Included in this issue: FCA announces reforms to ensure UK primary markets remain effective; Rio Tinto fined for breach of DTRs in relation to impairment loss failings; New CMA guidance to improve merger process and more...

Equity Capital Markets

FCA announces reforms to ensure UK primary markets remain effective

The Financial Conduct Authority (FCA) has published a number of changes to the Listing Rules designed to ensure that the UK’s primary capital markets remain effective including:

  • clarifying the eligibility requirements for a premium listing so as to bring them in to line with market practice (LR 6);
  • introducing a new concessionary route to premium listing for some property companies based upon a property valuation report (LR 6);
  • updating how premium listed issuers classify transactions and, specifically, apply the profits test and deal with potentially anomalous results (LR 10). With the exception of related party transactions, issuers will be permitted to apply an adjusted profits figure if the results of the profits test are 25% or more and this result is anomalous and disregard the test altogether if the results of the profits test are 25% or more, this result is anomalous and all other class test ratios are less than 5%. In doing so, issuers will need to consult with their sponsors (but not the FCA), particularly as regards whether a result is anomalous; and
  • changing the FCA’s approach to reverse takeovers by reversing the presumption that there is insufficient information in the market thereby requiring a suspension (LR 5).

The amendments will be in force on 1 January 2018. Companies seeking admission to premium listing after that date should prepare any eligibility submissions on the basis of the new rules.

The FCA's Feedback Statement also provides an overview of the feedback received in response to the FCA discussion paper and outlines issues and changes which may be taken forward and consulted on in due course.

The FCA has also published a Policy Statement: "Reforming the availability of information in the UK IPO process". This contains new Conduct of Business Sourcebook (COBS) provisions which will take effect on 1 July 2018 and will have a significant impact on:

  • the timing and sequencing of information published during an IPO by connected analysts; and
  • the access of and information provided to unconnected analysts.

Among the revised rules are requirements that:

  • firms will need to permit "unconnected analysts" to have access to the issuer's management either through joining meetings between an issuer and connected analysts or through the provision of the same information as that provided to connected analysts. If separate access is granted, firms must retain written records of the information shared with both connected and unconnected analysts and retain those records for five years; and
  • firms will need to create and retain a written assessment of potential unconnected analysts who could be given access to management in such circumstance.

Note that the new rules will not apply to AIM for the time being.

The FCA has also decided not to proceed with the creation of an international listing segment for overseas companies.

ESMA updates its Q&As on prospectus issues

The European Securities and Markets Authority (ESMA) has updated its Q&As on prospectus related issues. The changes do not relate to the substance of the Q&As and have been made as a result of Prospectus Regulation (EU) 2017/1129 coming in to force on 20 July 2017.

AIM: Legal Entity Identifier requirement for AIM companies

By way of reminder, the Disclosure Guidance and Transparency Rules sourcebook was amended (from 1 October 2017) to require companies with securities admitted to trading on a regulated market such as the main market of the London Stock Exchange (LSE) to provide a Legal Entity Identifier (LEI) to the FCA when they file regulated information.

On 13 October 2017, the LSE published AIM Notice 47 on the requirement for AIM companies to have an LEI code so as to ensure compliance with MiFID II and the Market Abuse Regulation (MAR), which require market operators, such as the LSE, to collate LEI codes for each issuer with securities admitted to trading.

The notice includes a link to a helpsheet on LEIs which sets out the steps that an AIM company should follow in order to obtain an LEI from the LSE. The Exchange states that if an existing AIM company has not registered for an LEI, it must do so by 30 November 2017. It also notes that it is an AIM company’s responsibility to ensure that its LEI is renewed according to the terms of any of the accredited Local Operating Units of the Global LEI Foundation (which includes the Exchange).

The application form for admission of new securities to trading to AIM has been amended to require an LEI.

Number of "persons closely associated" with a PDMR potentially increased by updated ESMA Q&A

In July 2017, the ESMA issued the sixth version of its Q&A on MAR in which it provided (at Question 7) guidance on the definition of a "person closely associated" with a person discharging managerial responsibilities (PDMR). The City of London Law Society and Law Society Company Law Committees' Joint Working Parties (JWP) on Market Abuse, Share Plans and Takeovers Code has recently updated its own MAR Q&A to reflect ESMA's guidance. In short, all issuers and their PDMR should revisit their PCA analysis in light of ESMA's guidance. For further information, please read our Governance & Compliance update.

ESMA updates Q&A on interpretation of the Market Abuse Regulation

ESMA has published further updates to its MAR Q&A. A new Q&A (question 10) relates to Insider lists (Art 18, MAR) and clarifies that persons who act on behalf of or for the account of an issuer and who come into possession of inside information have their own duty, distinct from that of an issuer, to keep an insider list. Conversely, where a third party keeps an insider list on behalf of an issuer, the issuer remains primarily responsible for it. New questions 7.8 and 7.9 also deal with the issue of trading by PDMR during a closed period and the need to consider if doing so might constitute insider dealing and, therefore, market abuse.

Regulatory Enforcement Action

Rio Tinto fined for breach of DTRs in relation to impairment loss failings

The FCA has fined Rio Tinto plc £27.4m for breaching Disclosure and Transparency Rules by failing to account correctly for high-value mining assets when publishing its interim results.

AIM public censure and fine for breach of AIM Rules for Companies

The LSE has publicly censured and imposed a fine of £85,000 on Exchange and Management Resource Solutions plc for breaching Rules 10, 22 and 31 of the AIM Rules for Companies.

In the context of a proposed reverse takeover which was to be funded through a debt facility, certain directors became aware of concerns as to the availability of those funds and yet did not notify the company's finance director or its Nomad. The company also misled the LSE as to the timing of completion and did not mention its funding issues in discussions with the Exchange.

When the finance director became aware of the funding issues, he immediately informed the company's Nomad and trading in the company's securities was suspended. The proposed acquisition did not proceed.

The LSE determined that the company had breached:

  • AIM Rule 10 in failing to include mention of its funding difficulties in its notifications;
  • AIM Rule 31 by failing to keep its Nomad informed and by failing to seek its Nomad's advice on the AIM Rules; and
  • AIM Rule 22 as the board (at the time of the events and not the current board) did not fully co-operate with the LSE during its investigation.
Vetting and approval of prospectuses: will the regulator change?

The European Commission has published proposals to reform the EU's supervisory structure marking the first step towards the creation of a single European capital markets supervisor. In doing so it may extend ESMA's role and powers in respect of prospectuses and market abuse so as to create a level playing field for issuers, speed up prospectus approvals and prevent forum-shopping.

Of particular note is the proposal to amend the Prospectus Regulation and replace the need for approval of national competent authorities (e.g. the FCA) with that of ESMA in relation to prospectuses relating to certain types of securities.

The EU Commission has charged the European Parliament and the Council to discuss and agree its proposals as a high priority, in order to ensure their entry into force before the end of 2019. The impact of Brexit on the proposals is unclear.

Public M&A

Government publishes Green Paper on national security implications of foreign ownership of UK business

The government has published a consultation dealing with the national security implications of foreign ownership or control of UK businesses.

The review goes far beyond the defence sector, stating the government's belief that national security concerns arise in respect of utilities, transport, communication and other services, the loss of which would cause substantial disruption to daily life in the UK.

The Green Paper treads a careful line between ensuring that Britain remains open for business post-Brexit but also increasing the degree of protection the government may offer on national security grounds. The government recognises the risk that too much interference could produce a regime that deters inward investment.

As regards the Takeover Code, the Green Paper reiterates that the interests of all stakeholders should be born in mind when considering the merits of a takeover, and it references the s.172, Companies Act 2006 duty of directors to take all stakeholders into account when making such a decision. It also endorses the recent Takeover Panel consultation paper to force bidders to commit their intentions earlier and in more detail on bids. The government also intends to include "clawback" provisions in grants to R&D businesses whereby the money will have to be paid back on a change of control if the recipient-company ceases to be eligible for the grant funding.

The Green Paper proposes various short term measures including, in relation to the Enterprise Act 2002, lowering the turnover thresholds for deals in the defence and "advanced tech" sectors so that the Competition and Markets Authority (CMA) can scrutinise more mergers. The Paper notes that more significant changes in the shorter term are constrained by EU rules.

In the longer term and, specifically post Brexit, the Paper looks at ways in which the government can exert influence. One such proposal is to extend the government's reach by bringing asset deals and establishment of new ventures in critical industries within its remit. Another proposal is to make all deals in certain critical sectors – e.g. nuclear, telecoms – subject to mandatory filing, again widening the scope of government intervention.

The reason for increasing the scope of influence is explicitly stated as being "to impose conditions on the deal or in extremis to block it altogether" – a clear signal that undertakings will be the remedy of choice for the government in most circumstances.

Responses in relation to the longer-term proposals may be submitted until 9 January 2018.

New CMA guidance to improve merger process

The CMA has announced the following changes, intended to provide additional guidance to merging companies, streamline the CMA's process and reduce the requirements on businesses:

  • Additional guidance on CMA's use of initial enforcement orders (IEOs) – IEOs are orders that may be put into place during a CMA investigation to prevent merging companies from integrating in a way that could affect the outcome or interfere with the CMA’s ability to introduce any necessary measures. The guidance covers when these orders may typically be imposed; the form they will usually take; the types of derogations that the CMA is likely to grant; and the timing for imposing and revoking IEOs and granting derogations. There is also a revised template IEO derogation request letter.
  • Revise Merger Notice Template – This makes a number of changes to the merger notice form making it clearer to understand and reducing the overall amount of information that businesses need to provide. It removes unnecessary questions and provides additional guidance on what information is and isn’t likely to be required by the CMA in any given case. Notwithstanding this additional guidance, the CMA continues to strongly encourage early engagement in pre-notification discussions, in particular where further clarification as to the specific nature or extent of information that should be provided in the case at hand might be useful.
  • Revised guidance on the CMA’s mergers intelligence function – Some minor amendments have been made to the CMA's guidance on its merger intelligence function, including clarification on the point at which merging companies who do not propose to notify their transaction to the CMA should submit a briefing note.

Narrative Financial Reporting

FRC Corporate Reporting Annual Review 2017

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting for 2016/2017. Whilst it notes that the standard of corporate reporting, particularly by the largest listed companies, remains generally good, it states that the quality of reporting, especially in Strategic Reports, is not always as high as it could be. The review also reflects the increasing calls for more transparency about how a company has thought about its long-term success and how directors discharged their s.172 Companies Act 2006 duty to consider stakeholders in their decision-making.

The review also focuses on:

  • Risk reporting and viability statements. The FRC notes that further improvements in this area remain a key priority for investors and the Financial Reporting Lab plans to publish a report on risk and viability reporting later this year.
  • Brexit and the need for companies to consider how their assessment of the potential impact on their business has developed over the year and make appropriate disclosures to reflect their latest analysis.
  • Critical judgements and estimates. The FRC states that boilerplate and generic disclosures should be avoided - value can be improved by providing more granular information about a smaller set of judgements and estimates which had a significant impact on results and explaining why certain assets were subject to significant risk of material change.
FRC Lab second implementation study on disclosure of dividends

The FRC's Financial Reporting Lab has published an implementation study setting out its review of dividend disclosures in 2016 annual reports after investor calls for better disclosure.

In addition to examples of best practice in dividend policy disclosure, the report sets out examples of good practice in disclosing factors relevant to setting dividends, the level of distributable reserves and the link between those reserves and risk. The study also recommends ways in which disclosures could be developed in the future.

ESMA updates Q&As on APMs

ESMA has published updated Q&As on its guidelines on Alternative Performance Measures (APMs), adding six new questions and answers. The new questions deal with various issues including:

  • the definition of APMs;
  • the scope of the APMs guidelines;
  • carrying out numeric reconciliations; and
  • how to apply the fair review principle to APMs.

Corporate Governance

Timetable for new corporate governance reforms confirmed

The FRC has confirmed that changes to the UK Corporate Governance Code will be made "during the second half of 2018" following a consultation process which will be launched in late November or early December 2017. For further information, please read our Governance & Compliance update.

ICSA and Investment Association publish guidance on stakeholder engagement by boards

ICSA: The Governance Institute and The Investment Association (IA) have published guidance to assist company boards think about how to ensure they understand and weigh up the interests of their key stakeholders when taking strategic decisions. For further information, please read our Governance & Compliance update.

Investment Association calls on companies to publicise responses to adverse votes

In light of the government's announcement of the creation of a public register of shareholder votes, the IA is writing to companies in the FTSE All-Share that recorded at least 20% opposition to resolutions at their AGMs or withdrew a resolution in 2017. This is intended to give those companies the opportunity to provide a public explanation on how they have addressed shareholders' concerns since the vote and in anticipation of the IA's public register going live later in 2017. The register will contain a link to each company's response alongside their voting data.

ISS 2018 Proxy Voting Guidelines updated

Institutional Shareholder Services (ISS) has updated its UK benchmark proxy voting policies for 2018. A new policy on virtual meetings has been added, broadly along the lines proposed in October, stating that ISS will generally recommend voting FOR proposals allowing for the convening of hybrid shareholder meetings if it is clear that it is not the intention to hold virtual-only AGMs, but AGAINST proposals allowing for the convening of virtual-only shareholder meetings.

Other amendments include changes to policies on over-boarding for chairs, clarification that audit and remuneration committee members should be independent, threshold vesting levels for LTIPs (where a 25% vesting threshold may be considered to be inappropriate) and share issuances without pre-emption rights (i.e. cash-box placings). The new and amended policies will be applied to shareholder meetings taking place on or after 1 February 2018.

Hampton-Alexander Review supplementary report on gender balance in FTSE leadership

The Hampton-Alexander Review has published a supplementary report on gender balance in FTSE leadership. In its November 2016 report, the Review set the following targets, in each case to be achieved by the end of 2020: a minimum of 33% women's representation on FTSE 350 boards and minimum of 33% women's representation on FTSE 100 leadership teams (i.e. members of the executive committee and their direct reports). For further information, please read our Governance & Compliance update.

Parker Review final report on ethnic diversity on boards

The Parker Review Committee has published its final report into the ethnic diversity of UK boards, following its consultation launched in November 2016. The recommendations made in the final report remain unchanged from those made in the consultation version.

LSE publishes 2018 dividend procedure timetable

The LSE has issued its 2018 dividend procedure timetable. For further information, please read our Governance & Compliance update.

Consultation on best practice principles for shareholder voting research launched

The Best Practice Principles Group for Shareholder Voting Research is consulting on whether its principles and supporting arrangements need to be revised in light of the experience of implementing them, as well as market and regulatory developments since the principles were introduced in 2014.

Executive remuneration: Investment Association principles of remuneration for 2018

The IA has published a revised version of its principles of remuneration for 2018 and, in advance of the 2018 AGM season, highlighted certain items of focus. It also sets out the circumstances in which investors will vote against the re-election of the Rem Com chair including at the AGM following a company failing to get majority support for a remuneration resolution.