Included in this issue: AIM publishes revised AIM Rules for Companies, ESMA publishes technical advice under the Prospectus Regulation, Melrose's hostile offer for GKN plc succeeds and more... 

Equity Capital Markets

AIM publishes revised AIM Rules for Companies 

As previously covered in Corporate Finance News, the London Stock Exchange (LSE) has published AIM Notice 50 which provides feedback on the consultation launched by AIM Notice 49 and confirms changes to the AIM Rules for Companies and to the AIM Rules for Nominated Advisers. The rule changes proposed in the consultation have been implemented subject to some minor alterations.

The most significant change for AIM companies already admitted to the market is the amendment of AIM Rule 26. This requires AIM companies to apply a recognised corporate governance code and to comply or explain against its chosen code – previously AIM companies had the choice of either noting on their website which code they followed or stating that they did not follow a code and instead disclosing its corporate governance arrangements. The LSE has chosen not to define those codes it "recognises" for this purpose believing it preferable that AIM companies have a choice of code to suit their specific stage of development, sector and size.

The revised rules require AIM companies to review their statement of compliance annually and, as part of its website disclosure, state the date upon which its last review took place and update its AIM Rule 26 disclosure in light of that review. In its feedback on the consultation, the LSE reminds companies and Nomads of its belief that good corporate governance is supported by "meaningful" explanations of a company's practices against the principles of a chosen code, rather than "simply identifying areas of non-compliance". 

The Quoted Companies Alliance (QCA) has announced that it will release a new and updated version of its Corporate Governance Code, which will cover:

a) what good corporate governance is; 

b) the 10 corporate governance principles to follow; and 

c) step-by-step guidance on how to effectively apply the principles. 

Whilst Main Market companies are required to apply the Financial Reporting Council's (FRC) UK Corporate Governance Code (currently the subject of its own recently closed consultation) and many larger AIM companies choose to do so, smaller companies may find that the QCA Corporate Governance Code is more suitable.

The revised AIM Rules have also codified (within AIM Rule 2) the requirement for Nomads to submit early notifications in respect of new applicants in a prescribed form. Associated guidance is set out in the AIM Rules for Nominated Advisers.

The new rules came into force on 30 March 2018, although the requirement to comply with the amended AIM Rule 26 for Companies will take effect from 28 September 2018, to allow companies already on the market adequate time to prepare. Prior to 28 September 2018, new applicants will be required to disclose the corporate governance code that the board of directors of the applicant has decided to apply, but need only explain any departures from that code, and the reasons for them, from 28 September 2018. Clean and marked-up versions of the rules are available from the LSE website. 

ESMA publishes technical advice under the Prospectus Regulation

The European Securities and Markets Authority (ESMA) has published its final report on the technical advice under the new Prospectus Regulation (EU 2017/1129), including in relation to the following areas:

  • the format of the prospectus, the base prospectus and the final terms, the content of any share registration document and securities note; and
  • the format of the EU Growth prospectus and related registration document, securities note and summary.

Subject to approval by the European Commission, the technical advice is likely to be adopted by 21 January 2019 in time for the application of the Prospectus Regulation in July 2019.

ESMA adds new Q&A on profit forecasts 

ESMA has also updated its Q&As on prospectus-related issues, to include a new Q&A on profit forecasts. The new Q&A clarifies how to identify profit forecasts in the context of prospectuses, notably by explaining the definition included in the Prospectus Regulation No 809/2004 and by providing examples on what may or not constitute a profit forecast.

Takeover Code

Takeover Panel confirms Disney is required to make a "chain principle" mandatory bid for Sky plc in certain circumstances

The Takeover Panel (Panel) has published Panel Statement 2018/4 which confirmed that The Walt Disney Company (Disney) will be required to make a mandatory offer for all the shares in Sky plc (Sky) that it does not own on the completion of its acquisition of Twenty-First Century Fox Inc (Fox) (after a divestment of certain businesses of Fox), as a result of Fox's holding of approximately 39% of Sky. Fox itself had made a pre-conditional firm offer announcement to acquire the remaining shares in Sky prior to agreeing to be bought by Disney. To add to the complications, Comcast Corporation (Comcast) has also recently announced a competing superior cash proposal for Sky. 

The recent Panel statement is a relatively rare example of the application of the "chain principle" under Note 8 of Rule 9.1 of the Takeover Code (Code), where a mandatory bid is required if a person (in the Sky scenario, Disney) acquires shares in a non-Code company (Chainco – i.e. Fox) which itself holds a 30+% stake in a Code company (Target - i.e. Sky). The Panel operates a dual test to determine whether the chain principle applies - either:

a) is the interest in Target held by Chainco significant in relation to Chainco? Relative values of 50+% are normally regarded as significant. Fox's holding in Sky was worth less than 50% of Fox's overall valuation, meaning that this test was not met; or

b) might securing control of Target be reasonably considered to be a significant purpose of acquiring Chainco? The Panel held that securing the 39% stake in Sky was a significant purpose of Disney's acquisition of Fox, and thereby required a mandatory bid.

However, the Panel will not require Disney to make a bid if, by the time of completion of its acquisition of Fox, Fox already owns 100% of Disney (i.e. the Fox bid succeeds) or Comcast owns 50+% of Sky (i.e. Comcast makes a bid which subsequently succeeds).

Calculating the pricing for any such mandatory bid is a difficult exercise where there has been no historic share dealing. The Appendix to the Panel Statement sets out the Panel's approach to the calculation of the mandatory offer price, which was based on the value attributed to the Fox shareholding in Sky in internal valuation materials prepared by Disney which the Panel requested be provided. The bid, if made by Disney, would be required to be made at £10.75 per share – which is also the price at which Fox has bid for Sky.

Melrose's hostile offer for GKN plc succeeds

At 4.00pm on 29 March, being Day 60, the final day, of the bid timetable, Melrose plc (Melrose) announced that it had received acceptances representing 52.43% of the voting rights in GKN plc (GKN), narrowly winning the contested battle for control. It is rare for a contested bid to be so close on Day 60 – Note 7 on Rule 10 of the Code requires that the receiving agents must issue a certificate before an offer is declared unconditional as to acceptances, but such a document can rarely have been as keenly anticipated as in this instance.

Following that announcement, Melrose confirmed the terms of the post offer undertakings it was providing in relation to the bid. This was only the second time that such legally binding undertakings have been given – the first being on SoftBank's 2016 offer for ARM Holdings (ARM).

Similar to the undertakings on the ARM bid, the Melrose post-offer undertakings endure for several years, and are focussed on ensuring that GKN's HQ remains in the UK. There is also a commitment to a minimum R&D spend, which is increasingly becoming an area of regulatory and political focus. An independent reviewer was appointed to monitor compliance which appears to be set to be a regular feature of any such undertakings. Unlike on ARM, Melrose included qualifications and conditions to its undertakings – notably that it would cease to be bound if Melrose becomes unable to comply with them due to an event outside its control, such as a successful unsolicited offer for Melrose.

Changes proposed to UK merger thresholds for certain transactions impacting on national security 

In November 2017 we reported that the government had proposed new powers of scrutiny in relation to mergers which raise national security concerns. In the short term, it is introducing lower thresholds for intervening in such mergers, by amending section 23 of the Enterprise Act 2002 (section 23). Section 23 sets out the criteria for determining which acquisitions amount to a 'relevant merger situation' that qualifies for investigation by the Competition and Markets Authority (CMA). The new thresholds will thus extend the Secretary of State's powers to intervene in mergers which might give rise to national security implications and in which he would not otherwise be able to intervene. 

 In effect, the proposals would allow the scrutiny of more mergers in three areas of the economy where national security concerns may arise:

  • the development or production of items for military, or for military and civilian ("dual"), use;
  • the development and production of quantum technology; and
  • the design and maintenance of aspects of computing hardware.

A draft of The Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018  has now been laid before Parliament which will, subject to approval, amend section 23. It introduces a new share of supply test for mergers where the target is active in one (or more) of the three designated areas of the economy and has a 25% (or more) share of supply of the relevant activity in the UK. Under this test the existing 25% share of supply will, on its own, qualify the merger for investigation; whether the other party has an overlapping share of supply is immaterial as there is no requirement for any increase in the UK share of supply as a result of the merger. This test is in addition to the current share of supply test that applies to all sectors of the economy and covers mergers which (by combining shares of supply) bring about an increase in the UK share of supply to, or above, 25%. 

A separate order is planned to amend the turnover test in section 23 by introducing a new, lower, annual turnover threshold of £1m for mergers which might give rise to national security implications, above which ministerial intervention will be possible.  This will be in addition to the current £70m turnover threshold that applies to all sectors of the economy.

Company Law

Government response register of beneficial owners of overseas entities

The government has published its response to a call for evidence (published in April 2017) on proposals for a new beneficial ownership register (similar to a "Persons with Significant Control" or "PSC" register) of overseas companies that own UK property or participate in UK government procurement. 

By way of background, in the original proposals, overseas entities that owned or wanted to buy UK property would be required to supply beneficial ownership information to Companies House and apply for a registration number, which would be required to register title to such property. For overseas entities that already owned UK property, a grace period of 12 months was proposed to allow them to comply and obtain a registration number. Where the regime was not complied with, sales restrictions would appear on the title register. Information on the overseas register would need to be updated at least every two years and failure to do so would be a criminal offence.

In its published response, the government has rowed back substantially from some of the original proposals. The timeline for introducing the regime has also slipped with the government intending to publish a draft Bill to create the new register later in 2018 with the register itself becoming operational in 2021.

For a full summary of the government's response and latest intentions, click here.

Pre-Emption Group expectations for disapplication thresholds

When the Prospectus Regulation was partially implemented in 2017, it introduced a new exemption from the obligation to publish a prospectus provided that the new securities represented, over a 12 month period, less than 20% (increased from 10%) of the number of securities already admitted to trading on the same regulated market (see PR 1.2.3 R(1)). In light of the new threshold, the Pre-Emption Group (Group) has confirmed that no change to the flexibility permitted by their 2015 Statement of Principles was expected as a consequence of the Prospectus Regulation, and that the Group continues to support the overall limit of a 10% disapplication of pre-emption rights.


Strengthening the Regulator's anti-avoidance/moral hazard powers

The government has published its White Paper: "Protecting Defined Benefit Pension Schemes." Our Pension's e-bulletin summarises the measures being considered including a new criminal offence to punish "wilful or grossly reckless behaviour of directors".  

Corporate Governance

FRC plans to enhance the way it monitors audit firms

The FRC has published proposals which aim to enhance the monitoring of the Big Six audit firms to avoid systematic deficiencies within firms’ networks, disruption in the provision of statutory audit services and instability in the financial sector. The FRC will focus its attention on "five key pillars" which it believes are critical to the stability of audit firms and the quality of their work, as follows:

  • leadership and governance;
  • values and behaviours;
  • business models and financial soundness;
  • risk management and control; and
  • evidence on audit quality, including from the FRC’s annual programme of audit quality reviews. 
BEIS and Insolvency Service launch consultation on insolvency and corporate governance

The Department of Business Energy and Industrial Strategy (BEIS) and the Insolvency Service have published a consultation paper which aims to reduce the risk of major company failures occurring, and to strengthen directors' responsibilities, when companies are in or approaching insolvency. Various potentially significant proposals have been made, including:

  • deterring reckless sales of businesses in distress - directors of parent companies should be held to account and penalised (for example, disqualified or held personally liable) where they make a decision to sell an insolvent subsidiary resulting in harm to creditors and, at the time of the decision to sell, the directors could not have reasonably believed that the sale would lead to a better outcome for creditors than liquidation or administration;
  • reversal of value extraction schemes - inappropriate asset stripping from companies in financial difficulties by "rescue" investors should be reversible in the event that the target company subsequently enters liquidation or administration thereby clawing money back for creditors;
  • strengthening corporate governance in pre-insolvency situations – for example, revisiting the legal and technical framework within which decisions are made on the payment of dividends; and
  • granting the Insolvency Service new investigative powers into the conduct of directors of dissolved companies. 

Responses are required by 11 June 2018.