Included in this issue: New FCA rules on IPO research, FCA consults on changes to its guidance on financial and inside information and more...
Equity Capital Markets
New FCA rules on IPO research
On 1 July 2018, the Financial Conduct Authority's (FCA) new rules on the publication of IPO research come into force. The new rules will have a significant impact on the structuring of Main Market IPOs (and in particular, the timing for publication of the main disclosure documents). The FCA has said that the purpose of the new rules is to restore the centrality of the prospectus to the IPO process. The FCA's view is that the final prospectus is currently published too late in the process, and that therefore investor education is seen as being driven by research notes prepared by connected analysts (i.e. those working for the banks forming part of the IPO syndicate), resulting in an increased risk of conflicts of interest.
The new rules (which are set out in COBS 11A and 12) will require issuers to publish a registration document (which forms a substantial part of the usual contents of a prospectus) at an early stage of the IPO process to give a suitable range of unconnected analysts (i.e. those not working for the banks forming part of the IPO syndicate) the opportunity to publish their own research notes – thereby enabling a wider range of views on the IPO candidate to be known in the market. Connected research and "intention to float" announcements cannot be published for at least seven days following publication of the registration document, unless unconnected analysts are given access to management of the issuer on the same terms as connected analysts.
Market practice for IPOs will change as a result of the new rules. The Association for Financial Markets in Europe (AFME) is currently producing guidelines setting out the terms on which unconnected analysts may be given access to management. These guidelines are eagerly awaited since they are likely to inform the development of market practice.
FCA consults on changes to its guidance on financial and inside information
The FCA has published a Special Edition (#19) of its Primary Market Bulletin consulting on a proposed change to its Technical Note FCA/TN/506.2 - Periodic financial information and inside information. The proposed changes cover the delay in the disclosure of inside information under Article 17(4) of the Market Abuse Regulation in the context of an issuer's results announcement. Feedback is sought by 23 July 2018.
The consultation follows the publication of guidelines by the European Securities and Markets Authority (ESMA) which set out a non-exhaustive, indicative list of: (i) legitimate interests of issuers that are likely to be prejudiced by the immediate disclosure of inside information; and (ii) situations in which delay of disclosure is likely to mislead the public. Further detail on the consultation can be found in our Governance & Compliance update.
NEX Exchange consultation on proposed changes to Fast Track admission process
The NEX Exchange has published a consultation proposing amendments to the NEX Exchange Growth Market Rules for Issuers (Rules for Issuers) in relation to the fast track admission process primarily to ensure that there is parity between issuers who are and are not eligible to use that route to market. NEX has also published a mark-up of the Rules for Issuers highlighting the proposed amendments.
Responses must be submitted by 29 June 2018. NEX Exchange will confirm the outcome of the consultation by 13 July 2018.
FCA to introduce a new premium listing category for sovereign-controlled companies
The FCA has published a Policy Statement confirming that, from 1 July 2018, it will be introducing a new premium listing category for "sovereign-controlled companies" which are, in effect, companies with a 30%+ sovereign country as a shareholder.
In its original consultation, the FCA argued that several requirements attendant to premium listing should not apply to such companies. However, it has ultimately decided that only the requirements to put in place an agreement with an issuer's controlling shareholder and the need to obtain a sponsor's opinion and independent shareholder approval of transactions with its sovereign shareholder should not apply. A further modification to the rules means that sovereign-controlled companies will be able to list depository receipts in the new premium category, as well as equity shares.
Commons briefing paper on contested mergers and takeovers
The House of Commons has published a briefing paper on the law on mergers and takeovers and which describes the role and powers of bodies that are involved in the process (including the Competition and Markets Authority, the Takeover Panel, and the European Commission). The paper also covers recent regulatory developments (including the national security and infrastructure investment review) and transactions of interest (including Softbank’s acquisition of ARM Holdings and Melrose’s hostile takeover of GKN).
Governance reform: BEIS publishes draft secondary legislation
As part of its corporate governance reform agenda, the government confirmed its intention to drive greater transparency in reporting by introducing secondary legislation to, amongst other things, (i) require companies of a "significant" size to explain how their directors comply with the requirements of section 172 of the Companies Act 2006 to have regard to stakeholders in their decision-making; and (ii) to require quoted companies to report annually the ratio of CEO pay to the average pay of their UK workforce. On 10 June 2018, the Department for Business, Energy & Industrial Strategy (BEIS) published draft regulations - The Companies (Miscellaneous Reporting) Regulations 2018 (Regulations) - implementing these and other legislative changes.
The Regulations also require the largest private companies (those with more than 2,000 employees and / or with turnover more than £200m and a balance sheet total of more than £2bn) to include in their directors' report a statement that sets out the details of any corporate governance code that the company has applied during each financial year, how they have applied it and the extent and reasons for any departure from it. If no code was applied, the directors' report must explain the reasons for that decision as well as the governance arrangements that were in place. The Regulations do not prescribe any particular code for such companies to follow, although see below in relation to The Wates Corporate Governance Principles for Large Private Companies.
BEIS has also published accompanying Q&As. While it acknowledges that the Regulations will not become law until approved by Parliament, it wants to give companies and stakeholders as much time as possible to understand the proposed changes. For further information, see our Governance & Compliance update.
FRC publishes consultation on Wates Corporate Governance Principles for Large Private Companies
As alluded to above, the Financial Reporting Council (FRC), on behalf of James Wates CBE, has published a consultation on corporate governance principles for large private companies (Wates Principles). Large private companies will be encouraged to follow six principles to inform and develop their corporate governance practices and adopt them on an ‘apply and explain’ basis. Development of the Wates Principles follows the government’s 2016 Green Paper and the BEIS Select Committee’s report of April 2017, which considered the need for improved transparency and accountability in such companies. For further information, see our Governance & Compliance update.
The consultation is open until 7 September 2018. The final version of the Wates Principles will be published in December 2018.
Government launches review of the FRC
The independent review of the FRC has launched a call for evidence, seeking evidence from stakeholders on topics such as:
•the FRC's role and purpose;
•its effectiveness and its powers;
•its potential role in preventing corporate failure; and
•its governance and leadership.
The review will also examine:
•whether or not the FRC is, as it was charged in the recent Select Committee report on Carillion, 'chronically passive', 'timid' and requiring culture change;
•whether or not it is too slow, insufficiently proactive and whether its actions have sufficient deterrent effect; and
•whether or not it is too close to, or unwilling sufficiently to challenge, the 'big 4' audit firms.
Responses are required on or before 6 August 2018.
FRC highlights key issues regarding compliance with reporting requirements
The FRC's latest Corporate Reporting Review Briefing sets out current 'hot topics', many of which will be relevant to forthcoming interim reports. Four key issues identified by recent FRC monitoring are:
•considerations of materiality - amounts should be determined in accordance with IFRS, not just management's alternative performance measures;
•the correct classification of cash flows - the Briefing reminds companies of the distinction between investing activities, financing activities and operating activities for these purposes;
•the determination of comparative earnings per share figures where there has been a change in the number of a company's shares outstanding following a share split or consolidation. All companies are reminded to follow the specific requirements of IAS 33 when calculating EPS; and
•the need to consider the requirements of the Companies Act 2006 when making a dividend payment – in particular the requirement for individual company interim accounts to be filed with the Registrar before paying a dividend in excess of the distributable profits shown in the relevant accounts (which is usually the company's most recent audited accounts).
Investors call for reassessment of how performance metrics are reported
The FRC's Financial Reporting Lab has published a report dealing with the reporting of performance metrics in which it sets out investors’ views on the subject. The Lab Report includes a framework and set of questions for companies and their boards to consider when deciding on how they report their performance.
The Lab Report sets out five principles of performance metrics, describes for each which metrics investors seek disclosure of, and then lists the questions that company management and their boards should ask.
The Lab Report supplements ESMA's Guidelines on Alternative Performance Measures, and the FRC's reviews on the application of the guidelines.
HMRC updates guidance on criminal facilitation of tax evasion
HM Revenue and Customs (HMRC) has updated its guidance on failure to prevent criminal facilitation of tax evasion to include information about self-reporting a company or partnership that has facilitated criminal tax evasion.
The guidance has been produced to help business understand the offences and take a more effective approach to mitigating the risk of a business failing to prevent its representatives from criminally facilitating tax evasion.
Market Abuse Regulation
Changes to market abuse rules proposed for SME Growth Markets
As part of the EU's Capital Markets Union agenda, the European Commission has proposed various amendments to the EU Market Abuse Regulation to facilitate SME access to financing through public markets, specifically by cutting 'red-tape' on SME Growth Markets (which include AIM and the NEX Exchange Growth Market). Proposed changes include allowing issuers to:
•keep a list of 'permanent insiders' as opposed to a separate list for each piece of inside information; and
•notify the market of transactions carried out by their persons discharging managerial responsibilities (PDMRs) and those persons closely associated with them (PCAs) within two business days of receipt of the notification of a transaction, a considerable relaxation of the current requirement for both PDMRs / PCAs and issuers to discharge their notification obligations within three business days of any transaction taking place.
Given the UK's looming departure from the EU, it is not clear if and when these changes might affect issuers on designated UK SME Growth Markets.
Can you orally amend a written agreement with a 'no oral modification' clause?
Our commercial team have published an article on the eagerly awaited decision in Rock Advertising v MWB Business Exchange 2018 UKSC 24 which provides some clarity on the use of 'no oral modification' (NOM) clauses.
An alterations / variations clause is commonly included in a contract to provide certainty between the parties as to what has been agreed and flexibility to vary that agreement provided the formalities set out in the agreement are complied with. More often than not this will require alterations to be in writing (a NOM clause). The effectiveness of NOM clauses was put in doubt by a number of cases including the Court of Appeal decision in this case - therefore the Supreme Court decision provides some welcome clarity. That said, it also underlines the importance of post execution contract management which, for some, is more easily said than done.