Included in this issue: Equity Capital Markets; Public M&A; Corporate Governance and Brexit. Read more...
Equity Capital Markets
FCA consults on aligning the FCA Handbook with the Prospectus Regulation
The Financial Conduct Authority (FCA) has published Consultation Paper 19/6 setting out potential changes required to align the Prospectus Rules sourcebook with the Prospectus Regulation. In most cases, the changes simply insert text from the Prospectus Regulation directly into the sourcebook. The consultation assumes that an implementation period will be agreed on the UK leaving the EU and, therefore, that EU law will continue to apply in the UK until the end of the implementation period. In turn, this means that the remaining provisions of the Prospectus Regulation yet to be implemented will come into force on 21 July 2019. If there is 'no deal', the FCA will not proceed with the proposed changes. The consultation paper also sets out a useful summary of the main changes introduced by the Prospectus Regulation. Comments are requested by 28 March 2019.
ESMA publishes list of thresholds below which an EU prospectus is not required
The European Securities and Markets Authority (ESMA) has published a list of the thresholds below which an offer of securities to the public does not need a prospectus under the Prospectus Regulation in each EU Member State.
On 21 July 2018, the Prospectus Regulation introduced a new threshold of €1 million below which an offer does not require a prospectus. In addition, Member States may also decide to raise that threshold to a maximum of €8 million provided that an offer will not be passported to another Member State.
ESMA’s document contains information provided by national competent authorities setting out:
- a short description of the national thresholds below which no prospectus is required;
- a summary of any national rules which apply to offers below that threshold; and
- hyperlinks to the relevant national legislation and rules.
FCA publishes Primary Market Bulletin 20
The FCA has published the 20th edition of its Primary Market Bulletin. This covers a number of matters including:
- the use of the name 'UKLA' or 'UK Listing Authority', which is being 'retired' on the basis that use of the term sometimes creates confusion amongst commentators and members of the public (particularly concerning whether the UKLA is a separate body from the FCA). The FCA will instead refer to its 'primary market' functions when referring to the UKLA;
- the introduction of a new online portal for submissions to the Issuer Management team, which the FCA has said is a much easier way for market participants to interact with them;
- a number of Brexit updates including the previous publication by the FCA of Consultation Papers regarding the 'onshoring' of the Listing Rules, Prospectus Rules and the Disclosure Guidance and Transparency Rules (DGTRs), among other things;
- a reminder from the FCA (since the FCA sees the issue reasonably frequently) that rectification resolutions put to shareholders to ratify the situation of a company paying a dividend when it has not published interim accounts, and its previous published annual accounts do not show sufficient distributable reserves to cover the dividend, could constitute a related party transaction for the purposes of Chapter 11 of the Listing Rules (given that significant shareholders, directors and, in some cases, former directors will be related parties for the purposes of LR 11). The FCA reminds issuers that there is a Technical Note (UKLA/TN/204.2) which covers the point; and
- the publication of a number of new and amended Technical Notes in the UKLA Knowledge Base, and the issue of a number of consultations in relation to several other Technical Notes.
FCA moves to implement the amended Shareholders Rights Directive
The FCA has published Consultation Paper CP19/7 which, among other issues, seeks to implement the provisions of the amended EU Shareholder Rights Directive (SRD II). The changes proposed include those relating to the transparency of related party transactions, in addition to changes intended to increase transparency of engagement policies and investment strategies of FCA-regulated life insurers and asset managers. As regards related party transactions, the substantive new requirements will be set out in new Chapters 1B and 7.3 of the DGTRs, and will apply to all companies with a registered office in the UK which have shares admitted to trading on a regulated market in the UK or elsewhere in the EU.
These changes should not have a significant impact on premium-listed issuers as they already need to comply with the related party transaction disclosure and approval requirements set out in existing LR 11.1.7R, which are generally more stringent than those contained in new DTR 7.3. The proposed new rules make it clear that, to the extent a premium listed issuer has complied with LR 11.1.7R, no further action will need to be taken as a result of the requirements to be set out in DTR 7.3. The one difference is that SRD II uses the definition of 'related party' set out in IAS 24, which is wider than the definition contained in the Listing Rules, meaning that more transactions could be caught. The changes will however, if implemented, have a particular impact on issuers whose securities are admitted to trading on other regulated markets (particularly the Specialist Fund Segment and the High Growth Segment). The related party transaction provisions of LR11 will also be amended to apply to companies with a standard listing of equity shares.
The proposed new rules will require issuers to, among other things:
- seek board approval (rather than shareholder approval) for 'material related party transactions'. The threshold for materiality is proposed to be set at 25 per cent. in any one of the relevant class tests, which largely replicate the class tests set out in LR 11; and
- publicly announce the terms of a 'material related party transaction' when they are agreed – it being noted that the disclosure requirement under the EU Market Abuse Regulation may apply earlier than the disclosure requirement under new DTR 7.3.
There is no requirement for a 'fair and reasonable' opinion letter from a third party as to the terms of the transaction (as premium listed companies are required to obtain from their sponsor in the context of a 'smaller related party transaction' under LR 11.1.10R).
If implemented as anticipated, the new rules will need to be complied with by affected issuers from the start of their first financial year which begins on or after 10 June 2019 (that being the date upon which, if a transition period for the UK's withdrawal from the EU is agreed, the changes brought about by SRD II must be implemented). The FCA's consultation is open for comments until 27 March 2019.
QCA publishes report on the impact of MiFID II
The Quoted Companies Alliance (QCA) has published the 2019 QCA/Peel Hunt Mid and Small-Cap Investor Survey which brings together the views of 102 UK-based fund managers and 105 small and mid-sized quoted companies in relation to the impact of MiFID II. The survey was undertaken between October and December 2018. Key findings are that:
- 62 per cent. of investors report that there is less research being produced on small and mid-cap companies since MiFID II came into effect;
- 86 per cent. of investors expect there to be fewer broking houses in the next 12 months as a result of MiFID II; and
- 90 per cent. of companies say that they either have developed, or plan to develop, their corporate websites to improve visibility to investors. Investors themselves state that holding a capital markets day is the best way to improve visibility.
On the subject of AIM as a market, key findings are that:
- the majority of fund managers appear reluctant to label it as an attractive market for companies looking to float;
- about one third of investors considered that the market’s credibility had improved over the past 12 months (compared with over 50 per cent. last year); and
- 46 per cent. of investors considered that the change to require companies to adopt a recognised corporate governance code will have a positive effect on AIM companies.
NEX Exchange publishes final changes to Growth Market Rules for Issuers
The NEX Exchange has published an overview of the feedback received on its consultation on proposed changes to the Growth Market Rules for Issuers launched as a result of NEX Exchange Growth Market's designation as an SME Growth Market. In particular, NEX Exchange has clarified that issuers will be required to keep regulatory information available on their website for five years from the date of its first publication (Rules 10 and 75). A marked up copy of the Rules for Issuers, which are now in force, is available on the NEX Exchange website.
FCA publishes speech on MAR compliance
The FCA has published a speech by Julia Hoggett, Director of Market Oversight at the FCA, delivered at the 'AFME Implementation of the Market Abuse Regulation in the UK' event. The central theme of the speech focuses on the importance of preventing abusive behaviour in the first place, in addition to ensuring that it can be detected when it does occur.
Response statements regarding recent consultations
The Takeover Panel has published its response statements in relation to the two recent consultation papers. These papers proposed changes to the Takeover Code (Code): (i) in relation to the treatment of asset valuations in the context of a takeover; and (ii) required as a consequence of the UK's withdrawal from the European Union.
RS2018/1 addresses asset valuations in the context of a takeover offer – the changes set out in the original consultation paper will be implemented with effect from 1 April with only minor amendments. These changes do not amount to a significant change in approach, as the amendments were essentially a codification of the Panel's existing practice. In particular, the Panel confirmed that an asset valuation published by an offeree company in the 12 months prior to an offer which is material in the context of the offer must be reported on. For certain types of companies, notably property companies which publish NAV valuations at regular intervals, the Code effectively makes an asset valuation mandatory on a bid – as the Panel's view is that without a valuation, shareholders will not be able to make a reasoned investment decision. The Panel reiterated that 'ordinary course' asset valuations would not benefit from the more lenient approach that is generally available in respect of ordinary course profit forecasts under Rule 28.
RS2018/2 addresses changes that will be made to the Code if/when the UK leaves the European Union. The implementation date of these changes is not yet fixed, and will be determined by the nature and timing of any Brexit. The changes to the Code are mainly mechanical, and the most notable relate to the shared jurisdiction regime whereby offers for companies: (i) incorporated in Europe but listed in the UK; or (ii) incorporated in the UK but listed and resident in Europe, will cease to be regulated by the Code. The Panel confirms that its primary approach to determining a company's place of residency is whether a simple majority of the directors are themselves resident in the UK.
The Panel also signposted that it will continue to consider a wider review of the provisions of the Code relating to conditions to an offer. In particular, the 'special treatment' afforded to European antitrust conditions under Rules 12 and 13 of the Code will become anomalous in a post-Brexit world when the EU Commission will have the same status in the UK as any other antitrust regulator (other than the CMA). These Rules currently allow an EU antitrust condition to be invoked even when it is not materially significant in the context of an offer – a notable departure from the threshold applied to antitrust conditions in all other jurisdictions. The Panel acknowledged that, in leaving this framework in place post Brexit, it made a pragmatic decision not to affect the established balance of interests currently enshrined in the Code. However, the status quo does not seem tenable in the longer term, assuming Brexit proceeds in some form.
Investment Association sets out guidelines relating to irredeemable preference shares
The Investment Association (IA) has published guidelines relating to the redemption or cancellation of irredeemable preference shares. The guidelines are intended as a guide to shareholder expectations and good practice and, if followed, are meant to enable engagement on issues concerning the redemption or cancellation of irredeemable preference shares to be 'efficient and effective'.
The IA believe that following the guidelines will promote market confidence in irredeemable preference shares as an asset class, and avoid reputational risk for issuers. They should be read as being of general application to all listed companies, notwithstanding the recent focus on the issue in light of expected changes to the treatment of regulatory capital for insurers.
FCA issues its first decision under competition law
The FCA has issued its first formal decision under its competition enforcement powers. This decision relates to certain asset managers who were found to have shared strategic information, on a bilateral basis, during one IPO and one placing, shortly before the issue price was set. The firms disclosed and/or accepted receipt of otherwise confidential bidding intentions, in the form of the price they were willing to pay and sometimes the volume they wished to acquire. This, in turn, allowed one firm to know another's plans during the IPO or placing process when they should have been competing for shares.
Hargreave Hale and River and Mercantile were fined £306,300 and £108,600 respectively, whilst Newton Investment Management Limited was given immunity under the competition leniency programme. No action was taken against the fourth, Artemis. For more detail, please read our Competition Team's update.
Tougher powers for Pensions Regulator announced
The government has published a response to its consultation proposing tougher powers for the Pensions Regulator (TPR), confirming its intention to press ahead with many of the changes proposed. For a review of the June 2018 consultation, please read the bulletin our Pensions team published the time.
The planned changes broaden the duties of those involved in transactions which could potentially impact a defined benefit pension scheme, and also significantly increase the sanctions available to TPR when duties are not complied with. Although the government has not committed to a timescale for implementing the changes, it has signalled a clear direction of travel towards more severe sanctions for those involved in corporate activity which adversely affects a pension scheme, even where there is no deliberate wrongdoing. That raises the possibility of TPR's current powers being applied using this principle even before these changes come into force. For more detail on the government's response, please read our Pensions team's latest bulletin.
Investment Association publishes analysis of voting trends during 2018
The IA has published its analysis of voting trends during the 2018 AGM season revealing that shareholder rebellions rose by over 25 per cent. The analysis is based on data from the IA's public register of shareholder dissent.
The IA's analysis shows that:
- 120 FTSE All-Share companies were added to the public register up to the end of July 2018, compared with 110 companies over the same period in 2017;
- 29 companies appeared on the register as regards dissent on the same resolution as in 2017;
- opposition to individual director re-election was a key theme, with the number of resolutions added to the register more than doubling from 38 in 2017 to 80 in 2018. The rise was particularly stark in the FTSE 250, with 37 resolutions added in 2018 compared to just 18 in 2017. Of the companies added to the register in 2018 for dissent in relation to director re-election, 43 per cent. of resolutions added were in relation to the election of the chair; and
- dissent as regards executive pay declined in the FTSE All-Share, with the total number of remuneration resolutions added dropping from 68 in 2017 to 61 in 2018. That said, there was a sharp rise in objections to FTSE 100 pay in 2018, with 18 pay resolutions attracting over 20 per cent. shareholder dissent among FTSE 100 companies compared to 9 in 2017.
Investment Association publishes statement on gender diversity and executive pensions
The IA has announced that it will use its Institutional Voting Information Service (IVIS) in the 2019 AGM season to highlight companies 'who are lagging behind on diversity, or pay pension contributions to executives at rates above the majority of the workforce'. Under the new policy, IVIS will 'red-top' companies which:
- have no women or only one woman on their board; and / or
- pay newly-appointed directors pension contributions which are not in line with the majority of their employees.
By way of reminder, a 'red-top' represents the highest level of warning that IVIS issues and is reserved for companies where, in its opinion, shareholders should have the 'most significant and serious concerns'. IVIS will also issue an 'amber-top' (the second highest warning) to companies not on course to meet the requirements of the Hampton-Alexander review, for 33 per cent. of women on their board by 2020. IVIS will also highlight any board with women representing 25 per cent. or less.
More recently, the IA and the Hampton-Alexander Review has written to 69 FTSE 350 companies which have no or only one woman on their board outlining concerns about gender diversity and seeking clarification of the action those companies intend to take to address the issue.
PLSA publishes Corporate Governance Policy and Voting Guidelines, and 2018 AGM Review
The Pensions and Lifetime Savings Association (PLSA) has published the 2019 version of its Corporate Governance Policy and Voting Guidelines. These now mirror the 2018 UK Corporate Governance Code and highlight some of the key developments in UK corporate governance policy and practice. The guidelines build on the PLSA's 2018 AGM Review. For more detail, please read our Governance & Compliance update.
FRC publishes consultation on a revised Stewardship Code
The Financial Reporting Council (FRC) has published its long awaited consultation on a revised Stewardship Code for Institutional Investors. For more detail, please read our Governance & Compliance update. Comments on the consultation are requested by 29 March 2019.
The FRC and the FCA have also published a discussion paper 'Building a regulatory framework for effective stewardship' to advance the discussion about what effective stewardship should look like, the expectations for financial services firms, and how this can best be supported by the UK's regulatory framework. The discussion paper requests input on various matters including:
- the proposed definition of 'stewardship';
- what effective stewardship looks like;
- the key challenges in delivering an effective regulatory framework for stewardship in the UK; and
- how to strike the right balance between regulatory rules and voluntary codes of best practice.
Responses are requested by 30 April 2019.
FRC to be replaced by the Audit, Reporting and Governance Authority
In response to the Independent Review of the FRC led by Sir John Kingman, the Business Secretary Greg Clark has announced that a new regulator, the Audit, Reporting and Governance Authority, will be established. Specifically, the new regulator will for the first time:
- be a statutory body with powers including the ability to make direct changes to accounts, rather than needing to apply to court to do so, and to undertake more comprehensive, visible reviews for greater transparency;
- have strategic direction and duties to protect the interests of customers and the public by setting high standards of statutory audit, corporate reporting and corporate governance, and by holding companies and professional advisors to account; and
- regulate the biggest audit firms directly (rather than those powers being delegated).
There will also be greater sanctions available to the new body in cases of corporate failure, including new powers to require rapid explanations from companies and, in the most serious cases, publish a report about the company's conduct and management. Recruitment for the Chair and Deputy Chair of the new regulator will commence shortly.
The announcement was accompanied by an Initial Consultation on the implementation of the Kingman recommendations. The consultation closes on 11 June 2019.
The authors acknowledge that Parliament voted last week to, in effect, take 'no deal' off the table. Nevertheless, a 'no deal' scenario still remains a possibility hence the inclusion of certain items in this part of the bulletin.
FCA publishes Primary Market Bulletin 21
The FCA has published a further Primary Market Bulletin which focuses on new regulatory obligations that market makers and issuers will need to implement for the purposes of the Short Selling Regulation and Market Abuse Regulation, if the UK leaves the EU on 29 March 2019 on the basis of 'no deal'.
As regards MAR, certain issuers will need to send notifications of the delayed disclosure of inside information and reports in relation to PDMR transactions to the FCA regardless of any additional obligations under MAR to notify an EU competent authority due to, for example, the issuer being registered in an EU Member State and/or having instruments admitted to trading on an EU trading venue. The content and format of the notifications and reports in each case will remain the same.
ESMA issues new Q&A clarifying Prospectus and Transparency rules in event of ‘no deal’ Brexit
ESMA has published three new Q&A clarifying the application of certain provisions of the Prospectus Directive and the Transparency Directive in the event of a 'no-deal' Brexit.
The Q&A clarify that:
- when issuers of equity securities and non-equity securities below €1000 who currently have the UK as their Prospectus Directive home Member State choose a new home Member State, they should do so from the EU27 / EEA EFTA States in which they have their activities after 29 March;
- issuers admitted to trading on a regulated market within the EU27 / EEA EFTA States who currently have the UK as their Transparency Directive home Member State should choose and disclose their TD home Member State without delay following 29 March 2019; and
- as the UK will be considered to be a 'third country', prospectus and supplements approved by the FCA before 29 March 2019 cannot be used in the EU27 / EEA EFTA after a 'no deal' Brexit.
FRC publish letters to the accounting and audit sectors in anticipation of a 'no deal' Brexit
The government and the FRC have published letters to the accounting and audit sectors setting out the implications for them if the UK leaves the EU without a deal. The letters explain (among other things) that, while the UK's corporate reporting regime will remain largely unchanged after UK exits, there are some changes that impact a small number of companies.
LSE publishes amended Primary and Secondary Market Rulebooks in event of a ‘no deal’ Brexit
In contemplation of a potential 'no deal' Brexit, the London Stock Exchange (LSE) has published proposed amendments to its:
- Primary Market Rulebooks (see Market Notice N04/19); and
- Secondary Market Rulebooks (see Market Notice N05/19).
Alongside the notices, marked-up versions of the following rulebooks have also been published:
- Admission and Disclosure Standards;
- AIM Rules for Companies;
- AIM Rules for Nominated Advisers;
- International Securities Market Rulebook;
- Rules of the London Stock Exchange; and
- Rules of the London Stock Exchange Derivatives Market.
In the event of a ‘no deal’ Brexit, the amendments will become effective from 11.00 pm on 29 March 2019 and updated versions of the Rulebooks will be available on the Exchange’s website.
FRC publishes consultation on stronger going concern standard for auditors
The FRC has published a consultation on revisions to International Standard on Auditing (ISA) (UK) 570 - Going Concern. This proposes to increase the work required of auditors when assessing whether an entity is a going concern and impose requirements on UK auditors which are 'significantly stronger' than those required by international standards.
The FRC proposes:
- auditors make greater effort 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 to provide a 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 consultation closes on Friday 14 June 2019.
Up to Speed on the run again
AG London's 'Up To Speed' training programme
'Up To Speed' is AG's training programme aimed at newer members of corporate finance departments of investment banks, which we run every couple of years. It covers, over 17 one-hour sessions, all key aspects of ECM transactions, continuing obligations of listed companies, and public M&A.
Since we last ran the programme in 2017, all content has been refreshed to take into account recent legal and regulatory changes, and the programme also includes entirely new sessions on Corporate Governance and the role of the reporting accountant in ECM transactions (delivered by Deloitte). A session on US Securities will also be delivered by Proskauer.
The first session will run at AG's London office at 8:30am on 26th March, and sessions will then run every other week until early December (with a break over the summer). If you or any of your junior colleagues feel they would benefit from attending some or all of the sessions, please email their names and email addresses to email@example.com. For further information on the programme (including a summary of the contents of each session), please email firstname.lastname@example.org.