Read on for the latest news and updates in equity capital markets, ECM and Brexit, takeovers, corporate governance, stewardship, auditing and financial reporting.
Equity Capital Markets
FCA's Market Watch focuses on insider lists and access to inside information
The Financial Conduct Authority (FCA) has published the 60th edition of its Market Watch magazine where it considers insider lists and the control of access to inside information as required by Article 18 of the Market Abuse Regulation (MAR) and in light of the conviction for insider dealing of a former compliance officer at a major investment bank.
The FCA uses the publication to issue a reminder that it is crucial for it to be able to establish who had access to inside information at a particular point in time. Nevertheless, it frequently encounters insider lists omitting the names of people who were provided with or who had access to inside information as well as evidence of individuals not named on relevant insider lists accessing inside information. It views such an inability to respond accurately to a regulatory request as an indication of underlying weaknesses in systems, procedures and policies.
ESMA consultation on MAR
The European Securities and Markets Authority (ESMA) has published a consultation on MAR in which it calls for views on various issues including:
- Inside information – How easy (or otherwise) is it for issuers to determine whether inside information exists? Is the definition of inside information 'sufficient for combatting market abuse'?;
- Delaying disclosure – Do the conditions for delaying disclosure function properly? Should issuers be required to have in place systems and controls for identifying, handling and disclosing inside information;
- Insider lists – Should insider lists be limited to those who have accessed inside information as opposed to those who have access to it? Should the insider list regime be expanded to include any person with access to inside information, irrespective of whether they act on behalf or on account of the issuer – such as auditors? What value is the list of permanent insiders?
- PDMR transactions – Should the closed period regime prohibiting transactions be extended to issuers and the closely associated persons of PDMR? Should further exemptions to the closed period prohibition on dealing be introduced?
- Market soundings / buy-back programmes – Questions are raised here as regards the scope and potential simplification of both regimes.
Feedback is requested by 29 November 2019. Whether any resultant changes to MAR are of application in the UK depend on Brexit and the nature of any such departure from the EU.
EC adopts Regulation to promote SME Growth Markets
The European Council (EC) has adopted a new regulation (SME Growth Markets Regulation) amending MAR and the Prospectus Regulation, with the aim of addressing the administrative burden and regulatory compliance costs placed on issuers on SME Growth Markets – such as AIM and the NEX Growth Market.
Changes to MAR include:
- amending the 'market soundings' regime in relation to the disclosure of inside information to qualified investors for the purpose of evaluating a proposed private placement of bonds. Such disclosure is to be treated as being made in the normal exercise of a person's employment, profession or duties, and shall not constitute unlawful disclosure of inside information provided that an adequate non-disclosure agreement is in place;
- where issuers on an SME Growth Market are permitted to delay disclosure of inside information under Article 17(4), they will still need to notify the competent authority of the decision to delay disclosure, but will only have to provide an explanation of the reasons for the delay upon request by the competent authority. This amendment will be of little practical benefit in the UK, which already exercises the discretion afforded in Article 17(4) to allow issuers to provide a written explanation only upon request by the FCA;
- an option for SME Growth Market issuers to include in their insider lists only those persons who have regular access to inside information. This is, however, subject to the right of Member States to provide that the competent authority in a Member State can require insider lists to include all persons who have access to inside information;
- a new format of insider list for SME Growth Market issuers which 'shall be proportionate and represent a lighter administrative burden' compared to the format used by issuers on other markets. The European Securities and Markets Authority (ESMA) is tasked with producing draft implementing technical standards; and
- changing the period within which issuers must disclose transactions by PDMRs and their closely associated persons from the current three business days after the transaction to two business days from receipt of notification of the relevant transaction.
Changes to the Prospectus Regulation include:
- allowing the use of a simplified prospectus for issuers whose equity securities have been admitted to trading on either a regulated market or an SME Growth Market continuously for at least 18 months, in respect of an issue of securities that are fungible with equity securities previously issued;
- allowing the use of a simplified prospectus for the admission to trading on a regulated market of securities fungible with securities which have been offered to the public and continuously traded on an SME Growth Market for at least two years, provided that the issuer has fully complied with its reporting and disclosure obligations throughout that period; and
- allowing issuers seeking an IPO with a tentative market capitalisation below €200m to draw up an EU Growth Prospectus.
The SME Regulation and the other texts adopted by the European Council on 8 November 2019 will be signed in the week of 25 November 2019 and then be published in the Official Journal of the EU. The changes to MAR do not apply until the date which is 12 months after entry into force of the SME Growth Markets Regulation which itself is 20 days after publication in the Official Journal – thus Brexit may have a part to play. Certain changes to the Prospectus Regulation will apply as from its entry into force.
LSE launches 'Green Economy Mark'
The London Stock Exchange (LSE) has launched a 'Green Economy Mark' which recognises equity issuers on all segments of the main market and AIM with 'green revenues' which derive from products and services that contribute to the global green economy of more than 50% of their total annual revenues. The underlying methodology incorporates the 'Green Revenues data model' developed by FTSE Russell. The Green Economy Mark is offered to issuers on a voluntary basis.
The LSE has also launched the Sustainable Bond Market (SBM) which aims to build upon the success of its Green Bond Segment, launched in 2015. The SBM includes new dedicated segments for social and sustainability bonds, in addition to the existing Green Bond Segment. These new segments further enable investors to distinguish between different types of sustainable bonds, based on independently verified frameworks and use of proceeds.
FCA publishes proposals for action on climate change and green finance
- consulting in early 2020 on new disclosure rules for certain listed issuers aligned with the Task Force on Climate-related Financial Disclosures' (TCFD) recommendations, as well as clarifying existing disclosure obligations relating to climate change risks. This aligns with the Government’s expectation in its Green Finance Strategy that all listed issuers disclose in line with the TCFD’s recommendations by 2022;
- publishing a response to its joint Discussion Paper (DP19/1) with the Financial Reporting Council (FRC) on stewardship which will set out actions to help address some of the most significant barriers to effective stewardship; and
- challenging firms where the FCA see potential 'greenwashing' – i.e. where financial products are marketed as sustainable but which are not, in fact, materially different to products that do not have such a label – and issuing guidance and taking action to prevent consumers being misled.
The FCA will provide an update on its work in this area as part of the report it will submit to the Department for Environment, Food and Rural Affairs in 2021.
Note also that the FRC's Financial Reporting Lab (FRC Lab) has published practical guidance on how companies can improve their reporting of climate change in order to meet investors' expectations.
FCA publishes latest Primary Market Bulletin
The FCA has published Primary Market Bulletin No. 25 in which it consults on a best practice note for government departments, industry regulators and public bodies only, on identifying, controlling and disclosing inside information. It also gives information on firms’ obligations around ‘cold-shouldering’ – i.e. avoiding doing business with a certain individual.
NEX Exchange publishes revised Growth Market Rules and Corporate Adviser Handbook
NEX Exchange has published an update to the Growth Market Rules for Issuers (Issuer Rules) and to the Corporate Adviser Handbook (Handbook) – both are now in force. Marked-up versions of the Issuer Rules and of the Handbook have also been published.
The revised Issuer Rules:
- incorporate the early suitability review process previously set out in the NEX Exchange Practice Note;
- introduce a revised procedure for the submission of application documentation; and
- set out a process by which the NEX Exchange will make a pre-admission announcement on a RIS on behalf of an applicant.
TSE added to NEX fast-track list
Toronto Stock Exchange (TSE) has been added to the list of qualifying markets recognised by NEX Exchange for the purposes of the fast-track admission procedure. Previously, TSX Venture Exchange (but not TSE) was recognised as a qualifying market for fast-track admission purposes in NEX Exchange’s primary rules. A checklist for fast-track admission has also been published.
ECM and Brexit
UK Government makes Prospectus (Amendment etc.) (EU Exit) Regulations 2019 in preparation for Brexit
The UK Government made the Prospectus (Amendment etc.) (EU Exit) Regulations 2019 (the EU Exit Regulations) in preparation for the UK's departure from the EU (currently scheduled for 31 January 2020). The EU Exit Regulations amend the EU Prospectus Regulation (which has had direct effect in the UK since its full implementation on 21 July 2019) and other relevant legislation which together form the UK prospectus regime, to ensure that the UK has an effectively functioning prospectus regime from the time the UK leaves the EU. For further information on the implementation of the Prospectus Regulation in the UK, see our briefing here.
The key changes to the UK prospectus regime as a result of the EU Exit Regulations are:
- Powers which were previously exercised by the European Commission and the ESMA are to be transferred to HM Treasury and the FCA, respectively;
- EEA issuers who wish to use their prospectuses in the UK will have to have the prospectus approved by the FCA (unless those prospectuses have been approved by an EEA regulator prior to exit day and are still within their 12 month period of validity);
- The provisions of the EU Prospectus Regulation which enable documents previously approved by an EEA regulator to be incorporated by reference into a UK prospectus have been removed (unless those documents have been approved by an EEA regulator prior to exit day);
- Provisions of the EU Prospectus Regulation relating to supervisory co-operation between EEA competent authorities have been removed. The existing framework for other (non-EEA) countries contained in FSMA (which provides for co-operation on a discretionary basis) will instead apply; and
- The prospectus exemption which applies to certain EEA public bodies (states, local authorities, etc.) has been widened such that such public bodies in the UK or any other country can rely on the exemption.
Further detail can be found in the Explanatory Memorandum published alongside the EU Exit Regulations by HM Treasury.
AIM prepares for a 'no deal' Brexit
The LSE has published AIM Notice 57, which updates AIM Notice 55 regarding the proposed changes to its AIM Rulebooks that will apply in the event of a no-deal Brexit on 31 January 2020. Marked-up versions of the AIM Rules for Companies and the AIM Rules for Nominated Advisers have also been published.
Takeover Panel Hearings Committee 'cold-shoulders' David King for four years
The Takeover Panel published Panel Statement 2019/16 in which it sets out the ruling of the Panel's Hearings Committee in relation to the proceedings brought by the Panel Executive against David King, the chairman of Rangers International Football Club PLC. The ruling of the Committee was that Mr King should be 'cold shouldered' for a period of four years.
AG publishes latest Governance & Compliance updates
We have recently published various updates focused on Governance & Compliance. Issues of note not set out in the body of this edition of Corporate Finance News include:
In Issue 147 (November 2019):
- the publication of ISS's 2020 Voting Guidelines;
- the latest Hampton-Alexander report discussing progress for the promotion of women on boards; and
- calls by the Institute of Directors to reform aspects of the corporate governance regime so that business can 'regain the trust of wider society'.
In Issue 146 (November 2019):
- the publication of the Investment Association's (IA) latest Principles of Remuneration;
- the publication of Glass Lewis' 2020 Voting Guidelines; and
- the Financial Reporting Council's (FRC) Annual Review of Reporting and Governance.
In Issue 143 (October 2019):
- the Quoted Companies Alliance (QCA) report on the role of non-executives in growth companies and updated guidance for audit committees;
- the creation of the 'Men as Change Agents Board' focused on promoting diversity;
- the IA's new guidelines on executive pension contributions;
- the FRC Lab's report on cash disclosures for investors; and
- the FRC's letter to audit committee chairs and FDs in relation to a 'no-deal' Brexit.
FRC publishes revised UK Stewardship Code
The FRC has published the revised version of the UK Stewardship Code (Code) following the consultation it launched in January 2019. The FRC believes that the new Code 'substantially raises expectations for how money is invested on behalf of UK savers and pensioners'.
The revised Code focuses on the responsible investment of money with a new emphasis on creating long-term value and on considering beneficiary and client needs. It directly addresses the issues raised by Sir John Kingman’s independent review of the FRC in respect of the previous Code. It comprises a set of 12 'apply and explain' principles for asset managers and asset owners, and a separate set of six 'apply and explain' principles for service providers. Each principle is supported by reporting expectations which signpost the information that organisations should include in their report, and which underpin the assessment of reporting quality.
Key changes in the new Code include:
- an extended focus that includes asset owners, such as pension funds and insurance companies, and service providers as well as asset managers. This is intended to help align the approach of the whole investment community in the interest of end-investors and beneficiaries;
- a requirement to report annually on stewardship activity and its outcomes. Signatories’ reports will show what has actually been done in the previous year, and what the outcome was, including their engagement with the assets they invest in, their voting records and how they have protected and enhanced the value of their investments. This greater transparency is intended to allow clients to see how their interests are being served. Reports must be submitted to the FRC for approval and will need to meet FRC expectations for an organisation to become a signatory to the 2020 Code;
- an expectation that signatories will take environmental, social and governance (ESG) factors, including climate change, into account and to ensure their investment decisions are aligned with the needs of their clients;
- an expectation that signatories will explain how they have exercised stewardship across asset classes beyond listed equity, such as fixed income, private equity and infrastructure, and in investments outside the UK; and
- a requirement for signatories to explain their organisation’s purpose, investment beliefs, strategy and culture and how these enable them to practice stewardship. They are also expected to show how they are demonstrating this commitment through appropriate governance, resourcing and staff incentives.
The new Code takes effect on 1 January 2020. Transitional arrangements from the 2012 to the 2020 Code can be found in Part 3 of the FRC's Feedback Statement.
Commons committee calls for audit reform after Thomas Cook collapse
The Business, Energy and Industrial Strategy Committee (BEIS Committee) has proposed a series of recommendations on corporate governance, executive pay and bonuses in light of the collapse of Thomas Cook. In a letter to Andrea Leadsom, the Business Secretary, the BEIS Committee calls for the government to, among other things, push ahead with proposed legislation to replace the FRC in accordance with the recommendations of the Kingman review, reform auditing and tackle late payments to small businesses.
The FRC has published a revised going concern statement – the 'International Standard on Auditing (ISA) (UK) 570' – in response to recent enforcement cases and corporate failures where the auditor's report failed to highlight concerns about the prospects of entities which collapsed shortly after. The revised standard therefore increases the work auditors are expected to do when assessing whether an entity is a going concern. The FRC believe that this means UK auditors will follow significantly stronger requirements than those required by current international standards.
The revised standard requires:
- greater work on the part of the auditor to more robustly challenge management's assessment of going concern, thoroughly test the adequacy of the supporting evidence, evaluate the risk of management bias, and make greater use of the viability statement;
- improved transparency with a new reporting requirement for the auditor of public interest entities, listed and large private companies to provide a clear and positive conclusion on whether management's assessment is appropriate, and to set out the work they have done in this respect; and
- a 'stand back' requirement to consider all of the evidence obtained, whether corroborative or contradictory, when the auditor draws their conclusions on going concern.
The standard is effective for audits of financial statements for periods commencing on or after 15 December 2019. Earlier adoption is permitted.
FRC publishes thematic reviews of Impairment of Non-financial Assets disclosures
The FRC believes that companies have responded positively to the newly introduced reporting requirements for revenue recognition and financial instruments but there is still considerable scope for them to improve the quality of their annual report disclosures. The findings relate to three thematic reviews analysing companies' disclosures to meet the new requirements as well as existing requirements on the Impairment of Non-financial Assets, specifically:
- IFRS 9 – Financial Instruments;
- IFRS 15 - Revenue from contacts with customers;
- Impairment of Non-financial Assets.
The Pension Schemes Bill: widening the powers of Pension Regulator
The Government has published the Pension Schemes Bill in which it is consulting on strengthening the Pension Regulator's powers, so as to enable it to fine and/or criminalise corporate decision-makers whose actions prejudice the position of pension schemes. Financial penalties could be up to £1m and the new criminal offences could carry fines and render those convicted liable to imprisonment for up to seven years. For further detail see our Pension team's alert. The General Election means it is uncertain whether and when the Bill will be taken forward but, at present, there appears to be cross-party consensus for its proposals.