Included in this issue: FCA publishes final rules implementing the revised Shareholder Rights Directive; Government confirms Shanghai-London Stock Connect launch; LSE disciplines Real Good Food plc for breaches of AIM Rules and more

Prospectus Regulation

Prospectus Regulation to come into full effect on 21 July 2019

On 21 July, the new EU Prospectus Regulation comes fully into force. For more detail on its impact on equity issuance and supporting technical standards and guidance - click here.

Equity Capital Markets

FCA publishes final rules implementing the revised Shareholder Rights Directive

The Financial Conduct Authority (FCA) has published a policy statement (PS19/13) following its consultation paper (CP19/7) on proposals to implement requirements of the revised Shareholder Rights Directive (SRD II).

SRD II makes various changes of relevance to FCA-regulated asset managers and life insurers, including requiring them to disclose details of their stewardship and engagement policies. In addition, proxy voting agencies come within the FCA's remit, in effect empowering the regulator to require the provision of information and apply its enforcement regime. As a result of SRD II, the Proxy Advisors (Shareholders’ Rights) Regulations 2019 also requires proxy advisors to make certain disclosures about how they conduct their business.

Of particular significance are the changes SRD II makes to the related party transaction regime. New rules are located in Chapter 7.3 of the Disclosure Guidance and Transparency Rules (DTR) and require the independent board approval of 'material related party transactions'.

The rules apply to all UK companies with securities traded on EEA-regulated markets, such as the London Stock Exchange's (LSE) main market, whether an issuer has a premium or a standard listing. They also apply to issuers with securities that are not 'listed' but are admitted to a regulated market, such as issuers admitted to the LSE's High Growth Segment or Specialist Fund Market.

A transaction is considered material if it exceeds 5% on the application of various tests (located in Annex 1 to DTR 7), namely relative to an issuer's profits, assets, market capitalisation and gross capital. Twelve month rolling aggregation rules also apply. Issuers should note that the definition of a related party transaction is wider than that contained in Chapter 11 of the Listing Rules as it is, subject to certain exceptions, given the meaning in EU-adopted IFRS. Limited carve-outs exist for transactions in the ordinary course of business on normal market terms and, for UK companies, in relation to directors' remuneration arrangements in line with a company's approved remuneration policy.

A relevant transaction of a UK incorporated issuer to which the new rules apply must be the subject of board approval before the transaction is entered into. Any director interested in the transaction should not take part in the approval process - although as a matter of good governance and a function of directors' duties in the Companies Act 2006 such approval should have been taking place in any event. Details of the transaction must then be announced to the market and include sufficient information for shareholders to assess whether the transaction is 'fair and reasonable'. Issuers incorporated elsewhere in the EEA will need to comply with their local rules implemented as a consequence of SRD II.

In practice, UK incorporated issuers with a premium listing should have little to do given the more onerous LR 11 regime to which they are already subject, although they should note the wider definition of 'related party transaction'. For those with a standard listing, the regime will present new regulatory challenges.

The new rules are now in force.

FCA publishes Primary Market Bulletin 23

The FCA has published Primary Market Bulletin 23 in which it concludes the consultation it launched in June 2018 on its Technical Note dealing with the ability of issuers to delay the publication of inside information under the EU Market Abuse Regulation (MAR) whilst producing periodic financial information (e.g. annual and interim results). A summary of the proposals was contained in our Governance & Compliance update issued at the time. In short, few changes of note have been made to the consultation draft other than to add a clarification that for an issuer to delay the disclosure of inside information in line with Article 17 of MAR, it must be able to ensure the confidentiality of the information in question. The final Technical Note can be found here

NEX Exchange consults on changes to its Growth Market rules

NEX Exchange is consulting on proposed changes to the NEX Exchange Growth Market Rules for Issuers (NEX rules). The main reason for the consultation is to reflect the changes being brought in by the Prospectus Regulation and specifically the introduction of the new EU growth prospectus for certain issues by SMEs which provides for a standardised format and reduced disclosure requirements.

Other proposed changes to the NEX rules include:

  • Trading record: Removing the requirement that an issuer has published audited financial information covering a 12 month period, to allow for the admission of early stage companies with strong prospects.
  • Inside information: Replacing the NEX Exchange definition of price sensitive information, as well as the obligation to make announcements, with a requirement that an issuer comply with their obligations under MAR.
  • Financial reporting timetable: Extending the deadline for the announcement of an issuer's annual accounts from five to six months after its year end.
  • Related party transactions: Applying a materiality threshold such that issuers need not announce related party transactions that do not exceed 5% of the issuer's turnover or gross assets.
  • Corporate governance requirements: Replacing the reference in the Nex rules to the UK Corporate Governance Code with a requirement that issuers should have regard to a ‘Recognised Corporate Governance Code’ (which, for UK issuers, would include either the UK Corporate Governance Code or the QCA Corporate Governance Code).

A marked-up copy of the NEX rules, and of the proposed NEX Exchange Admission Document requirements can be found here.

Inside AIM - Guidance notes published

The LSE has published two guidance notes as part of its Inside AIM newsletter. The first comprises a Q&A on the staffing of nominated advisers; the second deals with the use of the AIM Designated Market route to admission. AIM has included EU Regulated Markets and SME Growth Markets for this purpose meaning that companies traded on such venues for 18 months may now be able to benefit from fast-track admission to AIM without the need to produce an AIM Admission Document.

Government confirms Shanghai-London Stock Connect launch

The Government has announced the launch of the Shanghai-London Stock Connect, a two-way arrangement between the Shanghai Stock Exchange and London Stock Exchange.

Eligible companies listed on the LSE will be able to issue Chinese Depository Receipts (CDRs) to Chinese investors and apply for them to be listed on the Main Board of the Shanghai Stock Exchange. In the initial stages of the Stock Connect scheme, companies may issue CDRs representing existing shares.

Eligible companies listed on the Shanghai Stock Exchange will be able to issue Global Depository Receipts (GDRs) to UK and global investors and apply for them to be listed on the LSE’s main market. Such companies may issue GDRs representing both existing and newly issued shares.

The FCA and the China Securities Regulatory Commission have published a Memorandum of Understanding which provides the basis for regulatory co-operation.

QCA publishes MAR poll

The Quoted Companies Alliance (QCA) in association with Thomson Reuters Practical Law has published the results of a survey of QCA members which looks at how small and mid-size companies have implemented MAR. 

Regulatory Enforcement

FCA fines Cathay International, its CEO and Finance Director for breaches of the Listing Principles and DTRs

The FCA has published decision notices concerning Cathay International Holdings Limited (Cathay) and two of its directors, Mr Jin-Yi Lee, its CEO, and Mr Eric Siu, its Finance Director. The FCA considers that Cathay breached the FCA’s Listing Principles and DTR  by:

  • failing to have adequate systems and procedures in place to monitor its financial performance and being reckless as to the need to take reasonable steps to put such systems and procedures in place (in breach of Listing Principle 1);
  • recklessly failing to inform the market of a material change to its actual and expected performance relative to market expectations (in breach of Premium Listing Principle 6 and DTR 2.2.1R); and
  • failing to deal with the FCA in an open and co-operative manner (in breach of Listing Principle 2) in providing information in relation to forecasting procedures which was materially different to the actual procedures undertaken.

The FCA also considers that the relevant directors were knowingly concerned in some of the breaches, including as regards co-operating with the FCA's investigation.

The FCA has imposed a fines of £411,000 on Cathay, £214,300 on Mr Lee and £40,200 on Mr Siu.

LSE disciplines Real Good Food plc for breaches of AIM Rules

The LSE has published a Disciplinary Notice in relation to the public censure and fine of £450,000 (discounted to £300,000 for early settlement) of Real Good Food plc (RGF) for breaches of Rule 10 (Principles of disclosure), Rule 13 (Related party transactions), Rule 17 (Disclosure of miscellaneous information), Rule 19 (Annual accounts), Rule 21 (Dealing policy) and Rule 31 (AIM company and directors’ responsibility for compliance) of the AIM Rules for Companies (AIM Rules).  

The AIM Rule 17 and 21 requirements relating to directors’ dealings at the relevant time were subsequently removed from the AIM Rules on the implementation of MAR.

The events which gave rise to the public censure occurred during the tenure of RGF's former board and relate to:

  • RGF's disclosure of misleading or incomplete information in respect of its expected trading performance;
  • disclosure failures with respect to multiple related party transactions between RGF and certain members of the board;
  • dealing by a director in a close period and delaying the notification of that dealing; and
  • failures in RGF's procedures and controls to comply with the AIM Rules, and in its approach to ensuring both collective and individual responsibility of its directors for its AIM Rules compliance and in its approach to providing information to, and seeking advice from, its Nomad.

The LSE emphasises that robust procedures and controls, overseen by independent non-executive directors who can hold management to account, are essential to ensure integrity, considered judgement and accountability. It is therefore incumbent on AIM companies to ensure that appropriate corporate governance and financial controls are properly embedded and are effective in practice. Failure to do so gives rise to the inherent risk of breaches of a company’s AIM Rules obligations.

LSE disciplines Telit Communications plc for breaches of AIM Rules

The LSE has published a Disciplinary Notice in relation to the public censure and fine of Telit Communications plc (Telit) for breaches of Rules 3 (Admission document) and 31 (AIM company and directors’ responsibility for compliance) of the AIM Rules.  

The LSE states that is had agreed settlement terms with the Company for a public censure and fine of £350,000, but has decided to waive the fine in light of the particular circumstances of the case. Nevertheless, details of the public censure have been published to educate the market on expected standards of conduct for AIM companies under the AIM Rules, including as regards directors and proposed directors.

Telit failed to disclose the former name of one of its directors and CEO (Mr Oozi Cats), which previously had a different spelling, in its Admission Document published in 2005. The Admission Document also failed to refer to the fact he had been indicted in the US under that former name. This information had also been withheld from Telit's Nomads and only came to light when Telit conducted a subsequent review. The LSE noted Telit's swift action when the matter came to light in August 2017 and the current board's full co-operation in the subsequent investigation. 


Takeover Panel publishes Takeover Code amendments for Brexit

The Takeover Panel has issued Panel Statement 2019/8 announcing the publication of amendments to the Takeover Code (Code) with regard to the United Kingdom’s withdrawal from the European Union in a ‘no deal’ scenario. The amendments will take effect on 'exit day' as defined in the European Union (Withdrawal) Act 2018.

Takeover Panel Statement 2019/6 – Minor amendments to the Code

As a result of the FCA announcing that it will no longer be using the name 'UK Listing Authority' or 'UKLA', the Code has been amended to replace any such references. Minor amendments have also been made to Note 2 on Rule 9.1 (Collective shareholder action), to refer to general meetings instead of annual general meetings and extraordinary general meetings. The amendments are now in force.

Corporate Governance

Hampton-Alexander Review update: FTSE 350 urged to keep up the pace on diversity

The Government has announced that the Hampton-Alexander Review has published an update suggesting that, for the first time, the FTSE 250 could meet the 33% target for women in senior leadership positions if the current rate of progress is maintained. 

The figures published by the Review reveal that:

  • 32.1% of FTSE 100 board positions are held by women, up from 12.5% in 2011 – thus the FTSE 100 is also on track to meet the 33% target by 2020;
  • 27.5% of FTSE 250 board positions are now held by women, up from 24.9%;
  • there remain four all male FTSE 350 boards (albeit that is down from 152 in 2011); and
  • 14 companies in the FTSE 350 are named as having not responded to the joint letter from the Investment Association and the Hampton-Alexander Review written in March 2019 to 69 companies in the FTSE 350 with one woman or less on their board and which sought clarification of the actions those companies intended to take to ensure progress was made towards the 33% target.

The 2019 Hampton-Alexander Report will be published in November 2019.

Government develop proposals on prompt payments

In the response to its call for evidence on how to improve corporate payment practices, the Government has confirmed a number of outline proposals including the requirement for audit committees of certain large companies to report in their annual report on their payment practices.

ICSA consultation on effectiveness of independent board evaluation in UK listed sector

The Governance Institute (ICSA) has published a consultation aimed at assessing the quality of independent board evaluation, as well as ways in which it might be improved. The review is being carried out at the request of the Department for Business, Energy and Industrial Strategy (BEIS).

The ICSA seeks views on whether there is a need for:

  • a code of practice for board evaluers, and formal arrangements for implementing and monitoring such a code;
  • voluntary principles to be applied by listed companies when engaging external evaluers; and
  • guidance for listed companies on disclosure of the conduct and outcomes of their board evaluation.

The consultation document includes draft versions of a code of practice for independent reviewers and voluntary principles and guidance on disclosure for listed companies.


BEIS Committee reports on the future of Audit

The BEIS Select Committee has published its report on the future of audit which sets out its proposals to address a 'lack of trust' in the UK audit market. Issues dealt with and recommendations from the report can be found in our Governance & Compliance update.

CMA publishes final report on UK audit industry

The Competition and Markets Authority (CMA) has published its final report with recommendations to address competition concerns in the UK audit industry. This also takes into account the recommendations of the Kingman review. The CMA has also published a summary alongside the full report. More detail on the recommendations can be found in our Governance & Compliance update.

Brydon Review launches consultation on the quality and effectiveness of statutory audit

BEIS has published a consultation launched by the Sir Donald Brydon Independent Review (Brydon Review) to make recommendations as to what more can be done to ensure audits meet public, shareholder and investor expectations. In particular the review will look at:

  • the purpose and target audience for audits;
  • whether its scope and purpose should be widened and strengthened;
  • how the quality of the audit process and product could be improved;
  • whether audit findings could be better communicated;
  • the role of audit within wider business assurance and in relation to directors’ legal responsibilities;
  • the role of audit in detecting fraud; and
  • auditor liability.

Executive Remuneration

Government implements Shareholders' Rights Directive Remuneration aspects

The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 have been published. They amend the regulations and legislation governing the disclosure of directors' remuneration and are being implemented to enact SRD II. A full summary can be found in our Governance & Compliance update. The Government has also published a Q&A document to explain various aspects of the regime.

Government responds to BEIS Select Committee proposals on pay

The Government has published its response to the recommendations of the BEIS Select Committee. Of particular note are that the replacement body for the Financial Reporting Council (FRC) (the Audit, Reporting and Governance Authority) will be responsible for monitoring directors' remuneration reports and section 172(1) statements made in accordance with the Companies (Miscellaneous Reporting) Regulations 2018 – i.e. the statement of how directors have satisfied their Companies Act 2006 duty to promote the success of the company while taking into account various factors and stakeholder interests.

The Government has, however, rejected various proposals from the Select Committee including its call for remuneration committees to be augmented with at least one employee representative and requiring such committees to put a cap on CEO pay.

Corporate Governance Factbook published by OECD

The Organisation for Economic Co-operation and Development (OECD) has published a comparison of the corporate governance frameworks of 49 jurisdictions.

Narrative Financial Reporting

FRC and ICAEW publish guide for smaller listed companies

The FRC and the ICAEW have published a guide to help audit committees and boards of smaller listed and AIM quoted companies improve their financial reporting. The guide addresses issues raised by the FRC about the quality of financial reporting in this sector, and provides practical tips and questions for audit committees to consider, with a view to driving up the quality of smaller quoted company financial reporting. The guide builds on key themes that emerged from the FRC’s 2015 Discussion Paper: ‘Improving the Quality of Reporting by Smaller Listed and AIM Quoted Companies’.

Investment Association calls for companies to state dividend distribution policy

The Investment Association (IA) has published a report: 'Shareholder votes on dividend distributions in UK listed companies’, which calls for companies to be more transparent on their approach to paying dividends. The report forms part of an investigation into dividend payment practices carried out by the IA at the request of the Government as part of its consultation on 'Insolvency and Corporate Governance'. Other Government proposals in this area include strengthening the 'net asset' test that applies when a public company pays a dividend; requiring companies to state their level of realised profits as a separate line item in their accounts; and introducing an ability for companies to declare and pay dividends based on an assessment of their solvency by directors, rather than on the level of their distributable profit.

FSB Task Force publishes status report on climate-related financial disclosures

The Financial Stability Board (FSB) has issued a press release noting that the Task Force on Climate-related Financial Disclosures (TCFD) has published its 2019 Status Report.

The status report provides an overview of the extent to which companies' reports included information aligned with the core TCFD recommendations on climate-related financial disclosures, over the period from 2016 to 2018.

The Task Force's key findings include:

  • Disclosure of climate-related financial information has increased since 2016, but is still insufficient for investors.
  • More clarity is needed on the potential financial impact of climate-related issues on companies.
  • Of companies using scenarios, the majority do not disclose information on the resilience of their strategies.
  • Mainstreaming climate-related issues requires the involvement of multiple functions within organisations.
European Commission guidelines on climate-related information reporting

The European Commission has published new guidelines on corporate climate-related information reporting, as part of its Sustainable Finance Action Plan. The guidelines aim to provide companies with practical recommendations on how to better report the impact that their activities are having on the climate as well as the impact of climate change on their business. The Commission also notes the publication of three new reports by the Technical Expert Group on sustainable finance. These include key recommendations on the types of economic activities that can contribute to climate change mitigation or adaptation.

Single Electronic Financial Reporting Format published

The European Commission has published a new Regulation which introduces the new single electronic financial reporting format. This will apply to all annual financial reports published by issuers with securities admitted to trading on an EU regulated market such as the main market of the LSE and the NEX Exchange Main Board.

The Regulation requires a relevant annual report to be prepared in extensible hypertext mark-up language (XHTML). In addition, should an annual report contain consolidated financial statements prepared in accordance with IFRS, an issuer will need to annotate them in extensible business reporting language (XBRL).

The Regulation is now in force and would survive the UK leaving the EU in a "no-deal" Brexit scenario. It applies to the annual reports of relevant issuers for financial years beginning on or after 1 January 2020.


FCA publishes final instruments and guidance in relation to Brexit

The FCA has announced that it has published final instruments and guidance that will apply if the UK leaves the EU without a deal or an implementation period. The final instruments are largely unchanged from the near final forms published earlier in the year, although the instruments now commence on ‘exit day’, rather than 11pm on 29 March 2019.