Included in this issue: FCA consults on implementation of the Prospectus Regulation; No appeal in share-splitting scheme of arrangement case of Severn Trent plc's takeover of Dee Valley Group plc; FRC announces review of UK Corporate Governance Code and more... 

Equity Capital Markets

FCA consults on implementation of the Prospectus Regulation 

The Financial Conduct Authority (FCA) has published a consultation paper which, among other things, proposes changes to the Prospectus Rules in anticipation of the entry into the force of the EU Prospectus Regulation (which will replace the Prospectus Directive). Of particular significance are the following proposals:

  • the Prospectus Regulation amends the existing exemption from the requirement to publish a prospectus for a company with securities admitted to a regulated market where the annual increase of shares proposed is less than 10%, to a higher threshold of 20%. The amended exemption will also apply to securities, not just shares; and
  • a traded company may admit any number of shares to trading without publishing a prospectus if those shares result from the conversion or exchange of existing securities. It is proposed that a limit of 20% of a company's existing share capital be imposed.

If made, these rule changes will apply from the date the Prospectus Regulation comes into force and so the FCA is asking for responses before 3 April 2017 as implementation of the Regulation is likely in May or June 2017.

IPOs: FCA consultation on availability of information in the IPO process

The FCA has published a consultation paper on reforming the availability of information in the UK equity IPO process so as to address the perceived bias in connected research published on placings, and the lack of access for independent researchers to produce the analysis.

The proposed changes include that:

  • a range of unconnected analysts must be allowed to participate in any communication with an issuer's management team, or otherwise interact with management in a specified manner, before publication of any connected research by syndicate bank analysts. If not, syndicate banks must prevent their analysts from communicating with the issuer or its advisers;
  • if that range of unconnected analysts is allowed to participate in any communication with an issuer's management team, connected research may be published one day after the prospectus or registration document is published. If not, connected research cannot be published until seven days after publication of the prospectus or registration document. Underpinning this proposal is the desire to reassert the primacy of the prospectus in the IPO process; and
  • analysts would be prohibited from interacting with an issuer to whom the investment bank is proposing to provide underwriting or placing services until an underwriting or placing mandate has been accepted and the bank's position in the syndicate has been contractually agreed and documented.

The consultation closes on 1 June 2017. If adopted, the changes would apply to IPOs on regulated markets only, however the FCA intends to look at whether to extend the proposals to other, non-regulated markets (such as AIM) in due course.

FCA policy statement on changes to DTR 2.5 – delaying disclosure of inside information

The FCA has set out the Handbook changes it has made to DTR 2.5 in relation to the circumstances in which issuers may delay the disclosure of inside information. Changes have been made in light of the implementation of the EU Market Abuse Regulation (No. 596/2014) (MAR) and, more pertinently, the guidelines issued by the European Securities and Markets Authority (ESMA). The FCA has proceeded with proposals to amend DTR 2.5 as outlined in its consultation paper.

The FCA has:

  • clarified in DTR 2.5.1BG that the ESMA Guidelines contain a non-exhaustive and indicative list of the legitimate interests of issuers which may be prejudiced by immediate disclosure and situations in which delayed disclosure is likely to mislead the public. Notwithstanding this clarification, the FCA reminds issuers that, despite the list being non-exhaustive and indicative, it is the FCA's and ESMA's expectation that Article 17(4) of MAR (which sets out the ability of an issuer to delay disclosure provided certain conditions are met) should be narrowly interpreted; and
  • retained DTR 2.5.4G(1) which states that an issuer will not be allowed to delay disclosure of the fact that it is in financial difficulty under the guise of keeping a transaction or negotiation secret.

The changes came into force on 24 February 2017.

FCA consults on UK primary capital markets and Listing Rules

The FCA has published a discussion paper: ‘Review of the Effectiveness of Primary Markets: The UK Primary Markets Landscape’ (DP17/2). The FCA is seeking views on various matters including: the current split, and continued relevance of the difference, between standard and premium listing segments; support for specialist issuers, such as science and technology companies; the listing of debt securities; and retail access to debt markets. Responses are requested by 14 May 2017.

FCA consultation on amendments and new technical notes

The FCA has also published a consultation paper entitled: 'Review of the Effectiveness of Primary Markets: Enhancements to the Listing Regime' (CP17/4) in which it proposes, among other things:

  • clarifying the premium listing eligibility requirements for commercial companies (in LR 6) and introducing two new technical notes which deal with financial information and track record requirements, and the independent business requirements for companies applying for premium listing;
  • changes to the concessionary routes to premium listing, including the introduction of a new concessionary route for certain types of property company;
  • changes to the profits test in the context of classifying transactions (in LR 10 / LR 11) of application to premium listed issuers. In addition, the FCA is also consulting on whether it should include further adjustments to the profit test results, or alternative measures of profitability in the classification rules; and
  • a change in its approach to reverse takeovers, such that the FCA will no longer assume where a reverse takeover is in contemplation that there will be insufficient information in the market about the target. In turn, this means that a suspension of listing will be less likely.
NEX Exchange: reissued Growth Market Rules for Issuers and Corporate Adviser Handbook

The NEX Exchange (formerly ISDX) has reissued the ISDX Growth Market Rules for Issuers and the ISDX Corporate Adviser Handbook as, respectively, the NEX Exchange Growth Market Rules for Issuers and the NEX Exchange Corporate Adviser Handbook. The reissue of the rules follows the renaming of ISDX as NEX Exchange on 30 December 2016.

Public M&A

No appeal in share-splitting scheme of arrangement case of Severn Trent plc's takeover of Dee Valley Group plc

In last month's Corporate Finance News, we reported that the High Court had sanctioned the Dee Valley takeover scheme and held that share-splitting could not be used to defeat a scheme of arrangement. The Court granted leave to appeal and ruled that the filing of the scheme sanction order (in order to make the takeover scheme effective) be delayed, pending a possible appeal of its ruling. Initially, seven shareholders made an application to appeal the decision. However, on 13 February those opposing shareholders confirmed that they would not appeal the decision thereby allowing Dee Valley to implement the scheme.

Rangers Football Club - decision of the Takeover Appeal Board in relation to Rule 9 breach 

The Takeover Appeal Board (TAB) has published its ruling dismissing an appeal by Mr David Cunningham King, regarding his failure to announce an offer pursuant to Rule 9 of The City Code on Takeovers and Mergers (Code). TAB's ruling upholds an earlier ruling of the Hearings Committee of the Takeover Panel published on the same day.

Mr King's appeal related to a decision of the Panel Executive that Mr King acted in concert with Messrs George Letham, George Taylor and Douglas Park in acquiring in aggregate 34.05% of the issued share capital of Rangers International Football Club Plc (Rangers) on 31 December 2014 and 2 January 2015. As a consequence, Mr King triggered an obligation to extend an offer to acquire the shares of the other shareholders of Rangers pursuant to Rules 9.3 and 9.5 of the Code.

The Hearings Committee upheld the ruling of Panel Executive and confirmed that:

  • in terms of whether Mr King was acting in concert with the purchaser of the shares, New Oasis Asset Management (NOAL) (a company wholly owned by the trustee of trusts settled by him on behalf of himself and his family), the presumption in point 5 of the definition of "Acting in concert" (to include persons and related trusts) applies retrospectively to its codification in 2015 and by acting on his instructions, such trust fulfilled the definition of "affiliate" set out on Note 2 to the definition of "Acting in concert";
  • an informal arrangement or even a tacit understanding between people to co-operate to purchase shares to obtain control of a company will mean that such persons are acting in concert to make the relevant share purchases;
  • it is not necessary or relevant to ask whether there is a consensus amongst a group as to how the voting rights attaching to shares would be exercised once acquired: it is enough that the purpose for which such group was co-operating and applying its purchasing power was to effect a change of control of a board without prior agreement as to how such control would be exercised once obtained; and
  • a delay in making an offer, however significant and even where the shares concerned are trading at a higher price than the price applicable to the offer, is not a basis for avoiding an obligation pursuant to Rule 9.

Under the terms of TAB's ruling Mr King has until 12 April 2017 to announce an offer pursuant to Rule 9 of the Code.

Corporate Governance

FRC announces review of UK Corporate Governance Code

The FRC has announced plans to carry out a fundamental review of the UK Corporate Governance Code, taking into account the work it has completed on corporate culture and succession planning, and the issues raised in the BEIS Green Paper on corporate governance reform. The FRC will commence a consultation on its proposals later in 2017.

Company Law and Reporting

The Small Business Commissioner – Payment Complaints Scheme

As previously reported, new regulations on payment practices for companies and LLPs will come into force from April 2017. For further detail, please see our Commercial team's overview of the regime. From that date, small businesses (those with fewer than 50 employees) will be able to complain to the UK’s Small Business Commissioner (SBC) about the payment (or non-payment) practices of larger businesses.

Although the SBC does not have the ability to impose a binding judgment, it does have the ability to “name and shame” large businesses which are the subject of complaints. The aim of the SBC is to help small suppliers and customers work through their payment issues. If large customers take a positive approach in dealing with the SBC, then this will help to avoid the reputational damage of being named by the SBC in a report. For a summary of the key points – click here.

Best Practice in Audit Tendering

Audit tenders: updated FRC notes on best practice

In light of the implementation of the EU Statutory Audit Regulation and Directive, the Financial Reporting Council (FRC) has published updated notes on best practice in conducting an audit tender with the aim of giving ideas to audit committees so that they, in turn, can conduct an effective tender process. The notes are based on discussions with audit committee chairs, investors and audit partners. The updated notes deal with, among other matters, the following issues:

  • the timing of tenders;
  • communication with investors before and on the conclusion of the tender process;
  • considerations for and the responsibilities of members of the audit committee in relation to the tender;
  • structuring and conducting the tender process;
  • how the decision is made and by whom, including negotiating the audit fee; and
  • managing any transition between auditors.
Audit tenders: IA guidelines

The Investment Association (IA) has also published guidelines, setting out the expectations of its members when companies put their audits out to tender. The guidelines repeat many of the FRC's recommendations and broadly deal with:

  • planning the tender – the IA support audit committee oversight of the tender process and encourage appropriate disclosures in annual reports or via RNS announcements;
  • tender candidates – the IA believe that it is of critical importance to prioritise auditor selection and, in particular, audit quality, over the ability of the audit firm to provide other services. Investors want audit committees to be transparent on how they decided on the candidates, especially if one of them is the incumbent;
  • the tender process – clear objectives should be set as to what the audit committee wants to achieve and what is looked for in an auditor; and
  • the tender decision – following any tender, the audit committee should consider reporting on various issues including: the various stages in the tender process; how firms and their fees were assessed and why the appointed auditor was recommended; and an overview of the handover process.

Gender Pay Gap Reporting

Gender pay gap reporting – Guidance published

Draft guidance has been published by the Advisory, Conciliation and Arbitration Service (ACAS) and the Government Equalities Office which aims to help large businesses abide by the new gender pay gap regulations. Under the new law, coming into force in April 2017, large companies are required to take a salary snapshot of male and female employees and report on gender pay gaps within their organisations. For further detail, please see our Employment team's Practical Guide to Gender Pay Gap Reporting.