Included in this issue: ESMA publishes EEA prospectus activity report for 2017; LSE confirms changes to the AIM Disciplinary Procedures and Appeals Handbook; Panel issues consultation on proposed Code amendments as consequence of Brexit and more

Equity Capital Markets

ESMA publishes EEA prospectus activity report for 2017

The European Securities and Markets Authority (ESMA) has published its annual report on prospectus activity in the EEA for 2017. The report shows that in 2017 the number of prospectus approvals across the EEA increased by around 1.9% compared to 2016 (from 3,499 to 3,567), putting an end to a decade-long decline observed since the start of the financial crisis. The report evidences that:

  • in line with 2016, in 2017 around 40% of the prospectuses approved were in the form of base prospectuses and 91% were drawn up as single documents as opposed to tripartite prospectuses; and
  • almost 74% of prospectuses approved in 2017 related to non-equity securities with the most frequent security type being debt securities with a denomination of at least €100,000.
ESMA updates MAR Q&As

ESMA has published a further update to its Q&A on the EU Market Abuse Regulation (MAR) which includes a new question (Q7.10) which deals with whether the prohibition on PDMR dealing in a closed period in Article 19(11) of MAR encompass transactions of the issuer relating to its own financial instruments. The response clarifies that Article 19 of MAR prohibits PDMRs within an issuer, and not the issuer itself, from conducting ‘any transactions on its own account or for the account of a third party, directly or indirectly, relating to the share or debt instruments of the issuer […] during a closed period of 30 calendar days’ before the announcement of a financial report.

However, any transaction undertaken by the issuer during a closed period should be treated carefully, because the issuer remains subject to Article 14 of MAR (the prohibition of insider dealing). Accordingly, where an issuer possesses inside information regarding its own financial instruments, it will be prevented from trading in them unless it had established, implemented and maintained the internal arrangements and procedures specified in Article 9(1) of MAR (legitimate behaviour).

NEX Exchange adds NASDAQ as qualifying market for its fast track admission procedure

The NEX Exchange has announced that it has revised the list of qualifying markets for issuers wishing to apply for admission to the NEX Exchange Growth Market under their fast-track procedure. The list of qualifying markets has been extended to include the NASDAQ Capital Market, NASDAQ Global Market and NASDAQ Global Select Market segments of NASDAQ US.

LSE confirms changes to the AIM Disciplinary Procedures and Appeals Handbook

The LSE has issued AIM Notice 54 and published a revised AIM Disciplinary Procedures and Appeals Handbook (Handbook) on the back of its July consultation. The new rules are now in force. The Handbook sets out the procedures to be followed when the LSE wishes to start disciplinary proceedings against an AIM company or nominated adviser for breach of the AIM Rules for Companies or the AIM Rules for Nominated Advisers or when an AIM company or nominated adviser wishes to lodge an appeal against either a non-disciplinary decision or a warning notice issued by the LSE.  Minor consequential amendments have also been made to the AIM Rules for Companies.  


Takeover Panel issues consultation on proposed Takeover Code amendments on asset valuations

The Code Committee of the Takeover Panel (Panel) has published a Public Consultation Paper (PCP 2018/1), setting out proposed amendments to Rule 29 of the Takeover Code (Code) which deals with asset valuations in the context of an offer.

The proposed amendments codify the current, unwritten practice of the Panel Executive in respect of asset valuations and do not result in any material changes to how Rule 29 has been applied on recent transactions.

The consultation paper anticipates that the type of assets for which the rules on valuations will most commonly apply will be property, natural resources reserves or unquoted investments. However, valuations of other types of assets may well also fall within the ambit of the revised rule, including the valuation of a standalone business division.

A valuation of any asset published by either an offeree company or a share-for-share offeror during, or in the 12 month period prior to, an offer period will be required to be reported on by an appropriately qualified expert, provided that such valuation is a material factor for offeree company shareholders in determining whether to accept the offer. For property and resources companies in particular, there is a strong presumption that any published asset valuation will be such an important reference point in the assessment of the merits of an offer that in practice a valuation report will always be required – even if such valuation has been produced in the ordinary course during the previous 12 months.

Property companies in particular should be aware that publication of any NAV or adjusted NAV valuation will require a report to be produced in respect of the underlying assets only. The accounting adjustments required to produce the relevant NAV figure from the underlying asset values will not be covered by the asset valuation report and it will fall to the party making the valuation statement to ensure that these accounting adjustments are produced to a high enough standard to meet the standard of care required under the Code.

Valuations of other types of assets which may be contained in annual accounts published in the previous 12 months, but which are not referred to in the arguments relating to the merits of the offer will not need to be reported on. The proposals also grant some leeway to parties to an offer in being able to value standalone business divisions on a EBITDA multiple basis to show an illustration of value based on similar deals in the sector without the need for a report – provided that such comparisons are all appropriately sourced and referenced.

The consultation closing date is 7 December 2018. Any changes to the Code are expected to come into effect in Q1 2019.

Panel issues consultation on proposed Code amendments as a consequence of Brexit

The Code Committee of the Panel has published a further Public Consultation Paper (PCP 2018/2), setting out proposed amendments to the Code in relation to the withdrawal of the UK from the European Union (Brexit).

The proposals, if implemented, will not have a material effect on the conduct of most UK takeover offers, although there will be an impact on certain infrequent bid situations that have a European aspect – particularly where jurisdiction over the regulation of a bid is currently shared between EEA member state regulators. There are also several technical changes to the Code which, together with the recent SI published by the Government, The Takeovers (Amendment) (EU Exit) Regulations) (see below), address how the Takeover Directive is being incorporated into UK law as part of the European Union (Withdrawal) Act 2018.

One of the key changes relates to offers that currently would fall within the shared jurisdiction regime, where an offeree company's registered office is in one EEA member state, but its shares are traded on a regulated market in another EEA state. As a consequence of the proposals, contractual takeover offers for the following types of companies would no longer be regulated by the Code:

  • a company with its registered office in an EEA state, but whose shares are admitted to trading on a regulated market in the UK; or
  • a company whose registered office is in the UK, but whose shares are traded in a EEA state and not the UK – provided that its place of central control and management is outside the UK.

Place of central control and management is determined primarily by the residency of a majority of directors . If a company whose registered office is in the UK, but whose shares are traded solely in an EEA state has its place of central control and management in the UK, the Code will apply in its entirety should the proposals be implemented. The consultation anticipates that currently 36 companies are affected by these changes – their names are listed in an appendix.

Certain other technical changes are proposed to be made by the consultation – for example, it is proposed to be clarified that a Code offer cannot be effected by a European cross-border merger. While the Panel's duty to co-operate with other EEA takeover regulators is proposed to be deleted, the Companies Act 2006 (2006 Act) contains an overriding obligation on the Panel to co-operate with takeover regulators globally; no change in practice is expected.

The consultation does not address what will become an anomaly post Brexit – that Phase 2 European Antitrust Proceedings will continue to be given special treatment under the Code. Post Brexit, the EU Commission will be no different to any other overseas antitrust regulator, yet it is proposed to retain the carve out from the application of the materiality test under Rule 13.5 for EU antitrust conditions. The Code Committee acknowledged that this is a 'pragmatic decision' and commits to keep the situation under review, indicating that this anomaly may well be the subject of further consultation in due course.

Finally, the implementation date for these changes depends on the wider Brexit outcome; should the current deal with the EU be approved, the amendments will come into force at the end of the transition period on 31 December 2020. If the deal is not approved, and there is a 'hard Brexit', the changes will come into force sooner, on 29 March 2019.

Takeovers and Brexit – Amendments to the Companies Act 2006

The government has published the Takeovers (Amendment) (EU Exit) Regulations 2019 amending Part 28 of the 2006 Act to enable the domestic takeovers regime to operate effectively on a freestanding basis outside the EU framework post-Brexit. The draft regulation also underscores the proposal mentioned above, namely the removal of the shared jurisdiction regime from the Code. The proposed changes to the Code will come into force on 29 March 2019, assuming a 'hard Brexit'.  If a transition period is agreed, then the Takeovers Directive will continue to apply during the transition period - i.e. until 31 December 2020. 

Company Law

Government publishes measures to tackle late payments

The government has published measures to tackle the issue of late payment of sums owed to small businesses. The call for evidence will be open until 29 November 2018. It seeks views on the best way company boards can put in place responsible payment practices throughout their supply chain, including for example giving a non-executive director specific responsibility for the company's prompt payment performance. The proposals also include measures to empower trade bodies to highlight best and worst practices in payment behaviour in order to deliver practical improvements. 

Corporate Governance

GC100 publishes guidance on Directors' Duties – s.172 and stakeholder considerations

The Association of General Counsel and Company Secretaries working in the FTSE100 (GC100) has published practical guidance for company directors on performing their duty in accordance with section 172 (section 172) of the 2006 Act. This supplements the guidance published by the GC100 at the time of the codification of directors' duties in the 2006 Act.

The emphasis of the guidance is on practicality as opposed to providing formal legal advice and, as such, it:

  • provides a summary of the key suggestions of matters to be considered by directors when discharging their section 172 duty;
  • sets out practical steps which directors could take to assist in the discharge of their section 172 duty, including for directors on UK subsidiary and UK joint venture company boards;
  • summarises the key legal background to and aspects of section 172; and
  • provides a worked example of how directors in a specific business situation could discharge their duties.

The GC100s's publication forms part of the government's wider series of measures to improve the UK's corporate governance framework and coincides with the recent publication of the 2018 UK Corporate Governance Code and The Companies (Miscellaneous Reporting) Regulations 2018, both of which require disclosure of how directors have performed their section 172 duty. The guidance does not, as anticipated, deal in particular detail with the practicalities of these disclosure requirements. For more detail, please read our Governance & Compliance update.

Government opens consultation on mandatory

The government has published a consultation seeking views on how to take forward the manifesto commitment that large employers should be required to publish ethnicity pay information. For more detail, please read our Employment team's update.

PRA and FCA intensify focus on financial risks from climate change

The Prudential Regulation Authority (PRA) has published a Consultation Paper (CP23/18) on a draft supervisory statement on banks’ and insurers’ approaches to managing the financial risks from climate change. It sets out how effective governance, risk management, scenario analysis, and disclosures may be applied by firms to address the financial risks from climate change. Feedback is sought by 15 January 2019.

The Financial Conduct Authority (FCA) has also published a discussion paper (DP18/8) on the impact of climate change and green finance on financial services. The FCA is seeking input on the following issues where it believes that a greater regulatory focus is warranted:

  • climate change and pensions—ensuring that those making investment decisions take account of risks including climate change;
  • enabling competition and market growth for green finance;
  • ensuring that disclosures in capital markets appropriately give adequate information to investors of the financial impacts of climate change; and
  • establishing whether there is scope for the introduction of a new requirement for financial services firms to report publicly on how they manage climate risks.

Feedback on the discussion paper is sought by 31 January 2019.

QCA assesses role of boardroom behaviour

The Quoted Companies Alliance (QCA) has published a paper exploring the role of NEDs and examining board effectiveness from the viewpoint of small and mid-sized companies and advisory firms in the context of the QCA Corporate Governance Code (QCA Code). The paper takes four of the ten Principles from the QCA Code and uses data from the QCA/YouGov Small & Mid-Cap Sentiment Index to explore each Principle from the perspective of the NED. 


BEIS Committee examines the future of audit

The Department of Business, Energy and Industrial Strategy Select Committee (BEIS Committee) has launched an inquiry into the future of audit alleging that the current audit market is 'broken' and that failings in audits, including at Carillion, have helped to undermine public trust in business. As a consequence, the BEIS Committee believes that Parliamentary involvement is needed to give voice to public and shareholder concerns about ineffective corporate governance and ensure that future proposals, including from the Competition and Markets Authority (CMA) market study of the UK statutory audit market and the independent review of the Financial Reporting Council (FRC), led by Sir John Kingman, are swiftly acted upon.

The FRC has also announced a strategic programme of work that aims to ensure that audit better serves the public interest. The programme encompasses work on auditor independence, audit quality, the future needs of investors and corporate viability. In light of recent company failures, the FRC will create proposals to strengthen requirements on auditors when considering if an organisation is a going concern, including whether the responsibilities of auditors in assessing companies’ statements on longer-term viability should be increased and whether auditors should publicly report their views of the realism of assessments made by companies. 


UK government publishes further technical notices on 'no deal' Brexit

The Department for Exiting the EU has published the fourth tranche of technical notices which focus on the implications of exiting the EU should there be 'no deal' in place. The technical notices follow the issue of the Government’s White Papers: The future relationship between the United Kingdom and the European Union and Legislating for the Withdrawal Agreement between the United Kingdom and the European Union, both of which were published in July 2018.

The latest documents cover a range of subjects, including:

  • Business structures – there will be no change in who can be an owner, senior manager or director of a UK company but the requirements for EU companies that operate branches in the UK will change. UK businesses that own or run business operations in EU Member States may face additional requirements or additional approvals to operate, depending on the sector and EU Member State. UK companies and limited liability partnerships that have their central administration or principal place of business in certain EU member states may no longer have their limited liability recognised in jurisdictions that operate the ‘real seat’ principle of incorporation.
  • Cross-border mergers involving UK companies – mergers involving UK companies will no longer be able to take place under the relevant EU Directive and EU Member States will no longer be required to give effect to cross-border mergers that do not complete prior to the UK exiting the EU.
  • Treatment of 'EU' companies – European Economic Interest Groupings (EEIGs), Societas Europaea and European Groupings of Territorial Cooperation will no longer be able to be registered in the UK. Societas Europaea and EEIGs registered in the UK that do not make alternative arrangements before exit will be automatically converted into a new UK corporate structure.
  • Accounting and audit – parent companies of EU businesses and UK incorporated subsidiaries will continue to be subject to the UK's corporate reporting regime. Companies with parents or subsidiaries incorporated in the EU will not be able to benefit from certain exemptions in the 2006 Act relating to the preparation of individual accounts. UK businesses with a branch operating in the EU will become third country businesses and will be required to comply with the specific accounting and reporting requirements in the Member State in which they operate, and UK companies listed in an EU Member State may be required to provide additional assurance to any relevant listing authority that their accounts comply with IFRS. 
  • Free trade agreements – the government will seek to bring into force bilateral UK-third country agreements from exit day. If that is not possible, trade would then take place on a ‘Most-Favoured Nation’ basis, or ‘World Trade Organization Terms’, until any such new arrangements have been implemented.

Narrative Financial Reporting 

FRC publishes thematic review of reporting by smaller companies 

The FRC has published a thematic review of reporting by smaller listed and AIM quoted companies to highlight where reporting needs to improve.  

Topics covered by the review included alternative performance measures (and strategic reports, pensions disclosures, accounting policies (including critical judgements and estimates), cash flow statements and tax disclosures. Examples of good reporting are provided throughout the review.

FRC reviews quality of corporate reporting under IFRS 9 and IFRS 15

The FRC has also published two thematic reviews to help companies improve the quality of corporate reporting in relation to IFRS 9 (financial instruments) and IFRS 15 (revenue from contracts with customers). The reviews analyse the disclosures in a sample of company interim reports from June 2018 and explain their effect, providing examples of better practice for other companies to follow. The FRC will challenge companies who fail to provide an adequate level of disclosure about the impact of IFRS 9 and IFRS 15 through their 2018 review process.

FRC Financial Reporting Lab publishes guidance on the presentation of performance metrics

The FRC’s Financial Reporting Lab (Lab) has published guidance for companies on the presentation of performance metrics. This builds on the Lab's June Report which outlined that investors want metrics to be 'aligned to strategy', 'transparent', 'in context', 'reliable' and 'consistent'. The guidance follows these principles and provides examples of current practice which 'resonated' with the Lab team and investors.

FRC to publish final Wates Principles on 12 December 2018

The FRC has stated that it will publish the final version of the Wates Corporate Governance Principles for Larger Private Companies on 12 December 2018, following the consultation it launched in June 2018.