ‘creep’ upwards following the financial crisis. Payment the cut-off for new claims. These two factors came at a time when Lloyds and RBS were trading on low valuations (roughly at book value in the case of Lloyds and substantially below book value in the case of RBS). Both pay an attractive dividend yield to shareholders. Outside of the FTSE 100, the largest purchases included adding materially to the existing position in motor and home insurer Direct Line, which is making good progress under its new chief executive officer. Despite a difficult backdrop for car insurance (with high claims inflation), it continues to generate good underwriting returns. We also participated in fund raisings for Hipgnosis Songs Fund which purchases music back catalogues from song writers (for which they receive a royalty stream if the song is, for example, streamed on services such as Spotify, or broadcast). This pays an attractive approximately 5% dividend yield to shareholders and has the additional benefit that it brings diversification to the portfolio (as it should, for example, not be exposed to the economic cycle). In the US the largest new position was Bristol-Myers Squibb, which was purchased subsequent to Bristol announcing a merger with Celgene that was poorly received. As a result, the shares were trading on a low valuation for a pharmaceutical company that is among the world leaders in oncology. What we’ve been selling The two largest sales during the year were the two open ended Fund holdings, Baillie Gifford Overseas Growth and Stewart Investors Asia Pacific Leaders. Both had been good performers for the investment trust over the long term and had brought additional diversity to the portfolio, both in terms of geography and sector exposure. We continue to hold a selection of closed ended Funds that in our view bring diversification to the investment trust in areas outside of our expertise. A good example is Herald Investment Trust which has been an excellent performer for the portfolio over time. Also among the largest sales during the year was Greene King, which was sold following a cash takeover approach from Hong Kong conglomerate CK Asset Holdings. Property company A&J Mucklow was also sold following a cash and shares takeover from UK-listed peer LondonMetric. We expect there to be further protection insurance provisions have also come to an end following corporate activity within the portfolio in 2020, as UK listed In our view the long-term positives of the UK market have been forgotten with the political uncertainty in recent years, but continue to represent a valuation opportunity for long-term investors. We therefore remain happy with approximately 80% of the portfolio invested in the UK as at the end of December. 21 S T R A T E G I C I N F O R M A T I O N Investment manager’s review continued companies remain at a valuation discount, but with greater The focus is to find stocks where there is an excellence in their political clarity following the general election. offering but that it is not recognised in the valuation. The discipline Where we reduced positions during the year it tended to be on valuation grounds following a period of strong performance. For example the positions in textile rental company Johnson Service Group and paving stone company Marshalls were reduced. of having a valuation screen is important. A product or service may be very competitive currently, but the pace of change means this will not necessarily be maintained. The life cycle of products is generally getting shorter. For this reason, the belief that a stock can be held ‘forever’ is flawed. Therefore, we will be reducing Details of your Company’s largest holdings, along with our the ‘winners’ when valuations are high and buying the forgotten investment case, can be found on pages 24 and 25. companies on low valuations; hopefully, before they reinvent A full portfolio listing can be found on pages 28 to 31. Outlook themselves and return to growth. Buying these recovery stocks will at times result in holding companies that do not return to growth and fail. This is why a successful investor using this approach will have a relatively The future relationship of the UK with the rest of Europe will start long list of stocks. During periods of low economic activity, good to be resolved over the course of this year but the UK economy opportunities often emerge to refresh the portfolio with future faces continued uncertainties; Sterling could be volatile and tariffs are a concern if a free trade deal is not achieved. At the same time, many industries are facing structural change. For strong growing companies. These companies will often have an above average dividend yield as they are out of favour with investors. Therefore the new buying is expected to add to the instance, the growth of online shopping is dramatically changing dividend potential of Law Debenture as well as providing capital the retail landscape. The need to reduce carbon emissions is growth as these stocks gain traction. leading to profound changes for the business model of heavy energy users. These changes will create opportunities as well as threats for companies, but overall economic growth is expected to be fairly subdued. However, the stocks in the portfolio are not a proxy for the UK economy but, rather a broad mix of James Henderson & Laura Foll Investment manager companies with management teams that, through quality of their 26 February 2020 services or products, are expected to add value in spite of the economic background. 22 22 lawdebenture.com lawdebenture.com Portfolio by sector Portfolio by sector 2019 2018 Oil and gas 9.7% Basic materials 6.4% Industrials 23.2% Consumer goods 5.2% Health care 8.9% Consumer services 10.2% Telecommunications 1.1% Utilities 4.0% Technology 2.4% Financials 28.9% S T R A T E G I C I N F O R M A T I O N Oil and gas 10.8% Basic materials 7.3% Industrials 24.8% Consumer goods 4.5% Health care 8.9% Consumer services 7.4% Telecommunications 1.4% Utilities 3.6% Technology 3.7% Financials 27.6% Geographical distribution Geographical distribution of portfolio by value 2019 of portfolio by value 2018 United Kingdom 80.7% North America 8.3% Europe 7.8% Japan 1.1% Other Pacific 0.9% Other 1.2% United Kingdom 74.5% North America 9.9% Europe 8.6% Japan 1.1% Other Pacific 4.5% Other 1.4% 23 S T R A T E G I C I N F O R M A T I O N Fifteen largest holdings: Investment Rationale at 31 December 2019 Rank 2019 Company % of portfolio Approx Market Cap. Valuation 2018 £000 Purchases £000 1 GlaxoSmithKline 3.6 £89bn 17,149 8,981 Sales £000 — Appreciation/ (Depreciation) £000 Valuation 2019 £000 3,662 29,792 GlaxoSmithKline is one of the world’s largest pharmaceutical, vaccine and consumer healthcare companies. The position was added to in 2019 as we gained confidence in the strategy under the (relatively) new CEO Emma Walmsley. GSK has historically traded at a discount to the global pharmaceutical sector. While they have world leading consumer healthcare and vaccines businesses, the pharmaceutical division has lagged behind others in, for example, innovative oncology drugs. Under a new management team (as well as Emma there is a new head of pharmaceuticals and new head of research & development) they are re-investing in R&D and focussing on innovative products. Given the long development time within pharmaceuticals, it will take years for this change to become fully evident, but we are seeing early stages of an improved drug pipeline. 2 Royal Dutch Shell 3.4 £176bn 29,213 — — (1,219) 27,994 Royal Dutch Shell is a vertically integrated oil & gas company. Following the material oil price fall from 2014 to 2015 and subsequent acquisition of BG Group, Shell focussed intensely on reducing its operating and capital expenditure in order to improve its free cash generation at a lower oil price. The management have successfully brought down the ‘break-even’ oil price at which Shell can generate free cash flow, such that their existing over 6% dividend yield is covered by cash generation. Shell are also perceived to be leading the transition to renewable energy within integrated oil and gas companies, which we believe will be a vital component of their success over time. 3 Rio Tinto 2.1 £73bn 13,986 — (688) 3,586 16,884 Rio Tinto is one of the world’s largest mining companies, with a particular focus on iron ore, aluminium and copper. Their mines are well positioned on the cost curve, often at the lowest cost quartile globally, meaning that they can continue to be highly cash generative despite volatile commodity prices. This cash generation, combined with a strong balance sheet, has meant that they have been able to return excess cash to shareholders in the form of special dividends in recent years, a trend we expect to continue in the current year. They fully exited all coal production in 2018 and score highly relative to other mining companies on environmental, social and governance risk factors. 4 HSBC 1.9 £120bn 17,054 — — (1,448) 15,606 HSBC are a global bank with a market-leading presence in Hong Kong as well as some emerging economies. Their geographic focus brings worthwhile diversity to the portfolio, and they currently pay an attractive dividend yield of over 6%. Under a new management team, they are scaling back their comparatively lower returning US and European operations and seeking to redeploy the capital in Asia and the Middle East in order to improve the returns of the group overall. This is not, in our view, factored into the current valuation. 5 BP 1.8 £96bn 15,870 — — (779) 15,091 BP is a vertically integrated oil and gas company. Similar to Royal Dutch Shell, they materially reduced operating and capital expenditure following the last oil price fall, meaning their ‘break-even’ oil price has been substantially reduced. They currently pay an attractive over 6% dividend yield that is covered by free cash flow. Under their new CEO they have committed to achieving net zero carbon emissions by 2050 (both from their own operations and those of their upstream oil & gas customers), while continuing to grow free cash flow and dividends. 6 Relx 1.7 £37bn 12,124 — — 2,164 14,288 Relx (formerly Reed Elsevier) are an information services provider across a broad range of industries. For example, their LexisNexis software is used as a reference and analytical tool by the majority of law firms globally. They also manage exhibitions and publish scientific and medical journals. Relx have done an excellent job of growing sales and earnings consistently in recent years, with low single-digit organic sales growth plus a small amount of margin growth leading to high single-digit earnings growth. This consistency has meant they have acquired a (in our view justified) valuation premium relative to the broader market. 7 Johnson Service 1.7 £725m 10,191 — (3,047) 7,123 14,267 Johnson Service Group is a UK textile rental company operating across workwear, hotel and restaurant linen. It has grown well both organically and via ‘bolt-on’ acquisitions in recent years, often filling in geographic gaps in the portfolio. This has led it to consistently grow earnings while maintaining an only modestly geared balance sheet. In 2019, the position was modestly reduced, not because of fundamental concerns about the business, but rather because the shares have performed well and, as a result, are on a higher valuation than they have been historically. 24 lawdebenture.com Rank 2019 Company 8 AstraZeneca % of portfolio Approx Market Cap. Valuation 2018 £000 Purchases £000 1.7 £100bn 10,492 — Sales £000 — Appreciation/ (Depreciation) £000 Valuation 2019 £000 3,117 13,609 AstraZeneca are a global pharmaceutical company. Following the appointment of Pascal Soriot as CEO in 2012, the business has invested heavily in R&D and has become one of the world leaders in oncology drugs. The shares have performed well and now trade at a valuation premium to the global pharmaceutical sector. However, the fast growing new oncology products in the portfolio mean it is also growing sales and earnings substantially faster than peers. 9 Prudential 1.6 £38bn 13,095 — (1,467) 1,878 13,506 The company is a leading provider of insurance products in Asia, with additional operations in the US. In 2019 Prudential spun off its M&G division which constituted its UK business. This brings a clearer focus to the company and enhances its growth prospects. The savings market in Asia is immature and has strong growth drivers. S T R A T E G I C I N F O R M A T I O N 10 National Grid 1.6 £33bn 10,769 — — 2,538 13,307 National Grid are a regulated utility company with operations in both the UK and the US. The position was added to substantially in 2018 as it was trading at a material discount to global peers, partly due to the threat of nationalisation of its UK assets under a potential Labour government. In our view this valuation discount was underestimating how global its operations are, with the US already generating roughly 50% of its earnings (where they own gas and electricity distribution networks in cities such as New York). Electricity networks will play a crucial role in the transition away from fossil fuels – the widespread adoption of electric cars will put increasing pressure on electricity networks that will require substantial investment. This would be a long term positive for National Grid as their regulated asset base grows. The shares have performed well and the position brings defensive qualities whilst continuing to pay an attractive dividend yield. 11 Herald Investment Trust 1.5 £1bn 9,095 — — 3,485 12,580 Herald is a global technology focussed investment trust managed by Katie Potts (who launched the trust in 1994). Its technology focus brings worthwhile diversity to the portfolio and it has been an excellent performer over time (on both a short term and long term basis). The trust is predominantly focused on the UK and North America, with a high weighting to fast-growing software companies. Katie and her team cover the approximately 300 holdings in the trust to a high level of detail with substantial specialist knowledge of the technology sector. 12 Severn Trent 1.5 £6bn 8,163 925 — 3,487 12,575 Severn Trent is a UK water utility. Similar to National Grid the position was added to substantially in 2018 and early 2019 on the view that the threat of nationalisation was causing the valuation to be too low. Severn Trent is one of the best-quality water companies in the UK on metrics such as preventing leakages as it has a well invested network. It also scores highly on environmental, social and governance concerns relative to other listed (and privately held) water companies. The shares have performed well particularly since the UK election, but the position brings defensiveness to the overall portfolio and the dividend yield remains attractive. 13 Land Securities 1.5 £7bn 8,435 1,524 — 2,400 12,359 Land Securities are a property owner in the UK with assets roughly equally split between offices and retail. Largely due to the retail exposure, they have traded at a discount to estimated net asset value. However, this discount could in our view be too simplistic because of the quality of their retail assets. For example, only 20% of their portfolio is in retail outside of London, with their shopping centres in London often being more focussed on food outlets than traditional clothing retail (a good example of this would be their ‘One New Change’ shopping centre in St Paul’s). They are among the leaders in UK property companies in environmental targets, recently announcing their aim to become a net zero carbon business. 14 Ceres Power 1.5 £403m 6,372 1,590 — 4,090 12,052 The company operates as a fuel cell technology and engineering business. The technology is fuel flexible (it can use a combination of hydrogen and natural gas) and the company has licensed it out to Bosch, Weichi, Minra and Doosan, therefore strong revenue growth is expected in coming years. Recently Bosch have taken a substantial stake in the company and a seat on the board. The desire to push towards lowering carbon emissions drives the need for fuel cell technology to be adopted. 15 Dunelm 1.5 £2bn 4,873 852 — 6,182 11,907 Dunelm are an in-store and online homeware retailer in the UK. Under a (relatively) new CEO they have taken a number of measures to improve both financial and operating performance, leading to an improvement in trading both in store and online (where they have materially improved their website and are seeing the benefit of this). Their trading performance has been particularly impressive in what has been a difficult retail trading backdrop in the UK. 2525 S T R A T E G I C I N F O R M A T I O N Classification of investments based on market values at 31 December 2019 Oil & gas Oil & gas producers Oil equipment services & distribution Basic materials Chemicals Forestry & paper Mining Industrials Construction & materials Aerospace & defence General industrials Electronic & electrical equipment Industrial engineering Industrial transportation Support services Consumer goods Automobiles & parts Beverages Food producers Household goods & home construction Personal goods Tobacco Health care Health care equipment & services Pharmaceuticals & biotechnology Consumer services General retailers Media Travel & leisure Telecommunications Mobile telecommunications Utilities Electricity Gas water & multi utilities Financials Banks Nonlife insurance Life insurance/assurance Real estate investment & services Real estate investment trusts Financial services Equity investment instruments Technology Software & computer services Technology hardware & equipment TOTAL 2019 TOTAL 2018 26 lawdebenture.com U.K. % 6.12 1.79 7.91 1.70 1.02 3.24 5.96 4.01 5.73 1.32 2.67 2.31 1.11 2.01 19.16 — — — 1.70 — 0.98 2.68 1.05 5.28 6.33 1.88 2.85 3.58 8.31 0.62 0.62 0.70 3.26 3.96 5.67 3.48 3.40 1.12 3.97 5.13 3.05 25.82 — — — 80.75 74.50 North America % Europe % Rest of the world % 0.88 0.42 1.30 — — — — — — — — 2.56 — — 2.56 0.76 — — — — — 0.46 — 0.46 0.46 — — 0.46 0.12 — 0.21 0.27 — — 0.28 0.88 — 0.31 0.43 — — — — — — — — — — — 0.61 — — — — — 0.61 1.06 — — — — — 0.76 0.74 1.06 — 1.74 1.74 — — — — — — — — — — — — — — — — — 1.16 0.78 1.94 8.30 9.88 — 0.77 0.77 — 0.45 1.39 1.84 0.51 0.51 — — — 0.51 0.65 — — — 0.51 — 1.67 0.50 — 0.50 7.83 8.61 — — — — — — — — — — — — — — — 0.57 — — 0.88 1.45 — — — 3.12 7.01 Total 2019 % 7.46 2.21 9.67 2.16 1.02 3.24 6.42 4.13 6.34 1.53 2.94 4.87 1.11 2.29 23.21 1.82 0.31 0.43 1.70 — 0.98 5.24 1.05 7.79 8.84 1.88 3.30 4.97 10.15 1.13 1.13 0.70 3.26 3.96 6.18 4.13 3.40 1.69 3.97 5.64 3.93 Total 2019 £000 61,340 18,114 79,454 17,732 8,419 26,656 52,807 33,971 52,140 12,525 24,158 39,990 9,089 18,778 Total 2018 % 9.24 1.58 10.82 2.87 0.99 3.48 7.34 5.19 7.33 1.37 2.59 5.16 1.08 2.02 Total 2018 £000 61,055 10,517 71,572 19,109 6,534 23,060 48,703 34,376 48,486 9,073 17,166 34,246 7,163 13,405 190,651 24.74 163,915 14,910 2,534 3,499 13,952 — 8,079 42,974 8,608 64,098 72,706 15,462 27,105 40,946 83,513 9,325 9,325 5,825 26,775 32,600 50,890 33,916 28,048 13,916 32,633 46,442 32,315 2.13 0.36 0.42 1.42 0.21 — 14,125 2,406 2,803 9,403 1,394 — 4.54 30,131 2.28 6.64 8.92 1.03 2.32 4.05 7.40 1.38 1.38 0.70 2.86 3.56 4.33 4.03 2.96 1.59 3.34 4.47 15,093 43,912 59,005 6,816 15,377 26,725 48,918 9,124 9,124 4,612 18,932 23,544 28,749 26,710 19,625 10,481 22,115 29,753 6.91 45,868 28.94 238,160 27.63 183,301 1.66 0.78 2.44 13,676 6,450 20,126 100.00 822,316 2.08 1.59 3.67 13,814 10,566 24,380 — — 100.00 662,593 The above table excludes bank balances and short-term deposits S T R A T E G I C I N F O R M A T I O N 27 S T R A T E G I C I N F O R M A T I O N Investment portfolio valuation based on market values at 31 December 2019 Location Sector Industry UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK Holding name GlaxoSmithKline Royal Dutch Shell Rio Tinto HSBC BP Relx Johnson Service AstraZeneca Prudential National Grid Herald Investment Trust Severn Trent Land Securities Ceres Power Dunelm Senior Rolls Royce Morgan Advanced Materials Standard Chartered Smith (DS) Lloyds Banking Hiscox Hammerson BAE Systems Direct Line Insurance Urban Logistics REIT BHP Royal Bank Of Scotland Flutter Entertainment St Modwen Properties Hill & Smith Watkin Jones Toyota Motor (Jap) Smith & Nephew International Consolidated Airlines Croda Mondi Accsys Technologies Carnival Cummins (USA) British American Tobacco RSA Insurance 28 lawdebenture.com Oil Equipment Services & Distribution 12,052 Health Care Pharmaceuticals & Biotechnology Oil & Gas Oil & Gas Producers Basic Materials Financials Oil & Gas Mining Banks Oil & Gas Producers Consumer Services Media Industrials Health Care Financials Utilities Pooled Equity Investments. Utilities Financials Oil & Gas Support Services Pharmaceuticals & Biotechnology Life Insurance / Assurance Gas Water & Multiutilities Equity Investment Instruments Gas Water & Multiutilities Real Estate Investment Trusts Consumer Services General Retailers Industrials Industrials Industrials Financials Industrials Financials Financials Financials Industrials Financials Financials Aerospace & Defence Aerospace & Defence Electronic & Electrical Equipment Banks General Industrials Banks Nonlife Insurance Real Estate Investment Trusts Aerospace & Defence Nonlife Insurance Real Estate Investment Trusts Basic Materials Mining Financials Banks Consumer Services Travel & Leisure Financials Industrials Real Estate Investment & Services Industrial Engineering Consumer Goods Household Goods & Home Construction 8,730 Japan Consumer Goods Automobiles & Parts UK UK UK UK UK UK USA UK UK Health Care Health Care Equipment & Services Consumer Services Travel & Leisure Basic Materials Chemicals Basic Materials Forestry & Paper Industrials Construction & Materials Consumer Services Travel & Leisure Industrials Industrial Engineering Consumer Goods Tobacco Financials Nonlife Insurance 8,693 8,608 8,594 8,429 8,419 8,218 8,186 8,103 8,079 7,916 £000 % 29,792 27,994 3.62 3.41 16,884 2.05 15,606 1.90 15,091 14,288 14,267 13,609 13,506 13,307 12,580 12,575 12,359 11,907 11,293 11,273 11,095 10,940 10,816 10,625 10,522 10,341 10,166 10,156 9,933 9,772 9,510 9,492 9,206 9,195 9,068 1.84 1.74 1.74 1.66 1.64 1.62 1.53 1.53 1.50 1.47 1.45 1.37 1.37 1.35 1.33 1.32 1.29 1.28 1.26 1.24 1.24 1.21 1.19 1.16 1.15 1.12 1.12 1.10 1.06 1.06 1.05 1.05 1.03 1.02 1.00 1.00 0.99 0.98 0.96 Microsoft (USA) USA Technology Software & Computer Services S T R A T E G I C I N F O R M A T I O N Holding name Babcock Caterpillar (USA) Marshalls Provident Financial Location Sector Industry UK USA UK UK Industrials Industrials Industrials Financials Aerospace & Defence Industrial Engineering Construction & Materials Financial Services £000 7,811 7,802 7,740 7,466 % 0.95 0.95 0.94 0.91 Scottish Oriental Smaller Companies Trust Other Pacific Pooled Equity Investments Equity Investment Instruments 7,237 0.88 Gibson Energy (Can) Canada Oil & Gas Oil & Gas Producers Ibstock Royal Mail Euromoney Institutional Investor Meggitt UK UK UK UK Industrials Industrials Construction & Materials Industrial Transportation Consumer Services Media Industrials Aerospace & Defence Irish Continental (Ire) Ireland Consumer Services Travel & Leisure Applied Materials (USA) IP Group General Motors (USA) Hipgnosis Songs Fund Spectris International Personal Finance USA UK USA UK UK UK Technology Financials Technology Hardware & Equipment Financial Services Consumer Goods Automobiles & Parts Pooled Equity Investments Industrials Financials Equity Investment Instruments 6,210 0.76 Electronic & Electrical Equipment Financial Services Johnson & Johnson (USA) USA Health Care Pharmaceuticals & Biotechnology Standard Life Aberdeen Chesnara Aviva Elementis Balfour Beatty Taylor Wimpey IMI Vodafone Deere (USA) Embraer (Bra) Ryanair (Ire) UK UK UK UK UK UK UK UK Financials Financials Financials Financial Services Life Insurance / Assurance Life Insurance / Assurance Basic Materials Chemicals Industrials Construction & Materials Consumer Goods Household Goods & Home Construction 5,222 Industrials Industrial Engineering Telecommunications Mobile Telecommunications USA Other Industrials Industrials Industrial Engineering Aerospace & Defence Grit Real Estate Income Other Financials Real Estate Investment & Services Ireland Consumer Services Travel & Leisure 4,958 0.60 Allied Minds TT Electronics Indus Gas Pfizer (USA) Foresight Solar Bristol-Myers Squibb (USA) SSE UK UK UK USA UK USA UK Financials Industrials Oil & Gas Financial Services Electronic & Electrical Equipment Oil & Gas Producers Health Care Pharmaceuticals & Biotechnology Pooled Equity Investments Equity Investment Instruments 4,393 0.53 Health Care Pharmaceuticals & Biotechnology Utilities Electricity Muenchener Rueckver (Ger) Germany Financials Nonlife Insurance Oxford Sciences Innovation (unlisted) UK Financials Financial Services Total (Fra) France Oil & Gas Oil & Gas Producers Koninklijke DSM (Net) Netherlands Basic Materials Chemicals 7,223 0.88 6,919 6,789 0.84 0.83 6,545 0.80 6,544 0.80 6,506 6,450 6,299 6,217 0.79 0.78 0.77 0.76 6,175 5,877 5,502 5,434 5,419 5,380 5,297 5,261 5,156 5,137 5,105 5,053 0.75 0.71 0.67 0.66 0.65 0.65 0.64 0.64 0.64 0.63 0.62 0.62 0.61 4,721 4,699 4,680 4,633 4,434 0.57 0.57 0.57 0.56 0.54 4,357 4,316 3,865 3,855 3,802 3,769 0.53 0.52 0.47 0.47 0.46 0.46 29 S T R A T E G I C I N F O R M A T I O N Investment portfolio valuation continued based on market values at 31 December 2019 Holding name Phoenix Vivendi (Fra) Studio Retail Nestlé (Swi) Roche (Swi) Marstons Sigmaroc Bawag (Aus) Weir Group SAP (Ger) Morses Club Location Sector Industry UK Financials Life Insurance / Assurance France Consumer Services Media UK Consumer Services General Retailers Switzerland Consumer Goods Food Producers Switzerland Health Care Pharmaceuticals & Biotechnology £000 3,743 3,703 3,555 3,499 3,475 % 0.46 0.45 0.43 0.43 0.42 Consumer Services Travel & Leisure 3,403 0.40 UK UK Industrials Construction & Materials Austria Financials Banks UK Industrials Industrial Engineering Germany Technology Software & Computer Services UK Financials Financial Services Novo-Nordisk (Den) Denmark Health Care Pharmaceuticals & Biotechnology M and G Redde UK UK Financials Financials Financial Services Financial Services Pernod-Ricard (Fra) France Consumer Goods Beverages Schlumberger (USA) USA Oil & Gas Oil Equipment Services & Distribution Deutsche Börse (Ger) Germany Financials Financial Services ITM Power SGS (Swi) UK Oil & Gas Oil Equipment Services & Distribution Switzerland Industrials Support Services Daily Mail & General Trust UK Consumer Services Media Deutsche Telekom (Ger) Germany Telecommunications Mobile Telecommunications Augean Legrand (Fra) Cellnex Telecom (Spa) Amundi (Fra) Kier UK France Spain France UK Industrials Industrials Support Services Electronic & Electrical Equipment Telecommunications Mobile Telecommunications Financials Industrials Financial Services Construction & Materials Sig Combibloc (Swi) Switzerland Industrials General Industrials Hipgnosis Songs Fund - Class C Simec Atlantis Energy UK UK Pooled Equity Investments Equity Investment Instruments 1,545 0.19 Utilities Electricity Allianz (Ger) Wincanton Tullow Oil Premier Oil Prosus (Net) Germany Financials Nonlife Insurance UK UK UK Industrials Industrial Transportation Oil & Gas Oil & Gas Oil & Gas Producers Oil & Gas Producers Netherlands Technology Software & Computer Services ING Group (Net) Netherlands Financials Banks Renold National Oilwell Varco (USA) UK USA Industrials Oil & Gas Industrial Engineering Oil Equipment Services & Distribution Assa Abloy (Swe) Sweden Industrials Construction & Materials Centrica Eddie Stobart Logistics Severfield Better Capital (2012) 30 lawdebenture.com UK UK UK UK Utilities Industrials Industrials Pooled Equity Investments Gas Water & Multiutilities Industrial Transportation Industrial Engineering Equity Investment Instruments 350 0.04 3,125 3,123 3,018 2,984 2,968 2,929 2,806 2,650 2,534 2,427 2,403 2,294 2,293 2,288 2,224 2,218 2,208 1,964 1,772 1,762 1,709 0.38 0.38 0.37 0.36 0.36 0.35 0.33 0.32 0.31 0.29 0.29 0.28 0.28 0.28 0.27 0.27 0.27 0.24 0.22 0.21 0.21 1,509 1,457 1,425 1,274 1,227 1,182 1,100 1,041 946 946 893 875 697 0.18 0.18 0.17 0.15 0.15 0.14 0.13 0.13 0.12 0.12 0.11 0.11 0.08 Holding name Velocys Mirriad Advertising Carclo LDIC Investments Now (USA) Providence Resources Fastjet Location Sector Industry £000 % UK UK UK UK USA UK UK Oil & Gas Oil Equipment Services & Distribution Consumer Services Media Basic Materials Chemicals Financials Oil & Gas Oil & Gas Financial Services Oil Equipment Services & Distribution Oil & Gas Producers Consumer Services Travel & Leisure 289 281 237 213 106 96 93 4 0.04 0.03 0.03 0.03 0.01 0.01 0.01 0.00 822,316 100.00 S T R A T E G I C I N F O R M A T I O N Permanent TSB (Ire) Ireland Financials Banks Changes in geographical distribution Valuation 31 December 2018 £000 Purchases £000 Costs of acquisition £000 Sales proceeds £000 Appreciation/ (depreciation)* £000 United Kingdom 493,564 132,493 North America Europe Japan Other Pacific Other 65,495 57,053 7,433 29,928 9,120 4,743 23,497 — — 2,373 (596) (1) (63) — — (1) (31,731) (17,891) (27,963) — (25,303) — 662,593 163,106 (661) (102,888) 70,291 15,836 11,885 1,260 2,612 (1,718) 100,166 Valuation 31 December 2019 £000 664,021 68,182 64,409 8,693 7,237 9,774 % 80.7 8.3 7.8 1.1 0.9 1.2 822,316 100.0 * Please refer to note 2 on page 90. 31 S T R A T E G I C I N F O R M A T I O N Strategic report Who we are From its origins in 1889, Law Debenture has diversified to become UK a Group with a unique range of activities in the financial and professional services sectors. The Group has two distinct areas of business: we are an investment trust with an investment portfolio and a leading provider of independent professional services (IPS or IPS business). Objectives, investment strategy, business model Our objective for the investment trust is to achieve long-term capital growth in real terms and steadily increasing income. The aim is to achieve a higher rate of total return than the FTSE Actuaries All- Share Index through investing in a diversified portfolio of stocks. Law Debenture shares are intended for private investors in the UK (retail investors), professionally advised private clients and institutional investors. By investing in an investment trust, shareholders typically accept the risk of exposure to equities but hope that the pooled nature of an investment trust portfolio will give some protection from the volatility in share price movements that can sometimes affect individual equities. Our investment strategy (which did not change in 2019) is as follows: North America Europe Japan Other Pacific Other Minimum % Maximum % 55 0 0 0 0 0 85 20 10 10 10 10 companies (OEICs), fixed interest securities, interests in limited liability partnerships, cash and liquid assets. Derivatives may be used but only with the prior authorisation of the Board. It is permissible to hedge against currency movements on both the capital and income account, and to lend stocks up to 30% of the NAV, subject again to prior authorisation of the Board. Trading in suspended shares and short positions are not permitted. No more than 15% of gross assets will be invested in other UK listed investment trusts. The Company’s investment activities are subject to the following limitations and restrictions: • No investment may be made which raises the aggregate value of the largest 20 holdings, excluding investments in collective investment vehicles that give exposure to the Japan, Asia/ Pacific or emerging market regions, to more than 40% of the Company’s portfolio, including gilts and cash. The Company’s portfolio will typically contain between 70 and 150 listed investments. The portfolio is diversified in order to spread investment risk. There is no obligation to hold shares in any particular type of company, industry or geographical location. The IPS business does not form part of the investment portfolio and is outside this strategy. Whilst performance is measured against local and UK indices, the composition of these indices does not influence the construction of the portfolio. As a consequence, it is expected that the Company’s investment portfolio and performance will deviate from the comparator indices. The aim is to achieve a higher rate of total return than the • The value of a new acquisition in any one company may not exceed 5% of total portfolio value (including cash) at the time the investment is made. Further additions shall not cause a single holding to exceed 5%, and Board approval must be sought to retain a holding, should its value increase above the 5% limit (that approval to be sought at the next FTSE Actuaries All- Board meeting). Share Index through • The Company applies a ceiling on investing in a diversified portfolio of stocks effective gearing of 50%. While effective gearing will be employed in a typical range of 10% net cash to 20% gearing, the Board retains the ability to reduce equity exposure so that net cash is above 10% if deemed appropriate. There are some guidelines, set by the Board, on maximum or minimum stakes in particular regions and all stakes are monitored in detail by the Board at each Board meeting in order to ensure that sufficient diversification is maintained. • The Company may not make investments in respect of which there is unlimited liability. Our business model is designed to position the Company to best advantage in the investment trust sector. Liquidity and long-term borrowings are managed with the aim of improving returns to shareholders. The policy on gearing is to adopt a level of gearing that balances risk with the objective of increasing the return to shareholders, in pursuit of its investment objective. More information on gearing can be found on page 34. Investments may be held in, inter alia, equity shares, collective investment products including open ended investment We aim to deliver the investment trust’s objective by skilled implementation of the investment strategy, complemented by maintaining and operating our IPS business profitably and safely, while keeping it distinct from the portfolio. The operational independence of the IPS means that the business can act flexibly and commercially. It provides a regular flow of dividend income to the Company. This helps the Board to smooth out equity dividend 32 lawdebenture.com peaks and troughs, means that the investment manager does the longer term and Janus Henderson has delivered positive not have to be constrained by choosing stocks just for yield and returns over many years. is an important element in delivering the objective of steadily increasing income for shareholders. In turn, some of the tax relief at the investment trust level arising from our debenture interest and excess costs, which would otherwise be unutilised, can be transferred to the IPS business, thus reducing the overall tax liability of the Group. Fee structure and ongoing charges Our portfolio of investments is managed under delegation by James Henderson and Laura Foll of Janus Henderson Investors (Janus Henderson) under a contract terminable by either side on six months’ notice. On a fully discretionary basis, Janus Henderson is responsible for implementing the Company’s investment strategy and fees are charged at 0.30% of the value of the net assets of the Group (excluding the net assets of IPS), calculated on the basis adopted in the audited financial statements. This The agreement with Janus Henderson does not cover custody which is the responsibility of the depositary (see section on regulatory compliance in the Directors’ report, page 40). Nor does it cover the preparation of data associated with investment performance, or record keeping, both of which are maintained by the Company. Investment trusts are required to publish their ongoing charges. This is the cost of operating the trust and includes the investment management fee, depositary and custody fees, investment performance data, accounting, company secretary and back office administration. Law Debenture’s latest published level of ongoing charges shown on page 5 is one of the lowest in the marketplace. No performance fees are paid to the investment manager. Capital structure – simple and mainstream means that the Company continues to maintain one of the most Law Debenture’s capital structure is transparent. We have only competitive fee structures in the investment trust sector and one class of share – ordinary shares – and each share has the same this, combined with the strong performance of Janus Henderson rights as every other share. over the years as our investment manager, has led the Board to conclude that the continuing appointment of Janus Henderson as the Company’s investment manager remains in the best interests of shareholders. Equity investment needs to be considered over The Company conducts its affairs so that its ordinary shares are capable of being recommended by independent financial advisors to retail investors in accordance with relevant FCA rules. S T R A T E G I C I N F O R M A T I O N THE L AW DEBE NTURE BUSIN ESS MO DE L The business model provides advantages over other investment trusts Total shareholder return INVESTMENT PORTFOLIO • Invests in diverse equity portfolio • Earns capital returns and dividends • Low ongoing charges INDEPENDENT PROFESSIONAL SERVICES • Trusted, professional and third party • Earns fees • Cost base kept under control • Profits give a dividend stream which increases the ability to pay dividends to shareholders • Tax efficient 33 S T R A T E G I C I N F O R M A T I O N Strategic report continued Our ordinary shares are, we consider, mainstream investment products because they are shares in an investment trust. The Company intends to continue conducting its affairs for the foreseeable future so that the ordinary shares can continue to be categorised as a mainstream investment. Transparency In order to assist shareholders in understanding the nature of the underlying investments they are buying into when investing in Law Principal risks and uncertainties – investment portfolio The principal risks to the Company’s ability to continue operations as an investment trust relate to investment activities generally and include market price risk, foreign currency risk, liquidity risk, interest rate risk, credit risk and regulatory risk. The Directors have carried out a robust assessment of these and other risks, which are explained in more detail below and in note 20 to the accounts. Debenture shares, we publish our entire portfolio twice a year – in the annual report (see pages 28 to 31) and half-yearly report – with regular monthly updates on the composition of the top ten holdings in the portfolio. From February 2020, we will be publishing our full portfolio listing monthly, to further improve the transparency around the portfolio for investors. Gearing Law Debenture’s latest published level of ongoing charges is one of the lowest Investment trusts have the benefit of being in the marketplace at Market risk could arise from sudden fluctuations in world stock markets. The portfolio deliberately contains a ‘long list’ of stocks and is diversified to spread risk. In extreme circumstances, as the Company’s investments comprise almost entirely of readily realisable, quoted equities, these could be sold to meet funding requirements. The Company conducts stress tests each month, as part of its compliance programme, which gives the Board a degree of comfort about the Company’s ability to withstand any able to ‘gear’ their portfolios according to market conditions. This means that they can raise debt (either short- or long-term) to generate funds for further investment. These funds can be used to increase the size of the portfolio, or assets from within the portfolio can be sold to reduce debt 0.48%. No performance significant market shock. fees are paid to the investment manager. Regulatory risk could arise from failure to comply with legal and regulatory obligations. This could result in suspension of the Company’s stock exchange listing and/ or regulatory sanction (including financial and even be “negatively geared”. This means selling assets to hold cash so that less than 100% of the Company’s assets are invested in equities. At 31 December 2019, our gearing was 9% (2018: 3%). There has been no change in the Company’s gearing policy, with effective gearing typically employed in a range of 10% net cash to 20% gearing. Borrowings The Company has two debentures (long dated sterling denominated financing) details of which are at page 107. The weighted average interest payable on the Company’s structural borrowings is 4.589% (2018: 4.589%). Share price and NAV Investment trusts can trade at a discount (where the share price is lower than the combined value (NAV) of the underlying assets), penalties). Breach of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains. The Executive team provides regular reports to the Board and the Audit Committee on the monitoring programmes in place to mitigate these risks. As its own AIFM, the Company is able to monitor investment positions along with levels of forecast income and expenditure and the depositary carries out regular checks on the Company’s investment activity and accounting. Operational risk could arise from failure of the Company’s accounting systems, the systems of the investment manager, or those of the custodian, which might result in an inability to provide accurate reporting and monitoring or a misappropriation of assets. All relevant providers of these services have comprehensive business continuity plans which include robust plans for continued operation of the business in the event of a service disruption or other major disruption. The Audit Committee considers detailed reports on the Company’s risk profile and the internal controls in place to mitigate such risks, as well as receiving reports by other key third party providers. or at a premium (where the share price trades at a higher level Gearing risk could arise where the Company has borrowed money than the underlying NAV). Investment trust investors need to for investment purposes. If the value of portfolio investments falls, understand these concepts as well as examine the underlying any borrowings will magnify the extent of this loss. All borrowings portfolio and the way in which it is managed, to decide whether or require the prior approval of the Board and gearing levels are not an investment trust share represents “good value”. kept under close review by the Board. As stated in the investment strategy, there is a ceiling on effective gearing of 50%. 34 lawdebenture.com S T R A T E G I C I N F O R M A T I O N The Board is cognisant that, with an ever changing political, market • NAV total return per share (combining the capital and income and regulatory backdrop, it is increasingly important to monitor returns of the Group) and how this compares, over various time and identify new and emerging risk. intervals, with relevant indices; The Company views effective risk management as a key priority and the corporate governance report sets out in detail the control framework in place to manage or mitigate the risks that the • • the discount/premium in share price to NAV; and the cost of running the portfolio as a percentage of its value. Group faces. Viability statement The Company is required to publish a longer term statement about its viability. The Directors believe that a forward looking period of three years is appropriate. The Directors assess the Company’s future prospects by keeping under close review its current and projected financial position, threats/risks to the delivery over the longer term of the investment strategy objectives and the Group business model and a macroeconomic overview based on a reasonable time horizon. A three-year time period also takes into account the nature of the markets in which the IPS business operates, where fluctuations in revenue can occur year-on-year for reasons beyond Law Debenture’s control. The Directors confirm that they have a reasonable expectation that the Company will continue to implement its investment strategy and business model and to operate and be able to meet its liabilities as they fall due for the next three financial years. There are no current plans to amend the investment policy, which has delivered good capital and dividend returns for shareholders over many years. In May 2019, the Company moved to the UK Equity Income sector AIC category from the previous global sector classification. The strategy for the IPS business remains to continue to drive growth; more detail can be found in the Chief Executive Officer’s review on pages 12 to 17. The Directors’ strategic report explains in detail their assessment and understanding of the principal risks facing the Company. There is a detailed description of the controls in place to manage those risks in the corporate governance report. The main qualification to this viability statement is that the investment manager is appointed on a fully discretionary basis, so, while stocks are picked by the manager within the guidelines in the investment strategy, the Board does not dictate what individual stocks are bought or sold. Portfolio over- or under-performance is only properly measurable over the medium and longer term. Short-term fluctuations will not necessarily result in a change of strategy, but might in extreme circumstances pose a risk to viability. This risk is accepted within the Board’s risk appetite. This statement is in addition to, rather than any replacement of, the going concern basis of preparation statement on page 45. Key performance indicators (KPIs) and alternative performance measures The KPIs used to measure the progress and performance of the Group are: Since the objective of the investment trust is measurable solely in financial terms, the Directors do not consider that it is appropriate to adopt non-financial KPIs. The financial measures adopted as KPIs are part of our financial reporting obligations. Alternative Performance Measures as defined under ESMA guidelines have been adopted and these are described in detail on page 115. Investment strategy – implementation The way in which we implemented the investment strategy during 2019 is described in the investment manager’s review on pages 18 to 22. Performance against KPIs is set out at pages 3 to 31, which contain comprehensive tables, charts and data to explain performance both over the year under review and over the long term. Law Debenture’s responsibilities as an institutional shareholder The Company recognises that in delivering its objective to produce long-term capital growth and a steadily increasing income, it must ensure that its investment strategy is delivered with due emphasis on the need to ensure that investee companies are acting in accordance with accepted standards of corporate governance. The Company has therefore adopted the following policy. Law Debenture will normally support incumbent management and vote in favour of resolutions proposed by the boards of companies in which it has a shareholding, but will vote against management or withhold a vote where appropriate. The Board determines the Company’s investment strategy but does not issue express instructions to the investment manager on transactions in particular shares. Where Law Debenture believes that incumbent management is failing in its duties, Law Debenture (or on its behalf, the Company’s investment manager) may attempt to enter into dialogue with the company concerned in an attempt to alter the management’s position. Where this is not possible, or where incumbent management declines to alter its behaviour, Law Debenture will consider voting against resolutions proposed by the management. Further, if it is deemed necessary or desirable, the Company would consider acting collectively with other institutional investors to try and achieve a particular goal. Janus Henderson, on Law Debenture’s behalf, monitors companies in which Law Debenture is invested, and from time to time may discuss matters of corporate responsibility with such companies. The Janus Henderson corporate governance unit will notify Law Debenture’s investment managers, who in turn may notify Law 35 S T R A T E G I C I N F O R M A T I O N Strategic report continued Debenture, should matters arise that might lead the Company to consider intervening, abstaining or voting against a particular proposal. During the year, the Company abstained or voted against one or more resolutions at the annual general meetings of 22 investee companies. The Company will not hold shares in companies whose ethical and environmental practices are in its view likely to damage the performance of the business to the detriment of its shareholders. The Company does not believe that conflicts arise between its duties as an institutional shareholder and the IPS work undertaken by the IPS business. The investment manager has complete discretion as to portfolio decisions and as a matter of Statement in compliance with section 172 of the Companies Act 2006 The Board is responsible for the overall strategy and management of the Group, setting investment strategy and ensuring that the Company is acting in accordance with its legal and regulatory obligations. In discharging its responsibilities, the Board takes into account the Group’s purpose, value and culture and acts in good faith in a way that is most likely to promote the success of the Company and to maintain high standards of business conduct. It considers the key stakeholders with whom the business interacts and which are impacted by the Company’s activities including shareholders, principal service providers, clients, employees, the policy, has no access to ‘non-public’ knowledge about any of the community and the environment. activities of the IPS business. The IPS business – part of our business model Shareholders: The Board actively communicates with its shareholders as detailed in the Directors’ report on page 41. In addition, meetings are held with shareholders throughout the year which are attended by Executive and Non-Executive Directors along with representatives from the investment Operating through wholly owned subsidiary companies, all manager. Key topics of discussion during the year included of which are listed at note 14 to the accounts, we provide pension trustee executives, outsourced pension services, prospects and valuation of the IPS business, performance against benchmark, prospects for the UK economy and the investment corporate trust services, and corporate services to companies, style and stock selection. As a result of shareholder feedback, the agencies, organisations and individuals throughout the world. Company will be publishing a full portfolio listing on the website The services are provided through offices in the UK, Dublin, every month going forwards and reporting will evolve in 2020 and New York, Delaware, Hong Kong, the Channel Islands and the beyond. When making decisions the Board considers the interests Cayman Islands. Group employees are employed by L.D.C. Trust Management Limited and Safecall Limited (in the UK) or a locally incorporated entity (in the overseas jurisdictions). As part of their duties, a of shareholders as a whole and the need to act fairly as between members of the Company. Service providers: The Company has regard for principal service providers, and in particular the investment manager, with which it number of the employees provide services to the investment engages on an on-going basis. The investment manager provides trust and their time is charged to the trust, forming a part of the an update on management of the portfolio at every Board ongoing charges. More details about the performance of the IPS in 2019 are given in the Chief Executive Officer’s review at pages 12 to 17. Principal risks and uncertainties – IPS business The principal risks to the business model for IPS arise where transactions to which we provide a service come under stress. An example of this would be where we act as trustee on a bond which goes into default, or where re-financings or other transaction amendments are required. Such risks may arise from the wider economic pressures on some sectors, borrowers and regions. To mitigate these risks, we work closely with our legal advisers and where appropriate, financial advisers, both in the meeting and the Directors meet annually with relevant senior Janus Henderson employees to consider the systems and controls in place in respect of the management of Law Debenture’s portfolio. The Board also receives presentations from each IPS business head on a rolling basis during the course of the year, including details of client relationship management initiatives and proposed new service offerings to expand the client base. Employees: With effect from 1 January 2019, the Board appointed Mark Bridgeman as its designated Non-Executive Director to gather the views of Law Debenture’s workforce. He commissioned an employee engagement survey across the entire employee base, the results of which have been considered by the Board. Employees are also invited to attend and ask questions at an all staff “townhall” presentation from the Executives and investment manager following the result of the half year and annual results. set up phase to ensure that we have as many protections as The Group’s employees are provided with modern, comfortable practicable and on a continuing basis. The Directors, via detailed working environments that comply with all relevant safety Audit Committee review, monitor these risks closely. regulations. Employee wellbeing is ensured through delivery of The single KPI of the IPS business is revenue return per share, which is reported within the financial summary and the ten year record at pages 3 and 39. a range of benefits designed to promote good health including health insurance and access to medical reviews. Independent confidential helpline facilities are provided to enable employees to deal with issues of concern to them, whether work related 36 lawdebenture.com or domestic. As a result of these measures, and senior management’s open style, staff turnover is generally low. Future trends and factors Community and environment: We disclose our carbon emissions consumption as part of the Directors’ report. Those emissions Law Debenture will continue to strive to deliver its business objectives for both the investment trust and the IPS business. relate solely to the maintenance of our various offices around The Chairman’s statement, the investment manager’s review and the world. The Group supports certain charities from time to time, particularly where employees have personally organised events, or take part in sponsored activities, that benefit charities related to them or their families. the Chief Executive Officer’s review (all of which form part of this strategic report) respectively set out the Company’s views on future developments. Brexit S T R A T E G I C I N F O R M A T I O N The Group is unaware of any human rights issues that might arise from its activities, mindful though of the need to act responsibly as an institutional shareholder (as described on page 35). The Board continues to believe that the UK’s decision to leave the EU does not present a threat to the Group’s business model, the viability statement, or its ability to continue producing accounts Key decisions impacting shareholders in 2019: One of the key decisions taken this year was in relation to dividend policy and a move to pay quarterly dividends, as explained more in the Chairman’s Statement on page 4. The Board sees this as a positive on a going concern basis. Performance and related data for shareholders and many of our employees who are also long Pages 3, 13 and 18 to 22, which contain performance and related term shareholders, and perceive no impact on other stakeholders. data, form a part of this strategic report. Law Debenture Corporate Services Limited Company Secretary 26 February 2020 The Remuneration Committee have reviewed the Company’s Remuneration Policy and, as described in full in the remuneration report on pages 50 to 62, has recommended that a new policy be approved by shareholders. Some of the larger shareholders and their representative bodies were consulted on the policy. The Board believes the new policy will ensure both strong differentiation of performance alignment of management rewards with the shareholder experience, while providing a more competitive remuneration package that will help attract, retain and motivate key talent to ensure the successful delivery of strategy. The Board initiated consultation with the Association of Investment Companies to assess whether it remained appropriate for Law Debenture to stay within the Global sector. Following this consultation, the AIC elected to move the Company into the UK Equity Income sector. It is the Board’s belief that this move will assist all stakeholders in being able to compare the Company with its peers and assess its performance. Breakdown of employees by sex We report that at the 2019 year end: • • two Directors of the Group parent were female (2018: nil). 31% of the senior managers of the Group were female (2018: 23%) (senior manager being any individual with responsibility for planning, directing or controlling an activity of one of the subsidiary companies, excluding the Chief Executive Officer and the Chief Financial Officer); and • 50% (2018: 43%) of the Group employees were female. 37 S T R A T E G I C I N F O R M A T I O N Calculation of net asset value (NAV) per share Valuation of our IPS Business Accounting standards require us to consolidate the income, costs reflect the difference between the comparable companies and and taxation of our IPS business into the Group income statement IPS in respect of size, liquidity, margin and growth. A range of on page 80. The assets and liabilities of the business are also multiples is then provided by the professional valuation firm, from consolidated into the Group column of the statement of financial which the Board selects an appropriate multiple to apply. The position on page 81. A segmental analysis is provided in note 7 multiple selected for the current year is 9.2x, which represents (page 93) to these accounts which shows a detailed breakdown a discount of almost 30% on the mean multiple across the of the split between the investment portfolio, IPS business and comparable businesses. Group charges. Valuation guidelines require the fair value of the IPS business Consolidating the value of the IPS business in this way failed be established on a stand-alone basis. The valuation does not to recognise the value created for the shareholder by the IPS therefore reflect the value of Group tax relief from the investment business. To address this, from December 2015, the NAV we trust to the IPS business reduced the tax charge by £1,120,000 have published for the Group has included a fair value for the (2018: £845,000), which is not reflected in this valuation. It is standalone IPS business. The current fair value of the IPS business is calculated based upon historical earnings before interest, taxation, depreciation and amortisation (EBITDA) for 2019, with an appropriate multiple applied. The EBITDA for the IPS business for 2019 was £11,515,000. This number is reached by taking the return, including profit hoped that our initiatives to inject growth into the IPS business will result in a corresponding increase in valuation over time. As stated above, management is aiming to achieve mid to high single digit growth in 2020. The valuation of the business has increased by £31.8m/35.2% since the first valuation of the business as at 31 December 2015. attribution on ordinary activities before interest and taxation In order to assist investors, the Company restated its historical of £11,356,000 from note 7 on page 93 and adding back the NAV in 2015 to include the fair value of the IPS business for the last depreciation charge for property plant and equipment of £93,000 ten years. This information is provided in the annual report within and the amortization of intangible assets of £65,000 shown in the 10 year record on the opposite page. note 3 on page 91. The calculation of the IPS valuation and methodology used to derive it are included in the annual report at note 14. In determining a calculated basis for the fair valuation of the IPS business, the Directors have taken external professional advice. The multiple applied in valuing IPS is from comparable companies sourced from market data, with appropriate adjustments to Long-term borrowing The fair value of long-term borrowings held by the Group is disclosed in note 21 to the accounts. The methodology of fair valuing all long-term borrowings is to benchmark the Group debt against A rated UK corporate bond yields. Calculation of NAV per share The table below shows how the NAV at fair value is calculated. The value of assets already included within the NAV per the Group statement of financial position that relate to IPS are removed (£30,445,000) and substituted with the calculation of the fair value and surplus net assets of the business (£122,305,000). An adjustment of £36,992,000 is then made to show the Group’s debt at fair value, rather than the book cost that is included in the NAV per the Group statement of financial position. This calculation shows an NAV fair value for the Group as at 31 December 2019 of £830,139,000 or 702.17 pence per share: Net asset value (NAV) per Group statement of financial position Fair valuation of IPS: EBITDA at a multiple of 9.2x (2018: 8.4x) Surplus net assets Fair value of IPS business Removal of assets already included in NAV per financial statements Fair value uplift for IPS business Debt fair value adjustment NAV at fair value 31 December 2019 31 December 2018 £000 Pence per share £000 Pence per share 775,272 105,938 16,367 122,305 (30,445) 91,860 (36,992) 830,139 655.76 669,364 566.27 89.61 13.84 103.45 (25.75) 77.70 (31.29) 702.17 87,562 16,844 104,406 (25,967) 78,439 (21,940) 725,863 74.08 14.25 88.33 (21.97) 66.36 (18.56) 614.07 38 lawdebenture.com S T R A T E G I C I N F O R M A T I O N Long-term performance record 10 year record 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 412.6 390.9 451.9 569.1 574.2 557.3 662.3 748.3 669.4 775.3 Net assets (£m)1 Revenue return (pence) 342.4 13.02 Capital return (pence) 62.77 58.22 (19.07) 50.24 13.26 15.52 15.14 16.27 97.18 16.95 18.10 15.96 21.66 21.26 30.68 3.87 (17.47) 89.30 67.10 (71.85) 79.27 Total (pence) 75.79 71.48 (3.55) 65.38 113.45 20.82 0.63 105.26 88.76 (50.59) 109.95 Revenue return (pence) Investment trust Independent professional services 7.33 5.69 7.07 6.19 8.27 7.25 8.47 6.67 9.31 10.08 6.96 6.87 11.01 7.09 10.88 7.68 11.61 9.933 13.23 22.18 7.87 8.54 Group charges2 — — — — — — — (2.60) 0.12 0.16 (0.04) 13.02 13.26 15.52 15.14 16.27 16.95 18.10 18.56 21.54 21.10 30.72 13.02 13.26 15.52 15.14 16.27 16.95 18.10 15.96 21.66 21.26 30.68 Dividends (pence) 12.20 12.70 13.50 14.25 15.00 15.70 16.20 16.70 17.30 18.90 26.00 Share price (pence)1 284.5 356.6 333.5 425.0 529.0 530.0 498.0 530.0 629.0 540.0 650.0 (Discount)/premium (%)1 (15.7) (10.5) NAV at fair value (pence)1 337.5 398.5 (13.4) 385.1 0.1 (2.4) (2.3) (5.1) (11.4) (6.0) 424.7 541.8 542.3 524.5 598.5 669.5 (12.1) 614.1 (7.4) 702.2 Market capitalisation (£m)1 335.9 418.6 393.8 501.9 625.0 627.1 589.3 627.2 744.5 639.3 769.8 1 At 31 December calculated in accordance with AIC methodology, based on performance data held by Law Debenture including fair value of IPS business and long-term borrowings 2 For details see note 7 to the accounts 3 This includes 2.72 pence per share of exceptional items including the sale of an unlisted investment, excluding which, normalised earnings per share were 7.21 pence per share Note: The 10 year record has been restated (2009-2014) to reflect the fair value of the IPS business and the long-term borrowings 39 39 C O R P O R A T E G O V E R N A N C E Directors’ report The Directors present their annual report and the audited financial statements for the year ended 31 December 2019. The Company Regulatory compliance operates as an investment trust in accordance with Sections 1158- The Company is subject to continuing obligations applicable to 1159 of the Corporation Tax Act 2010 as amended (s1158-1159) and has premium listed companies, overseen by the UK Listing Authority. been approved as such by HM Revenue & Customs. In the opinion of the Directors, the Company has conducted its affairs so as to enable it to continue to be an Approved Investment Trust under s1158-1159. The Company, which (as far as the Directors are aware) is not a close company, is registered as an investment company as defined in Section 833 of the Companies Act 2006 and operates as such. The Directors consider that the Group operates as a going concern. The corporate governance report forms a part of the Directors’ report. Information required to be disclosed in accordance with Listing Rule 9.8.4 is included as referenced below: Rule 9.8.4 (1) 9.8.4 (7) Detail Where Interest capitalised Note 6, page 92 Allotment of equity securities Note 18, page 101 9.8.4 (2-6) (8-14) Not applicable n/a Essential contracts In the view of the Board, the only contract that is essential to the business of the Group is the investment management agreement Under the Alternative Investment Fund Managers Directive (AIFMD) the Company is required to appoint an “Alternative Investment Fund Manager” (AIFM), which must be appropriately regulated by the FCA. The Company has elected to be its own AIFM. with Janus Henderson, details of which are set out in the strategic The AIFM is required to provide portfolio management, risk report. Revenue, dividends and reserves The Group revenue return attributable to shareholders for the year ended 31 December 2019 was 30.68p per share. The Directors recommend a final dividend of 19.4p per share, which, together with the interim dividend of 6.60p paid in September 2019, will produce a total of 26.0p per share (2018: 18.90p). The final dividend will be paid on 16 April 2020 to holders on the register on the record date of 13 March 2020. After deduction of the interim and final dividends of £30,788,000 (2018: £22,339,000), consolidated revenue reserves increased by £4,854,000 (2018: increase of £4,075,000). Directors The Directors at the date of this report are listed on pages 72 and 73. All Directors held office throughout the year other than Claire Finn, who was appointed on 2 September 2019. management, administration, accounting and company secretarial services to the Company. All of these functions, barring portfolio management which continues to be delegated to Janus Henderson, are undertaken by the Company. The Company has appointed NatWest Trustee and Depositary Services Limited, as depositary under Article 36 of the AIFMD. A fee is payable for this service, being 0.0225% per annum of the calculated monthly NAV. As part of its duties, the depositary is responsible for custody of the Company’s portfolio assets, and has appointed HSBC Bank plc (which has been the Company’s custodian for many years) as sub-custodian. AIFMs are obliged to publish certain information for investors and prospective investors and that information may be found either in this annual report or on the Company’s website at www.lawdebenture. com/investment-trust/corporate-governance/the-aifmd. The AIFMD requires us to report on ‘leverage’. This is slightly different from gearing, leverage being any method of borrowing that increases the Company’s exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company’s exposure and its NAV and must be calculated on a ‘gross’ and a ‘commitment’ method. Under the gross method, exposure represents All Directors are required to stand for re-election every year (or election the sum of the Company’s positions after the deduction of sterling at the next AGM following appointment). The list of candidates, which cash balances, without taking into account any hedging and the Board supports, is set out in the notice of annual general meeting, netting arrangements. Under the commitment method, exposure is along with a statement in each case of why the candidate is supported calculated without the deduction of sterling cash balances and after and the particular attributes that each brings to the objective of certain hedging and netting positions are offset against each other. At promoting the success of the Company and the Group. 31 December 2019, the maximum amount of leverage under the gross Directors’ conflicts of interests and commitment methods was 1.50 and actual amounts were 1.06 and 1.15 respectively. The Directors are under statutory duty to avoid conflicts of interest. The Board has in place appropriate procedures to deal with conflicts Greenhouse gas emissions and potential conflicts, including an annual review, and can confirm The Group’s carbon emissions arise from its consumption of energy those procedures are operating effectively. Each Director has in maintaining its offices. Using conversion factors published by declared all matters that might give rise to a potential conflict of the UK Department for Business, Energy and Industrial Strategy, interest and these have been considered and (where necessary) emissions for the year to 31 December 2019 were 228.63 tonnes of approved by the Board. 40 lawdebenture.com CO2e (2018: 265.64 tonnes of CO2e). This equates to 0.0062 tonnes of CO2e per £000 of IPS revenue (2018: 0.0079 tonnes of CO2e). Modern Slavery Act Shareholder relations We are required to publish a ‘slavery and human trafficking The Company encourages communication between management statement’ to outline the steps the Group has taken to ensure and shareholders on matters of mutual interest. All shareholders on that slavery and human trafficking is not taking place within Law the register are sent a copy of the annual report and the half yearly Debenture’s supply chain. Law Debenture is a service provider, rather than a manufacturer. Its supply chain comprises the steps taken to get our services to a customer. report, and the Company also provides this service to shareholders in nominee companies where the nominee has made appropriate arrangements. Shareholders wishing to receive reports and other communications electronically may do so by writing to the Company. In addition to periodic regulatory reports published via the London While Law Debenture is committed to preventing slavery and Stock Exchange, the Company publishes a monthly factsheet on its human trafficking in its corporate activities, it believes that its website about the investment portfolio performance. supply chains are of low risk as suppliers, for the most part, are professional advisory firms. The Executive Directors have reviewed the supply chains across the Group. Law Debenture’s organisational structure is set out elsewhere in the annual report, including the countries in which it is established (see page 1). None of the activities listed is considered to be at high risk of slavery or human trafficking in its supply chains. All of Law Debenture’s employees have access to confidential whistleblowing arrangements which make it easy for them to make disclosures, without fear of retaliation, if an employee has any concerns about Law Debenture’s supply chain. Law Debenture only uses suppliers – generally, this means legal advisers, financial advisers, accountants and other professional firms – of the highest repute and of appropriate regulatory status. Investment manager – interests held Laura Foll held 1,750 shares in the Company as at 31 December 2019 (2018: nil). James Henderson did not have a beneficial interest at 31 December 2019 (2018: nil), although persons connected to him had an interest of 100,000 shares (2018: 100,000 shares). In addition, a charity with which James Henderson has non-beneficial connections owns 100,000 shares (2018: 100,000 shares). The Company holds no shares in members of the Janus Henderson Group. It has been notified that funds managed by members of the Janus Henderson Group held 154,026 shares in the Company at 31 December 2019 (2018: 87,955 shares). C O R P O R A T E G O V E R N A N C E This statement has been approved by the Board and is also published on Law Debenture’s website. Bribery Act Repurchase of shares During the year, the Company did not repurchase any of its shares for cancellation. It intends to seek shareholder approval to renew its powers to repurchase shares for cancellation up to 14.99% of the The Company maintains a ‘zero tolerance’ anti-bribery policy, which applies to the Company and all its subsidiaries. The policy is published on the Company’s website. Employee participation/issue of shares Company’s issued share capital, if circumstances are appropriate at Employees are informed of the financial aspects of the Group’s the 2020 AGM. Share capital and substantial shareholdings The Company’s share capital is made up of ordinary shares with performance through periodic management meetings. Copies of the annual and half yearly reports are made available to all employees. The Company operates a SAYE scheme in which all UK full-time employees are eligible to participate after completing a minimum service requirement. a nominal value of 5p each. The voting rights of the shares on a Options outstanding under the SAYE scheme at 31 December poll are one vote for every share held. There are no restrictions on 2019 were: the transfer of the Company’s ordinary shares or voting rights and no shares which carry specific rights with regard to the control of the Company. There are no other classes of share capital and none of the Company’s issued shares are held in treasury. As at 31 December 2019, there were 118,429,010 ordinary shares in issue with 118,429,010 voting rights. Note 18 includes details of share capital changes in the year. As at 25 February 2020, there were no shareholders that had notified the Company of a beneficial interest in 3% or more of the issued share capital. Share information as required by section 992 of the Companies Act 2006 appears at pages 32 and 101. Date of grant 27 August 2014 19 August 2015 23 August 2016 15 August 2017 15 August 2018 14 August 2019 Number of option holders Shares under option Exercise price 2 13 8 12 23 16 3,801 518.00p 24,872 512.50p 13,611 18,153 495.75p 594.75p 47,380 606.00p 27,761 592.00p 41 C O R P O R A T E G O V E R N A N C E Directors’ report continued The Company also operates a Share Incentive Plan, details of which are provided in the remuneration report. Website publication Directors’ responsibilities The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial The Directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the website is the responsibility of the Company. The work carried out by the auditors does not involve consideration statements for each financial year and have elected to prepare the of these matters and, accordingly the auditors accept no financial statements in accordance with International Financial responsibility for any changes that may have occurred to the Reporting Standards (IFRSs) as adopted by the European Union. annual report since it was initially presented on the website. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit and loss for the Group for that period. Directors’ responsibility statement pursuant to DTR4 In preparing these financial statements, the Directors are required The Directors confirm to the best of their knowledge: to: • • • select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; • prepare a Director’s report, a strategic report and Director’s remuneration report which comply with the requirements of the Companies Act 2006. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring that the annual report and accounts, taken as a whole, are fair, balanced, and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy. • The Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and give a true and fair view of the assets, liabilities, financial position and profit and loss of the Group. • The annual report includes a fair review of the development and performance of the business and the financial position of the Group and the parent company, together with a description of the principal risks and uncertainties that they face. Auditors A resolution to re-appoint BDO LLP as auditors to the Company will be proposed at the annual general meeting. By order of the Board Law Debenture Corporate Services Limited Company Secretary 26 February 2020 42 lawdebenture.com Corporate governance report Corporate governance Procedures are in place to enable independent professional advice to be taken by individual Directors at the Company’s The Directors are required to report on how the Company has expense. Appropriate insurance cover is in place in respect of legal applied the main and supporting principles in the UK Corporate action against the Directors. Governance Code (the Code), and to confirm that it has complied with the Code’s provisions or, where this has not been the case, to provide an explanation. This report relates to the Code as published in July 2018, a copy of which may be obtained by visiting www.frc.org.uk. The FRC has recognised that the Board structure of investment companies such as Law Debenture might affect the relevance of some of the provisions of the Code. The Company has therefore considered the provisions of the Code that are applicable to it as a FTSE 250 listed investment company. Where Law Debenture has departed from any provisions of the Code, this is explained below. This corporate governance statement forms a part of the Directors’ report and should be read in conjunction with the strategic report on pages 32 to 37. The Board – role, modus operandi and appraisal The Board includes a majority of Non-Executive Directors. The names and biographies of the Directors at the date of this report are on pages 72 and 73 of the annual report. Katie Thorpe was appointed as an Executive Director on 1 January 2019 and Claire Finn was appointed as a Non-Executive Director on 2 September 2019. The Board meets regularly throughout the year. The attendance records of the Directors (both at meetings of the Board and, where they are a member, meetings of Board Committees) are set out in the table below. There was also a strategy meeting in September 2019, attended by all of the Directors, the investment manager and certain senior executives. Board Remuneration Audit Nominations Number of meetings in the year Meetings attended by: D. Jackson K. Thorpe R. Hingley R. Laing M. Bridgeman T. Bond C. Finn* 7 7 7 7 7 7 7 3 9 — — 9 9 9 8 4 4 4 4 4 3 4 4 1 C O R P O R A T E G O V E R N A N C E 2 — — 2 2 2 2 — The Board is responsible for the overall strategy and management * Appointed on 2 September 2019 of the Group, setting investment strategy and ensuring that the Company is operating in compliance with statutory and legal Whilst not members of the Committees, Denis Jackson, Katie obligations. There is a formal schedule of matters specifically Thorpe attend meetings at the invitation of the relevant reserved for Board decision, published on the Company’s website Committee. The same is true in relation to Robert Hingley’s (www.lawdebenture.com under investment-trust/corporate- attendance at Audit Committee meetings. governance). Matters connected with strategy and management, structure and capital, financial reporting and control, investment trust portfolio, contracts, shareholder communication, Board membership and other appointments, remuneration and corporate governance are reserved for the Board. The Board keeps under review the performance of the Executive Directors and the Chairman formally appraises all the Directors each year and implements any training or education needs that might be identified. The Non-Executive Directors meet once each year (without the presence of the Chairman) to review In discharging its responsibilities, the Board takes account of the the Chairman’s performance, the results of the review being Group’s purpose, value and culture, aiming to promote enhanced discussed with the Chairman by the Senior Independent Director value for shareholders in both capital and income terms. The (SID). The Board evaluates its own performance and that of its Board sets a cultural tone that encourages openness, diversity and Committees and considers these matters again after each AGM attention to the needs and views of shareholders and those who in the light of comments received from shareholders and other transact with us through our IPS activities. interested parties. The Board notes the requirement of the The Chairman takes personal responsibility for leadership of the Board and ensures that Directors receive accurate, timely and clear information. He reviews channels for provision of information with the company secretary at least annually. The Board operates as a collective decision-making forum. Individual Directors are required to scrutinise reports produced by the executive and are encouraged to debate issues in an open and constructive manner. If one or more Directors cannot support a consensus decision, a vote will be taken and the views of a dissenting Director recorded in the minutes. Code for Companies in the FTSE 350 to undertake an external evaluation at least every three years. Since its move to the FTSE 250 in 2019, the Board will be considering the appropriate time to undertake such a review. Robert Laing is the SID. The SID is available to shareholders who have concerns that cannot be addressed through the Chairman, Chief Executive Officer or Chief Financial Officer. 43 C O R P O R A T E G O V E R N A N C E Corporate governance report continued The Board – independence All new Directors undergo an induction process, involving presentations by the Chief Executive Officer, Chief Financial At least half of the Board, excluding the Chairman, must be Officer and each business head and meetings with the independent Non-Executive Directors (NEDs). The Board can investment manager. All Directors are submitted for annual re- confirm that as at the date of this report, excluding the Chairman, election, subject to continued satisfactory performance, which four of the six other Directors are independent NEDs. In assessing is assessed as described above. There is no maximum number of Directors’ independence, the Board takes into account whether or terms that a Director may serve, other than the Chairman whose not a Director is independent of management and any material tenure is explained on page 45. The Company has established a business or other relationship that could affect or interfere with the diversity policy, described in the Nominations Committee report. exercise of objective judgement by the Director, or his/her ability to act in the best interests of the Company and its subsidiaries. As well as being satisfied that each Director dedicates sufficient time to Law Debenture, the Board is satisfied that none of the Directors is ‘overboarded’ (having five or more listed company roles). The contribution made by each Director to the Company’s and Group’s long-term success, along with the particular skills that each brings, are described in the notes to the notice of AGM. Directors’ remuneration Details of the Directors’ remuneration appear in the remuneration report on pages 50 to 70. Board Committees The Chairman, Robert Hingley, was independent at appointment The Board has established a Nominations Committee, an Audit and continued to be independent throughout the period, in the Committee and a Remuneration Committee, to each of which view of the Board, having no current or previous connections with it has delegated certain responsibilities. Each Committee has the Company or any of its subsidiaries. The Board is satisfied that Robert Hingley’s other commitments do not interfere with the discharge of his responsibilities to Law Debenture, and that he makes sufficient time available to discharge his duties as Chairman. terms of reference, which are published on the Company’s website (www.lawdebenture.com/investment-trust/corporate- governance). Membership of the Committees is kept under review; taking account of the position of the Company as an investment trust, the Board is deliberately kept small and it believes this is in the best interests of shareholders. The Board is satisfied that its Robert Laing was independent at appointment in April 2012 and composition and size is sufficient to ensure that the requirements the Board is satisfied that he remains so, having no current or of the business can be met. previous connections with the Company or any of its subsidiaries. A majority of members of Board Committees are independent Mark Bridgeman was independent at appointment in March 2014 NEDs as assessed by the Board and the Committee memberships and the Board is satisfied that he remains so, having no current or are fully compliant with Code stipulations. previous connections with the Company or any of its subsidiaries. The Board does not operate a management engagement Tim Bond was independent at appointment in April 2015 and the Committee, the duties of such a Committee being undertaken Board is satisfied that he remains so, having no current or previous directly by the Board. connections with the Company or any of its subsidiaries. A summary of each Committee is set out below. Claire Finn was independent at appointment in September 2019 and the Board is satisfied that she remains so, having no current or previous connections with the Company or any of its subsidiaries. Denis Jackson and Katie Thorpe, as Executive Directors, are not independent. The Board – re-election and renewal The Nominations Committee ensures that the Board has in place arrangements for orderly and transparent appointments to the Board. There are job descriptions in place for NEDs’ roles, and the Board has written terms and conditions of appointment for NEDs, which are available for inspection at the AGM. Particular care is taken to ensure that NEDs have sufficient time to commit Nominations Committee Role To keep under review the structure, size and composition of the Board and make recommendations about adjustments that are deemed necessary, and to ensure effective succession planning in accordance with legal and corporate governance needs. Key duties • identification and nomination for Board approval of suitable candidates to fill vacancies with particular regard for the need to develop a diverse pipeline of Board members and senior executives; to the duties expected of them and as necessary, diversity issues • succession planning (in particular of the Chairman and are considered. No new NED is appointed without first being Chief Executive Officer); interviewed by each existing NED and comfort being obtained in relation to their other commitments to ensure they have sufficient time to devote to the role. • making recommendations about the re-appointment of non-executive Directors; and 44 lawdebenture.com • ensuring that the Board and its Committees are constituted financial statements. The Directors consider it appropriate to adopt to comply so far as practicable with the Code. a going concern basis in preparing the financial statements. The Committee reports as follows: The Nomination Committee is also responsible for considering the policy on the tenure of the Chairman of the Board and planning for the chair’s succession. Robert Hingley was appointed to the Board in October 2017 and, in line with the policy on tenure and the recommendations of the Code, he will stand down after nine years although this period may be extended for a limited time to facilitate effective succession planning. The Audit Committee has concluded and the Board concurs, that the financial statements present a fair, balanced and understandable assessment of the financial position and prospects of the Company and the Group. The financial statements are reviewed by the Audit Committee, then approved by the Board and signed by the Chairman and Chief Executive Officer. In the opinion of the Board, the annual report, taken as a whole, is fair, balanced and understandable and provides the necessary information for shareholders to assess the corporation and Group’s position and The Committee engaged Nurole, the online Board and C-level performance, business model and strategy. recruitment platform (which has no other connection with the Company) to conduct a search for a new Non-Executive Director and, as a result, Claire Finn was appointed. Our diversity policy states that, while the Board remains small, it will endeavour to have at least two Directors who are female. That objective is being met at the date of this report. The Committee’s approach to effectiveness evaluation is set out elsewhere in the governance report and the gender balance of those in senior management is set out in the strategic report. Members R. Hingley (Chairman) T. Bond M. Bridgeman C. Finn R. Laing Audit and Remuneration Committees Following best practice guidelines published by the Financial Reporting Council (FRC), the Audit Committee’s report is published as a separate section of the annual report and can be found at pages 48 and 49. Information on the role of the Remuneration Committee is with the separate annual remuneration report on pages 50 to 70. Accountability and audit, fair balanced and understandable reporting and going concern The statement of Directors’ responsibilities in relation to the financial statements appears on page 42. The independent auditors’ report appears on pages 75 to 79. The Directors confirm that the Group and Company are a going concern as evidenced by the financial statements, which demonstrate a healthy position, taking into account all known and future anticipated liabilities, and the Group’s ability to meet those liabilities. The performance metrics of the Group remain strong. The Trust has outperformed is benchmark by 230% over the last ten years and the IPS business has shown positive growth following the introduction of a new management team. There are no material uncertainties that call into question the Company’s ability to continue to be a going concern for at least 12 months from the date of approval of the C O R P O R A T E G O V E R N A N C E Internal controls The framework of internal controls ensures that the Company has sound risk management systems to enable it to operate within the desired risk appetite. The following paragraphs provide a description of the main features of the internal control and risk management systems in relation to the financial reporting process, which fulfill the obligations of the FRC “Guidance on Risk Management, Internal Control and Related Financial and Business Reporting” and the UKLA’s Disclosure and Transparency Rules. This section should be read in conjunction with the strategic report section which sets out how the Directors manage or mitigate the principal risks relating to the Company and Group business model. The Board monitors the effectiveness of internal controls on a continuous basis to ensure that internal control and risk mitigation is incorporated in to the day to day management of the organisation, both directly through main Board general reviews and by the more specific work carried out by the Audit Committee. The annual internal audit programme and system of compliance checks have both been developed using a risk-based methodology and an evaluation of the existing process controls. Other mechanisms in place to monitor risk include: • • • • • • • Board review of the Group’s matrix of key risks and controls managed by the legal, risk and compliance officer, reporting to an executive risk committee; an internal audit function, which involves business departments and business wide processes (including overseas offices) being subject to audit on a regular basis; testing by the legal, risk and compliance officer of the Financial Conduct Authority (FCA) regulated business systems and controls; testing by the legal, risk and compliance officer of the Company’s compliance with its AIFMD obligations; review of reports by the depositary and the sub-custodian; periodic reports to the Board by the legal, risk and compliance officer about legal and regulatory changes, and the steps that the Board must take to comply; and review of the reports produced by the external auditors on their annual audit work. 45 C O R P O R A T E G O V E R N A N C E Corporate governance report continued The Board considers that the above measures constitute continuing monitoring the effectiveness of the internal control systems for application of the FRC risk guidance and form an important the period. This process has been in place throughout 2019 and management tool in the monitoring and control of the Group’s will be reviewed by the Board on a regular basis. operational risks. Arrangements are in place by which staff of the Group may, in An important element of the overall controls remains a continuous confidence, raise concerns under the Public Interest Disclosure review of the quality and effectiveness of internal financial controls Act 1998 about possible improprieties in matters of financial of the Group. In addition to safeguarding the ongoing maintenance reporting or other matters. Any concerns which are raised will of proper accounting records to enable the production of be subject to proportionate and independent investigation, with robust financial information to support appropriate business appropriate follow up action. All employees also have to access decisions, the Board has hired a new head of internal controls to en external whistleblowing service. If necessary, any member and started a programme of investment to further enhance the of staff with an honest and reasonable suspicion about possible controls in operation across the business. This is in recognition impropriety may raise the matter directly with the Chairman of the of the importance of ensuring that the controls in place are not Audit Committee. only effective but also efficient and support the delivery of the Company’s growth strategy. This includes enhancing the data available to the Board to allow for consideration of country and currency exposure and potential impairment of assets (both financial and non-financial). Key elements of the systems of internal control continue to be: • regular qualitative self-assessment of the effectiveness of the individual controls maintained in the overall internal financial control framework; • preparation by management of a comprehensive and detailed Information about share capital The information that the Company is required to disclose about its share capital can be found in the Directors’ report (significant holders) and AGM notice (total voting rights). Annual general meeting (AGM) Details of the AGM for 2020 are set out at pages 117 to 121. budget, involving annual Board approval and monthly The Board recognises the value of the AGM as an opportunity to comparison at Board level of actual results with budgets and communicate with shareholders and encourage their participation. forecasts; • systematic reporting to the Board of matters relating to litigation, insurance, pensions, taxation, accounting, counterparty risk and cash management as well as legal, compliance and company secretarial issues; Separate resolutions are put to the AGM on each substantially separate issue. The number of proxies lodged for each resolution, the balance for and against the resolution and the number of votes withheld is published immediately after the AGM to the London Stock Exchange and on the Company’s website. In line with governance recommendations, if 20% or more of the votes cast • review of internal audit reports by the appropriate professional are against any Board resolution, the Company would announce services company Board and the Audit Committee; what action it intended to take to consult shareholders views and • review of the internal controls of those services, such as investment management, which have been delegated to third parties. This review was conducted during the initial contractual negotiations and on a regular basis, including annual discussions with the senior management and compliance staff of Janus Henderson; provide a summary of the outcome. The Board confirms that none of the resolutions put to shareholders at the AGM in 2019 received votes against above 20% of the votes cast. The notice of the AGM and related papers are sent to shareholders at least 21 working days before the meeting. Where requested by nominee holders, annual reports and related documentation are circulated to beneficial owners and the Company is happy for beneficial owners to attend • monitoring by the Board of the investment management the AGM and (where appropriate arrangements have been made process, including the establishment and maintenance with the nominee) to vote their shares in person. Summary statement of compliance The Board has concluded that, as demonstrated by the disclosures made in the foregoing, the Company has complied with all of the requirements applicable to it of the UK Corporate Governance Code. of investment guidelines, receiving a report from the investment manager at each Board meeting, the review of all transactions with the investment manager and regular reconciliations of the records of the Group with those of the depositary and sub-custodian; and • receipt of frequent and detailed reports about the performance of independent professional services business, including the overseas subsidiaries. The systems of internal financial control are designed to provide reasonable assurance against material misstatement or loss. By means of the procedures set out above, the Directors have established a robust process for identifying, evaluating and 46 lawdebenture.com The Company has complied with all of the requirements applicable to it of the UK Corporate Governance Code C O R P O R A T E G O V E R N A N C E 47 C O R P O R A T E G O V E R N A N C E Audit Committee report Annual statement by the chairman of the Audit Committee Principal activities of the Committee I am pleased to present the Company’s Audit Committee report During the year, the Committee’s business included: for the year ending 31 December 2019. • consideration of the annual report and financial statements The Committee was comprised at the year end of Robert Laing, and of the half yearly report and statements including Tim Bond, Claire Finn and me. Robert Hingley, whilst not a consideration of the final and interim dividends; member of the Committee, is invited to attend. Role and duties The main function of the Audit Committee is to assist the Board in the management of the Group’s finances, financial reporting structure and internal controls. Our key duties are as follows: • consideration of the Company’s matrix of risks and controls and general oversight of the Group’s internal control systems and procedures including in the context of reports by the depositary and the Company’s obligations as an AIFM; • meetings with the external auditor to discuss the 2018 financial statements and, in the fourth quarter, to plan the 2019 audit. These meetings included discussions on fees, • monitoring the independence and objectivity of the auditors, auditor independence, key risks and developments in their performance and agreeing their remuneration; accounting standards; the reappointment of the external auditors; monitoring the integrity of the financial statements and the statutory audit process and in particular focussing on significant issues highlighted in the process; • • • review and approval of internal audit programme; consideration of all internal audit reports; receipt of reports about reconciliations, procedures in place to prevent fraud and anti-bribery and corruption; and • • • • developing and implementing policy on the engagement (or not) of the external auditor for non-audit services; reviewing the annual and half yearly accounts before submission to the Board, including particular focus on changes in accounting policy and providing an opinion to the Board on whether the report and accounts are fair, balanced and understandable; and • reviewing the effectiveness of systems of internal control and risk management, including monitoring the executive risk management function, the internal audit function and consideration of country and currency risks. As part of my duties as Committee Chairman, I met with the audit partner and I met a number of times with the Chief Financial Officer and Company Secretary to discuss matters of significance. The Committee considers that I have recent and relevant financial experience due to my extensive experience as a fund manager and from my executive management experience. Similarly, Tim Bond satisfies the requirement as an active fund manager. The Committee as a whole has competence relevant to the sector in which the Company operates. 48 lawdebenture.com • review of new accounting standards and the possible impact on Law Debenture. Shortly after the year end, the Committee met with the external auditors to discuss the 2019 financial statements and the outcome of that discussion is set out below. Risk management, internal control and internal audit The internal controls adopted by the Group are set out in the corporate governance report. The Board as a whole is responsible for the effectiveness of internal control mechanisms but it is informed by more specific work carried out by the Audit Committee, which includes the initiation and oversight of any investigations that may be necessary to address control weaknesses/breaches, as identified. In particular, the Committee reviews the adequacy and effectiveness of the Group’s risk management systems and processes. The head of legal, risk and compliance reports through an executive risk Committee, but in line with good practice in this area, the terms of reference give her the right to report directly to me on any specific matter of concern. The internal auditor, who reports to me as Chairman of the Audit Committee, presents his annual audit programme to the Committee for approval each year and attends Committee meetings, presenting all of his reports including management’s actions in response to his findings and recommendations. The internal auditor has the right, should he wish, to meet separately with the Audit Committee to raise any matters of concern that may arise (although he did not need to do so during the year under report). I undertake an annual review of the internal auditor’s effectiveness by formally appraising him in writing, Non-audit services having taken views from Directors and senior management. Non-audit services provided by the auditor are reviewed by the Based on that review, the Committee is satisfied that the quality, Committee to ensure that independence is maintained. Non- experience and expertise of the internal auditor is appropriate audit fees are shown at note 3 to the accounts. The Committee’s for the business. External auditors – assessing effectiveness One of the most important functions of the Committee is to monitor the independence and objectivity of the auditors, their performance and effectiveness. The Committee achieves this by an annual formal meeting with the audit partner to plan that year’s audit. Part of that process requires the auditor to give the Committee written assessment of how the audit team identifies and manages the threats to its independence, along policy is that non-audit work should be limited to those matters where the external auditor is most appropriately placed to carry out the work, unless there is a conflict of interest. Consequently, fees for non-audit services have historically been low and in the year under review were £14,000 (2018: £14,000). Significant financial issues relating to the 2019 accounts The Code requires us to describe any significant issues considered in relation to the financial statements and how those issues with the description of the safeguards that it has in place to avoid such threats. This vital part of the audit process also enables were addressed. the Committee to examine in detail the scope of the audit, ensuring that the auditor’s objectives meet the Committee’s own expectations, along with key audit and accounting matters to be No new significant issues arose during the course of the audit. As reported in previous years, an area of consideration is that relating to bad debt provisions. considered that year. At the conclusion of each audit, the Committee receives a presentation from the audit partner on the principal findings. This provides the opportunity for robust challenge, particularly in areas where management judgement has been required. The Committee will also give the auditors an opportunity, without executive management present, to comment on the quality and standard of the executive’s performance generally and during the audit. Similarly, the Committee will seek the views of the executive on the effectiveness and performance of the audit team. There were no matters of concern raised during the period under review. Audit tendering BDO LLP (BDO) were first appointed as the Company’s auditors on 31 October 2008. Having consideration of the experience of staff and level of service provided, it is recommended that BDO LLP be reappointed at the forthcoming AGM. The Committee last put the audit to tender during 2017. The process was conducted in accordance with the Competition and Markets Authority Audit Order with which the Company is in compliance. Following the tender process the Committee recommended a preferred audit firm (BDO) and a reserve audit firm. The Board resolved to appoint BDO as auditor. Whilst the Audit Committee continues to believe that the level of service provided by BDO is satisfactory, it has recommended to the Board that the Company should undertake an audit tender during the course of 2020 to ensure that the costs of the audit are competitive following the step increase in the audit fees for the 2019 audit. Management makes an estimate of a number of bad debt provisions for non-collection of fees and costs as part of the risk management and control framework. Other issues that arose included: the risk that portfolio investments may not be beneficially owned or correctly valued; and that revenue is appropriately recognised. The Committee has received assurance on these matters from management. The Committee is satisfied that the judgements made by management are reasonable and that appropriate disclosures have been included in the accounts. Taken in its entirety, the Committee was able to conclude that the financial statements themselves and the annual report as a whole are fair, balanced and understandable and provide the necessary information for shareholders to assess the Company and Group’s position and performance, business model and strategy. That conclusion was reported to the Board. Mark Bridgeman Chairman, Audit Committee 26 February 2020 C O R P O R A T E G O V E R N A N C E 49 C O R P O R A T E G O V E R N A N C E Annual remuneration report Part 1 Remuneration Committee Chairman’s annual statement Dear Shareholder On behalf of the Board, I am pleased to present the Company’s Directors’ Remuneration Report for the year ending 31 December 2019. This year we have overhauled the report to improve transparency and clarity for all stakeholders and improve alignment with governance best practice. The current Remuneration Policy is due to expire in 2020, and therefore a new Remuneration Policy is being presented for shareholder approval at the AGM in April 2020. This report summarises the new Policy, how it will be implemented in 2020, and how the current Policy has been operated during the year. New Remuneration Policy During the year, the Committee, undertook a comprehensive review of the Policy to ensure that it supports the Company’s strategy. The IPS is a key differentiator between Law Debenture and other investment trusts. A key component of the Company’s strategy is to drive sustainable long-term growth in the IPS business to increase profit, which will fund dividends and create value for shareholders. It provides a regular flow of dividend income to the Company, contributing 35% of annual dividend payments to shareholders in the past ten years1, which has allowed the investment portfolio manager, increased flexibility in constructing the investment portfolio. For a professional services business such as IPS, the most important driver of growth is the quality of the people. It is therefore critical for Law Debenture to have a remuneration structure that is effective to attract, retain and motivate key talent of the right calibre to drive long-term sustainable growth in the IPS business, ensuring the successful delivery of the strategy and creation of value for shareholders. The Committee has reviewed the current Policy and concluded that it is no longer fit for purpose, as it provides neither a sufficient link between management reward and business performance to achieve this, nor sufficient lock-in or shareholder alignment. The Committee has sought to address these issues in the new Policy through restructuring the incentives to include a new Long- Term Incentive Plan (“LTIP”) and a simplified, more robust annual bonus structure. At the same time, the Committee has taken the opportunity to align the new Policy with the 2018 UK Corporate Governance Code (“the Code”) and best practice. Further details of these changes are provided below. New Long-Term Incentive Plan From 2020, the Executive Directors will receive annual awards of conditional shares worth 100% of salary under the LTIP which vest based on performance over a 3-year period and are released after five years from grant. Other individuals will be eligible to participate at a lower level at the Committee’s discretion. The main arguments in support of the introduction of the LTIP are as follows: 1 Calculated based on dividends paid in respect of the financial years between 2010 and 2019. 50 lawdebenture.com • Market practice: A review of the remuneration policies of a comparator group of companies revealed that an important component in the remuneration of senior executives was the ability to participate in an LTIP. The Committee therefore believe that the introduction of an LTIP is an important element in its ability to recruit and retain key individuals. • Conservative quantum: When designing the LTIP, the Committee was cognisant of the potential increase in total remuneration as a result of its introduction. It has therefore been careful to calibrate award levels to ensure that the overall pay positioning against the comparator group is conservative and not excessive. Whilst the Company is in the FTSE 250, for which the median CEO LTIP award is 200% of salary, the Committee took a conservative approach and set a lower award level of 100% of salary. This was felt to be more reflective of the size and complexity of the area of the business directly within management’s control. • Management shares in the value created for shareholders: The LTIP provides a link between value creation for shareholders and LTIP rewards for management by allowing them to share in a percentage of incremental profit. At least 50% of the awards will normally be based on IPS EPS profit (2020: 100%), this being the single KPI of the IPS business, with targets calibrated to deliver rewards only for meeting or exceeding shareholder expectations. The additional growth in EPS driven by the LTIP should help to reduce the discount to NAV as investors become more confident in its ability to generate real value over the longer term. While the IPS performance condition focusses on the main business area directly in management’s control, the delivery of the awards in Company shares ensures that management are fully aligned with shareholders and remain focussed on the business as a whole. • Alignment with LTIP market and best practice: The Terms & Conditions of the new LTIP fully comply with the 2018 UK Corporate Governance Code and best practice. Revised annual bonus framework For 2020, the Committee is introducing a more robust framework for determining Executive Director bonuses that is simple and provides greater clarity and transparency of the link between pay and performance for both participants and shareholders. This was felt necessary because the current bonus structure, whereby Executive Directors have a maximum bonus based on performance targets but are also subject to the same general bonus pool applying to the workforce, is complex and unusual in the listed environment and does not readily support clear articulation and disclosure of the assessment of bonus outcomes by the Committee. The new simplified framework will operate as follows: • Financial and non-financial targets are set at the start of the year (at least 50% based on IPS financial measures). • • • The maximum individual bonus limit for Executive Directors is unchanged at 100% of salary and is de-linked from the general proposing to increase her salary by 6.4% to £240,000 for 2020. The CEO’s salary will be increased by 3.0% to £325,000 for 2020, bonus pool. The total bonus for Executive Directors is capped at 25% of the general bonus pool to provide protection for shareholders and prevent excessive bonuses relative to the wider workforce. The first £100,000 will be paid in cash, with half of any bonus above deferred in shares for three years. This provides for greater levels of deferral at higher bonus payouts. in line with the increase to the wider workforce. For the remainder of the Policy, the Committee intends to limit Executive Director salary increases to the level of increase for the wider workforce. The Executive Directors’ pension contributions will continue to be aligned with the workforce at 12% of salary. The maximum bonus opportunity will remain unchanged at 100% of salary for 2020, with 50% of performance measures based on IPS financial targets and with the remainder based on non-financial • Greater disclosure of bonus targets and achievements will be measures aligned to the strategic priorities of both the IPS and the provided in the Annual Report. A general bonus pool available to all staff other than the Executive Directors will be retained that will normally be funded by a flat percentage of up to 20% of IPS profit before tax subject to a threshold of 90% of the previous year’s profit. Changes to improve alignment with governance best practice The Committee has ensured that the introduction of the LTIP is accompanied by the incorporation of several best practice governance features and that the new Policy is fully aligned with the 2018 Code. In particular, the following changes have been made in the new Policy: Company as a whole. Further details are provided on page 54 of this report, and the specific targets will be published together with the bonus outcome in the Annual Report on Remuneration for 2020. The deferral requirement has been enhanced under the new Policy such that half of any bonus earned above £100,000 will be deferred in shares for three years. Executive Directors will receive LTIP awards of 100% of salary in 2020 which will vest based on 3-year IPS EPS targets ranging from 4% p.a. growth at threshold (at which 25% of the award vests) to 10% p.a. at stretch. Given the internal business plan, analyst forecasts, the historically flat performance of the IPS business, and economic uncertainty, to sustain the proposed stretch level of earnings growth for three years would be exceptional. Any shares vesting must be C O R P O R A T E G O V E R N A N C E • Introduction of a minimum shareholding requirement of 200% held for a further two years. Further details are provided on page 54 of salary for Executive Directors, extending for two years post- of this report. cessation of employment. • Enhanced malus and clawback triggers to include serious reputational damage and corporate failure, in line with the FRC Guidance on Board Effectiveness. Performance and outcomes for 2019 Financial and operational highlights Our aim is to produce long-term capital growth and steadily • Remuneration Committee discretion included to override increasing income for our shareholders. Against those two aims, formulaic outcomes in incentives to reflect overall business 2019 proved a very successful year for Law Debenture, seeing a share performance. • Improved disclosure of bonus measures, targets and assessment of outcomes. Shareholder engagement The Committee consulted with nine of our largest institutional price total return of 24.5%. We are proud to have generated £157m of value for our shareholders over the course of last year and to see the share price end the year at £6.50, up from £5.40 at the end of 2018. 2019 was another positive year for our IPS business with revenue growth of 7.5% and an increase in earnings per share of 8.5% after several years of flat performance prior to the recruitment of the new shareholders and the main proxy voting agencies (the Investment management team. Please refer to the Chairman’s Statement on Association, ISS and Glass Lewis) to gain their input on the proposed pages 4 and 5 for further overview of the financial and operational new Policy prior to its finalisation. highlights for 2019. Implementation of the new Policy in 2020 The new CFO, who was appointed on 1 January 2019, was initially recruited on a below market-competitive salary with the intention of moving to a more competitive level as she became more established and proved herself in her first PLC director role. The Committee reviewed her performance at the end of her first year and determined that an increase was warranted to a more competitive level given her strong performance. The Committee is therefore Annual bonus outcomes for 2019 We believe that the changes to the Policy set out in this Report will help drive continued growth of the IPS and the recruitment and retention of key personnel to the benefit of shareholders. Management delivered well against a stretch target for IPS earnings per share of 9.0% and revenue growth of 8.0%. This has been achieved despite a difficult market backdrop, namely continued Brexit uncertainty, fears of globally escalating trade wars and reduced levels of investment banking activity, all of which have 51 C O R P O R A T E G O V E R N A N C E Annual remuneration report continued Part 1 Remuneration Committee Chairman’s annual statement continued particularly affected our capital markets facing businesses. It has as the Non-Executive Director with responsibility for enhancing also been pleasing to see the maintenance of margin, despite new that engagement process. Since making that appointment, various hiring and investment in technology which will help to further methods of communication (including presentations, email accelerate the growth of the business over the longer term. correspondence and availability for face-to-face meetings) have been utilised to raise employee awareness of the role and engagement Discretions The Committee determined that the annual bonus outcomes for 2019, with the Board more broadly. An employee engagement survey was commissioned towards the end of the year. Steps have already taken based on the application of the performance conditions, were in line to address some of the issues raised, with a longer term plan currently with the overall performance of the business and did not exercise its being put in place to deal with others. discretion to alter the outcomes. The Committee did not make any adjustments to account for share price appreciation or depreciation over the vesting period. The Remuneration Policy operated over the 2019 financial year as the Committee intended. In view of the positive outcome for the IPS business in what has been a difficult year and the progress that has been made in achieving various strategic objectives including the recruitment of new senior management, starting the process of overhauling the IT systems as well as their support in numerous shareholder meetings and presentations, we have decided to award a bonus of 91% to the CEO and 91% to the CFO. Wider workforce considerations and fairness In developing the proposed executive remuneration policy, the Committee has carefully considered remuneration arrangements across the Group. The Committee receives information on wider workforce remuneration of our staff, ensuring they have a good understanding of the structure and application of the reward policies throughout the Group. We are strengthening our approach to communicating with our employees in line with the provisions of the 2018 UK Corporate Governance Code. During the year we appointed Mark Bridgeman Conclusions In summary, the proposed changes to the executive remuneration Policy provide a framework which is in line with best practice and the 2018 UK Corporate Governance Code. We are confident the proposed changes ensure both strong differentiation of performance and alignment of management rewards with the shareholder experience, while providing a more competitive remuneration package that will help attract, retain and motivate key talent to ensure successful delivery of the strategy. I would like to thank our shareholders and their representative bodies for the constructive consultation on the new Remuneration Policy. We hope shareholders will be able to give their support at the AGM in April 2020. I will be available at the meeting to answer any questions in relation to this Remuneration report and the new Policy. Robert Laing Chairman, Remuneration Committee 26 February 2020 52 lawdebenture.com Part 2 Remuneration Policy The Remuneration Committee is required to put the new Directors’ Remuneration Policy to a binding shareholder vote at the next Annual General Meeting on 7 April 2020, as the current Committee Process to determine the new Remuneration Policy Policy that was approved at the 2017 AGM is approaching the In determining the 2020 Remuneration Policy the Committee: end of its three-year approval period. This new Policy, set out below, will take effect from the date of that meeting and is intended to apply for three years. Our remuneration principles A key objective of our Policy is to balance the interests of shareholders with those of the staff. We believe that: • Remuneration packages should be competitive but not extravagant and should broadly be in line with average packages in the markets in which Law Debenture operates; • There should be a clear link between total remuneration (including a profit related element) and performance; and • There should be no reward for failure, but the executives should be rewarded for the performance of the IPS business, which is central to Law Debenture’s business model and unique identity. • Considered the Company’s strategy, how the current Policy related to and supported the strategy, and formed its own views on the changes (if any) required to the Policy to align with the strategy; • Considered feedback from Shareholders and investor bodies on the 2018 Remuneration Report; • Sought advice from independent remuneration consultants on the impact of the 2018 UK Corporate Governance Code, Regulations and current investor sentiment in formulating the new Policy; • Reviewed wider workforce remuneration and incentives to ensure a consistent approach; • • Consulted with senior management on the proposed changes to the Policy; and Conducted a full consultation exercise with major Shareholders and investor bodies on the changes. The Committee was mindful in its deliberations on the new Policy of any potential conflicts of interest and sought to minimise them through an open and transparent internal consultation process; by seeking independent advice from its external advisers and by undertaking a full shareholder consultation exercise. C O R P O R A T E G O V E R N A N C E 53 C O R P O R A T E G O V E R N A N C E Annual remuneration report continued Changes to the new Remuneration Policy ELEMENT CURRENT POLICY PROPOSED CHANGE RATIONALE Long-Term Incentive Plan (LTIP) None. New LTIP Drives long-term sustainable growth of • Annual award of performance shares. the IPS business, in line with the strategy. • Maximum limit of 100% of salary. • Based on 3-year IPS EPS growth. • Vests after 3 years with a 2-year holding period post-vesting. Provides lock-in of critical talent and long-term alignment with shareholders, both lacking from the current Policy. Annual bonus Executive Director bonuses Executive Director bonuses will be de- Robust, simplified bonus structure are allocated from the linked from the general bonus pool and that is more appropriate for a listed general bonus pool. based solely on pre-defined financial and environment. High level disclosure of payouts, with specific targets not clearly non-financial objectives. The maximum individual limit is unchanged at 100% of salary, however disclosed. an aggregate cap will apply to Executive Improved pay-performance linkage. Improved clarity and transparency for all stakeholders. A third of the bonuses is deferred in shares for Director bonuses of up to 25% of the Enhanced deferral results in a greater general pool awarded to all other staff. level of deferral for higher payouts. three years. Enhanced disclosure of metrics, targets Aggregate bonus cap based on a and the assessment of bonus outcomes. percentage of the general bonus pool Half of any bonus earned above £100,000 will be deferred in shares for three years (enhanced malus and clawback provisions will apply as described below). provides protection for shareholders and prevents excessive bonuses relative to the wider workforce. Shareholding requirement None. 200% of salary for Executive Directors, In line with the 2018 Code, investor extending for two years post-cessation. expectations and the IA guidance. 50% of vesting deferred bonus and LTIP An Employee Benefit Trust or nominee awards are retained, net of tax, until met. account will be used to hold shares to enable the post cessation requirements to be operated. Malus/clawback triggers • IPS profits overstated. • Gross misconduct. Enhanced to align with the FRC • Breach of contract. • Misstatement of results. Guidance on Board Effectiveness. • Error in calculation. • Serious reputational damage. • Corporate failure. Remuneration Committee discretion Bonus outcome is Committee discretion to override In line with the 2018 Code. Ensures subject to a discretionary formulaic outcomes in the bonus rewards reflect the shareholder assessment. and LTIP to reflect overall business experience and prevents rewards performance. for failure. 54 lawdebenture.com C O R P O R A T E G O V E R N A N C E In determining the new Remuneration Policy, the Committee paid attention to Provision 40 of the 2018 UK Corporate Governance Code, as follows: FACTOR HOW OUR NEW REMUNERATION POLICY ALIGNS Clarity remuneration arrangements should • Bonus and LTIP performance conditions are based on the core KPIs of the strategy and therefore there is a clear link to all stakeholders between their delivery and reward be transparent and promote effective provided to management. engagement with shareholders and the • The LTIP provides annual grants of shares which must be retained for the longer-term workforce. to ensure a focus on sustainable performance. This provides complete clarity of the alignment of the interests of management and shareholders. Simplicity remuneration structures should avoid • Executive Director bonuses will be delinked from the general bonus pool and be linked to clearly defined corporate objectives to ensure the payout is reflective of corporate complexity and their rationale and performance. operation should be easy to understand. • The performance conditions for the annual bonus and LTIP are based on the Company’s key strategic objectives. This alignment of reward with the delivery of key markers of the success of the implementation of the strategy ensures simplicity. The Remuneration Policy includes: • • • • Compulsory deferral of a substantial proportion of pay in shares for a material period; Aligning the performance conditions with the strategy of the Company; Ensuring a focus on long-term sustainable performance through the LTIP; and Ensuring there is enough flexibility to adjust payments through malus and clawback and an overriding discretion to depart from formulaic outcomes. These elements mitigate against the risk of target-based incentives by: • Deferring the value in shares for the long-term which helps ensure that the performance earning the award was sustainable and thereby discouraging short term behaviours; • • • Aligning any reward to the agreed strategy of the Company; The LTIP supports a focus on the sustainability of performance over the longer term; Reducing the awards or cancelling them if the behaviours giving rise to the awards are inappropriate; and • Reducing the awards or cancelling them if it appears that the criteria on which the award was based do not reflect the underlying performance of the Company. • The Remuneration Policy sets out clearly the range of values and discretions in respect of the remuneration of management. • LTIP award levels are set to be conservative to avoid any egregious payouts. Risk remuneration arrangements should ensure reputational and other risks from excessive rewards, and behavioural risks that can arise from target-based incentive plans, are identified and mitigated. Predictability the range of possible values of rewards to individual Directors and any other limits or discretions should be identified and explained at the time of approving the policy. Proportionality the link between individual awards, the • The annual bonus and LTIP provides a clear link between the reward provided to management and the delivery of the strategy through incentivising management to delivery of strategy and the long-term deliver the KPIs. performance of the company should be clear. Outcomes should not reward poor performance. • The LTIP provides a focus on long-term sustainable performance through the build-up of a long-term locked in shareholding. • Both incentive plans allow the Remuneration Committee to exercise its discretion to override formulaic outcomes. • Executive Director bonuses are subject to an aggregate cap based on a percentage of the general bonus pool to prevent excessive bonuses relative to the wider workforce. Alignment to culture incentive schemes should drive behaviours consistent with company purpose, values and strategy. • • The annual bonus drives behaviours consistent with the strategy. The LTIP drives behaviours consistent with the Company’s purpose and values which are focused on the long-term future of the business throughout the business cycle. 55 C O R P O R A T E G O V E R N A N C E Annual remuneration report continued Policy table for Executive Directors COMPONENT Base salary PURPOSE AND LINK TO STRATEGY OPERATION OPERATION PERFORMANCE FRAMEWORK To provide an Typically reviewed annually, Salary increases will normally None. appropriate level of taking account of the be in line with those of the salary to attract and following: retain individuals of the required calibre to successfully deliver • Scope and responsibilities of role; the business strategy. • Individual skills, experience and performance; wider workforce. Increases may be made above this level in certain circumstances, including (but not limited to): • An increase in scale, scope or responsibilities of the • Business performance and role; the external economic environment; • To ensure salaries remain market competitive; and • Appropriate market data; and • Pay and conditions • Where individuals have been recruited or promoted with salaries elsewhere in the Company. below the targeted policy level initially and have become more established in their role. Benefits To provide market Benefits may include (but Benefits may vary by role and None. competitive benefits. are not limited to) private individual circumstance and medical insurance, life are reviewed periodically. insurance cover, disability income plan, season ticket loans and professional subscriptions. Other benefits may be introduced from time to time to ensure the benefits package is competitive and reflects the circumstances of the individual Director, for example relocation allowances. The Remuneration Committee may award non- pensionable cash payments in lieu of one or more of these benefits. Pension To provide funding Executive Directors Executive Directors None. for retirement at may receive pension (including current market competitive contributions to a personal incumbents and new levels. pension scheme and/or Directors) receive a cash allowances in lieu of contribution of 12% of salary contributions. in line with the contribution for the wider workforce. 56 lawdebenture.com C O R P O R A T E G O V E R N A N C E COMPONENT Annual bonus PURPOSE AND LINK TO STRATEGY OPERATION OPERATION PERFORMANCE FRAMEWORK To incentivise Performance measures, Maximum individual Performance measures, targets and reward the targets and weightings are set annual bonus opportunity and weightings are determined achievement of at the start of the year. is 100% of base salary. each year to reflect key business annual business objectives to enable successful implementation of the Group strategy, and to align the interests of Executive Directors with shareholders and support At the end of the year, the The total aggregate Committee determines the annual bonus payment priorities and are measured over a period of one financial year. extent to which the targets for Executive Directors A minimum of 50% of the have been achieved and is capped at 25% of the bonus is based on financial the resulting proportion of general bonus pool for measures. The remainder the maximum individual employees. opportunity payable to Executive Directors. Half of any bonus earned 20% of the maximum will be payable for threshold performance and 50% is based on non-financial measures aligned to the strategic priorities of the business and may also contain individual performance objectives. retention. above £100,000 will be of the maximum will be deferred in shares for three payable for on-target years. Dividend equivalents performance, with full The Committee has discretion may accrue on deferred payment for stretch to adjust the formulaic bonus bonus awards and be paid on performance. Payment outcome to reflect underlying those shares which vest. increases on a straight-line Company performance. Any The Plan contains malus and clawback provisions (see below for details). basis between threshold, adjustments or discretion applied target and stretch. by the Committee will be fully explained in the following year’s Remuneration Report. LTIP To drive sustained An award of conditional Maximum award of 100% At least half of the award will long-term performance that supports the creation of shareholder value, and to encourage and facilitate substantial long-term share ownership. shares or nil cost-options may of salary. be granted annually. 25% of the award Awards vest after three years, will vest for threshold be based on financial measures, normally profit-based measures linked to the IPS business. subject to performance and performance, with The Committee has discretion continued employment. full vesting for stretch to adjust the formulaic vesting Following vesting, an additional performance. Vesting outcome to reflect underlying two-year holding period will increases on a straight- Company performance. Any apply (net of tax), such that line basis between adjustments or discretion shares are not released until threshold and stretch. applied by the Committee five years from grant. Award levels and performance conditions are reviewed in advance of each grant to ensure they remain appropriate. Dividend equivalents may accrue on shares held under the Plan and be paid on those shares which vest. These will be delivered in shares in line with the Investment Association Guidelines. The Plan contains malus and clawback provisions (see below for details). will be fully explained in the following year’s Remuneration Report. 57 C O R P O R A T E G O V E R N A N C E Annual remuneration report continued Policy table for Executive Directors continued COMPONENT All Employee Plans PURPOSE AND LINK TO STRATEGY OPERATION OPERATION PERFORMANCE FRAMEWORK To encourage The Executive Directors are The prevailing HMRC None. share ownership eligible to participate in an approved limits apply. throughout the HMRC-approved Save As You Company Earn Share Save Plan (SAYE) and/or Share Incentive Plan (SIP) on the same basis as all other eligible UK employees. The Committee intends to maintain and operate these schemes in accordance with scheme rules and HMRC Regulations. Legacy arrangements The Committee reserves the right to make any remuneration The performance targets are set to be stretching but achievable, payments and payments for loss of office (including exercising taking into account a range of internal and external reference any discretions available to it in connection with such payments) points and having regard to the particular strategic priorities and that are not in line with the Policy set out in this report where the economic environment. terms of the payment were agreed before the Policy came into effect or at a time when the relevant individual was not a Director of the Company. Malus and clawback Minimum shareholding requirement Malus is the adjustment of deferred annual bonus awards or unvested LTIP awards, because of the occurrence of one or more circumstances listed below. The adjustment may result in the value The Committee believes that Directors should build a sizeable being reduced to nil. shareholding in Law Debenture over time to ensure that they are as closely aligned as possible with the Shareholder experience. The minimum shareholding guideline for Executive Directors is two times their gross basic salary. Executive Directors are required to retain 50% of the post-tax number of vested shares from the Company incentive plans until the minimum shareholding requirement is met and maintained. On cessation of employment, Executive Directors are required to retain their minimum shareholding requirement immediately prior to departure for two years. Where their actual shareholding at departure is below the minimum shareholding requirement, the Executive Director’s actual shareholding is required to be retained on the same terms and for the same periods. In addition, the Company is using an Employee Benefit Trust or nominee accounts in which to hold shares to enable the post cessation requirements to be operated. Clawback is the recovery of cash payments made under the annual bonus or vested LTIP awards as a result of the occurrence of one or more circumstances listed below. Clawback may apply to all or part of a participant’s payment or award and may be effected, among other means, by requiring the transfer of shares, payment of cash or reduction of awards or bonuses. The circumstances in which malus and clawback could apply are as follows: • • • • • Gross misconduct; Misstatement of the financial results; Error in reporting or calculation; Serious reputational damage; or Corporate failure. Performance measure selection Performance Measures used under the annual bonus and LTIP are selected annually to reflect the Group’s main short- and long-term objectives and reflect both financial and non-financial priorities. Malus applies to deferred annual bonus awards and unvested LTIP awards up to the date of vesting. Clawback applies to cash annual bonus payments and vested LTIP awards for up to two years from payment or vesting. For Executive Directors, performance measures in incentives will Annual bonus payments and LTIP awards are subject to malus and focus predominantly on the profitability of the IPS business which clawback for up to two years from payment of the bonus or vesting is central to Law Debenture’s business model and unique identity of shares. and is the area of the business fully within management’s control. 58 lawdebenture.com Discretion The Committee will operate all incentive plans according to the rules and discretions contained therein to ensure that the implementation of the Remuneration Policy is fair, both to the individual Director and to the shareholders. The discretions cover aspects such as: • treatment of awards on termination of employment and change of control; • adjustment of awards in certain circumstances, e.g. changes in capital structure, demerger, special dividend, distribution or any other corporate event which may affect the current or future • • • • • selection of participants; value of an award; timing of grant and vesting of awards; size of awards (subject to the Policy limits); • adjustment of performance conditions in exceptional circumstances provided the new targets are fair and reasonable and neither materially more or less challenging than the original choice of measures, weightings and targets; targets; and determining level of payout or vesting based on an assessment • application of malus and/or clawback. of performance; • settlement of awards in cash or shares; Any such use of discretion will be fully disclosed in the subsequent Annual Report and may, as appropriate, be the subject of consultation with the Company’s major Shareholders. Illustrations of total remuneration opportunity The charts below provide estimates of the potential future The Committee was mindful in its deliberations on the new Policy reward opportunities under the Policy for each of the Executive of any potential conflicts of interest and sought to minimise them Directors and the potential split between the different elements through an open and transparent internal consultation process; of remuneration under four different performance scenarios: by seeking independent advice from its external advisers and by ‘Minimum’, ‘On Target’, ‘Maximum’ and ‘Maximum with share price undertaking a full shareholder consultation exercise. growth of 50% over 3 years’. The ‘Minimum; scenario includes base salary, pension and benefits only (i.e. fixed remuneration). s 0 0 0 £ ' 1,200 1,000 800 600 400 200 0 £1,017 £1,179 £750 £870 £610 £367 £450 £270 Minimum On-Target Maximum Denis Jackson (CEO) Maximum with 50% share price appreciation Minimum On-Target Maximum Katie Thorpe (CFO) Maximum with 50% share price appreciation Fixed Annual Bonus LTIP Share price appreciation C O R P O R A T E G O V E R N A N C E ELEMENT ASSUMPTIONS Total fixed pay Base salary: CEO £325,000, CFO £240,000 (effective 1 January 2020). Pension: 12% of salary. Benefits: As disclosed in single figure table on page 64. Annual bonus Minimum: No payout. On-target: 50% of maximum (50% of salary). Maximum: 100% of maximum (100% of salary). LTIP Minimum: No vesting. On-target: 25% of maximum (25% of salary). Maximum: 100% of maximum (100% of salary). Share price growth Impact of 50% share price appreciation on maximum remuneration over three years. 59 C O R P O R A T E G O V E R N A N C E Annual remuneration report continued Recruitment Policy When determining the remuneration arrangements of a new • The Committee will appoint new Executive Directors with a appointment to the Board, the Committee will seek to apply the package that is in line with the Remuneration Policy in place following principles: • Although we operate in a competitive market for talent, we are mindful to pay no more than is necessary to attract and retain high-quality talent; at the time, as indicated in the table below. In particular, the maximum level of variable remuneration will be in line with the limits set out in the Policy table. Approach on recruitment ELEMENT ASSUMPTIONS Salary • The base salaries of new appointees will be determined by reference to the individual’s role and responsibilities, experience and skills, relevant market data and pay and conditions elsewhere in the Company. • • • Pension Benefits Base salary may be higher or lower than the previous incumbent. Salaries may be set at a lower level initially with the intention of increasing salaries at a higher than usual rate as the executive gains experience in the role. New appointees will be eligible to receive pension contributions (or cash in lieu) in line with the Policy. New appointees will be eligible to receive benefits in line with the Policy, including relocation benefits if the Committee deems it appropriate. Annual bonus • The structure described in the Policy table will normally apply to new appointees with the relevant maximum being pro-rated to reflect the proportion of the year served. The Committee retains the flexibility to determine that for the first year of appointment any annual incentive award will be subject to such terms as it may determine. LTIP • New appointees will be eligible for awards under the LTIP which will normally be on the same terms as other executives, as described in the Policy table. Termination Policy To facilitate recruitment, it may be necessary to “buy-out” Executive Directors will be entitled to receive salary and benefits remuneration arrangements forfeited on leaving a previous during the notice period, which may be paid ‘in lieu’ of all or part of employer. This will be considered on a case-by-case basis and may any period of notice. Payments may be made as either a lump sum comprise cash or performance and non-performance related share or in equal monthly instalments until the end of the notice period awards and would be in such form as the Committee considers at the discretion of the Company and Executive Directors will be appropriate considering all relevant factors such as the form, expected to mitigate their loss. performance conditions, expected value, anticipated vesting and timing of the forfeited remuneration. The Committee’s intention is that the value awarded would be no more than the commercial value of the awards forfeited. The Committee will seek to ensure that there are no unjustified payments for failure. There are no entitlements to payments of any sort in the event that for cause an Executive Director’s employment is summarily terminated. In the event that an Executive Director For internal promotions, the approach will be consistent with the is given notice of termination of employment within 12 months policy for external appointees. Where an individual has contractual of any change in control of the Company, he/she will be given not commitments made prior to their promotion to Executive Director less than 12 month’s written notice and the same arrangements level, the Company will continue to honour these arrangements. for receiving salary and benefits during this period will apply as described above. The Committee may authorise payments for statutory entitlements in the event of termination, reasonable settlement of potential legal claims, and payment of reasonable reimbursement of professional fees in connection with such agreements. Service contracts Executive Director service contracts can be terminated by not less than six months’ notice given in writing by either party to the contract, with no contractual provisions for compensation payable on early termination of the contract. The Directors are subject to annual re-election at the AGM. Non-Executive Directors’ contracts are available to view at the Company’s registered office. 60 lawdebenture.com PLAN GOOD LEAVERS1 ALL OTHER LEAVERS CHANGE OF CONTROL • • • • Annual bonus • Typically paid at the same time as continuing employees, to the extent that the performance conditions are achieved with pro- rating for the proportion of the financial year served, unless the Committee determines otherwise. • Deferred bonus awards will continue until the normal vesting date or may vest earlier at the discretion of the Committee. • Unvested LTIP awards will typically vest on the normal vesting date, to the extent that the performance conditions are achieved with pro- rating for the proportion of the financial year served, unless the Committee determines otherwise. • Vested awards will remain subject to any holding period. LTIP No bonus payable. • Normally paid immediately on the Unvested deferred bonus awards lapse. effective date of change of control, subject to the achievement of the performance conditions and pro-rated for the proportion of the year served to the date of change of control, unless the Committee determines otherwise. • Deferred bonus awards vest immediately in full on the effective date of change of control. Unvested awards lapse. • Unvested LTIP awards will typically Vested awards will remain subject to any holding period. vest immediately in full on the effective date of change of control, subject to the achievement of the performance conditions and pro-rated for the proportion of the year served to the date of change of control, unless the Committee determines otherwise. • The holding period applicable to any awards will end at the time of change in control. • Alternatively, awards may be exchanged for new equivalent awards in the acquiring company. C O R P O R A T E G O V E R N A N C E 1 The Committee has discretion to determine that an Executive Director is a good leaver. It is the Committee’s intention to only use this discretion in circumstances where there is an appropriate business case which will be explained in full to shareholders. A good leaver is typically defined as an employee who ceases to hold employment by reason of: death, injury, ill-health or disability; retirement with the agreement of the Group; redundancy; the participant’s employing Company being transferred to an entity which is not a Group member; Transfer of undertaking; or any other reason at the Committee’s discretion. External appointments It is the Board’s policy to allow Executive Directors to take up one for face-to-face meetings) have been utilised to raise employee Non-Executive position on the Board of another company, subject awareness of the role and engagement with the Board more to the prior approval of the Board. Any fee earned in relation to broadly. The Company has also commissioned an annual outside appointments is retained by the Executive Director. engagement survey to receive employee feedback. Consideration of employment conditions elsewhere In determining the remuneration arrangements for Executive Directors, the Committee considers pay and conditions of other employees across the IPS business and aims to ensure a consistent approach. To facilitate this, the Committee receives information on wider workforce remuneration, ensuring they have a good understanding of the structure and application of the reward policies throughout the Group. Mark Bridgeman has been appointed as the Non-Executive Director with responsibility for engaging with the workforce. Since making that appointment, various methods of communication (including presentations, email correspondence and availability Differences in remuneration policy for Executive Directors compared with other employees The Company’s approach to annual salary reviews is consistent across the Group, with consideration given to the level of experience, responsibility, individual performance and salary levels in comparable companies. In terms of variable incentives, all employees are eligible to participate in an annual bonus scheme with business area-specific metrics and individual performance taken into account where appropriate. The maximum bonus opportunity of 100% of salary is consistent across all staff. 61 C O R P O R A T E G O V E R N A N C E Annual remuneration report continued Policy for Chairman and Non-Executive Directors Senior managers may be eligible to participate in the LTIP with The Non-Executive Directors, including the Chairman, do not annual awards up to 100% of salary. Performance conditions are have service contracts and are appointed for an indefinite term. consistent for all participants, while award sizes vary by level. Non-Executive Directors will not be entitled to compensation on Specific cash incentives are also in place to motivate, reward and termination of their Directorship, no matter what the reason for retain staff below Board level. When determining incentive outcomes, the Remuneration Committee may take account of the Executive Director’s termination. The Directors are subject to annual re-election at the AGM. Non-Executive Directors’ letters of appointment are available to view at the Company’s registered office. contribution to the investment trust strategy and performance, Non-Executive Directors do not receive benefits from the as well as the performance of the IPS business. For all other Company, and they are not eligible to join the Company’s pension employees, performance is primarily based on the IPS business. scheme or participate in any bonus or share incentive plans. Where All UK employees are eligible to participate in the Company’s SAYE and SIP schemes on the same terms. specific cash or share arrangements are delivered to the Chairman or Non-Executive Directors, these will not include share options or any other performance related elements. Any reasonable expenses that they incur in the furtherance of their duties are reimbursed by the Company (including any tax liability thereon). PURPOSE AND LINK TO STRATEGY OPERATION FEE LEVELS To attract and retain Non-Executive The Chairman is paid a single annual all- Fee increases are typically expected to be in Directors of the required calibre by offering inclusive fee for all Board responsibilities. line with wider employee rises. market competitive fees. Non-Executive Directors receive a basic In exceptional circumstances (including, but annual Board fee. Additional fees may be not limited to, material misalignment with payable for additional Board responsibilities the market or a change in the complexity, such as Chairmanship or Membership responsibility or time commitment required of a Committee, or the role of Senior to fulfil the role) the Board may make Independent Director. appropriate adjustments to fee levels to The Chairman’s fee is determined by the Committee, and fees to Non-Executive ensure they remain market competitive and fair to the Director. Directors are determined by the Board. Fees The maximum annual aggregate fee for are reviewed periodically, considering time all Non-Executive Directors will be within commitment, scope and responsibilities, the limit set out in the Company’s Articles and appropriate market data. of Association. Expenses incurred in the performance of non-executive duties for the Company may be reimbursed or paid for directly by the Company, including any tax due thereon. Minor amendments The Committee may make minor amendments to the Policy set any remuneration issues that arise in relation to the Executive out above (for regulatory, exchange control, tax or administrative Directors. This feedback is taken into account when developing purposes or to take account of a change in legislation) without executive remuneration arrangements, in addition to guidelines of obtaining Shareholder approval for that amendment. investor bodies and shareholder views. The Committee continues Consideration of Shareholder views The Remuneration Committee is committed to shareholder dialogue and engages with shareholders as appropriate to address to monitor trends and developments in corporate governance and market practice to ensure the structure of executive remuneration remains appropriate and commits to undertake a shareholder consultation in advance of any material changes to the Remuneration Policy. 62 lawdebenture.com Part 3 Annual remuneration report This section provides details of how our Remuneration Policy was implemented during the financial year ended 31 December 2019, and how the Committee intends to implement the new Policy in 2020. Remuneration Committee membership and activities during 2019 The members of the Committee who served during the year were: than in relation to advice on remuneration, PwC provides support R. Laing (Chairman) R. Hingley T. Bond M. Bridgeman C. Finn Claire Finn was appointed as a Non-Executive Director with effect from 2 September 2019 and became a member of the Remuneration Committee on that date. to the Company in relation to valuation of the IPS business and tax advice. The Committee is satisfied that PwC engagement does not have connections with the Group that may impair their objectivity and independence. During the year, the Committee also took advice from the CEO and CFO, whose attendance at Committee meetings was by invitation from the Chair, to advise on specific questions raised by the Committee and on matters relating to the performance and remuneration of the Senior Management team, including Details of Committee meetings and attendance can be found the development of the new LTIP. No Director was present for any on page 43. discussions that related directly to their own remuneration. Key activities of the Committee during the year included: • Determining 2018 annual bonus outturns and payments; • Preparing the 2018 Directors’ Remuneration Report; • Determining salary adjustments; • Setting annual bonus measures and targets for 2019; • Reviewing Corporate governance and regulatory updates, and matters requiring further action in respect of the 2018 UK Corporate Governance Code; • Reviewing the remuneration Policy for 2020; Key responsibilities of the Committee The Committee’s Terms of Reference are published on the Company’s website (www.lawdebenture.com/investment- trust/corporate-governance). The Committee is reviewing its Terms of Reference for 2020 to ensure it reflects the broader responsibilities under the new UK Corporate Governance Code in relation to wider workforce remuneration and the operation of incentive plans throughout the Company. The key responsibilities of the Remuneration Committee are to: • Determine the Remuneration Policy for Executive Directors and Senior Managers (including the Company Secretary) in the context of pay and conditions across the workforce, and • Designing the new LTIP and reviewing the operation of the engaging with shareholders thereon; annual bonus; • Benchmarking pay for the Executive Directors; Directors and Senior Managers; • Determine the individual remuneration packages for Executive C O R P O R A T E G O V E R N A N C E • Determining executive pay for 2020, including performance conditions for the first LTIP awards; Reviewing workforce terms and conditions and the workforce engagement mechanism; • • Approve the remuneration package of the Chairman; Consider the design of, determine targets for, and review outcomes for the annual bonus plan; • Determine the design of, quantum and performance conditions Review of Remuneration Committee Terms of Reference; and for long-term incentive plans; • • • Reviewing Gender Pay Gap reporting. Support provided to the Committee PricewaterhouseCoopers LLP (‘PwC’) was appointed by the Remuneration Committee on 14 February 2019 as independent adviser following a formal selection process. PwC is a founding member of the Remuneration Consultants Group and voluntarily operates under its Code of Conduct in its dealings with the Committee. PwC’s fees charged for the provision of independent advice to the Committee during the year were £50,000. Other • Review workforce remuneration and related policies across the Company as a whole; • Review pension arrangements, service contracts and termination payments for Executive Directors and Senior Managers; and • Approving the Directors’ Remuneration Report, ensuring compliance with governance requirements. 63 C O R P O R A T E G O V E R N A N C E Annual remuneration report continued Statement of shareholder voting at the Company’s AGMs The table below sets out the results of the most recent shareholder votes on the Policy Report and the Annual Report on Remuneration at the AGM on 11 April 2019. Policy Report 2018 Annual Report on Remuneration Percentage of votes cast Number of votes cast For 97.94% 97.91% Against 2.06% 2.09% For Against Withheld1 31,560,733 31,523,592 662,366 673,060 63,565 115,012 1 A vote withheld is not a vote in law and is not counted in the calculation of the proportion of votes cast for and against a resolution. Single total figure of remuneration (audited) The table below sets out the single figure for the total remuneration received by each Executive Director and Non-Executive Director for the year ended 31 December 2019 and the prior period: Salary/fees Taxable benefits1 Annual bonus2 LTIP3 Pension4 Other5 Total Amount attributable to share price appreciation Executive Directors Denis Jackson Katie Thorpe6 Non-Executive Directors Christopher Smith7 Robert Hingley Robert Laing Mark Bridgeman Tim Bond Claire Finn8 2019 £315,425 £7,909 £286,750 2018 £286,750 £7,305 £286,750 2019 £225,500 £3,421 £205,000 2018 2019 2018 — — £22,462 2019 £85,000 2018 2019 2018 2019 2018 2019 2018 2019 2018 £69,170 £54,153 £52,000 £51,940 £46,909 £44,000 £41,250 £13,750 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — £33,309 £30,281 £25,013 — — — — — — — — — — — — — — £643,393 £100 £611,186 — — — — — — — — — — — — — — £458,934 — — £22,462 £85,000 £69,170 £54,153 £52,000 £51,940 £46,909 £44,000 £41,250 £13,750 — — — — — — — — — — — — — — — — — 1 Benefits received in 2018 and 2019 were the cost of life insurance cover and the disability income plan together with private medical insurance. 2 This is the total bonus earned in respect of performance during the relevant year, including any deferred bonus. For 2018 and 2019, one third of the bonus was deferred. Further details of the performance criteria, achievement and resulting awards for the 2019 bonus are set out below. 3 There were no long-term incentive arrangements in place during 2018 and 2019. 4 During 2018 and 2019, the Executive Directors received pension contributions of 12% of salary, in line with the workforce. Where this was received as a cash allowance, 88% of that contribution was payable. 5 Other payments include a contractual payment for signature of the service agreement. 6 Katie Thorpe was promoted to the Board as an Executive Director with effect from 1 January 2019. 7 Christopher Smith retired 11 April 2018. 8 Claire Finn joined the Board as a Non-Executive Director with effect from 2 September 2019. 64 lawdebenture.com Annual bonus payout in respect of 2019 (audited) For 2019 the maximum bonus opportunity for the Executive Directors was 100% of salary. Performance conditions were based 60% on financial metrics and 40% on strategic metrics. Details of the specific measures, weightings, targets and outcome achieved are set out below: Measure IPS EPS growth IPS revenue growth Market standing Governance and risk management Total Threshold (0% of maximum) Target (50% of maximum Maximum (100% of maximum) Weighting 30% 30% 25% 15% 100% 4% 3% 6.5% 5.5% 9% 8% Further details set out below Further details set out below Actual 8.5% 7.5% Denis Jackson (% of salary) Katie Thorpe (% of salary) 27% 27% 23% 14% 91% 27% 27% 23% 14% 91% Strategic objectives Executive Directors’ strategic objectives are linked to the delivery of Law Debenture’s strategic priorities. By their nature, some objectives require a more subjective assessment than others and this is done by the Committee following the input from the wider Board and other Board Committees as appropriate. Recognising that the retail investment space is highly competitive, the Executive Directors have been targeted to improve the market standing of Law Debenture as an investment proposition. In assessing the Executive Directors performance against this metric, the Committee has considered the improved engagement with analysts, wealth managers, fund platforms, journalists and investors they have delivered which has helped to broaden and deepen the knowledge of our investment case. The Committee believes that significant progress has been made with regards to market standing over the course of 2019. The discount moved from 12.1% at the 31 December 2018 to 7.4% at 31 December 2019. While it is impossible to assess the specific impact these efforts have had in narrowing the discount, (particularly given improved sentiment to the UK and sustained strong performance from the portfolio), it is never-the-less the belief of the Committee that the significant efforts of the Executive Directors have contributed to this shift which has helped to create value for shareholders. It is of critical importance to the Board that the standard of strong Governance & Risk Management is maintained by the Executive Directors as the IPS business starts to accelerate its growth. In assessing performance against this metric, the Committee has considered the steps taken to modernise and enhance the governance, risk and control environment over the course of the 2019. Significant improvements have been made to the underlying IT systems and infrastructure that support the business, including implementation of cloud based solutions and introduction of higher levels of automation to reduce the risk of human error. It is the assessment of the Committee that significant enhancements to governance and risk management were achieved over the course of 2019. The Committee is satisfied that the bonus outcomes above are reflective of the performance delivered over the year and therefore has not used any discretion to adjust the payouts. One third of the bonus earned is deferred in shares for three years. Long-term incentives vesting and scheme interests awarded during 2019 (audited) There are currently no long-term incentive arrangements in place. It is proposed that a new Long-Term Incentive Plan will be introduced from 2020 under the new Policy. C O R P O R A T E G O V E R N A N C E Payments for loss of office (audited) There were no payments to former Directors during the year. Payments to past Directors (audited) There were no payments to former Directors during the year. 65 C O R P O R A T E G O V E R N A N C E Annual remuneration report continued Directors’ shareholdings (audited) The table below shows the interests of the Directors and connected persons in shares (owned outright or vested) as at 31 December 2019. There have been no changes in Directors’ interests in the period between 31 December 2019 and 25 February 2020. Outstanding scheme interests Shares owned outright Unvested shares not subject to performance4 Unvested options not subject to performance5 Vested but unexercised share options5 Total scheme interests Shareholding guideline (% of salary)6 Current shareholding (% of salary)7 Guideline met Denis Jackson Katie Thorpe1 Robert Hingley Robert Laing Mark Bridgeman2 Tim Bond Claire Finn3 1,854 1,767 4,870 12,300 4,513 — — 19,075 6,620 — 2,475 — — — — — — — — — — — — — — — — — 19,075 9,095 — — — — — 200 200 n/a n/a n/a n/a n/a 3.82 5.09 n/a n/a n/a n/a n/a No No n/a n/a n/a n/a n/a 1 Katie Thorpe joined the Board as an Executive Director with effect from 1 January 2019. 2 Interests of connected persons in addition to his beneficial holding – 1,120 shares. 3 Claire Finn joined the Board as a Non-Executive Director with effect from 2 September 2019. 4 Includes deferred bonus awards granted under the Deferred Share Plan. 5 Includes options awarded under the Save As You Earn Share Save Plan. 6 There was no minimum shareholding requirement for Executive Directors in 2019. A new shareholding requirement is being introduced under the new Policy from 2020. Further details are provided on page 54. 7 Based on the share price on 31 December 2019 of 650p. Shares owned outright have been included. Directors’ interests in shares and option plans (audited) Interests held at 1 January 2019 Granted in the year Date of grant Market price at grant Vested in the year Lapsed / forfeited in the year Exercised in the year Market price at date of exercise Interests held at 31 December 2019 Vesting / first exercise date Exercise price — — — — — — — — — 5.94546p — 5.93890p — 5.93890p — 606.00p n/a n/a n/a n/a 2,981 01.03.21 16,094 11.03.22 19,075 6,620 11.03.22 2,475 01.10.23 9,095 Denis Jackson Katie Thorpe Scheme DSP1 DSP2 Total DSP2 — 2,981 02.03.18 572.00p — 16,094 11.03.19 582.00p — 19,075 — 6,620 11.03.19 582.00p SAYE3 2,475 — 15.08.18 612.00p Total 2,475 6,620 1 Deferred Share Plan 2018. 2 Deferred Share Plan 2019. 3 Save As You Earn Save Plan 2018. 66 lawdebenture.com Percentage change in CEO remuneration The table below shows the percentage change in CEO remuneration, comprising salary, taxable benefits and annual bonus, and comparable data for the average of all UK employees within the Company. Salary Benefits Annual bonus Total 2019 (£000) 315 41 287 643 CEO 2018 (£000) 287 37 287 611 % change1 All UK employees2 % change 10.0 9.7 — 5.3 3.0 6.1 7.1 4.0 1 Calculations are based on actual numbers in whole pounds as shown on page 64. 2 All UK employees of L.D.C. Trust Management Limited have been used as the comparator group. The CEO was initially remunerated at the same salary level as his predecessor. When the salary was reviewed at the end of his first full year in office, the Committee calculated that a 10% increase was justified to make it more competitive with market rates. The increase in taxable benefits is broadly in line with that of employees. The rationale for the bonus calculation can be found on page 65. Based on this calculation, his total bonus remained unchanged year on year, compared to an increase of 7.1% for the employee population. Relative importance of spend on pay The chart below shows the Company’s actual expenditure on Shareholder distributions (including dividends and share buybacks) and total employee pay expenditure for the financial years ended 31 December 2018 and 31 December 2019. Total employee pay expenditure1 Total distributed to shareholders2 2019 (£000) £14,709 £30,778 2018 (£000) £13,964 £22,339 % change 5.3 37.8 1 Total remuneration includes bonuses, employers’ NI and pension costs and is the figure reported at note 3 of the accounts. 2 Amounts distributed to shareholders are the totals of the final and interim dividends in respect of that year. There were no other distributions. Distribution to shareholders has been subject to a significant increase for the current year as explained in the Chairman’s statement on pages 4 and 5. The average number of employees has increased from 123 in 2018 to 133 in 2019, which has lead to an increase in employee pay expenditure. The increase also includes an element of inflationary increase in individuals remuneration. C O R P O R A T E G O V E R N A N C E Historical remuneration and TSR chart 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Incumbent C. Banszky C. Banszky C. Banszky C. Banszky C. Banszky C. Banszky C. Banszky CEO single figure of total remuneration (£000) Annual bonus and deferred bonus awarded (against maximum %) 528.4 588.5 602.7 636.9 636.9 690.7 677.5 67.5% 90.0% 75.0% 70.0% 72.1% 62.0% 100.0% M. Adams1 T. Fullwood2 C. Banszky M. Adams D. Jackson3 D. Jackson3 180.5 757.8 142.2 344.1 65.1% 100.0% 0.0% 0.0% 611.2 643.4 100.0% 90.9% 1 C. Banszky stepped down as CEO on 31 August and was succeeded by M. Adams on the same date following his appointment to the Board on 4 August. 2 T. Fullwood was appointed interim Chief Executive Officer from 22 October for a fixed term until retirement at 31 December 2017. 3 D. Jackson was appointed as CEO on 1 January 2018. 67 C O R P O R A T E G O V E R N A N C E Annual remuneration report continued Total Shareholder Return (TSR) chart and historical remuneration The graph below compares the value of £1,000 invested in Law Debenture’s shares, including reinvested dividends, with the FTSE All-Share Total Return Index over the last ten years. This index was selected because it is the index adopted as Law Debenture’s benchmark. £3,400 £3,200 £3,000 £2,800 £2,600 £2,400 £2,200 £2,000 £1,800 £1,600 £1,400 £1,200 £1,000 £800 £600 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Law Debenture share price total return, assuming the investment of £1,000 on 31 December 2009 and the reinvestment of all dividends (excluding dealing expenses) FTSE All-Share Index Total Return assuming notional investment of £1,000 into the index on 31 December 2009 and the reinvestment of all income (excluding dealing expenses) Notes 1. The graph shows the total shareholder return of a nominal holding of £1,000 of Law Debenture’s shares measured against the total shareholder return of a nominal holding of £1,000 invested in the FTSE All-Share Index over a 10 year period. 2. Dividends have been reinvested. 3. FTSE All-Share Index is chosen as the comparator in this table because that is the index against which, historically, the Company has reported the performance of the investment trust portfolio. External appointments It is the Board’s policy to allow the Executive Directors to take up one non-executive position on the board of another company, subject to the prior approval of the Board. The CEO had one external directorship of Meinl Capital Markets Limited from which he earned £5,625 in 2019. He stepped down from this role effective 30 September 2019. Implementation of the Policy in 2020 Base salary Executive Director salary increases for 2020 are provided in the table below: Committee member Denis Jackson Katie Thorpe Base salary effective 1 January 2020 % change Base salary effective 1 January 2019 £325,000 £240,000 3.0% 6.4% £315,425 £225,500 % change 10.0% Base salary effective 1 January 2018 £286,750 68 lawdebenture.com During 2019, the Committee increased the salaries of the new CEO and CFO by 10% in recognition of their strong performance in 2018 in achieving growth in the IPS business after a long period of stagnation. The Committee recognises that this was a large increase in the current environment but on balance believed it is in the best interests of shareholders to retain and motivate the new management team given their criticality to the business at an important time, and as their total levels of remuneration were below the market. For 2020, the Committee conducted a holistic review of the remuneration Policy for Executive Directors. In case of the new CFO, who joined in June 2018 and was appointed to the Board on 1 January 2019, she was initially recruited on a below market-competitive salary with the intention of moving to a more competitive level as she become more established and proved herself in her first PLC director role. The Committee reviewed her performance at the end of her first year on the Board and determined that a further increase was warranted to a more competitive level given her strong performance. The Committee is therefore proposing to increase her salary to £240,000 for 2020. The CEO’s salary will be increased by 3% to £325,000 for 2020, in line with the increase for the wider workforce. For the remainder of the term of the Policy, the Committee intends to limit Executive Director salary increases to the level of increase for the wider workforce. Pension and Benefits For 2019, Executive Directors’ benefits will include private medical insurance, life insurance cover and disability income protection. Pension contributions for the CEO and CFO will be 12% of salary, in line with the contribution to the wider workforce. Where this is received as a cash allowance, 88% of that contribution is payable. Annual bonus The maximum annual bonus opportunity for Executive Directors will be 100% of salary for 2020, subject to an aggregate cap for Executive Director bonuses of 25% of the general bonus pool. The performance measures will be based 50% on IPS financial targets, with the remainder based on non-financial measures aligned to the strategic priorities of both IPS and the Company as a whole. Half of any bonus earned above £100,000 will be deferred in shares for 3 years. Dividend equivalents will accrue on deferred bonus awards and be paid on those shares which vest. Malus and clawback provisions may apply in the event of gross misconduct, misstatement of financial results, an error in reporting or calculation, serious reputational damage, or corporate failure. Full disclosure on the targets, performance achieved and resulting bonus payouts for 2020 will be provided in next year’s report. Long-Term Incentive Plan awards The first awards under the new LTIP will be granted to Executive Directors in 2020 at a level of 100% of salary. The awards will vest after three years based on IPS EPS performance, and any vested shares (net of tax) will be subject to a further two-year holding period. The performance targets will be as follows: C O R P O R A T E G O V E R N A N C E Below threshold Threshold Stretch % vesting 0% 25% 100% IPS EPS 3-year CAGR (p.a.) Less than 4% 4% 10% Vesting increases on a straight-line basis between threshold and stretch Prior to vesting, the Committee will consider whether a discretionary adjustment is required to the outcome to reflect overall business performance. Dividend equivalents will accrue over the vesting period and be paid on those shares which vest. Malus and clawback provisions may apply in the event of gross misconduct, misstatement of financial results, an error in reporting or calculation, serious reputational damage, or corporate failure. 69 C O R P O R A T E G O V E R N A N C E Annual remuneration report continued Implementation of the Policy in 2020 continued Non-Executive Director fees For 2020, the fees for the Chairman and Non-Executive Directors have been increased in line with the wider workforce: Fees effective 1 January 2020 Fees effective 1 January 2019 % change £87,550 £45,320 £5,665 £5,665 £5,665 £85,000 £44,000 £5,500 £5,500 £5,500 3.0 3.0 3.0 3.0 3.0 Fee Chairman fee Non-Executive Director base fee Additional fee for Chairman of Audit Committee Additional fee for Chairman of Remuneration Committee Additional fee for oversight of workforce engagement For and on behalf of the Remuneration Committee. Robert Laing Chairman of the Remuneration Committee 26 February 2020 70 70 lawdebenture.com lawdebenture.com Company advisers and information Registered office Broker Fifth Floor, 100 Wood Street, London EC2V 7EX T: 020 7606 5451 F: 020 7606 0643 W: www.lawdebenture.com (Registered in England – No. 30397) Investment managers J.P. Morgan Cazenove Limited 25 Bank Street, London E14 5JP AIC A member of the Association of Investment Companies James Henderson joined Henderson Global Investors (now Janus Henderson Investors) in 1983 and has been an investment trust portfolio manager since 1990. He first became involved in the Shareholder information management of Law Debenture’s portfolio in 1994 and took over lead responsibility for management of the portfolio in June 2003. He also Investment trust status The Company carries on business as an investment trust company manages Lowland Investment Company plc, Henderson Opportunities Trust plc and Henderson UK Equity Income & Growth Fund. as defined in Sections 1158-1159 of the Corporation Tax Act 2010. James is assisted by Laura Foll, who joined Janus Henderson Investors in 2009 and has held the position of Portfolio Manager on the Global Equity Income Team since 2014. She first became involved with Law Debenture’s portfolio in September 2011 and became joint portfolio manager in 2019. Alternative Investment Fund Manager The Law Debenture Corporation p.l.c. Investment portfolio manager Janus Henderson Global Investors 201 Bishopsgate, London EC2M 3AE Auditors BDO LLP, 55 Baker Street, London W1U 7EU Depositary NatWest Trustee and Depositary Services Limited 250 Bishopsgate, London EC2M 4AA Global custodian HSBC Group (under delegation by the depositary) 8 Canada Square, London E14 5HQ Registrar Computershare Investor Services PLC Company share information Information about the Company can be found on its web site www.lawdebenture.com. The market price of its ordinary shares is also published daily in the Financial Times. Registrars Our registrars, Computershare Investor Services PLC, operate a dedicated telephone service for Law Debenture shareholders – 0370 707 1129. Shareholders can use this number to access holding balances, dividend payment details, share price data, or to request that a form be sent to their registered address. Share dealing Computershare Investor Services PLC offers shareholders a share dealing service via the internet or by telephone, details of which are as follows: www.computershare.trade T 0370 703 0084 Commission for the internet service is 1% with a minimum charge of £30 and 1% for the telephone service, plus £35. The service is available only to those shareholders who hold their shares on the register (i.e. it is not available to those who hold their shares via a nominee). Shareholders using the internet service will need their Shareholder Reference Number (SRN) and post code to complete their trade. The SRN can be found printed on your proxy card. Computershare Brokerage Services are provided by The Share Centre Ltd, which is member of the London Stock Exchange and is authorised and regulated by the FCA. The Company is not responsible or liable for anything arising from a shareholder’s decision to use the service. The Company is not acting as an The Pavilions, Bridgwater Road, Bristol BS99 6ZZ introducer for the share dealing service and receives no financial T: 0370 707 1129 benefit, either from making shareholders aware of the service or from any share deals conducted by shareholders who use the service. C O R P O R A T E G O V E R N A N C E 71 71 C O R P O R A T E G O V E R N A N C E The Board Robert Hingley Chairman, Non-Executive Director Denis Jackson Chief Executive Officer Katie Thorpe Chief Financial Officer Appointed to the Board in October 2017, Appointed to the Board in January 2018 Appointed to the Board in January 2019. becoming Chairman in April 2018. A having joined Law Debenture in July She is a chartered accountant and qualified corporate financier with over 30 years’ 2017 as Chief Commercial Officer. He was with PricewaterhouseCoopers before experience. A partner of Ondra LLP until previously at Capita plc as director of new joining J. Rothschild Capital Management October 2017. Before that, in 2012 he business enterprise, having been a director Limited, the manager/subsidiary of RIT joined the Association of British Insurers as at Throgmorton UK Limited (which Capita Capital Partners plc. Initially appointed as director, investment affairs and acted as a acquired). Prior to that, he was regional financial controller, she was promoted to consultant following the merger of ABI’s general manager – Europe and the United deputy chief operating officer, responsible Investment Affairs with the Investment States – for Tibra Trading Europe Limited, for day-to-day operations, HR, IT, legal and Management Association, until the end a FCA regulated proprietary trading company secretarial, with a significant of 2014. From 2010 until 2015, he was company, which he joined from Citigroup emphasis on RIT’s investor relations a managing director, and later senior (formerly Salomon Brothers). He spent with shareholders and brokers. She is a advisor, at Lazard. He was previously almost 20 years there in a variety of roles Trustee of the Rambert School of Ballet director-general of The Takeover Panel, on including in treasury (both in New York and Contemporary Dance and chairs the secondment from Lexicon Partners, where and London), as head of the finance desk school’s finance and premises committee. he was vice chairman. Prior to that, he was in Hong Kong, head of fixed income prime co-head of the global financial institutions brokerage in New York and ultimately, head group and head of german investment of EMEA prime brokerage sales. banking at Citigroup Global Capital Markets, which acquired the investment banking business of Schroders in 2000. He joined Schroders in 1985 after having qualified as a solicitor with Clifford Chance in 1984. He is chairman of Phoenix Spree Deutschland Limited, a non-executive director of Marathon Asset Management, chairman of Euroclear UK and Ireland Limited, a member of The Takeover Panel and trustee of a charitable organisation. He is a member of the Remuneration and Nominations Committees. 72 lawdebenture.com C O R P O R A T E G O V E R N A N C E Robert Laing Non-Executive Director Mark Bridgeman Non-Executive Director Tim Bond Non-Executive Director Claire Finn Non-Executive Director Appointed to the Board in April Appointed to the Board in Appointed to the Board in April Appointed to the Board in 2012. Admitted as a solicitor in March 2013. He spent 19 years 2015. Partner of Odey Asset September 2019. She had England in 1977 and in Scotland with Schroders plc as an analyst Management LLP, which he a career spanning over 18 in 1985. He worked for Slaughter and then fund manager, rising joined in 2010, he currently years in financial services, and May from 1975 until 1983 to become global head of manages Odey’s Odyssey Fund. with extensive experience in when he joined Maclay Murray research. He now manages a He previously spent 12 years at fund product development & Spens. He was a partner large rural estate and farming Barclays Capital as managing and distribution to retail and in that firm (which has since business in Northumberland. director and head of global institutional investors. She was merged with Dentons) from He is a non-executive Director asset allocation and was editor previously at BlackRock, where 1985 and its chairman from of JP Morgan Brazil Investment and principal author of Barclays she spent almost 13 years, 1 June 2010 until his retirement Trust plc. He is president of Capital’s Equity Gilt Study and rising to become managing from the firm in May 2016. He the board of the Country Land chief advisor to the bank’s director – head of UK DC, is a non-executive director of and Business Association (CLA) RADAR fund. Before Barclays, unit-linked and platforms, The Independent Investment and is also on the boards of he worked as a strategist at responsible for strategy, Trust plc. Senior independent two charities. Chairman of the Moore Capital and at Tokai innovation and growth. She Director, Chairman of the Audit Committee, a member Bank Europe. He is a member is a non-executive director Remuneration Committee and of the Remuneration and of the audit, remuneration and of Artemis Fund Managers a member of the Audit and Nominations Committees and nominations Committees. Limited. She is a member of Nominations Committees. the designated Non-Executive Director appointed to oversee workforce engagement. the Audit, Remuneration and Nominations Committees. 73 F I N A N C I A L S T A T E M E N T S 74 lawdebenture.com Independent auditor’s report to the Members of the Law Debenture Corporation P.l.c. Opinion We have audited the financial statements of The Law Debenture Corporation p.l.c. (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2019 which comprise the group income statement, the group statement of comprehensive Conclusions relating to principal risks, going concern and viability statement We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw income, the group and company statement of financial position, attention to: the group and company statement of changes in equity, the group and company statements of cash flows and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion the financial statements: • • • give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2019 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the group financial statements, Article 4 of the IAS Regulation. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our Report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. • the directors’ confirmation set out on page 34 in the Annual Report that they have carried out a robust assessment of the Group’s emerging and principal risks and the disclosures in the annual report that describe the principal risks and the procedures in place to identify emerging risks and explain how they are being managed or mitigated; • the directors’ statement set out on page 45 in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the group and parent company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • whether the directors’ statement relating to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or • the directors’ explanation set out on page 35 in the Annual Report as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. F I N A N C I A L S T A T E M E N T S 75 F I N A N C I A L S T A T E M E N T S Independent auditor’s report continued Key Audit Matter How the matter was addressed in the audit Valuation, existence and ownership of investments Investments comprise 90% of the total assets of the group. The investment portfolio at the year-end comprised of listed equity investments valued at £818m and unlisted investments valued at £4m (notes 1 and 14 to the financial statements). Investments represent the most significant balance in the financial statements and underpins the principal activity of the entity therefore we identified the following areas to be of significant focus: • • • Valuation, existence and ownership of listed equity investments Completion, accuracy and clarity of the investment related disclosures Valuation of investments with respect to unrealised gains/losses Completeness of income from investments (Notes 1 and 7 to the financial statements) We considered the completeness of dividend income recognised and its presentation in the Income Statement, as set out in the requirements of The Association of Investment Companies Statement of Recommended Practice (the ‘AIC SORP’ issued in November 2014 and updated in October 2019 with consequential amendments) to be a significant risk. Dividend income is one of the key drivers of dividend returns to investors and is often a key factor is demonstrating the performance of the portfolio. Accuracy of income in relation to the provision of professional services (Notes 1 and 7 to the financial statements) Revenue in relation to the provision of professional services also consists of fees receivable from the provision of various professional services including, but not limited to, annual trustee services, transaction fees, service of process fees, company secretarial fees, special fees, daily rates, single payments, new fee structure and European Medium Term Note revenue. Revenue recognition in the professional services component of the group was considered to be a risk as the timing of invoicing of fees results in amounts being accrued or deferred at the year-end based on management’s estimates, including the stage of completion. This is because incomplete or inaccurate income could have a material impact on the group’s earnings per share. 76 lawdebenture.com We responded to this matter by testing the valuation, existence and ownership of 100% of the portfolio of listed investments. We performed the following procedures: • • • • • • • Checked against independent data sources that the correct bid-price has been used for the year end fair value Performed a total recalculation of the listed portfolio using the holdings per the third party HSBC report and the independent bid prices as above Checked the appropriateness of the valuation methodology applied and checked that there are no contra indicators, such as liquidity considerations, to suggest that bid price is not the most appropriate indication of fair value Agreed the investment holdings in the name of the group to independently received third party confirmation from the custodian to confirm existence, ownership and completeness Reviewed the latest available independent assurance report addressing the relevant controls in place at the custodian to assess whether any of the exceptions identified had an impact on our audit approach We corroborated a sample additions to the BNP third party confirmations and recalculated the cost recognised in the financial statements For a sample of disposals, we corroborated the proceeds figure to the BNP third party confirmation and recalculated the realised gains and losses based on the brought forward book cost We also tested the completeness, accuracy and clarity of investment related disclosures. For the unrealised gains/losses on investments held at fair value, we tested the valuation of the portfolio at the year-end, together with testing the reconciliation of opening and closing investments. We did this by taking the portfolio holdings at three different points in the year and corroborating the bid prices to independent sources, obtaining evidence comfort over the unrealised movements recognised between these points. Key observations: Based on our procedures performed, we did not identify any exceptions with regards to valuation, existence or ownership of listed investments as well as the corresponding disclosures. We assessed the accounting policy for income recognition in the Investment Trust for compliance with accounting standards and the AIC SORP and performed testing to confirm the nature of the revenue and to check that income had been accounted for and presented in accordance with this stated accounting policy. In respect of completeness of dividend income, we tested that the appropriate dividends had been recognised in the year by reference to independent data of dividends declared on a sample of investment holdings in the portfolio. Key observations: Based on our procedures performed, we did not identify any exceptions with regards to the completeness of income from investments. In respect of fee income from the provision of professional services, our audit strategy differed per revenue stream. For annual trustee fees in all entities bar Safecall, we agreed a sample of recorded revenue to a contract or similar agreement, invoice and receipt of cash. We also obtained a breakdown of accrued and deferred income and selected a sample which we recalculated based on the above to check that the appropriate proportion of income had been recognised in the year. The same approach was taken for transaction fees, service of process, company secretarial fees and special fees. For annual fees within the Safecall subsidiaries, as well as the daily rates revenue stream, we tested controls around the establishment of a contract, the authorisation of sales invoices raised and controls around the bank reconciliations performed. This testing was supported by tracing a sample of items to invoice and bank receipt. Single payments, New Fee Structure and European Medium Term Note revenue generated was tested through a sample being agreed to client agreements or recent correspondence where a countersigned agreement was not available, sales invoices and bank receipts; in addition to a revenue recalculation being performed. Assurance over completeness was gained through a number of procedures to confirm that revenue is recognised in the correct period. We reviewed client take on records and tested post year-end credit notes raised to ascertain revenue raised in 2019 that has been nullified post year end. We performed controls testing where appropriate, on the key manual controls operating in the year assessing their implementation and effectiveness. Key observations: Based on our procedures performed, we did not identify any exceptions with regards to the accuracy of income in relation to the provision of professional services. Our application of materiality We apply the concept of materiality both in planning evaluated as immaterial as we also take account of the nature and performing our audit, and in evaluating the effect of of identified misstatements, and the particular circumstances misstatements. We consider materiality to be the magnitude of their occurrence, when evaluating their effect on the by which misstatements, including omissions, could influence financial statements as a whole. The application of these key the economic decisions of reasonable users that are taken considerations gives rise to three levels of materiality applicable on the basis of the financial statements. Importantly, to the Group, the quantum and purpose of which are tabulated misstatements below these levels will not necessarily be below. Materiality measure Purpose Financial statement materiality (1% of investment portfolio) Assessing whether the financial statements as a whole present a true and fair view. Performance materiality (75% of materiality) Specific materiality – classes of transactions and balances which impact on net realised returns (5% of revenue return before tax) Lower level of materiality applied in performance of the audit when determining the nature and extent of testing applied to individual balances and classes of transactions. Assessing those classes of transactions, balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Key considerations and benchmark s • The value of investments The level of judgement • inherent in the valuation The range of reasonable alternative valuations • • Risk and control environment Quantum (£) £8,220,000 (31 December 2018: £6,630,000) £6,165,000 (31 December 2018: £4,970,000) • Net revenue returns of the Group £1,884,000 (31 December 2018: £1,325,000) Parent company financial statement materiality (95% of Group materiality) Assessing whether the parent company financial statements as a whole present a true and fair view. • A principal consideration in assessing the financial performance of the Group Materiality - £7,809,000 Performance materiality (75%) - £5,857,000 (31 December 2018: Materiality - £6,300,000, Performance materiality (75%) - £4,720,000) Full scope audits of the seven significant components were We agreed with the Audit Committee that we would report to performed at a materiality level calculated based on a level the Committee all audit differences in excess of £164,000 for the appropriate to the relative scale of the business concerned. Five of financial statements as a whole (2018: £133,000) and £38,000 for the components had a materiality calculated based on 5% of their items impacting net realised returns this year (2018: £27,000), adjusted profit before tax with LDCTM based on 1% of expenditure as well as differences below that threshold that, in our view, and the parent company capped at 95% of Group materiality. warranted reporting on qualitative grounds. An overview of the scope of our audit All significant components are based in the UK and the group audit As part of designing our audit, we determined materiality and team have responsibility for the audit of all components included assessed the risks of material misstatement in the financial in the consolidated financial statements. Component materiality statements. ranged up to £7,809,000. For components where full scope audits were not undertaken, the group audit team undertook audit procedures on material balances with a performance materiality of 75% in all cases. Capability of the audit to detect irregularities, including fraud We gained an understanding of the legal and regulatory framework applicable to the group and the industry in which it operates, and considered the risk of acts by the company which were contrary to Our audit approach was developed by obtaining an understanding applicable laws and regulations, including fraud. These included of the group’s activities, the key functions undertaken by the Board but were not limited to compliance with Companies Act 2006, and the overall control environment. Based on this understanding the FCA listing and DTR rules, the principles of the UK Corporate we assessed those aspects of the group’s transactions and balances Governance Code, industry practice represented by the AIC SORP which were most likely to give rise to a material misstatement. and International Financial Reporting Standards (IFRSs) as adopted F I N A N C I A L S T A T E M E N T S 77 F I N A N C I A L S T A T E M E N T S Independent auditor’s report continued An overview of the scope of our audit continued misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to by the European Union. We also considered the company’s determine whether there is a material misstatement in the qualification as an Investment Trust under UK tax legislation. financial statements or a material misstatement of the other We designed audit procedures to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in We considered compliance with this framework through the other information and to report as uncorrected material discussions with the Audit Committee and performed audit misstatements of the other information where we conclude procedures on these areas as considered necessary. Our that those items meet the following conditions: procedures involved enquiries with Management, review of the reporting to the directors with respect to compliance with laws and regulation, review of board meeting minutes and review of legal correspondence. • Fair, balanced and understandable – the statement given as to why the Annual Report does not include a statement by the directors that they consider the Annual Report and financial statements taken as a whole is fair, balanced and We focused on laws and regulations that could give rise to a understandable and provides the necessary information for material misstatement in the company financial statements. shareholders to assess the corporation and group’s position Our tests included, but were not limited to: • • • • agreement of the financial statement disclosures to underlying supporting documentation; enquiries of management; review of minutes of board meetings throughout the period; and considering the effectiveness of the control environment in monitoring compliance with laws and regulations There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. We also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. Other information The directors are responsible for the other information. The other information comprises the information included in the Annual Report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially 78 lawdebenture.com • • and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or Audit Committee reporting – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit; or Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements and the part of the directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or • • A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s Report. Other matters which we are required to address Following the recommendation of the audit committee, we were reappointed on 11 April 2019 to audit the financial statements for the year ended 31 December 2019 and subsequent financial periods. The period of total uninterrupted engagement is 11 years, covering the years ending 31 December 2009 to 31 December 2019. The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company and we remain independent of the group and the parent company in conducting our audit. Our audit opinion is consistent with the additional Report to the we have not received all the information and explanations we require for our audit. audit committee. Use of our report This Report is made solely to the parent company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the parent company’s members those matters we are required to state to them in an Auditor’s Report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the parent company and the parent company’s members as a body, for our audit work, for this Report, or for the opinions we have formed. Vanessa-Jayne Bradley (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London United Kingdom 26 February 2020 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). F I N A N C I A L S T A T E M E N T S Responsibilities of Directors As explained more fully in the directors’ responsibilities statement, within the director’s report set out on page 42, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. 79 F I N A N C I A L S T A T E M E N T S Group income statement as at 31 December 2019 UK dividends UK special dividends Overseas dividends Overseas special dividends Interest income Independent professional services fees Other income Total income Net gain/(loss) on investments held at fair value through profit or loss Total income and capital gains/(losses) Cost of sales Administrative expenses Provision for onerous contracts Operating profit/(loss) Finance costs Interest payable Profit/(loss) before taxation Taxation Profit/(loss) for the year Return per ordinary share (pence) Diluted return per ordinary share (pence) * See note 1 Notes 6 2 3 4 6 7 8 7 10 10 Revenue £000 23,458 2,364 3,294 85 29,201 706 36,815 20 66,742 Capital £000 — — — — — — — — — 2019 Total* £000 23,458 2,364 3,294 85 29,201 706 36,815 20 66,742 Revenue £000 18,892 810 3,407 90 23,199 480 33,252 176 57,107 Capital £000 — — — — — — — — — 2018 Total* £000 18,892 810 3,407 90 23,199 480 33,252 176 57,107 — 100,023 100,023 — (84,301) (84,301) 66,742 (5,026) (22,835) 113 100,023 — (2,379) — 166,765 (5,026) (25,214) 113 38,994 97,644 136,638 (1,319) 37,675 (1,420) 36,255 (3,958) 93,686 — 93,686 (5,277) 131,361 (1,420) 129,941 57,107 (3,668) (22,705) 319 31,053 (4,617) 26,436 (1,318) 25,118 (84,301) — (610) — (27,194) (3,668) (23,315) 319 (84,911) (53,858) — (4,617) (84,911) (58,475) — (1,318) (84,911) (59,793) 30.68 79.27 109.95 21.26 (71.85) (50.59) 30.67 79.27 109.94 21.25 (71.84) (50.59) Statement of comprehensive income as at 31 December 2019 GROUP Profit/(loss) for the year Foreign exchange on translation of foreign operations Pension actuarial gains/(losses) Taxation on pension Other comprehensive (loss)/income for the year Total comprehensive income/(loss) for the year 80 lawdebenture.com Revenue £000 36,255 — (800) 152 Capital £000 93,686 (214) — — 2019 Total £000 129,941 (214) (800) 152 Revenue £000 25,118 — 1,600 (304) (648) (214) (862) 1,296 Capital £000 (84,911) 450 — — 450 2018 Total £000 (59,793) 450 1,600 (304) 1,746 35,607 93,472 129,079 26,414 (84,461) (58,047) Statement of financial position as at 31 December 2019 Assets Non-current assets Goodwill Property, plant and equipment Right-of-use asset Other intangible assets Investments held at fair value through profit or loss Investments in subsidiary undertakings Retirement benefit asset Deferred tax assets Total non-current assets Current assets Trade and other receivables Other accrued income and prepaid expenses Cash and cash equivalents Total current assets Total assets Current liabilities Amounts owed to subsidiary undertakings Trade and other payables Lease liability Corporation tax payable Deferred tax liability Other taxation including social security Deferred income Total current liabilities Non-current liabilities and deferred income Long-term borrowings Deferred income Lease liability Provision for onerous contracts Total non-current liabilities Total net assets Equity Called up share capital Share premium Own shares Capital redemption Translation reserve Capital reserves Retained earnings Total equity Total equity pence per share Notes 11 12 23 13 14 14 24 8 15 16 17 23 8 21 23 4 18 18 19 2019 £000 1,930 64 1,057 104 GROUP 2018 £000 1,952 100 — 186 822,316 662,593 — 2,700 — — 2,500 11 COMPANY 2018 £000 2019 £000 — — — 16 822,102 61,283 — — — — — — 662,379 61,233 — — 828,171 667,342 883,401 723,612 7,213 6,438 71,236 84,887 913,058 — 13,010 730 710 83 540 5,625 20,698 114,157 2,463 350 118 117,088 775,272 5,921 9,147 (1,332) 8 1,897 697,119 62,512 775,272 655.76 6,925 5,768 124,148 136,841 804,183 — 11,888 — 199 — 583 4,005 16,675 114,112 3,796 — 236 118,144 669,364 5,919 8,904 (966) 8 2,111 603,433 49,955 669,364 566.27 542 2,155 46,128 48,825 384 1,687 100,321 102,392 932,226 826,004 53,990 1,420 47,840 1,404 — 20 — 534 16 — 20 — 497 16 55,980 49,777 74,551 74,534 135 — — 145 — — 74,686 801,560 74,679 701,548 5,921 9,147 — 8 — 755,717 30,767 801,560 5,919 8,904 — 8 — 662,031 24,686 701,548 F I N A N C I A L S T A T E M E N T S As permitted by Section 408 of the Companies Act 2006, the Company has not presented its own income statement, however its gain for the year was £122,817,000 (2018: loss £60,070,000). Approved and authorised for issue by the Board on 26 February 2020 and signed on its behalf by: R. Hingley, Chairman Registered number 30397. | D. Jackson, Chief Executive Officer 81 F I N A N C I A L S T A T E M E N T S Statement of changes in equity as at 31 December 2019 GROUP Called up share capital £000 Share premium £000 Own shares £000 Capital redemption £000 Translation reserve £000 Capital reserves £000 Retained earnings £000 Total £000 Balance at 1 January 2018 5,918 8,787 (1,033) Net loss for the period Foreign exchange Actuarial gain on pension scheme (net of tax) Total comprehensive loss for the period Issue of shares Dividend relating to 2017 Dividend relating to 2018 Movement in own shares Total equity at 31 December 2018 — — — — 1 — — — — — — — 117 — — — — — — — — — — 67 5,919 8,904 (966) Balance at 1 January 2019 5,919 8,904 (966) Net gain for the period Foreign exchange Actuarial gain on pension scheme (net of tax) Total comprehensive income for the period Issue of shares Dividend relating to 2018 Dividend relating to 2019 Statute barred dividends Movement in own shares Total equity at 31 December 2019 — — — — 2 — — — — — — — — 243 — — — — — — — — — — — — (366) 5,921 9,147 (1,332) 8 — — — — — — — — 8 8 — — — — — — — — — 8 1,661 688,344 44,573 748,258 — 450 — (84,911) 25,118 (59,793) — — — 450 1,296 1,296 450 (84,911) 26,414 (58,047) — — — — — — — — — 118 (13,942) (13,942) (7,090) (7,090) — 67 2,111 603,433 49,955 669,364 2,111 — (214) — 603,433 49,955 669,364 93,686 36,255 129,941 — — — (214) (648) (648) (214) 93,686 35,607 129,079 — — — — — — — — — — — 245 (15,272) (15,272) (7,813) (7,813) 35 — 35 (366) 1,897 697,119 62,512 775,272 Capital reserves comprises realised and unrealised gains on investments held at fair value through profit or loss (see note 19). 82 lawdebenture.com Statement of changes in equity continued as at 31 December 2019 COMPANY Balance at 1 January 2018 Total comprehensive income Issue of shares Dividend relating to 2017 Dividend relating to 2018 Total equity at 31 December 2018 Share capital £000 5,918 Share premium £000 8,787 — 1 — — — 117 — — 5,919 8,904 Balance at 1 January 2019 5,919 8,904 Total comprehensive gain for the period Issue of shares Dividend relating to 2018 Dividend relating to 2019 Statute barred dividends Total equity at 31 December 2019 — 2 — — — — 243 — — — 5,921 9,147 Own shares £000 Capital redemption £000 Translation reserve £000 — — — — — — — — — — — — — 8 — — — — 8 8 — — — — — 8 — — — — — — — — — — — — — Capital reserves £000 745,025 (82,994) — — — Retained earnings £000 Total £000 22,794 782,532 22,924 (60,070) — 118 (13,942) (13,942) (7,090) (7,090) 662,031 24,686 701,548 662,031 24,686 701,548 93,686 29,131 122,817 — — — — — 245 (15,272) (15,272) (7,813) (7,813) 35 35 755,717 30,767 801,560 Capital reserves comprises realised and unrealised gains on investments held at fair value through profit or loss (see note 19). F I N A N C I A L S T A T E M E N T S 83 F I N A N C I A L S T A T E M E N T S Statements of cash flows for the year ended 31 December 2019 Operating activities Operating profit before interest payable and taxation Losses/(gains) on investments Foreign exchange losses/(gains) Depreciation of property,plant and equipment Depreciation of right-of-use assets Interest on lease liability Amortisation of intangible assets Decrease/(increase) in receivables (Decrease)/increase in payables Transfer from capital reserves Normal pension contributions in excess of cost Cash generated from operating activities Taxation Operating cash flow Investing activities Acquisition of property, plant and equipment Expenditure on intangible assets Purchase of investments Sale of investments Sales of subsidiary undertakings Acquisition of subsidiary undertakings Cash flow from investing activities Financing activities Intercompany funding Derivative financial instrument Interest paid Dividends paid Payment of lease liability Proceeds of increase in share capital Purchase of own shares 2019 £000 GROUP 2018 £000 COMPANY 2018 £000 2019 £000 136,638 (53,858) (97,644) 84,911 128,207 (97,644) (54,521) 82,994 20 55 1,101 99 104 (958) 1,298 (1,680) (1,000) 38,033 (663) 37,370 (7) 93 — — 85 (1,273) (138) (200) (600) 29,013 (820) 28,193 — — — — — (626) 60 (1,680) — — — — — — 342 138 (200) — 28,317 28,753 — — 28,317 28,753 (21) (23) (70) (110) — (16) — — (163,106) (113,396) (163,106) (113,396) 102,888 102,166 102,888 — — — — — (50) 102,141 35,078 — (60,262) (11,410) (60,284) 23,823 — — (5,277) — (1,390) (5,748) 6,150 — (5,390) (5,757) (1,390) (5,549) (23,050) (21,032) (23,050) (21,032) (1,177) 245 (366) — 118 67 — 245 — — 118 — Net cash flow from financing activities (29,625) (27,985) (22,045) (33,610) Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of period Foreign exchange (losses)/gains on cash and cash equivalents Cash and cash equivalents at end of period (52,517) 124,148 (395) 71,236 (11,202) (54,012) 134,011 100,321 1,339 (181) 18,966 78,549 2,806 124,148 46,128 100,321 84 lawdebenture.com Notes to the accounts for the year end 31 December 2019 1. Summary of significant accounting policies General information The Law Debenture Corporation p.l.c. is a public company incorporated in the United Kingdom. The address of the registered office is given on page 71. The Group’s operations and its principal activities are as an investment trust and the provider of independent professional services. Basis of preparation The financial statements have been prepared on a going concern basis and under the historical cost basis of accounting, modified to include the revaluation of investments at fair value through profit or loss. The financial statements of The Law Debenture Corporation p.l.c. and the Group have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union. Where presentational guidance set out in the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts issued November 2014 and updated in October 2019 (SORP) is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. Critical accounting estimates and judgements The preparation of the financial statements requires the exercise of judgement both in application of accounting policies which are set out below and in the selection of assumptions used in the calculation of estimates. These estimates and judgements are reviewed on an ongoing basis and are continually evaluated based on historical experience and other factors. However, actual results may differ from these estimates. The most significantly affected component of the financial statements and associated critical judgements is as follows: Defined benefit scheme The calculation of the defined benefit scheme assets and obligations is sensitive to the assumptions used. The assumptions used are given in note 24 to the financial statements. The sensitivity to changes in assumptions and conditions which are significant to the calculation of the asset have been considered and the following is an illustration of the potential impact. Discount rate +0.1% Inflation assumptions +0.1% Life expectancy at 65 +1 year RPI/CPI gap 1.0% instead of 0.8% (2018: 1.1% instead of 1.0%) The Directors take advice from an actuary when selecting assumptions. New IFRSs Increase/(decrease) in asset at 31 December 2019 £ million at 31 December 2018 £ million (1.1) 0.9 2.0 (0.6) (0.9) 0.7 2.0 (0.2) F I N A N C I A L S T A T E M E N T S The following relevant standard and interpretation was issued by the International Accounting Standards Board (IASB) or the IFRS Interpretations Committee (IFRIC) before the period end: IFRS 16 Leases (effective from 1 January 2019). IFRS 16 ‘Leases’ replaces IAS 17 and addresses the definition, recognition and measurement of leases. The key change arising from IFRS 16 is that most operating leases will be accounted for on the balance sheet as a right-of-use asset and a lease liability based on discounted future lease payments. The asset will be depreciated over its useful economic life while the lease payment will be apportioned between a capital repayment of the lease liability and a finance charge representing the incremental borrowing. 85 Notes to the accounts continued for the year end 31 December 2019 1. Summary of significant accounting policies continued New IFRSs continued The Group elected to apply the modified retrospective approach for incorporating this standard in 2019, which does not require restatement of comparative periods. This method applies a cumulative effect for the current year and therefore the Group will only recognise leases on the balance sheet at 1 January 2019. In addition it has decided to measure the right-of-use assets using the lease liability on that date. Leases of low value (under £5,000) or less than 12 months remaining have been excluded from reporting in incorporation of this new standard. The impact to the Group using the modified retrospective approach is immaterial for 2019. Basis of consolidation The consolidated financial statements incorporate the financial statements of The Law Debenture Corporation p.l.c. and entities controlled by the Company (its subsidiaries) made up to the end of the financial period. The Company controls an investment if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control. The assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess consideration over the fair values of the identifiable net assets acquired is recognised as goodwill. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. The financial statements of subsidiaries are adjusted, where necessary, to ensure the accounting policies used are consistent with those adopted by the Group. Presentation of income statement and statement of comprehensive income In order to better reflect the activities of an investment trust company and in accordance with the SORP, supplementary information which analyses the income statement and statement of comprehensive income between items of a revenue and capital nature has been presented. Additionally, the net revenue is the measure the Directors believe appropriate in assessing the Group’s compliance with certain requirements set out in Sections 1158-1159 of the Corporation Tax Act 2010. Effective from 1 January 2019, the Board decided to alter the allocation of finance costs and investment management fees between the revenue and the capital columns in the income statement to better reflect the expected split of future returns between income and capital. Whereas previously all investment management fees and finance costs were allocated to the revenue column, from 1 January 2019 the proportional split has been: • Revenue 25% • Capital 75% The change in allocation is not a change in accounting policy. Segment reporting Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the Directors in deciding how to allocate resources and in assessing performance. The Group comprises two operating segments; the investment portfolio and independent professional services business. This is consistent with internal reporting. Foreign currencies Transactions recorded in foreign currencies are translated into sterling at the exchange rate ruling on the date of the transaction. Assets and liabilities denominated in foreign currencies at the reporting date are translated into sterling at the exchange rate ruling at that date. Gains and losses on translation are included in profit or loss for the period, however exchange gains or losses on investments held at fair value through profit or loss are included as part of their fair value gain or loss. The assets and liabilities of overseas subsidiaries are translated at exchange rates prevailing on the reporting date. Income and expenses of overseas subsidiaries are translated at the average exchange rates for the period. Exchange differences arising from the translation of net investment in foreign subsidiaries are recognised in the statement of comprehensive income and transferred to the Group’s translation reserve. 86 lawdebenture.com Property, plant and equipment and right-of-use assets All property, plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the item. Depreciation is calculated using the straight-line method to allocate the cost over the assets’ estimated useful lives. Right-of-use assets are measured at cost less accumulated depreciation. The carrying amount is adjusted for any re-measurement of the lease liability. Leasehold improvements over the remaining lease period Office furniture and equipment 3-10 years Right-of-use asset over the remaining lease period Intangible assets Computer software Computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives of between three and five years. Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment would be recognised in profit or loss and is not subsequently reversed. Impairment of assets An impairment loss is recognised for the amount by which an asset’s carrying amount exceeds its recoverable amount. Assets are reviewed on a regular basis and tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Financial instruments Investments Listed and unlisted investments, which comprise the investment trust portfolio, have been designated as investments held at fair value through profit or loss. Purchases and sales of listed and unlisted investments are recognised on the date on which the Group commits to purchase or sell the investment. Investments are initially recognised at fair value and transaction costs are expensed as incurred. Gains and losses arising from listed and unlisted investments, as assets at fair value through profit or loss, are included in the income statement in the period in which they arise. The Group has not taken the option to irrevocably designate any equity securities as fair value through other comprehensive income. Transaction costs are expensed immediately. The fair value of listed investments is based on quoted market prices at the reporting date. The quoted market price used is the bid price. The fair value of unlisted investments is determined by the Directors with reference to the International Private Equity and Venture Capital Valuation (IPEV) guidelines (December 2018). F I N A N C I A L S T A T E M E N T S Gains and losses on investments and direct transaction costs are analysed within the income statement as capital. All other costs of the investment trust are treated as revenue items. Trade receivables Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Trade payables Trade payables are not interest bearing and are stated at their nominal value. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held with banks and other short-term highly liquid investments with original maturities of three months or less, subject to insignificant changes in fair value. Borrowings Borrowings are recognised initially at fair value, which is generally the proceeds net of transaction costs incurred. The difference between the proceeds net of transaction costs and the redemption value is recognised in the income statement over the term of the borrowings using the effective interest rate method, so as to generate a constant rate of return on the amount outstanding. 87 Notes to the accounts continued for the year end 31 December 2019 1. Summary of significant accounting policies continued Financial instruments continued Hedge accounting The Group had designated US dollar/sterling foreign exchange forward swaps as hedging instruments to hedge the net investment in its US operations. The hedges were documented at the inception of the relationships and were reviewed on an ongoing basis to assess the effectiveness of the hedges. The gain or loss on the hedging instruments relating to the effective portion of the hedges was recognised in other comprehensive income and accumulated in the translation reserve. Following the return of capital from a US subsidiary, these instruments were fully settled in September 2018. Share capital Ordinary shares are classified as equity. The ordinary shares of the Company which have been purchased by the Employee Share Ownership Trust (ESOT) to provide share based payments to employees are valued at cost and deducted from equity. Taxation Current tax is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense which are either never taxable or deductible or are taxable or deductible in other periods. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the year end date. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each year end date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to recover the asset. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is expected to be settled or the asset is expected to be realised based on tax rates that have been enacted or substantively enacted at the year end date. Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to do so and presented as a net number on the face of the balance sheet. Investment in subsidiaries Investments in subsidiaries are carried at cost. Revenue recognition Dividend income Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established. Interest income Interest income is accrued on a time basis using the effective interest rate applicable. IPS income The Group has disaggregated the IPS revenue into various categories below which depict the nature, amount, timing, and uncertainty of revenue and cash flows. Corporate Services Corporate Services provide governance services and includes Corporate Services, Service of Process and Safecall. Revenues are derived from acceptance of new business based on the fee charged, which is considered to be the transaction price. For Service of Process, the performance obligation is fulfilled at the point in time we are appointed as process agent for the client, who is the contract counter party. The performance obligation is the arising provision of contract services for Corporate Services and Safecall. The transaction price can include any combination of one-off acceptance fees, regular annual payments, and special fees for extra work. Transactions are billed as a single payment at point of engagement or as on-going annual fees. Revenue is recognised over the period of time it is taken to fulfil the contracted performance obligation. 88 lawdebenture.com Corporate Trust Contract terms are dealt with either in trust deeds or appointment letters. Revenue is recognised over the period of service where amounts which are not recognised in the financial period are deferred. Amounts are mostly billed and paid on an annual or quarterly basis. The transaction price can include any combination of one-off acceptance fees, regular annual payments, and special fees for extra work, and are recognised over the annual term or when the performance obligation is met. The performance obligations are services provided in the creation of the trust or the structure and the obligations set out in the trust deed or service agreement over the period for which the trust or structure will be in place. Pensions Pension trusts provide professional trustee and governance services to clients, typically on a fixed annual fee basis or a time cost basis. The revenue is recognised in the accounting period in which the time has been recorded with amounts mostly billed and paid on a quarterly basis. The transaction price may be determined either by time billed or as an annual fixed fee. The performance obligation is provision of the time of the Pensions professionals and the transfer of the services is at that point of time. Employee benefits Pension costs The Group operates a defined benefit pension plan, which was closed to future accrual on 31 December 2016. The cost of providing benefits under the plan is determined using the projected unit credit method, with independent actuarial calculations being carried out at each year end date. Actuarial gains and losses are recognised in full in the period in which they occur through other comprehensive income. The asset recognised in the statement of financial position in respect of the defined benefit plan is the present value of the defined benefit obligation at the year end date less the fair value of the plan assets. In addition the Group operates defined contribution plans, where the cost recognised is the contributions paid in respect of the year. Profit share schemes The Group recognises provisions in respect of its profit share schemes when contractually obliged or when there is a past practice that has created a constructive obligation. Share based plans The Group has awarded share options to executives and the Group makes equity based awards to executives. Reserves A description of each of the reserves follows: Share premium This reserve represents the difference between the issue price of shares and the nominal value of shares at the date of issue, net of related issue costs. Capital redemption This reserve was created on the cancellation and repayment of the Company’s share capital. F I N A N C I A L S T A T E M E N T S Own shares This represents the cost of shares purchased by the ESOT. Capital reserves The following are dealt with through this reserve: • gains and losses on realisation of investments; and • changes in fair value investments which are readily convertible to cash. Retained earnings Net revenue profits and losses of the Company and its subsidiaries and the fair value costs of share based payments which are revenue in nature are dealt with in this reserve. 89 Notes to the accounts continued for the year end 31 December 2019 1. Summary of significant accounting policies continued Reserves continued Translation reserve This reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries and in prior years gains or losses on hedging instruments relating to the effective portion of the hedge related to the net investment in foreign subsidiaries. Leases Operating leases reclassified under right-of-use model Previously under IAS 17, leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases, net of incentives received from the lessor, were charged to the income statement on a straight-line basis over the period of the lease. From 1 January 2019 IFRS 16 replaces IAS 17; and the right-of-use model replaces the risks and rewards of ownership model. Under this new standard leases previously classified as operating leases are recognised on the balance sheet, and the impact to the income statement is a change to both the expense character (rent expenses replaced with depreciation and interest expense) and recognition pattern (acceleration of lease expense relative to the recognition pattern for operating leases today). Further detail on leases is provided in note 23 of the accounts. Dividend distribution Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when paid. In the case of final dividends, this is when approved by the shareholders. 2. Net capital gain/(loss) on investments Realised gains based on historical cost Amounts recognised as unrealised in previous years Realised gains based on carrying value at previous year end date Unrealised gain/(loss) on investments Transfers (to) revenue 2019 £000 39,043 (22,242) 16,801 83,365 100,166 (143) 2018 £000 38,273 (34,390) 3,883 (87,984) (84,101) (200) 100,023 (84,301) 90 lawdebenture.com 3. Administrative expenses Administrative expenses include: Salaries and Directors’ fees Social security costs Other pension costs Investment management fee* Depreciation – property, plant and equipment Depreciation – right-of-use asset Amortisation – intangible assets Interest on lease liability Foreign exchange Auditors’ remuneration 2019 £000 12,731 1,457 878 15,066 512 55 1,101 104 99 54 265 2018 £000 11,953 1,211 800 13,964 2,144 93 — 85 — (21) 193 * From 1 January 2019 25% of the management fee is charged to revenue, and 75% to capital reserves, to better reflect the expected split of future returns between income and capital. Further details are given in note 1 on page 88. During the year, the Group employed an average of 133 staff (2018: 123). All staff are engaged in the provision of independent professional services. The Company has no employees. Details of the terms of the investment management agreement are provided on page 33 of the strategic report. Administrative expenses charged to capital are transaction costs and foreign exchange differences on the purchase of investments held at fair value through profit or loss. Cost of sales represent legal charges incurred to discharge trustee duties which are recovered from clients as part of fees. A more detailed analysis of the auditors’ remuneration on a worldwide basis is provided below: Audit services – fees payable to the Company’s auditors for the audit of its financial statements* – audit related regulatory 2019 £000 251 14 265 F I N A N C I A L S T A T E M E N T S 2018 £000 179 14 193 * Including the Company £45,500 (2018: £32,000). A description of the work of the Audit Committee is set out in the Audit Committee report on pages 48 to 49 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditors. 91 Notes to the accounts continued for the year end 31 December 2019 4. Provision for onerous contracts GROUP At 1 January (Release) made in the year Utilisation of provision in the year Foreign exchange At 31 December 2019 £000 236 (113) — (5) 118 2018 £000 1,667 (319) (1,131) 19 236 In December 2016 the Group completed the disposal of substantially all of its US corporate trust business for a consideration of $1. The disposal was the completion of the first part of a strategy to exit the US corporate trust business, so as to release $50m of capital required by the business. At the time of disposal the contracts remaining were assessed and deemed to generate insufficient income to cover the costs of running and financing the remainder of the business up to the eventual date of its closure. A provision for onerous costs of £3,106,000 representing the expected net future costs up to the date of disposal or completion of the remaining contracts was included in the year ended 31 December 2016. The remaining provision at 31 December 2019 comprises of the expected net running costs (including the cost of closure) of $150,000 (2018: $300,000). A reassessment of the provision required at December 2019 resulted in a release of £113,000 (2018: release of £319,000). 5. Remuneration of Directors (key management personnel) The remuneration of the Directors, who are the key management personnel of the Group, comprises the following: Short-term benefits including fees in respect of Non-Executive Directors Deferred share bonus scheme Details for each individual Director are shown in the remuneration report on page 64. 6. Interest Interest Income Interest on pension scheme (net) Interest on bank deposits Returns on money market funds Interest Payable Implied interest on derivative financial instruments Interest on long-term debt – revenue Interest on long-term debt – capital Utilisation of onerous provision in the year (see note 4) 2019 £ 2018 £ 1,351,170 842,977 — — 1,351,170 842,977 2019 £000 100 1 605 706 — 1,319 3,958 — 5,277 2018 £000 — 1 479 480 471 5,277 — (1,131) 4,617 Interest (net) (4,571) (4,137) 92 lawdebenture.com 7. Segment analysis Investment portfolio Independent professional services Group charges Total 31 December 2019 £000 31 December 2018 £000 31 December 2019 £000 31 December 2018 £000 31 December 2019 £000 31 December 2018 £000 31 December 2019 £000 31 December 2018 £000 Revenue Segment income 29,201 23,199 36,815 33,252 Net gain on investments Other income Cost of sales — 17 — — 169 — — 3 — 7 (5,026) (3,668) Administration costs (2,186) (3,360) (20,536) (19,345) Release of onerous contracts — — 27,032 20,008 Interest (net) (note 6) (822) (4,372) Return, including profit on ordinary activities before taxation 26,210 15,636 Taxation — — Return, including profit — 11,256 209 11,465 (1,370) — 10,246 235 10,481 (1,183) attributable to shareholders 26,210 15,636 10,095 9,298 — — — — (113) 113 — — — (50) (50) — — — — — 319 319 — 319 (135) 66,016 56,451 — 20 — 176 (5,026) (3,668) (22,835) (22,705) 113 38,288 (613) 37,675 (1,420) 319 30,573 (4,137) 26,436 (1,318) 184 36,255 25,118 Revenue return per ordinary share (pence) Assets Liabilities Total net assets 22.18 13.23 870,944 764,771 (126,399) (121,239) 744,545 643,532 8.54 42,021 (11,226) 30,795 7.87 39,312 (13,345) 25,967 (0.04) 50 (118) (68) 0.16 100 (235) (135) 30.68 21.26 913,015 804,183 (137,743) (134,819) 775,272 669,364 For the purposes of reporting segmental performance, the table above presents a split of the revenue column between the investment portfolio, the IPS business and Group charges. Geographic location of revenue: 90% of revenue is based in the UK. Geographic location is based on the jurisdiction in which the contracting legal entity is based. Major customers: Due to the diverse nature of the IPS revenue streams, there is no single customer or concentration of customers that represents more than 1.6% of gross revenue streams. Capital element: The capital element of the income statement is wholly gains and losses relating to investments held at fair value through profit and loss (2019 gain of £100,023,000; 2018 loss of £84,301,000), administrative expenses (2019: £2,379,000; 2018: £610,000) and interest payable (2019: £3,958,000; 2018: nil) which corresponds to amounts classified as capital in nature in accordance with the SORP are shown in the capital column of the income statement on page 80. Details regarding the segments are included on page 1 – Group summary and in note 1 – Segment reporting on page 86. F I N A N C I A L S T A T E M E N T S Investment portfolio Independent professional services Total 31 December 2019 £000 31 December 2018 £000 31 December 2019 £000 31 December 2018 £000 31 December 2019 £000 31 December 2018 £000 Other information Capital expenditure Depreciation/amortisation Depreciation – right-of-use asset — — — — — — 44 159 1,101 180 178 — 44 159 1,101 180 178 — Group charges before taxation during the year comprised the following: Closure of the US trust business: Release for onerous contracts (see note 4) 2019 £000 2018 £000 113 113 319 319 93 Notes to the accounts continued for the year end 31 December 2019 8. Taxation Taxation based on revenue for the year comprises: UK Corporation tax at 19.0% (2018: 19.0%) Overseas tax charge Total current tax charge Deferred tax charge Charge for the year Taxation The charge for the year can be reconciled to the profit per the income statement as follows: Profits before taxation Tax on ordinary activities at standard rate 19.0% (2018: 19.0%) Effects of: Expenses not deductible for tax purposes Higher rates of tax on overseas income Non-taxable capital (gains)/losses Tax credit on dividend income Limit on Group relief for UK interest expense Prior year under provision in respect of current tax Deferred tax on movement in provision for onerous contracts 2019 £000 855 327 1,182 238 1,420 2019 £000 131,361 24,885 25 150 (18,959) (4,848) 217 — (50) 1,420 2018 £000 816 203 1,019 299 1,318 2018 £000 (58,475) (11,110) 10 44 16,133 (4,231) 591 16 (135) 1,318 The Group expects that a substantial portion of its future income will continue to be in the form of dividend receipts and capital gains and losses, which constitute non-taxable income. On this basis, the Group tax charge is expected to remain significantly different to the standard UK rate of 19.0%. Deferred Tax The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting period. GROUP Deferred tax assets/(liabilities) At 1 January 2018 (Charge) to income (Charge) to other comprehensive income Foreign exchange At 1 January 2019 (Charge) to income (Charge)/credit to other comprehensive income Foreign exchange At 31 December 2019 Accelerated tax depreciation £000 Retirement benefit obligations £000 671 (185) — — 486 (48) — (8) 430 (57) (114) (304) — (475) (190) 152 — (513) Total £000 614 (299) (304) — 11 (238) 152 (8) (83) In accordance with the accounting policy, deferred tax is calculated at the tax rates that are expected to apply to the reversal. Overseas taxes reflect the current rate, whilst UK taxes are at the enacted rate of 19.0%. A deferred tax asset has not been recognised in respect of overseas losses of £1,245,981 (2018: £1,187,400) as their usability cannot be predicted with reasonable certainty. 94 lawdebenture.com 9. Dividends on ordinary shares Dividends on ordinary shares comprise the following: 2019 Interim 6.60p (2018: 6.00p) 2018 Final 12.90p (2017: 11.80p) Statute barred dividends* Total for year Proposed final dividend for the year ended 31 December 2019 * Relates to dividends unclaimed over 12 years old. 2019 £000 2018 £000 7,813 15,272 (35) 7,090 13,942 — 23,050 21,032 The proposed final dividend is subject to approval by shareholders at the annual general meeting and has not been included as a liability in these financial statements. Set out below is the total dividend payable in respect of the financial year, which is the basis on which the requirements of Sections 1158- 1159 of the Corporation Tax Act 2010 are considered. 2019 Interim 6.60p (2018: 6.00p) 2019 Final 19.40p (2018: 12.90p) 2019 £000 7,813 22,975 30,788 2018 £000 7,090 15,249 22,339 On this basis, The Law Debenture Corporation p.l.c. satisfies the requirements of Sections 1158-1159 of the Corporation Tax Act 2010, as an approved investment trust company. 10. Net asset value/return per share NAV per share is calculated based on 118,224,400 (2018: 118,205,909) shares, being the total number of shares in issue of 118,429,010 (2018: 118,381,667), less 204,610 (2018: 175,758) shares, acquired by the ESOT in the open market. The net asset value of £830,139,000 (2018: £725,863,000) comprises the NAV per the balance sheet of £775,272,000, (2018: £669,364,000) plus the fair value adjustment to for the IPS business of £91,860,000, (2018: £78,439,000) less the fair value adjustment for the debt of £36,993,000, (2018: £21,940,000). Revenue return per share is based on profits attributable of £36,255,000 (2018: £25,118,000). Capital return per share is based on capital gains for the year of £93,686,000 (2018: loss £84,911,000). Total return per share is based on gain for the year of £129,941,000 (2018: loss £59,793,000). The calculations of returns per share are based on 118,181,082 (2018: 118,174,550) shares, being the weighted average number of shares in issue during the year after adjusting for shares owned by the ESOT. In 2019, total revenue and capital diluted returns per share were calculated using 118,190,993 shares (2018: 118,187,923 shares), being the diluted weighted average number of shares in issue assuming exercise of options at less than fair value. There were 47,380 (2018: 83,061) antidilutive shares. F I N A N C I A L S T A T E M E N T S 11. Goodwill GROUP Cost At 1 January Foreign exchange At 31 December Provision for impairment At 1 January Provision in year Foreign exchange At 31 December Net book value at 31 December 2019 £000 2,397 (38) 2,359 445 — (16) 429 2018 £000 2,339 58 2,397 419 — 26 445 1,930 1,952 95 Notes to the accounts continued for the year end 31 December 2019 The goodwill is identifiable with separate operating companies (Safecall Limited: £1,419,000; and Delaware Corporate Services Inc.: £512,000). At 31 December 2019 the goodwill in relation to the operating companies was reviewed. The review assessed whether the carrying value of goodwill was supported by the net present value of future cash flows based on management forecasts for 2020. The review for Safecall was assessed using annual growth for five years of 5% with no terminal growth, which is based on the lower end of current expectations and a discount rate of 9% (2018: 9%). Sensitivity analysis was also completed using annual growth of 2% and a discount rate of 10% and on neither basis was the goodwill considered to be impaired. The review of Delaware Corporate Services Inc. was assessed using annual growth for five years of 5% with no terminal growth, which is based on current expectations and a discount rate of 9% (2018: 9%). Sensitivity analysis was also completed using annual growth of 2% and a discount rate of 10% and on neither basis was the goodwill considered to be impaired (2018: nil). 12. Property, plant and equipment GROUP Cost At 1 January Additions at cost Foreign exchange At 31 December Accumulated depreciation At 1 January Charge Foreign exchange At 31 December Net book value at 31 December Office improvements £000 Furniture & equipment £000 2019 Total £000 Office improvements £000 Furniture & equipment £000 899 17 (3) 913 888 15 (3) 900 13 1,836 2,735 4 (5) 21 (8) 1,835 2,748 1,747 40 (3) 1,784 51 2,635 55 (6) 2,684 64 866 33 — 899 848 33 7 888 11 1,791 37 8 1,836 1,680 60 7 1,747 89 2018 Total £000 2,657 70 8 2,735 2,528 93 14 2,635 100 The Company holds no property, plant and equipment. 13. Other intangible assets GROUP Cost At 1 January Additions at cost Foreign exchange At 31 December Accumulated amortisation At 1 January Charge Foreign exchange At 31 December Net book value at 31 December 96 lawdebenture.com Computer software 2019 £000 Computer software 2018 £000 1,792 23 (1) 1,814 1,606 104 — 1,710 104 1,682 110 — 1,792 1,521 85 — 1,606 186 14. Investments Investments held at fair value through profit or loss GROUP Opening cost at 1 January Gains at 1 January Opening fair value at 1 January Purchases at cost Cost of acquisition Sales – proceeds – realised gains on sales Gains/(losses) in the income statement Closing fair value at 31 December Closing cost at 31 December Gains Closing fair value at 31 December Fair value through profit or loss COMPANY Opening cost at 1 January Gains at 1 January Opening fair value at 1 January Purchases at cost Cost of acquisition Sales – proceeds – realised gains on sales Gains/(losses) in the income statement Closing fair value at 31 December Closing cost at 31 December Gains Closing fair value at 31 December Listed £000 531,245 127,264 658,509 163,106 (661) (102,888) 39,043 61,138 818,247 629,845 188,402 818,247 Listed £000 536,343 122,166 658,509 163,106 (661) (102,888) 39,043 61,138 818,247 634,943 183,304 818,247 Unlisted £000 3,547 537 4,084 — — — — (15) 4,069 3,547 522 4,069 Unlisted £000 3,333 537 3,870 — — — — (15) 3,855 3,333 522 3,855 2019 Total £000 534,792 127,801 662,593 163,106 (661) (102,888) 39,043 61,123 822,316 633,392 188,924 822,316 2019 Total £000 539,676 122,703 662,379 163,106 (661) (102,888) 39,043 61,123 822,102 638,276 183,826 822,102 Listed £000 482,125 249,872 731,997 113,396 (408) (102,141) 38,273 (122,608) 658,509 531,245 127,264 658,509 Listed £000 487,223 244,774 731,997 113,396 (408) (102,141) 38,273 (122,608) 658,509 536,343 122,166 658,509 Unlisted £000 3,572 303 3,875 — — (25) — 234 4,084 3,547 537 4,084 Unlisted £000 3,333 303 3,636 — — — — 234 3,870 3,333 537 3,870 2018 Total £000 485,697 250,175 735,872 113,396 (408) (102,166) 38,273 (122,374) 662,593 534,792 127,801 662,593 2018 Total £000 490,556 245,077 735,633 113,396 (408) (102,141) 38,273 (122,374) 662,379 539,676 122,703 662,379 F I N A N C I A L S T A T E M E N T S Listed investments are all traded on active markets and as defined by IFRS 13 are Level 1 financial instruments. As such they are valued at unadjusted quoted bid prices. Unlisted investments are Level 3 financial instruments. They are valued by the Directors using unobservable inputs including the underlying net assets of the investments. There were no transfers in or out of Level 3 during the year. Investments in subsidiary undertakings – Company Cost At 1 January Investment in subsidiary – capital redemption Additions in year At 31 December 2019 £000 2018 £000 61,233 — 50 61,283 96,311 (35,078) — 61,233 97 Notes to the accounts continued for the year end 31 December 2019 Investments in subsidiaries are measured at cost less impairment. The financial statements consolidate the results and financial position of the Group, including all subsidiary undertakings, which are listed in this note under section “subsidiaries and related undertakings”. The cost of subsidiary undertakings includes capital contributions and as a consequence is not comparable to the fair value of the IPS business. Fair valuation of the IPS The fair value of the IPS business relates to all of the wholly owned subsidiaries of the Company, with the exception of Law Debenture Finance p.l.c. The Directors have chosen to provide a fair valuation of the IPS business, which is not included within the financial statements, to assist the users of the annual report. The fair valuation is used in preparing performance data for the Group. The fair value is determined using unobservable inputs (including the Group’s own data), which represent Level 3 inputs. The Directors’ estimate of fair value uses the guidelines and methodologies on valuation published by the International Private Equity and Venture Capital Association. The fair valuation of IPS is based upon the historic earnings before interest, taxation, depreciation and amortisation (EBITDA), an appropriate multiple and the surplus net assets of the business at their underlying fair value. The multiple applied in valuing IPS is from comparable companies sourced from market data, with appropriate adjustments to reflect the difference between the comparable companies and IPS in respect of growth, margin, size and liquidity. Fair valuation of IPS EBITDA at a multiple of 9.2 (2018: 8.4) Surplus net assets 2019 £000 105,938 16,367 122,305 2018 £000 87,562 16,844 104,406 An increase or decrease of 1 in the multiple would give rise to a £11.5m change in the fair valuation of the IPS. The adjustment to NAV to reflect the IPS fair value is an increase of 77.70p per share (2018: 66.36p). Subsidiaries and related undertakings The following is a list of all of the subsidiaries within the Law Debenture Group. Each of them is 100% owned within the Group and has been consolidated in the Group accounts. Subsidiaries held directly by the Company are in bold. Unless indicated, all subsidiaries are incorporated and have their registered office in the United Kingdom at Fifth Floor, 100 Wood Street, London EC2V 7EX. The addresses of overseas registered companies appear at page 116. All shares issued by Group subsidiaries are ordinary shares. The Company and the Group do not have any significant holdings in any qualifying undertakings other than the subsidiary undertakings listed below. L.D. Pension Plan Trustee Limited L.D.C. Trust Management Limited Safecall Limited Safecall Training Limited Law Debenture Investment Management Limited The Whistleblowing Company Limited Law Debenture (Independent Professional Services) Limited The Sole Trustee plc Beagle Nominees Limited The Law Debenture Corporation (Deutschland) Limited The Law Debenture Trust Corporation p.l.c. L.D.C. Latvia Limited The Law Debenture Pension Trust Corporation p.l.c. Law Debenture Trustee for Charities Pegasus Pensions plc Law Debenture (No. 1 Scheme) Trust Corporation Law Debenture Corporate Services Limited Law Debenture (No. 2 Scheme) Trust Corporation Law Debenture Trustees Limited Law Debenture (No. 3 Scheme) Pension Trust Corporation The Law Debenture Intermediary Corporation p.l.c. The Law Debenture (No. 5) Trust Corporation Law Debenture Overseas No. 1 Limited The Law Debenture (1996) Pension Trust Corporation Law Debenture Finance p.l.c. The Law Debenture (Airborne) Pension Trust Corporation Law Debenture Securitisation Services Limited The Law Debenture (BAA) Pension Trust Corporation LDPTC Nominees Limited The Law Debenture (BIS Management) Pension Trust Corporation Law Debenture Governance Services Limited The Law Debenture (BIS Retirement) Pension Trust Corporation 98 lawdebenture.com 14. Investments continued The Law Debenture (Freemans) Trust Corporation The Law Debenture (GS) Pension Trust Corporation The Law Debenture (Intel Old Plan) Pension Trust Corporation The Law Debenture (SAPP) Pension Trust Corporation The Law Debenture (JLPF) Pension Trust Corporation The Law Debenture (JLPP) Pension Trust Corporation The Law Debenture (JGRP) Pension Trust Corporation The Law Debenture (JGSPS) Pension Trust Corporation The Law Debenture (JIC) Pension Trust Corporation LDC DR Trustee Limited LDC DR Nominees Limited L.D.C. (SPV No.1) Limited LD (Holdco) Limited LD (Bidco) Limited The Law Debenture Corporation (HK) Limited (incorporated/registered office in Hong Kong) Law Debenture Trust (Asia) Limited (incorporated/registered office in Hong Kong) Law Debenture China Limited The Law Debenture (KBPP) Pension Trust Corporation (incorporated/registered office in Hong Kong) Law Debenture Services (HK) Limited (incorporated/registered office in Hong Kong) The Law Debenture Trust Corporation (Channel Islands) Limited (incorporated/registered office in Jersey) The Law Debenture Trust Corporation (Cayman) Limited (incorporated/registered office in the Cayman Islands) The Law Debenture Trust Company of New York (incorporated/registered office in the USA) Law Debenture Corporate Services Inc. (incorporated/registered office in the USA) Law Debenture Holdings Inc. (incorporated/registered office in the USA) Delaware Corporate Services Inc. (incorporated/registered office in the USA) Law Debenture (Ireland) Limited (incorporated/registered office in the Republic of Ireland) Law Debenture Ireland (Trustees) Limited (incorporated/registered office in the Republic of Ireland) Law Debenture Holdings (Ireland) Limited (incorporated/registered office in the Republic of Ireland) LDI (OCS) Limited (incorporated/registered office in the Republic of Ireland) Registered Shareholder Services No.1 Limited (incorporated/registered office in the Republic of Ireland) Registered Shareholder Services No.2 Limited (incorporated/registered office in the Republic of Ireland) Registered Shareholder Services No.3 Limited (incorporated/registered office in the Republic of Ireland) BHP SVC PTY Limited (incorporated/registered office in Australia) F I N A N C I A L S T A T E M E N T S The Law Debenture (KGPP) Pension Trust Corporation The Law Debenture (LBS) Pension Trust Corporation The Law Debenture (Swiss Re GB) Trust Corporation Law Debenture (Ocean) Trust Corporation Law Debenture (Odyssey) Trust Corporation The Law Debenture (SRL) Pension Trust Corporation The Law Debenture (Stena Line EPS) Pension Trust Corporation The Law Debenture (Tootal) Trust Corporation Law Debenture (GWR) Pension Trust Corporation The Law Debenture (JGDBS) Pension Trust Corporation ICI Pensions Trustee Limited Morgan Crucible Pension Trustees Limited AstraZeneca Pensions Trustee Limited Law Debenture MC Senior Pension Trust Corporation ICI Specialty Chemicals Pensions Trustee Limited RTL Shareholder SVC Limited Billiton SVC Limited DLC SVC Limited LDC (NCS) Limited Terrier Services Limited L.D.C. Securitisation Director No. 1 Limited L.D.C. Securitisation Director No. 2 Limited L.D.C. Securitisation Director No. 3 Limited L.D.C. Securitisation Director No. 4 Limited L.D.C. Corporate Director No. 1 Limited L.D.C. Corporate Director No. 2 Limited L.D.C. Corporate Director No. 3 Limited L.D.C. Corporate Director No. 4 Limited L.D.C. Corporate Director No. 5 Limited CD Corporate Director No. 1 Limited CD Corporate Director No. 2 Limited LDC Nominee Director No. 1 Limited LDC Nominee Director No. 2 Limited LDC Nominee Secretary Limited 99 Notes to the accounts continued for the year end 31 December 2019 14. Investments continued Unlisted investments The Group holds an immaterial amount (approximately 0.5% of the portfolio) in unlisted investments. Investment trust The majority of the investment portfolio is invested in listed investments. A small minority of investments are unlisted comprising a small fund investment and a number of other immaterial unquoted investments. Quarterly valuations for the small fund investment are received. The Investment Valuation Committee updates the valuation of this immaterial investment on a six monthly basis. The minutes of the meeting are shared with the auditors on a bi-annual basis. Other unquoted investment holdings are reviewed on a bi-annual basis to market value and agreed by the Committee members at the same Investment Valuation Committee meeting. Independent professional services As part of the services offered by the Independent Professional Services business, the Group acts as the registered holder of an immaterial amount of unlisted shares in structured finance companies which are held on trust for discretionary charitable purposes. The Group has no beneficial interest in those shares or the results of the companies whose shares are held. The holdings are reviewed on a bi-annual basis at the Investment Valuation Committee meeting but are not revalued as there is no market rate and the Group has no beneficial or economic interest in those shares. 15. Trade and other receivables The carrying value represents trade and other receivables which are not impaired. The Directors consider that the carrying value approximates to the fair value. The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables. To measure expected credit losses trade receivables are grouped based on similar risk characteristics and ageing. The expected loss rates are based on the Group’s historical credit losses experienced over the two year period prior to the period end. The historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Group’s customers. Contract assets and contract liabilities are included within “other accrued income and prepaid expenses” and “deferred income” respectively on the face of the statement of financial position. They arise from the Group’s IPS business which enters into contracts that can take more than one year to complete. 16. Cash and cash equivalents These comprise cash held at bank by the Group, short-term bank deposits with an original maturity of three months or less and money market funds with immediate access. The carrying value of these assets approximates to their fair value. 17. Trade and other payables Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 30 days. The Directors consider that the carrying value of trade and other payables approximates to their fair value, due to their age. 100 lawdebenture.com 18. Called up share capital Allotted, issued and fully paid share capital - Group and Company Value As at 1 January Issued in year As at 31 December Shares As at 1 January Issued in year As at 31 December 2019 £000 5,919 2 5,921 2018 £000 5,918 1 5,919 Number Number 118,381,667 118,358,244 47,343 23,423 118,429,010 118,381,667 During the year to 31 December 2019, 47,343 shares (2018: 23,423 shares) were allotted under the SAYE scheme for a total consideration of £244,937 (2018: £117,336) which includes a premium of £242,570 (2018: £116,165). During the year, 27,761 options were granted under the Company’s SAYE scheme. At 31 December 2019, options under the SAYE scheme exercisable from 2019 to 2025 at prices ranging from 495.72p to 606.00p per share were outstanding in respect of 135,578 ordinary shares (2018: 180,221 ordinary shares). During 2019, 25,061 options lapsed or were cancelled (2018: 8,233) and 47,343 (2018: 23,423) were exercised. Further details of options outstanding are given in the Directors’ report on page 41. Own shares held - Group Value Own shares held - cost 2019 £000 2018 £000 1,332 966 The own shares held represent the cost of 204,610 (2018: 175,758) ordinary shares of 5p each in the Company, acquired by the ESOT in the open market. The shares have been acquired to meet the requirements of the Deferred Share Plan. The voting rights relating to the shares have been waived while the relevant shares remain in trust, in accordance with the Plan rules. The market value of the shares at 31 December 2019 was £1,329,965 (2018: £949,093). F I N A N C I A L S T A T E M E N T S 101 Notes to the accounts continued for the year end 31 December 2019 19. Capital reserves GROUP At 1 January Transfer on disposal of investments Net gains on investments Cost of acquisition Foreign exchange Transfers to revenue At 31 December COMPANY At 1 January Transfer on disposal of investments Net gains on investments Cost of acquisition Foreign exchange Transfers to revenue At 31 December 20. Financial instruments Unrealised appreciation £000 Realised reserves £000 2019 Total £000 Unrealised appreciation £000 Realised reserves £000 2018 Total £000 121,273 (22,242) 83,365 (661) (181) (143) 181,411 Unrealised appreciation £000 114,554 (22,242) 83,365 (661) (181) (143) 174,692 482,160 603,433 22,242 16,801 — — (5,495) 515,708 Realised reserves £000 547,477 22,242 16,801 — — (5,495) 581,025 — 100,166 (661) (181) (5,638) 697,119 2019 Total £000 662,031 — 100,166 (661) (181) (5,638) 755,717 244,457 (34,390) (87,984) (408) (202) (200) 443,887 688,344 34,390 3,883 — — — — (84,101) (408) (202) (200) 121,273 482,160 603,433 Unrealised appreciation £000 Realised reserves £000 2018 Total £000 235,821 (34,390) (87,984) (408) 1,715 (200) 509,204 745,025 34,390 3,883 — — — — (84,101) (408) 1,715 (200) 114,554 547,477 662,031 The Group’s investment objective is to achieve long-term capital growth through investing in a diverse portfolio of investments. In pursuit of this objective, the Group has the power to deploy the following financial instruments: • Quoted equities, unlisted equities and fixed interest securities • Cash and short-term investments and deposits • Debentures, term loans and bank overdrafts to allow the Group to raise finance • Derivative transactions to manage any of the risks arising from the use of the above instruments • Derivative transactions to hedge the net investment in overseas subsidiaries It remains the Group’s policy that no trading in derivatives is undertaken. Information in respect of the investment portfolio is included on pages 18 to 31. Capital management The Company is not allowed to retain more than 15% of its income from shares and securities each year and has a policy to increase dividends. However revenue profits are calculated after all expenses. Distributions will not be made if they inhibit the investment strategy. This policy on dividends is expected to continue going forwards. The investment strategy of the Company is disclosed on page 32 and includes a ceiling on effective gearing of 50%, with a typical range of 10% net cash to 20% gearing. At 31 December 2019 gearing was 9% (2018: 3%). Gearing is calculated in line with net gearing guidelines from the AIC. Capital is represented by the Group’s net assets. 102 lawdebenture.com The Group and Company held the following categories of financial assets and liabilities at 31 December 2019: GROUP Assets Financial assets held at fair value through profit or loss: Equity investments Financial assets held at amortised cost Trade and other receivables Cash and cash equivalents Total financial assets Liabilities Financial liabilities measured at amortised cost Trade and other payables Long-term borrowings Lease liability Total financial liabilities COMPANY Assets Financial assets held at fair value through profit or loss: Equity investments Financial assets held at amortised cost Trade and other receivables Cash and cash equivalents Total financial assets Liabilities Financial liabilities measured at amortised cost Amounts owed to subsidiary undertakings Trade and other payables Long-term borrowings Total financial liabilities 2019 £000 2018 £000 822,316 662,593 7,213 71,236 78,449 6,925 124,148 131,073 900,765 793,666 13,010 114,157 1,080 11,888 114,112 — 128,247 126,000 2019 £000 2018 £000 822,102 662,379 542 46,128 46,670 868,772 384 100,321 100,705 763,084 53,990 1,420 74,551 129,961 47,840 1,404 74,534 123,778 F I N A N C I A L S T A T E M E N T S 103 Notes to the accounts continued for the year end 31 December 2019 20. Financial instruments continued Derivative financial instruments The hedge instrument was put in place to hedge US$50m of regulatory capital required by a US subsidiary engaged in corporate trust business. Following the sale of substantially all of the US corporate trust business at the end of 2016, the regulatory capital requirement ceased to apply in 2018 and the capital was returned to the UK. The swap that had been put in place to hedge this investment was terminated at the end of its term in September 2018. The principal risks facing the Group in respect of its financial instruments remain unchanged from 2018 and are: Market risk Price risk, arising from uncertainty in the future value of financial instruments. The Board maintains strategy guidelines whereby risk is spread over a range of investments, the number of holdings normally being between 70 and 150. In addition, the stock selections and transactions are actively monitored throughout the year by the investment manager, who reports to the Board on a regular basis to review past performance and develop future strategy. The investment portfolio is exposed to market price fluctuation: if the valuation at 31 December 2019 fell or rose by 10%, the impact on the Group’s total profit or loss for the year would have been £82.2m (2018: £66.3m). Corresponding 10% changes in the valuation of the investment portfolio on the Company’s total profit or loss for the year would have been £82.2m (2018: £66.2m). Foreign currency risk, arising from movements in currency rates applicable to the Group’s investment in equities and fixed interest securities and the net assets of the Group’s overseas subsidiaries denominated in currencies other than sterling. The Group’s financial assets denominated in currencies other than sterling were: GROUP US Dollar Canadian Dollar Euro Danish Krone Swedish Krona Swiss Franc Hong Kong Dollar Japanese Yen Investments £m Net monetary assets £m Total currency exposure £m Investments £m Net monetary assets £m Total currency exposure £m 2019 2018 70.7 7.2 49.6 2.9 1.0 11.0 — 8.7 151.1 5.0 — 0.7 — — — 0.4 — 6.1 75.7 7.2 50.3 2.9 1.0 11.0 0.4 8.7 71.5 5.0 37.1 2.3 1.6 14.1 — 7.4 157.2 139.0 4.3 — 0.3 — — — 0.4 — 5.0 75.8 5.0 37.4 2.3 1.6 14.1 0.4 7.4 144.0 2018 The Group US dollar net monetary assets is that held by the US operations of £3.1m together with £1.2m held by non-US operations. 2019 Investments £m Net monetary assets £m Total currency exposure £m Investments £m Net monetary (liabilities) £m Total currency exposure £m 70.7 7.2 49.6 2.9 1.0 11.0 8.7 151.1 0.1 — — — — — — 0.1 70.8 7.2 49.6 2.9 1.0 11.0 8.7 151.2 71.5 5.0 37.1 2.3 1.6 14.1 7.4 0.2 — — — — — — 71.7 5.0 37.1 2.3 1.6 14.1 7.4 139.0 0.2 139.2 COMPANY US Dollar Canadian Dollar Euro Danish Krone Swedish Krona Swiss Franc Japanese Yen 104 lawdebenture.com The holding in Scottish Oriental Smaller Companies Trust is denominated in sterling but has underlying assets in foreign currencies equivalent to £7.2m (2018: £29.9m which included £23.0m in Baillie Gifford Pacific and Stewart Investors Asia Pacific OEICs which were sold in 2019). Investments made in the UK and overseas have underlying assets and income streams in foreign currencies which cannot easily be determined and have not been included in the sensitivity analysis. If the value of all other currencies at 31 December 2019 rose or fell by 10% against sterling, the impact on the Group’s total profit or loss for the year would have been £17.6m and £14.2m respectively (2018: £18.9m and £15.4m). Corresponding 10% changes in currency values on the Company’s total profit or loss for the year would have been the same. The calculations are based on the investment portfolio at the respective year end dates and are not representative of the year as a whole. Interest rate risk, arising from movements in interest rates on borrowing, deposits and short-term investments. The Board reviews the mix of fixed and floating rate exposures and ensures that gearing levels are appropriate to the current and anticipated market environment. The Group’s interest rate profile was: Floating rate assets Sterling HK Dollars US Dollars £m 65.1 £m 0.4 £m 5.0 Floating rate assets Sterling £m 119.1 HK Dollars £m US Dollars £m 0.4 4.3 GROUP Euro £m 0.7 GROUP Euro £m 0.3 2019 COMPANY Sterling US Dollars £m 46.0 £m 0.1 2018 Sterling £m 100.1 COMPANY US Dollars £m 0.2 The Group holds cash and cash equivalents on short-term bank deposits and money market funds. Interest rates tend to vary with bank base rates. The investment portfolio is not directly exposed to interest rate risk. Fixed rate liabilities 2019 Sterling £m 114.2 GROUP 2018 Sterling £m 114.1 2019 Sterling £m 74.6 COMPANY 2018 Sterling £m 74.5 Weighted average fixed rate for the year 4.589% 4.589% 3.770% 3.770% If interest rates during the year were 1.0% higher the impact on the Group’s total profit or loss for the year would have been £791,000 credit (2018: £1,111,000 credit). It is assumed that interest rates are unlikely to fall below the current level. The Company holds cash and cash equivalents on short-term bank deposits and money market funds, it also has short-term borrowings. Amounts owed to subsidiary undertakings include £40m at a fixed rate. Interest rates on cash and cash equivalents and amounts due to subsidiary undertakings at floating rates tend to vary with bank base rates. A 1.0% increase in interest rates would have affected the Company’s profit or loss for the year by £593,000 credit (2018: £730,000 credit). The calculations are based on the balances at the respective year end dates and are not representative of the year as a whole. Liquidity risk Is the risk arising from any difficulty in realising assets or raising funds to meet commitments associated with any of the above financial instruments. To minimise this risk, the Board’s strategy largely limits investments to equities and fixed interest securities quoted in major financial markets. In addition, cash balances are maintained commensurate with likely future settlements. The maturity of the Group’s existing borrowings is set out in note 21. F I N A N C I A L S T A T E M E N T S 105 Notes to the accounts continued for the year end 31 December 2019 20. Financial instruments continued Credit risk Is the risk arising from the failure of another party to perform according to the terms of their contract. The Group minimises credit risk through policies which restrict deposits to highly rated financial institutions and restrict the maximum exposure to any individual financial institution. The Group’s maximum exposure to credit risk arising from financial assets is £78.4m (2018: £131.1m). The Company’s maximum exposure to credit risk arising from financial assets is £46.7m (2018: £100.7m). Trade and other receivables Trade and other receivables not impaired but past due by the following: Between 31 and 60 days Between 61 and 90 days More than 91 days Total 2019 £000 1,225 219 2,330 3,774 GROUP 2018 £000 1,315 437 1,721 3,473 COMPANY 2018 £000 2019 £000 — — — — — — — — The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables and contract assets. To measure expected credit losses trade receivables are grouped based on similar risk characteristics and ageing. The expected loss rates are based on the Company’s historical credit losses experienced over a two-year period prior to the year end. The historical loss rates are adjusted for current and forward-looking information on macroeconomic factors affecting the Company’s customers. At 31 December 2019 the provision in relation to IFRS 9 resulting from credit loss rates is £2,907,000. Trade and other payables Due in less than one month Due in more than one month and less than three months 2019 £000 12,686 324 13,010 GROUP 2018 £000 11,621 267 11,888 COMPANY 2018 £000 1,404 — 1,404 2019 £000 1,420 — 1,420 Fair value The Directors are of the opinion that the fair value of financial assets and liabilities of the Group are not materially different to their carrying values, with the exception of the long-term borrowings (see note 21). 106 lawdebenture.com 21. Long-term borrowings Long-term borrowings are repayable as follows: In more than five years Secured 6.125% guaranteed secured bonds 2034 3.77% secured senior notes 2045 2019 £000 GROUP 2018 £000 COMPANY 2018 £000 2019 £000 39,606 74,551 114,157 39,578 74,534 114,112 — 74,551 74,551 — 74,534 74,534 The 6.125% bonds were issued by Law Debenture Finance p.l.c. and guaranteed by the Company. The £40m nominal tranche, which produced proceeds of £39.1m, is constituted by a trust deed dated 12 October 1999 and the Company’s guarantee is secured by a floating charge on the undertaking and assets of the Company. The bonds are redeemable at nominal amount on 12 October 2034. Interest (see note 6) is payable semi-annually in equal instalments on 12 April and 12 October in each year. The 3.77% notes were issued by the Company. The £75m nominal tranche, which produced proceeds of £74.5m, is constituted by a note purchase agreement and the notes are secured by a floating charge which ranked pari passu with the charge given as part of the 6.125% bond issue. The notes are redeemable at nominal amount on 25 September 2045. Interest (see note 6) is payable semi-annually in equal instalments on 25 March and 25 September in each year. The long-term borrowings are stated in the statement of financial position at book value. Including them at a fair value of £151.2m at 31 December 2019 (2018: £136.1m) would have the effect of decreasing the year end NAV by 31.29p (2018: 18.56p). The estimated fair value is based on the redemption yield of reference gilts plus a margin derived from the spread of A rated UK corporate bond yields over UK gilt yields (2018: A). 22. Contingent liabilities The Group is from time to time party to legal proceedings and claims, which arise in the ordinary course of the IPS business. The Directors do not believe that the outcome of any of these proceedings and claims, either individually or in aggregate, will have a material adverse effect upon the Group’s financial position. The Company has provided a guarantee to a subsidiary undertaking in respect of the ongoing liabilities of the Group defined benefit pension scheme (see note 24). The Company has provided surety for the lease of the Group’s main property which is held by a subsidiary undertaking. The annual rental is currently £907,000 and its full term ends in 2020. The Company provided a guarantee in respect of liabilities that could arise from its US corporate trust business in the period before the business was sold. The guarantee ended in 2019. F I N A N C I A L S T A T E M E N T S 107 Notes to the accounts continued for the year end 31 December 2019 23. Right-of-use asset and lease liability Changes in significant accounting policies: IFRS 16 ‘Leases’ This note explains the impact of the adoption of IFRS 16 Leases on the financial statements. IFRS 16 introduced a single, on-balance sheet accounting model for lessees and replaces IAS 17, effective from 1 January 2019. This is the first set of the Group’s financial statements in which IFRS 16 has been applied. Changes to significant accounting policies are described in note 1. i) Definition of a lease Previously the Group determined at contract inception whether an arrangement was or contained a lease under IAS 17 and IFRIC 4. The Group now assesses whether a contract is or contains a lease based on the new definition of a lease. Under IFRS 16, a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration. The Group’s leasing activities and how these are accounted for The Group leases various office properties. Rental contracts are typically made for fixed periods of 1 to 10 years and lease terms are negotiated on an individual basis. As a lessee, the Group previously classified leases as either operating or finance leases based on its assessment of whether the lease transferred substantially all of the risks and rewards of ownership. The right-of-use model under IFRS 16 replaces the risks and rewards model in IAS 17, thereby the distinction between finance and operating leases is eliminated under IFRS 16. Under IFRS 16, the Group recognises right-of-use assets and lease liabilities for its office lease. The Group has elected not to recognise right-of-use assets and lease liabilities for some short-term leases and leases of low-value assets. Short- term leases are leases with a lease term of 12 months or less. Low-value assets typically comprise IT-equipment, and under £5,000 per IFRS 16. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses, adjusted for certain re-measurements of the lease liability and is presented on the face of the statement of financial position. Lease liabilities are presented in trade and other payables in the statement of financial position, initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, the Group’s incremental borrowing rate is used. Generally, the Group uses its incremental borrowing rate as the Group’s borrowing rate which is 4.589% as of 1 January 2019. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is re- measured when there is a change to future lease payments arising from a change in an index rate, a change in the estimate of the amount expected to be payable under the residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised. ii) Transition On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted at the Group’s incremental borrowing rate of 4.589% as of 1 January 2019. The associated right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 1 January 2019. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application. In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard: • • • • the use of a single discount rate to a portfolio of leases with reasonably similar characteristics; for leases previously accounting for as operating leases with a remaining lease term of less than 12 months the Group has applied the optional exemptions not to recognise right-of-use assets but to account for the remaining lease expense on a straight-line basis over the remaining lease term; the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease. The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying IAS 17 and IFRIC 4. 108 lawdebenture.com iii) Impacts of transition As a result of initially applying IFRS 16, in relation to the leases that were previously classified as operating leases, the company recognised £2,009,000 of right-of-use assets and (£2,009,000) of lease liabilities as at 1 January 2019. The following is a reconciliation of total operating lease commitments at 31 December 2018 (as disclosed in the financial statements to 31 December 2018) to the lease liabilities recognised at 1 January 2019: Total operating lease commitments disclosed at 31 December 2018 Recognition exemptions: Recognition exemption for leases with less than 12 months of lease term at transition and other reasons Operating lease liabilities before discounting Discounted using incremental borrowing rate Total lease liabilities recognised under IFRS 16 at 1 January 2019 The subsequent values at 31 December 2019 were £1,057,000 of right-of-use assets and (£1,080,000) of lease liabilities. Right -of-use asset Additional information on the right-of-use assets is as follows: GROUP £000 2,242 (73) 2,169 (160) 2,009 Opening balance at 1 January Leases signed in year Depreciation Closing NBV at 31 December Lease liabilities Lease liabilities are presented in the statement of financial position as follows: Current Non-Current Total lease liability iv) Prior Periods Office building leases £000 2,009 149 (1,101) 1,057 GROUP Total Right-of-use assets £000 2,009 149 (1,101) 1,057 GROUP 31 December 2019 £000 31 December 2018 £000 730 350 1,080 — — — F I N A N C I A L S T A T E M E N T S The modified retrospective approach to IFRS 16 has been applied, whereby this standard applies to year ended 2019, but prior year comparatives are unchanged. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019 as a cumulative catch-up. v) Future leases In 2020, the Group will sign a lease for its London Headquarters as its current lease at 100 Wood Street expires. At the date of signing, no lease agreement has been signed by the Directors. 109 Notes to the accounts continued for the year end 31 December 2019 24. Pension commitments For some employees, the Group operates a funded pension plan providing benefits for its employees based on final pensionable emoluments. The assets of the plan are held in a separate trustee administered fund. The Company has appointed an independent sole trustee to oversee the governance of the fund. The plan closed to future accrual of benefits on 31 December 2016 and benefits now increase broadly in line with inflation. Under the defined benefit pension plan, each member’s pension at retirement is related to their pensionable service and final pensionable emoluments. The weighted average duration of the expected benefit payments from the plan is around 20 years. The defined benefit scheme is operated from a trust, which has assets which are held separately from the Group and is overseen by an independent sole trustee who ensures the plan’s rules are strictly followed. These figures were prepared by an independent qualified actuary in accordance with IAS19 (revised), and are based on membership data as at 31 December 2019. The funding target is for the plan to hold assets equal in value to the accrued benefits based on projected pensionable emoluments. If there is a shortfall against this target, then the Group and the Trustee will agree deficit contributions to meet this deficit over a period. There is a risk to the Group that adverse experience could lead to a requirement for the Group to make additional contributions to reduce any deficit that arises. Contributions are set based upon funding valuations carried out every three years; the next valuation in respect of 31 December 2019 is currently underway. The estimated amount of total employer contributions expected to be paid to the plan during 2019 is £0.9m (2019 actual: £0.9m). Actuarial gains and losses are recognised immediately through other comprehensive income. The major assumptions in the 31 December 2019 disclosure under IAS19 (revised) are shown below and are applied to membership data supplied at that date. This shows the net pension assets and liabilities. 2019 % 2018 % 2.9 2.1 2.1 n/a n/a 3.2 2.2 2.9 n/a n/a 2019 years 2018 years 23.6/25.4 23.6/25.4 25.4/26.9 25.3/26.8 2019 £000 (100) — (100) 2018 £000 — 300 300 Significant actuarial assumptions: Retail Price Inflation Consumer Price Inflation Discount rate 5% limited RPI pension increases in payment General salary increases Life expectancy of male/female aged 65 in 2019 Life expectancy of male/female aged 65 in 2039 The amounts recognised in the income statement are as follows: Interest income Past service cost Total (income)/expense recognised in the income statement 110 lawdebenture.com The current allocation of plan assets is as follows: Equities Bonds Gilts Pensioner annuities Diversified growth funds Other Total Reconciliation of present value of defined benefit obligation At 1 January Interest on plan liabilities Actuarial losses/(gains) due to: Experience on benefit obligations Changes in financial assumptions Changes in demographic assumptions Benefits paid Curtailments and settlements At 31 December Reconciliation of fair value of plan assets At 1 January Interest on plan assets Actual returns net of interest Contributions by the employer Benefits paid At 31 December Allocation % £000 Allocation % 2019 50 9 25 1 13 2 30,000 5,600 14,900 700 8,100 1,200 47 10 26 1 14 2 2018 £000 25,600 5,300 14,000 700 7,700 800 100 60,500 100 54,100 2019 £000 2018 £000 51,600 1,500 (100) 6,200 — (1,400) — 57,800 57,300 1,300 — (5,100) (600) (1,600) 300 51,600 2019 £000 2018 £000 54,100 1,600 5,300 900 (1,400) 60,500 57,600 1,300 (4,100) 900 (1,600) 54,100 F I N A N C I A L S T A T E M E N T S The pension plan is exposed to investment risk, (the movement of the discount rate used against the value of the plans assets,) interest rate risk (decreases/ increases in the discount rate which will increase/ decrease the defined benefit obligation) and longevity risk, (changes in the estimation of mortality rates of members). 111 Notes to the accounts continued for the year end 31 December 2019 24. Pension commitments continued Movement in the net defined benefit obligations (Asset) at 1 January (Income)/expense charged to profit and loss Amount recognised outside of profit and loss Employer contributions Closing net (assets) at 31 December Plan assets and obligations Present value of defined benefit obligation Fair value of plan assets (Asset)/deficit 25. Related party transactions Group 2019 £000 2018 £000 (2,500) (100) 800 (900) (2,700) (300) 300 (1,600) (900) (2,500) 2019 £000 2018 £000 57,800 (60,500) (2,700) 51,600 (54,100) (2,500) Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. Company The related party transactions between the Company and its wholly owned subsidiary undertakings are summarised as follows: Dividends from subsidiaries Interest on intercompany balances charged by subsidiaries Management charges from subsidiaries 2019 £000 3,000 2,562 600 2018 £000 8,500 2,562 260 The key management personnel are the Directors of the Company. Details of their compensation are included in note 5 to the accounts and in Part 3 of the remuneration report on pages 63 to 70. Key management personnel costs inclusive of employers national insurance are £1,529,583 (2018: £958,286). Fees were received from J. Rothschild Capital Management Limited of £17,369 (2018:nil) in respect of the provision of sole trustee services to the entities pension scheme. J. Rothschild Capital Management Limited is a related party to a Director of the Group. 112 lawdebenture.com 26. Movement in borrowings Under IAS 7, the movement in borrowings in the year are as follows: GROUP Long-term borrowings 6.125% guaranteed secured bonds 2034 3.77% secured senior notes 2045 COMPANY Long-term borrowings 3.77% secured senior notes 2045 31 December 2019 £000 Non-cash items movement £000 31 December 2018 £000 Non-cash items movement £000 31 December 2017 £000 39,606 74,551 114,157 74,551 74,551 28 17 45 17 17 39,578 74,534 114,112 74,534 74,534 26 18 44 18 18 39,552 74,516 114,068 74,516 74,516 The Group had no short-term borrowings in 2019 (2018: nil). 27. Distributable reserves All historical dividend payments have been made from revenue reserves. The Group has retained earnings to pay 1.3 years of dividend at the current level. The Group has realised capital reserves of £515,708,000 including distributable capital reserves and retained earnings, which would allow 16.8 years of dividend payments at the current level. The Group does not intend to make dividend payments from capital reserves. F I N A N C I A L S T A T E M E N T S 113 C O R P O R A T E I N F O R M A T I O N 114 114 lawdebenture.com lawdebenture.com Alternative performance measures Alternative performance measures are numerical measures of the Company’s current, historical or future performance, financial position or cash flows, other than financial measures defined or specified in the financial framework that the Company has chosen to apply (International Financial Reporting Standards and the AIC SORP). The Directors use these measures as a means of assessing the Company’s performance. The measures are particularly relevant for investment trusts and are widely used across the investment trust sector. Net Asset Value (NAV) per ordinary share The value of the Company’s assets and cash at bank less any liabilities for which the Company is responsible, divided by the number of shares in issue. In Law Debenture’s case, the published NAV will include adjustments to reflect the fair value of the IPS business and the Company’s long-term debt. There is a detailed summary of the NAV, including a description of how it is calculated, on page 38 of the annual report. The NAV per ordinary share is published weekly and immediately after each month end. The change in NAV per share (see total return below) over one, three, five and ten years, as shown at page 3, is calculated by taking total return over the respective period and dividing by the opening NAV at the start of each period. Ongoing charges The ongoing charges have been calculated in accordance with AIC guidelines: annualised charges (total expenses), excluding non-recurring expenses, incurred by the Company, divided by the average net asset values throughout the year. Premium/discount The amount by which the market price per share of the Company is either higher (premium) or lower (discount) than the NAV per share, expressed as a percentage of the NAV per share. Total return – on share price and NAV The return on the share price or NAV taking into account both the movement of share price, NAV and the dividends and interest paid to shareholders and long-term debt noteholders. Any dividends paid by Law Debenture to a shareholder are assumed to have been reinvested in either additional shares (for share price total return) or the Company’s assets (for NAV total return) at the prevailing NAV/ share price. C O R P O R A T E I N F O R M A T I O N 115115 C O R P O R A T E I N F O R M A T I O N Financial calendar Dividend and interest payments Ordinary shares: Three interim dividends Announced in June, September and December Paid, July, October and January Final announced February/March Paid April 6.125% guaranteed secured notes Paid April and October 3.77% senior secured notes Paid March and September Group results Half year results Full year results Report and accounts Annual general meeting Factsheets Announced in July Announced in February/March Published in March Held in London in April Published monthly on the Company’s website Payment methods for dividends Dividends and interest can be paid to shareholders by means of BACS. Mandate forms for this purpose are available on request from the Company’s registrars. Subsidiary company details Subsidiary companies not incorporated in the United Kingdom, as listed at pages 98 and 99, are registered at the following addresses: Companies registered in Hong Kong Suite 1301 Ruttonjee House, Ruttonjee Centre, 11 Duddell Street, Central, Hong Kong Companies registered in the Republic of Ireland 38/39 Fitzwilliam Square, Dublin 2, Ireland Companies registered in USA other than Delaware Corporate Services 801 2nd Avenue, Suite 403, New York, NY 10017, USA Companies registered in USA - Delaware Corporate Services Company registered in Jersey 919 N Market St, Suite 725, Wilmington, DE 19801, USA PO Box 150, 3rd Floor, Standard Bank House, 47-49 La Motte Street, St Helier, Jersey JE4 5NW Company registered in Cayman Islands Elgin Court, Elgin Avenue, PO Box 448, Georgetown, Grand Cayman, KY1 1106, Cayman Islands Company registered in Australia PO Box 1385, Nowra, NSW 2541, Australia 116116 lawdebenture.com Notice of annual general meeting NOTICE IS HEREBY GIVEN that the 130th annual general meeting of the Company will be held on 7 April 2020 at 11.00am at the Pewterer’s Hall, Oat Lane, London EC2V 7DE for the following purposes: Ordinary resolutions 1. To receive the report of the Directors, the strategic report and the audited accounts and the auditor’s report for the year ended 31 December 2019. 2. To approve amendments to the Company’s remuneration policy. 3. To receive and approve the Directors’ remuneration report for the year ended 31 December 2019. 4. To declare a final dividend of 19.4p per share in respect of the year ended 31 December 2019. 5. To re-elect Denis Jackson as a Director. 6. To re-elect Robert Hingley as a Director. 7. To re-elect Robert Laing as a Director. 8. To re-elect Mark Bridgeman as a Director. 9. To re-elect Tim Bond as a Director. 10. To re-elect Katie Thorpe as a Director. 11. To elect Claire Finn as a Director. 12. To re-appoint BDO LLP as auditors of the Company to hold office until the conclusion of the next general meeting at which accounts are laid and to authorise the Audit Committee to determine their remuneration. 13. General authority to allot shares. THAT: (a) the Directors be generally and unconditionally authorised pursuant to and in accordance with section 551 of the Companies Act 2006 (the ‘Act’) to exercise for the period ending on the date of the Company’s next annual general meeting, all the powers of the Company to allot shares in the Company or to grant rights to subscribe for or to convert any security into shares in the Company up to an aggregate nominal amount (within the meaning of sections 551(3) and (6) of the Act) of £296,084; (b) the Company may during such period make offers or agreements which would or might require the making of allotments of equity securities or relevant securities as the case may be after the expiry of such period. Special resolutions To consider and, if thought fit, to pass the following resolutions which will be proposed as special resolutions: 14. Disapplication of statutory pre-emption rights. THAT: (a) in exercise of the authority given to the Directors by resolution 13 above, the Directors be empowered pursuant to section 570 of the Act to allot shares or grant rights to subscribe for or to convert any security into shares in the Company for the period ending on the date of the Company’s next annual general meeting wholly for cash generally up to an aggregate nominal amount of £296,084 (i.e. 5% of the issued share capital) as if section 561 of the Act did not apply to such allotment, provided always that no more than 7.5% of the issued share capital shall be issued on a non pre-emptive basis within any three year period; (b) the Company may during such period make offers or agreements which would or might require the making of allotments of equity securities or relevant securities as the case may be after the expiry of such period. 15. General authority to buy back shares. THAT: the Company be and is generally and unconditionally authorised in accordance with sections 693 and 701 of the Act to make market purchases (within the meaning of section 693(4) of the Act) of any of its issued ordinary shares of 5p each in the capital of the Company, in such manner and upon such terms as the Directors of the Company may from time to time determine, PROVIDED ALWAYS THAT: (a) the maximum number hereby authorised to be purchased shall be limited to 17,753,225 shares, or if less, that number of shares which is equal to 14.99% of the Company’s issued share capital as at the date of the passing of this resolution; (b) the minimum price which may be paid for a share shall be 5p; C O R P O R A T E I N F O R M A T I O N 117117 Notice of annual general meeting continued (c) the maximum price which may be paid for a share shall be an amount equal to 105% of the average of the middle market quotations (as derived from the London Stock Exchange Daily Official List) for the shares for the five business days immediately preceding the day on which the share is purchased; (d) unless previously revoked, renewed or varied, the authority hereby conferred shall expire on the date of the Company’s next annual general meeting provided that a contract of purchase may be made before such expiry which will or may be executed wholly or partly thereafter, and a purchase of shares may be made in pursuance of any such contract. 16. Authority to convene a general meeting – notice. THAT: a general meeting of the Company, other than an annual general meeting, may be called on not less than 14 clear days’ notice. By order of the Board Law Debenture Corporate Services Limited Secretary | 26 February 2020 Registered No. 30397 Registered office: Fifth Floor 100 Wood Street London EC2V 7EX 118118 lawdebenture.com Notes to the notice of annual general meeting 1. A member who holds ordinary shares on the register of increase in profits continues to enhance shareholder value. members and is entitled to attend and vote at this meeting His biography is included on page 72 of the annual report. is entitled to appoint one or more proxies to attend and, on a poll, to vote in his or her place (or in the case of a corporation, to appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member). A proxy need not be a member of the Company. Proxy rights do not apply to nominated persons although the nominated person may have a right under an agreement with the registered member to appoint a proxy. In addition to instructing a proxy to vote for or against a resolution, the form enables 8. Resolution 6: Robert Hingley offers himself for re-election. The Board supports his re-election. Robert has continued to evidence his abilities as a knowledgeable and effective Chairman. His corporate finance and market experience enables him to deliver constructive guidance and counsel that the Board and the Chief Executive Officer have found extremely helpful. His biography is included on page 72 of the annual report. shareholders to instruct a ‘vote withheld’ if preferred. A vote 9. Resolution 7: Robert Laing offers himself for re-election. The withheld is not a vote in law and will not be counted in the Board supports his re-election. The Board continues to believe calculation of votes. It may be used, for example, to convey that its effectiveness is enhanced by having Robert Laing a message of dissatisfaction on a particular issue, where the as a Non-Executive Director with a legal background and strength of feeling is not so great as to oppose the resolution, experience of one or more of the professional services sectors but supporting it is not appropriate either. 2. Shareholders who hold shares on the register of members (as opposed to holding them in a nominee) will find enclosed a form of proxy for use at the meeting. To be valid, forms of proxy must be lodged electronically by accessing www.investorcentre.co.uk/eproxy or where Law Debenture operates. He is an effective Senior Independent Director and Chairman of the Remuneration Committee. His biography is included on page 73 of the annual report. 10. Resolution 8: Mark Bridgeman offers himself for re-election. The Board supports his re-election. The Board recognises the by post at the office of the Company’s registrar, value in having at least one non-executive Director with fund Computershare Investor Services PLC, The Pavilions, management experience and Mark fulfils that need. He is an Bridgwater Road, Bristol BS99 6ZY. CREST members can effective Director and chairs the Audit Committee skillfully. register votes electronically by using the service provided by His biography is included on page 73 of the annual report. Euroclear. Proxies must be received not less than 48 hours before the time appointed for the holding of the meeting. This is also the voting record date by which a person must be entered on the register in order to have a right to attend and vote at the meeting. Lodgement of a form of proxy will not prevent a member from attending and voting in person. 11. Resolution 9: Tim Bond offers himself for re-election. The Board supports his re-election. The Board believes that it is desirable to have input from someone with a global, strategic macroeconomic background and an expert insight into the capital markets generally. Both from his current and previous experience, Tim is able to contribute in this way and does so 3. The register of Directors’ interests will be available for effectively. His biography is included on page 73. inspection at the registered office of the Company during normal business hours and at the annual general meeting. No Director has a service contract with the Company of more than one year’s duration. 12. Resolution 10: Katie Thorpe offers herself for re-election. The Board supports her re-election. Katie has a sound understanding of both the investment trust and the IPS business and her experience in the investment trust sector 4. Subject to the dividend on the ordinary shares now in particular has been of great value to Law Debenture and recommended being approved at the annual general how the businesses operate. She works effectively with Denis meeting, dividend payments will be made on 16 April 2020 to Jackson to deliver enhanced shareholder value. Her biography shareholders on the register on the record date on 13 March is included on page 72. 2020. 5. Resolution 2 is to approve amendments to the Company’s remuneration policy. The revised and updated policy is 13. Resolution 11: Claire Finn offers herself for election. The Board supports her election. Claire joined the Board in September 2019. The Board recognises the value of having being proposed for the reasons set out by the Remuneration a Director with fund product competence and distribution Committee Chairman on pages 50 and 51. experience which Claire is able to provide. Her biography is 6. Resolution 3 is to receive and approve the Directors’ include on page 73. remuneration report for the year ended 31 December 2019. 14. Resolution 12 is to re-appoint BDO LLP as the Company’s The remuneration report, which follows the format required auditors. BDO LLP were first appointed on 31 October 2008 by the relevant regulations, is set out at pages 50 to 70 of the and were the successful firm in the audit tender conducted annual report. in the autumn of 2017. 7. Resolution 5: Denis Jackson offers himself for re-election. The Board supports his re-election. Denis continues to lead 15. Resolution 13 renews the authority given to Directors at the last annual general meeting to allot unissued capital the effective implementation of strategy across the Group, not exceeding 296,084 shares, being 5% of the issued and has been instrumental in increasing the profits of the share capital. This authority would be exercised only at IPS business, as discussed within the annual report. This times when it would be advantageous to the Company’s C O R P O R A T E I N F O R M A T I O N 119119 Notes to the notice of annual general meeting continued shareholders to do so. Shares would not be issued under this authority at a price lower than market price or net asset 19. Meeting notice requirements – the Company is required under the Act to make a number of additional disclosures value at the time of the issue. If approved, the authority as follows. The Company’s website – www.lawdebenture. will continue to operate until the next annual general com/investment-trust/shareholder-information/corporate meeting. N.B. In the ordinary course of business, the power -governance/agm – contains a copy of this notice, which given by this resolution will only be used to allot shares includes the current total voting rights, as set out below. to participants in the HMRC approved Save As You Earn Should the required number of members requisition the Sharesave scheme. 16. Special resolution 14 is proposed because the Directors consider that in order to allot shares in the circumstances described in resolution 13 it is in the best interests of the Company and its shareholders to permit the allotment of a maximum of 296,084 shares, being 5% of the issued share capital, other than on a pre-emptive basis. The Board would not, however, issue more than 7.5% of the issued share capital on a non-pre-emptive basis within any three year period. Company to publish any statement about the audit or related matters that the relevant members propose to raise at the AGM (in accordance with section 527 of the Act), this would be published at the Company’s expense on the website and forwarded to the auditor. Similarly, any shareholder statements, resolutions and matters of business connected with the meeting received after publication of this notice will be published on the website subject to compliance by the submitting party with the Act. At the AGM, the Company will cause to be answered any question relating to the business being dealt with at the meeting put by a shareholder 17. Special resolution 15 renews the authority given to in attendance. Directors at the last annual general meeting to purchase ordinary shares in the market for cancellation. Such purchases at appropriate times and prices could be a suitable method of enhancing shareholder value and would be applied within guidelines set from time to time by the Board. It should be noted that no such purchases would be undertaken if shares were trading at a premium to net asset value. 18. Special resolution 16 seeks authority to convene a general meeting (but not the annual general meeting) by giving not less than 14 clear days’ notice. While the Directors have no current intention to call a general meeting in the year ahead, circumstances might arise when such a meeting might become necessary and the Directors deem it in the best interests of shareholders that it be held as quickly as possible. Such circumstances might include, for example, a decision to make a material amendment to the investment strategy (shareholder approval for such a change being a regulatory stipulation). Total voting rights and share information The Company has an issued share capital at 25 February 2020 of 118,433,786 ordinary shares with voting rights and no restrictions and no special rights with regard to control of the Company. There are no other classes of share capital and none of the Company’s issued shares are held in treasury. Therefore the total number of voting rights in The Law Debenture Corporation p.l.c. is 118,433,786. 120120 lawdebenture.com Annual general meeting venue Pewterers’ Hall, Oat Lane, London EC2V 7DE PEWTERERS’ HALL t S e t a g s r e d l A t ble S o N Oat Ln n g L ainin t S t d S o o W Love Ln t S d o o W Milk St Russia Row t S g n i K B a s i n g h a l l S t e t a g r o o M RAILWAY UNDERGROUND BUSES PARKING Main line stations within one mile include: Moorgate (Circle, Metropolitan, From Cheapside the 501 service There is limited meter parking connects London Bridge and in business hours near the • Holborn Viaduct • Blackfriars • Cannon Street • London Bridge • Fenchurch Street • Farringdon • Liverpool Street Main line stations within two miles are: • Charing Cross, • Waterloo • King’s Cross • St Pancras Hammersmith & City, and Waterloo via Holborn, from hall. Underground parking is Thames Link) Moorgate the 43 and 133 buses available beneath London Wall, Bank (Central, Northern, Waterloo & City) St Paul’s (Central) go to Liverpool Street, from entrance being by the corner London Wall the 172 goes of Coleman Street and on the to Blackfriars. north side of London Wall immediately before Bastion House. There is multi-storey parking in Aldersgate Street just north of the intersection with London Wall. C O R P O R A T E I N F O R M A T I O N 121 121 The Law Debenture Corporation p.l.c. Fifth Floor, 100 Wood Street, London EC2V 7EX Tel: 020 7606 5451 | www.lawdebenture.com 

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