Included in this issue: Consultation on the AIM Rules for Companies, AIM Disciplinary Notice: disciplinary action summary, Takeover Panel's first application for an enforcement order upheld and more...
Equity Capital Markets
Reminder that FCA policy statement on prohibition of restrictive contractual clauses in force from 3 January 2018
We reported in the summer that the Financial Conduct Authority (FCA) had published a policy statement (PS17/13) setting out its rules to ban the use of clauses by advisers which restrict a client's choice of future providers of primary market services (debt capital market services, equity capital market services and M&A services) following concerns that some practices could hinder competition. This is just a reminder that those provisions came into force on 3 January 2018 and will apply to all agreements entered into after that date.
Consultation on the AIM Rules for Companies
The London Stock Exchange (LSE) has published feedback on its discussion paper on the AIM Rules for Companies and Nominated Advisers (Nomads) together with a consultation on the Rules themselves taking forward some, but not all of its original proposals.
The most significant proposals being consulted on are:
- The requirement for an AIM company to state which recognised corporate governance code the board has decided to apply within its AIM Rule 26 website disclosures. This would end the ability of an AIM company not to follow any code of governance. If taken forward, the change would come into effect on 30 June 2018 in order to allow companies time to prepare.
- The codification within AIM Rule 2 of the requirement for Nomads to submit an early notification to the LSE as soon as reasonably practicable and before submitting the information already required by Schedule One to the AIM Rules. The LSE will not specify when that notification must be made but will specify, within a template to be published on the LSE's website, the information that will be required.
- The inclusion within Schedule Three to the AIM Rules for Nomads of a non-exhaustive list of factors that might give the LSE cause for concern and which Nomads should consider when assessing an applicant's appropriateness for admission.
The LSE does not propose to take forward proposals to impose:
- prescriptive criteria regarding a minimum level of shares held in public hands (or "free float");
- a minimum fundraising requirement on admission to trading; and
- a regime of automatic fines for breaches of the AIM Rulebooks, although the LSE does intend to review its Disciplinary Handbook in due course.
Responses are requested no later than 28 January 2018.
AIM Disciplinary Notice: disciplinary action summary
The LSE has published a summary of enforcement matters that were concluded as private censures and fines during 2017 by way of guidance to AIM companies and Nomads. The matters highlight that:
- when considering disclosure, AIM companies need to ensure that information included in any notification provides a complete picture of the matters being disclosed. Thus, while a company may conclude that information is not material in and of itself, it should also give consideration as to whether the information was necessary to ensure that a reader of the company's notifications would gain a full understanding of any transaction. AIM companies should also take care to ensure that related party information in transactions is properly disclosed; and
- Nomads owe certain obligations solely to the LSE, and the proper performance of these obligations is important to maintain the integrity and reputation of AIM.
FCA imposes first fine on an AIM company for failure to disclose inside information under MAR
The FCA has published a final notice in which it imposed a £70,000 fine on Tejoori Limited (Tejoori), an AIM company, for failing to inform the public as soon as possible of inside information, in breach of Article 17(1) of the Market Abuse Regulation (MAR). This is the first time the FCA has imposed a fine on an AIM company for late disclosure following the introduction of MAR on 3 July 2016.
In early 2016, Tejoori had two material investments, one of which was a shareholding in BEKON Holding AG (BEKON) which Tejoori valued in its financial statements at USD 3.35 million. On 12 July 2016, Tejoori was notified by BEKON about a compulsory acquisition of its shares by Eggersmann Gruppe GmbH & Co. KG (Eggersmann). The acquisition required Tejoori to sign a share purchase agreement and to sell its BEKON shares to Eggersmann for no initial consideration and with only a possibility of receiving deferred consideration that was materially lower than the value of Tejoori’s investment in BEKON. This information constituted inside information and, under MAR, needed to be disclosed as soon as possible.
Tejoori’s BEKON shares were ultimately transferred to Eggersmann on 10 August 2016 with both BEKON and Eggersmann issuing press releases announcing the acquisition the following day. The press releases made no reference to Tejoori so the market was unaware of the terms, including the consideration paid to Tejoori by Eggersmann.
Following a two-day, 38% price rise in Tejoori's shares based on bulletin board speculation about the proceeds Tejoori would receive from the BEKON sale, the LSE contacted Tejoori's Nomad. Tejoori denied having inside information and said that it had not sold its BEKON shares, based on the board's mistaken understanding of the mechanics of the agreement it had signed. The Nomad only learned the correct position when Tejoori's German legal adviser confirmed the sale. On 24 August 2016, Tejoori announced the sale of its BEKON shares for the first time and that it was unable, at that time, to assess whether it would receive any future consideration. Tejoori's share price closed 13% down after that announcement.
The FCA found that Tejoori had failed to inform the public as soon as possible after 12 July 2016 of inside information which directly concerned it. At that time it was in possession of information of a precise nature for the purposes of MAR which, had it been made public, would have been likely to have had a significant impact on the price of Tejoori's shares.
Takeover Code: Statements of intention
The Code Committee of the Takeover Panel has published its response statement (RS 2017/2), following its consultation on intention statements. The changes to the Code, which came into force on 8 January 2018, require:
- an offeror, when making intention statements relating to the offeree company's business, to make specific statements in relation to: (i) any research and development function of the offeree; (ii) any material change in the balance of the skills and functions of the offeree's employees and management; and (iii) the impact of its strategic plans on the offeree's headquarters and HQ functions;
- all offeror intention statements to be made in full at the time of the firm offer announcement. Previously offerors have been able to delay these statements until the publication of the offer document;
- that offer documents are not to be published for 14 days from the date of the firm offer announcement, unless the offeree consents otherwise; and
- parties to an offer to report publicly on compliance with intention statements (and post-offer undertakings, if any) 12 months after the conclusion of the offer.
The changes herald an increased focus on offeror intention statements by the Panel, and as a consequence more fulsome, granular disclosures will be expected. Intention statements should therefore be given increased prominence as a commercial issue at the early stages of public M&A transactions.
Takeover Code: Asset sales and other matters
The Code Committee has also published its response statement (RS 2017/1) following its consultation on proposed amendments to the Code in relation to asset sales and other matters. The key impact of these changes are to:
- prevent an offeror from avoiding the price setting or timing restrictions imposed by the Code as a consequence of a "no increase", "no extension" statement or a possible offer announcement which sets a floor as to the offer's terms. The changes prohibit an offeror who has made such a statement from lapsing its offer and acquiring 75+% of the offeree's assets at a higher price in the 3 months following the date of the lapse (rather than 50+% of the assets, as proposed in the initial consultation) – save with the consent of the Panel; and
- impose greater restrictions on a person who wishes to compete against an existing offer by acquiring "all or substantially all" (effectively 90+%) of the offeree's assets. In particular, the offeree will now be required to produce a quantified financial benefit statement, reported on by accountants and its financial adviser, should it propose to return the proceeds of any such competing asset sale to its shareholders by way of dividend.
The amendments to the Code took effect on 8 January 2018, including in respect of announcements or statements made on or after that date in relation to ongoing offers.
Takeover Panel's first application for an enforcement order upheld
The Court of Session in Edinburgh has upheld the Panel's first ever application for an enforcement order under section 955 Companies Act 2006. This matter relates to the hearings of the Hearings Committee and the Takeover Appeal Board held in 2017, pursuant to which Mr David King was directed to announce a mandatory offer for Rangers International Football Club (Rangers), as a consequence of dealing in shares while being in a concert party which held in excess of 30% of the shares in Rangers. Mr King failed to comply and on 13 April 2017 the Takeover Panel commenced proceedings to obtain an enforcement order.
The Court confirmed that it would not act as a "rubber stamp" to uphold the Panel's rulings in every case, but granted the enforcement order and required that Mr King make the bid. The Court reiterated the point made in the Datafin casethat the public has a very strong interest in the proper operation of the Panel, and that anything which undermined the Panel’s standing would be against the public interest.
Investment Association position statement on virtual-only AGMs
The Investment Association has stated that its members will not support amendments to articles of association that would allow "virtual-only" AGMs. Rather, it would expect any proposed amendment to confirm a requirement to hold a physical meeting alongside any electronic meeting element. This position broadly aligns with the position published by ISS in its 2018 Proxy Voting Guidelines.
The term "virtual-only" refers to meetings that are held witout a physical place of the meeting. They are distinct from hybrid meetings, where there is both a physical place of the meeting and electronic access.
IVIS will red-top any company that will have the ability to hold virtual-only AGMs after amending its articles.