Included in this issue: FCA publishes final report on investment and corporate banking services; Takeover Panel issues new checklists; Reporting on payment practices and performance and more...

Equity Capital Markets

FCA publishes final report on investment and corporate banking services

The Financial Conduct Authority (FCA) has published the final report on its market study into potential competition concerns in investment and corporate banking services. The study focused on primary market activities (equity capital market, debt capital market, and M&A services) carried out in the UK regardless of the location of the client.

The study found that there are some practices by banks and advisors active in primary market activities which could have a negative effect on competition, in particular for smaller clients.

In order to address the identified concerns, the FCA is taking forward the proposals for various remedies including the prohibition on contractual clauses which tie clients to banks ("right of first refusal" and "right to act" clauses). For more detail, please read our Corporate Finance Newsflash issued at the time of publication.

FCA consults on DTR 2.5 changes in relation to delaying disclosure

Further proposed amendments to the FCA's Disclosure Guidance and Transparency Rules have been set out for consultation. The FCA believes that the changes are required to ensure compliance with the guidelines issued by the European Securities and Markets Authority (ESMA) on delay in the disclosure of inside information under the EU Market Abuse Regulation (MAR). The consultation is open until 6 January 2017. For more detail, please read our Governance & Compliance update.

AIM Regulation team underline application of AIM Rules to social media and other communications

A new edition of Inside AIM has been published which underlines the potential application of the AIM Rules and those in MAR to the communication of all information by AIM companies including that released via social media (inc. Twitter), non-regulatory news feeds and through a company's own website. For further detail, please see our Governance & Compliance update.

AIM Disciplinary Notice: private censure and fine for breach of AIM Rule 31

The AIM Disciplinary Committee of the London Stock Exchange (Disciplinary Committee) has announced that an AIM company has been privately censured and fined £75,000 for breaching Rule 31 (AIM company and directors' responsibility for compliance). The Disciplinary Committee stated that the AIM company failed to:

provide its nomad with information reasonably required to carry out the nomad’s responsibilities owed to the Exchange;

  • seek its nomad’s advice regarding compliance with the AIM Rules when it was appropriate to do so; and
  • inform its nomad and seek advice regarding a series of business developments. The Disciplinary Committee held that it was not appropriate for the company to decide whether or not the business developments were disclosable based solely on its own assessment of its obligations under the AIM Rules, without reference to its nomad – this is precisely the sort of issue that falls within AIM Rule 31.

The Disciplinary Committee also found that:

  • the company’s obligation to inform its nomad and seek advice regarding business developments covered a wider range of developments than would be required to be announced under AIM Rule 11 (General disclosure of price sensitive information);
  • it was not sufficient for the company simply to send agendas and minutes of board meetings to its nomad without any context or conversation and assume that such actions discharged the company’s responsibilities under AIM Rule 31. Developments need to be shared openly and fully, and advice sought from the nomad; and
  • contractual obligations between an AIM company and its nomad do not override the company’s responsibilities under the AIM Rules.

The Disciplinary Committee findings underline the importance of an AIM company’s AIM Rule 31 obligations to liaise with its nomad. In particular, AIM Rule 31 should not be narrowly interpreted and requires an AIM company to provide full, timely and regular information to its nomad, given that the fundamental purpose of AIM Rule 31 is to ensure that the nomad is kept fully aware of developments and can fulfil its regulatory role and responsibilities to the Exchange, to advise and guide an AIM company for which it acts.

Disclosure of LEIs and announcement classifications to be required with all regulated information – DTR 6 to be amended

The FCA has published a consultation in order to implement certain provisions relating to the Transparency Directive (2004/109/EC) which will require the publication of certain details by issuers (including Legal Entity Identification numbers or LEIs) on all regulated information. The consultation closes on 2 January 2017, however all relevant issuers are encouraged to comply with the proposals from 1 January and the FCA intend to assist them in doing so. For more detail, please read our Governance & Compliance update.

Public M&A

Takeover Panel issues new checklists

The Panel Executive of the Takeover Panel has published various checklists and supplementary forms to be completed and submitted to the Executive by the financial adviser to a bidder or a target company (as appropriate) when publishing a firm offer announcement and the final form of certain documents to be sent to the shareholders in a target company. The checklists have immediate effect.

The checklists are intended to benefit parties to an offer, their advisers and the Executive when assessing compliance of such announcements and documents with the applicable provisions of the Takeover Code (Code).

Each checklist / supplementary form must be signed by the financial adviser(s). In doing so, the financial adviser(s) confirms that the checklist / form has been completed in accordance with the Panel's guidance and that the adviser is responsible for, and can be contacted in respect of, any aspect of the relevant section of the checklist for which it has given its approval. The guidance also sets out the number of hard copies of relevant documents which must be submitted to the Panel in addition to an electronic copy.

The relevant checklists and any supplementary forms must accompany any final form firm offer announcement, offer document, target board circular, scheme circular or Rule 15 offer/proposal required to be sent to the Panel before or at the time of publication in accordance with Rules 30.5(a) or 30.5(b) of the Code. The checklists are now available for download.

Corporate Governance

Corporate Governance reform - BEIS publishes Green Paper

BEIS has published a Green Paper which builds upon the inquiry into corporate governance and pay published in September 2016. The aim of the Green Paper is to consider what changes might be appropriate in the corporate governance regime to help deliver on the government's stated aim that the UK has an economy that "works for everyone". In doing so, it considers three specific aspects of corporate governance where there is scope to "build on and enhance the current framework":

  • executive pay;
  • strengthening the employee, customer and supplier "voice"; and
  • corporate governance in the UK's largest privately held businesses.

The Paper also endorses Matthew Taylor's review of employment practices in the modern economy and the Hampton – Alexander and Parker reports on diversity (see below). For more details, please read our Governance & Compliance update. The Financial Reporting Council (FRC) has indicated that it is likely to consult on changes to the UK Corporate Governance Code and associated guidance during 2017. The deadline for responding to the Green Paper is 17 February 2017.

IA calls for disclosure on executive pay

On the subject of remuneration, an open letter from the Investment Association (IA) to all FTSE 350 companies sets out new shareholder expectations on executive pay. The open letter follows recommendations of the industry-led independent Executive Remuneration Working Group, which looked to address the issue of complexity surrounding executive pay, and states that the IA’s Principles of Remuneration have been updated to pave the way for greater simplicity and flexibility of pay structures.

Government backs call for greater female representation in executive positions

The government and the FRC have welcomed a report - the Hampton-Alexander Report - which calls for FTSE 100 companies to set a voluntary target of at least 33% representation of women in executive pipeline positions by 2020. For more detail, please read our Governance & Compliance update.

Ethnicity under-represented in the boardroom

The Parker Review, led by Sir John Parker, has found that directors of colour are vastly under-represented on the boards of the UK’s leading companies. The review committee believes that there are clear business reasons for increasing ethnic diversity on boards, and wants to see an end to ‘all-white’ boards of FTSE 100 companies by 2021. For more detail, please read our Governance & Compliance update.

Narrative Financial Reporting

Alternative Performance Measures require clear definition

Since July 2016, guidelines issued by ESMA on the use of Alternative Performance Measures (APMs) in company reporting have applied to various communications made by listed companies. According to the FRC, while reporting which uses APMs has improved, its thematic review suggests that further improvements are required.

IA guidelines on viability statements

The Investment Association has published new guidelines setting out the expectations of institutional investors in relation to viability statements prepared by companies under provision C.2.2 of the UK Corporate Governance Code. The guidelines include a number of recommendations concerning the period of the viability assessment, the prospects and risks considered when assessing viability and transparency around stress testing and qualifications and assumptions.

Simple language and clear reporting essential for companies

UHY Hacker Young and the Quoted Companies Alliance have published their ‘Corporate Governance Behaviour Review 2016’, which advises small and mid-sized quoted companies to use plain language and clear reporting in their annual reports.

Payment Practices Reporting

Reporting on payment practices and performance

The Department of Business, Energy and Industrial Strategy has published the response to its consultation on the proposed duty to report on payment practices and policies which aims to: (i) increase transparency and public scrutiny of large businesses' payment practices; and (ii) enable small businesses to make more informed decisions about who to trade with, negotiate fairer terms and challenge late payments. It is due to come into force on 6 April 2017 and to apply to qualifying businesses with financial years which begin on or after that date. Among other things:

  • the revised draft regulations apply to large companies and large LLPs only;
  • the regulations must be published through a website / portal provided by the government to ensure that the information is readily accessible by third parties – thus website disclosure is voluntary;
  • businesses in scope will be required to publish reports twice yearly rather than, as originally proposed, quarterly and within 30 days of the end of each qualifying six month period; and
  • failure to report or reporting falsely will be a criminal offence with businesses and directors potentially liable to a fine. All directors will be liable unless they can show they took all reasonable steps to ensure the requirement would be met.

For more details, please read our Governance & Compliance update.

M&A Trends

European M&A outlook 2016

Mergermarket have produced the fourth edition of European M&A Outlook. Their survey of senior Europe-based executives was taken once before the referendum vote and again with the same participants one month after the Brexit vote. Key findings include:

  • the view that European M&A will be more muted over the next 12 months; and
  • the Brexit vote will reduce the price of assets with undervalued targets being a drive for buyers.

Shareholder Engagement

FRC tiering of signatories to the Stewardship Code

The FRC has published its assessment of signatories’ reporting against the Stewardship Code, which categorises signatories into tiers based on the quality of their Code statements. The tiering exercise, which was announced in December 2015, was undertaken with the aim of improving the quality of reporting against, and maintaining the credibility of, the Stewardship Code, and encouraging greater transparency in the market.

The FRC has categorised asset managers in three tiers and other signatories to the Code in two tiers on the following basis:

  • Tier 1: Signatories provide a good quality and transparent description of their approach to stewardship and explanations of an alternative approach where necessary;
  • Tier 2: Signatories meet many of the reporting expectations but report less transparently on their approach to stewardship or do not provide explanations where they depart from provisions of the Code; and
  • Tier 3: Significant reporting improvements need to be made to ensure the approach is more transparent.

The FRC states that the additional tier for asset managers reflects the greater relevance of the Code’s provisions to asset managers, their role as agents and the wide range of reporting quality. The FRC has also indicated that asset managers who have not achieved at least Tier 2 status after six months will be removed from the list of signatories to the Code. The FRC invites contact from signatories, particularly those in Tier 3, to discuss improvements to their reporting.