Welcome to our latest edition of Corporate Finance News. Read on for updates relating to COVID-19; Corporate Governance; Equity Capital Markets; Climate Change and more...


COVID-19: Legal & regulatory changes
Corporate Insolvency and Governance Act 2020 in force

The Corporate Insolvency and Governance Act 2020 (CIGA) was brought forward to implement various reforms to introduce greater flexibility to the UK's insolvency regime which was consulted on after the collapse of BHS. In light of COVID-19, it also temporarily suspends parts of insolvency law in an attempt to support directors to continue trading without the threat of personal liability, and provides companies and other bodies with temporary relaxations to facilitate various corporate actions including holding shareholder meetings, including AGMs. Its provisions are now in force.  For further detail, please read our Governance & Compliance update – Issue 169.

As a prelude to the CIGA coming into force, The Department of Business, Energy and Industrial Strategy (BEIS) and the Financial Reporting Council (FRCpublished various Q&As dealing with, among other things, AGMs and other general meetings during COVID-19. The Chartered Governance Institute has also issued several pieces of guidance on the conduct of AGMs. For their latest guidance in light of the easing of lockdown restrictions, please read our Governance & Compliance update – Issue 170. 

FRC, FCA and PRA publish joint COVID-19 statement and further measures

Almost immediately after the government implemented its "'Stay at Home Measures"', the FRC, Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRApublished a joint statement announcing a series of actions to "'ensure that information continues to flow to investors and support the continued functioning of the UK capital markets"'. The actions included:

  • statement by the FCA which, among other things, allows listed companies an extra two months to publish their audited annual reports with an encouragement to take that extra time; 
  • FRC guidance for companies preparing financial statements. This was complemented by guidance from the PRA regarding the approach that should be taken by banks, building societies and PRA-designated investment firms in assessing expected loss provisions under IFRS 9. The FRC subsequently augmented its guidance to cover the production of interim reports and assist in the production of going concern and viability statements as well as the reporting of "'exceptional or similar"' items and Alternative Performance Measures; and
  • additional FRC guidance for audit firms seeking to overcome challenges in obtaining audit evidence.

For further detail, please read our Governance & Compliance update – Issue 157.

The FCA also published other policy measures and commentary to help listed companies, including:

  • in relation to smaller share issues where it endorsed the statement of the Pre-Emption Group (PEG – on which more below) in which it recommends that investors, on a case-by-case basis and for a limited period, consider supporting non-pre-emptive issuances by companies of up to 20% of their issued share capital, particularly when undertaken on a "'soft"' pre-emptive basis;
  • encouraging the use of the simplified, reduced-disclosure prospectus regime for larger secondary issues, as introduced by the Prospectus Regulation;
  • providing clarity through a technical supplement on its expectations as regards the production of working capital statements in prospectuses; 
  • modifying its approach to Class 1 and related party transactions under the Listing Rules by allowing dispensations to be sought from the necessity to convene a general meeting to approve such transactions assuming certain conditions have been met;
  • in the 27th edition of Primary Market Bulletin, discussing disclosure under the EU Market Abuse Regulation (MAR), the FCA's attitude to delays in corporate reporting and market volatility and suspensions of trading; and
  • in the 28th edition of Primary Market Bulletin, granting issuers additional time to produce half-yearly reports, while setting out its views on the making of going concern statements, shareholder engagement and capital raisings.
The response on AIM

Mirroring many of the actions undertaken by the FCA, the London Stock Exchange (LSE) has temporarily modified the AIM Rules for Companies such that:

  • an AIM company may seek permission, through its Nomad, to utilise a further three month period in which to publish its annual audited accounts. AIM companies have also been granted an additional one month in which to publish their half-yearly reports subject to various notification obligations;
  • temporary suspensions of trading can be sought from the AIM Regulation team, again through a company's Nomad, where a company needs more time to make a fully compliant notification;
  • companies with securities suspended from trading between 30 September 2019 and 1 July 2020 can be granted a further six months before those securities are cancelled; and
  • various Nomad client "'take-on"' procedures have been altered.
COVID-19: Regulatory commentary
Continuing obligations under the Market Abuse Regulation

At all times since the start of the pandemic, the FCA has underlined the obligations of issuers to continue to meeting their obligations under MAR, particularly as regards the identification, handling and disclosure of inside information. In doing so, it has highlighted the fact that the pandemic itself, and policy responses to it, may alter the nature of information that is material to a business's prospects, and in relation to market recapitalisations.

In particular, in its Market Watch publication (Issue 63), the FCA set out its expectations of market conduct in the context of the increased number of capital raisings and alternative working arrangements – such as working from home -– due to COVID-19. In short, the FCA expects all market participants, including issuers, advisors and anyone handling inside information to continue to act in a manner that supports the integrity and orderly functioning of financial markets which includes complying with all obligations under MAR. Further detail can be found in our Governance & Compliance update – Issue 166

FRC guidance for companies preparing financial statements

At the time of its joint statement with the FCA and PRA, the FRC's also set out its key messages for boards on corporate governance and reporting, which it has subsequently augmented over time. It incorporates guidance on making forward-looking statements, including as to business viability and going concern.

FR Lab report: COVID-19 – Reporting on going concern, risk and viability disclosures

The Financial Reporting Lab (FR Lab) has published a report which focuses on going concern, risk and viability reporting in light of the uncertainty created by COVID-19, responding to the fact that providing detailed and useful disclosures on these issues has proved to be a challenge for many boards. For further detail, please read our Governance & Compliance update – Issue 168.

FR Lab report: COVID-19 - Reporting on resources, actions and the future

The FR Lab has also published a report to provide detailed guidance on its COVID-19 infographic. In doing so it considers the answers to the questions that, in its opinion, investors want answers to now, as well as providing examples of current reporting practice. For further detail, please read our Governance & Compliance update – Issue 168

COVID-19: The Investor perspective
Pre-Emption Group expectations for non-pre-emptive share issues during COVID-19

The Pre-Emption Group (PEGpublished its expectations for share issues in the light of COVID-19 in order to enable companies access to the capital they need to maintain their solvency. In particular, PEG has recommended that investors, on a case-by-case basis, consider supporting non-pre-emptive issuances by companies of up to 20% of their issued share capital on a temporary basis, rather than the 5% for general corporate purposes with an additional 5% for specified acquisitions or investments, as set out in the 2015 Statement of Principles. For further detail, including as to the additional requirements applicable should a company wish to take advantage of this additional flexibility, please read our Governance & Compliance update – Issue 158.

For AG's own review of equity fundraisings during COVID-19 – click here

Glass Lewis publishes guidance on its approach to COVID-19

Glass Lewis has published its views on how COVID-19 will impact on governance and broader ESG issues now and in the future. As an immediate response, Glass Lewis has updated its virtual meetings policy to give the market certainty about its support for such meetings, and has continued to update its guidance, including as to the timing and format of shareholder meetings. Further highlights from the guidance can be found in our Governance & Compliance update – Issue 163.

Investment Association commentary and guidance

The Investment Association (IAwrote to the Chairs of all FTSE 350 companies setting out ways in which its members will support companies during the COVID-19 pandemic. For a summary of its contents, please read our Governance & Compliance update – Issue 159. The letter covered various topics including the IA's expectations as to engagement and communication; financial reporting; equity fund raisings; and the conduct of AGMs. The letter also reiterated the IA's views on dividends and executive pay. Further detail can be found in our Governance & Compliance update – Issue 158.

Prior to the COVID-19 pandemic, the IA also published its view of "'Shareholder priorities for 2020"' in which it developed its expectations for listed companies in areas which its members believe can be critical drivers of long-term value, namely:

  • responding to climate change;
  • audit quality;
  • stakeholder engagement; and 
  • diversity.

For further detail, please read our Governance & Compliance update – Issue 152. 

ICGN publishes viewpoint on implications of COVID-19

The International Corporate Governance Network (ICGN) has published a statement on COVID-19 as a new systemic risk while setting out the implications for corporate governance and investor stewardship. It also sets out the questions that investors may wish to consider in their engagement with company managements and boards. 

TheCityUK publishes report on recapitalising businesses

TheCityUK has published the final report of its Recapitalisation Group entitled 'Supporting economic recovery: recapitalising businesses post Covid-19' in which it sets out its suggestions for actions to be taken to tackle the issue of £35bn of unsustainable debt that could result from COVID-19 loans.



The Takeover Panel considers whether the impact of COVID-19 led to a material adverse change on the business of Moss Bros

The Takeover Panel has once again had to consider the circumstances in which a bidder can invoke a material adverse change ("'MAC"') condition to its offer. Having previously considered the issue in 2001 in respect of WPP seeking to withdraw its offer for Tempus following the 11 September 2001 terrorist attacks in the United States, the Panel Executive had to consider the impact of COVID-19 on Moss Bros's business and whether this constituted a MAC which would allow Brigadier Acquisition Company ("'Brigadier"'), a company majority owned by Crew Clothing owner Michael Shina, to withdraw its offer.

As per its 2001 ruling, the Panel Executive confirmed that Brigadier had not established that the circumstances which give rise to its right to invoke the relevant conditions are of material significance to it in the context of its offer as required by Rule 13.5(a) of the Takeover Code and, therefore, Brigadier could not invoke the MAC condition. This again reiterates that a bidder will have to overcome a significantly high threshold in order to invoke the conditions to its offer.

Brigadier did not appeal the Panel Executive's ruling and the scheme subsequently became effective on 10 June 2020.

Panel Practice Statement No 5 provides guidance on how Rule 13.5(a) is applied in practice.

Foreign Direct Investment and national security

The UK government is putting in place further short term measures to expand the public interest intervention regime contained in the UK merger control rules, under which the government may intervene to scrutinise a merger on public interest grounds. It has added a further public interest criterion (in addition to national security, media plurality and the stability of the UK financial system) to allow intervention in transactions meeting the normal merger control thresholds, where relevant to “'the need to maintain in the United Kingdom the capability to combat, and to mitigate the effects of, public health emergencies"'. This new power, which took effect on 23 June, could be used in respect of companies directly involved in pandemic preparedness (e.g. PPE manufacture) as well as companies such as food supply chain or internet services companies that supply other necessary goods and services during a health crisis. The second change builds on the interim measures put in place in 2018 which reduced the jurisdictional thresholds for public interest interventions in mergers concerning the development or production of military or dual-use goods, computing hardware or quantum technology. Further legislation, when finalised, will apply those lower thresholds to mergers concerning artificial intelligence, cryptographic authentication technology and advanced materials, enabling intervention where the target's turnover is over £1 million (down from the normal merger control threshold of £70 million) or the target's "''share of supply'"'  is 25% (with no need for an incremental increase in share of supply).

The interim measures come ahead of broader reforms that will bring in a new regime for vetting investments in companies, businesses and assets that raise national security concerns. A National Security and Investment Bill was included in the Queen's Speech in December 2019 and is expected to be introduced this year. Further details of the short and long term changes can be found on our FDI hub.

AG reviews 
  • For AG's insight on M&A in Surreal Times: Eight things to consider in the months ahead – click here.
  • For AG's M&A Trends report for 2020 – click here
  • For AG's Nine pivotal Private Equity lessons for investing in 2020 – click here.
Corporate Governance
Parker review update reports on ethnicity in UK Boards

BEIS has published an update report from The Parker Review on the issue of the ethnic and cultural diversity of UK boards. The original Parker Review, published in 2017, recommended that there should be at least one non-white director on the boards of FTSE 100 companies by 2021, and at least one non-white director on the boards of FTSE 250 companies by 2024. This update report shows that 37% of FTSE 100 companies, and 69% of FTSE 250 companies, do not meet these aspirational targets and the current rate of progress makes meeting the targets "'challenging"'. For further detail, please read our Governance & Compliance update - Issue 152.

IA cautions FTSE 350 for lack of gender diversity at senior levels

Subsequent to the BEIS report, the IA announced that nearly one in five FTSE 350 companies have received letters from it and the Hampton-Alexander Review about the lack of gender diversity on their boards and executive committees. 63 companies have been asked to outline what action they are taking to improve gender balance in their leadership teams and ensure they meet the Hampton-Alexander targets of a minimum 33% of women on their boards and in their senior leadership teams by the end of 2020. For further detail, please read our Governance & Compliance update – Issue 155.

PLSA publishes stewardship guide and voting guidelines

The Pensions and Lifetime Savings Association (PLSA) has published the 2020 version of its Stewardship Guide and Voting Guidelines (Guidelines). The Guidelines have been extensively updated in light of the revised disclosure requirements of the Stewardship Code, so as to "'help owners hold their [scheme] managers and service providers to account"'. They now include checklists on stewardship, engagement and voting. 

The substantially revised Voting Guidelines include separate sections on "'Climate Change and Sustainability"', and "'Capital Allocation and Structure"'. For further detail, please read our Governance & Compliance update – Issue 153.

The PLSA Guidelines follow the publication of the PLSA 2019 AGM Voting Review in January and include a summary of its voting recommendations on an issue by issue basis.

ISS updates its proxy voting guidelines for use in 2020

Institutional Shareholder Services (ISS) has published updates to its Europe, Middle East and Africa Proxy Voting Guidelines, which are effective for meetings held on or after 1 February 2020. For companies listed in the UK and Ireland, the key changes largely reflect the application of the 2018 version of the UK Corporate Governance Code (2018 Governance Code). For further detail, please read our Governance & Compliance update, Issue 147.

ISS has also published additional guidance on its policy application in light of COVID-19 which includes its approach to equity fund raisings.  

Glass Lewis publishes 2020 voting guidelines

Glass Lewis has published its 2020 proxy voting guidelines with changes reflecting, in many areas, the 2018 Governance Code. Notably, Glass Lewis acknowledges the 2018 Governance Code's stated desire for investors and proxy advisers to move away from a "'prescriptive approach"' to comply or explain, instead paying due regard to a company's individual circumstances when evaluating performance. For further detail, please read our Governance & Compliance update, Issue 146.

QCA publishes its fourth NED survey

The Quoted Companies Alliance (QCA) has published its fourth NED survey which covers numerous issues including salaries, time commitment, independence, board evaluations and recruitment. For a brief summary of the key findings, please read our Governance & Compliance update – Issue 166.

Equity Capital Markets
Revised guidelines on Prospectus Regulation disclosure requirements

The European Securities and Markets Authority (ESMA) has published a revised version of its Prospectus Regulation disclosure guidelines which seek  to ensure that market participants have a consistent understanding of the relevant disclosures required in the various annexes to the Commission Delegated Regulation (EU) 2019/980. ESMA's final report on the guidelines can be found here.

The Guidelines cover a variety of financial and non-financial topics, including:

  • pro forma information;
  • working capital statements;
  • capitalisation and indebtedness;
  • profit forecasts and estimates;
  • historical financial information;
  • operating and financial reviews;
  • options agreements; and
  • collective investment undertakings.

The final Guidelines will become effective two months after being published on ESMA's website in all official EU languages.

Changes to the FCA Handbook

Recent changes to the FCA Handbook of particular note include: 

Other news
  • NEX Exchange has been renamed Aquis Stock Exchange (AQSE). This follows the completion of Aquis Exchange PLC's purchase of NEX Exchange Limited. The Primary Rules for the AQSE's Growth Market and Main Market have been updated accordingly. 
  • The FRC has issued revised Standards for investment reporting for use by reporting accountants in ECM transactions.
Regulation in practice
FCA censures AIM company for market abuse

The Financial Conduct Authority (FCA) has published a Final Notice in which it has publicly censured AIM-quoted Redcentric plc for committing market abuse by publishing false information about its net debt and holdings of cash and cash equivalents in both its unaudited interim results in November 2015 and in its audited final results in June 2016. These materially misstated accounting balances were discovered after an internal review instigated by the company's audit committee which led it to announce in November 2016 that the company's audited accounts for the previous years were likely to require restatement and that a further forensic review of current and historic balance sheets would be needed.

The FCA found that the company knew, or could reasonably have been expected to know, that the information included in the relevant results was false and misleading, and that it gave, or was likely to give, a false or misleading impression as to the value of its shares. Both the November 2015 and June 2016 announcements caused the company's shares potentially to have been traded at a higher value than they should have, a situation which endured until the company's announcement in November 2016 when its share price fell by 52%. In turn, this meant that purchasers of Redcentric's shares potentially paid a higher price for them during this period than they would have done if both announcements had been accurate.  

The FCA noted that the company has taken extensive steps to remedy the situation including commissioning an auditor-led independent review immediately upon discovering the issues, proactively offering information to the FCA, and making improvements to its systems and controls. Redcentric also accepted that it should take steps to compensate relevant investors and, to that end, has implemented a compensation scheme the value of which is estimated to be £11.4m. This led to the FCA deciding not to impose a further penalty on the company given that:

  • the company has taken reasonable steps to provide the compensation that it reasonably can provide through its scheme (a scheme which the FCA described as "'exemplary"');
  • it is preferable for the company to use its resources providing compensation in this way; and
  • a further penalty would risk causing disruption to the company's business which provides "'vital services"' in respect of the COVID-19 pandemic, and, in turn, to its customers which includes numerous NHS Trusts.

In a separate action, the FCA has instituted criminal proceedings against three former employees of Redcentric for allegedly, among other offences, making false or misleading statements contrary to section 89(1) of the Financial Services Act 2012.

Climate Change
FRC to assess company and auditor responses to climate change

The FRC has announced a review of how companies and auditors assess and report on the impact of climate change while considering how the quality of information can be improved to support informed decision-making by investors and other stakeholders. The FRC will also consider how investors are addressing the climate challenge in the stewardship of their investments and in their response to systemic and market risks when it monitors the first reports under the Stewardship Code. For further details, please read our Governance & Compliance update – Issue 153.

FCA consults on climate-related and other ESG disclosures

The FCA has consulted on proposals for new climate-related disclosures by premium listed issuers. A new Listing Rule will require all commercial companies (not investment companies) with a premium listing, including sovereign-controlled commercial companies, to either make climate-related disclosures in their annual report consistent with the approach set out by the Taskforce on Climate-related Financial Disclosures (TCFD) or explain why they have not done so. The FCA also consulted on a new technical note which clarifies existing disclosure obligations. If taken forward, the new rules would apply in relation to accounting periods beginning on or after 1 January 2021. For further detail, please read our Governance & Compliance update – Issue 154.

Other developments:
  • ISS has published new International Climate Proxy Voting Guidelines to provide investors with a solution to integrate climate-related factors into their voting decisions. The Guidelines are based on principles developed from widely recognised international frameworks, such as the TCFD requirements. For further detail, please read our Governance & Compliance update - Issue 155;
  • The FRC, in collaboration with Companies House and BEIS, has published a new digital tool intended to make it easier for businesses to comply with energy and carbon reporting rules. For further detail, please read our Governance & Compliance update - Issue 155; and
  • The Climate Disclosure Standards Board (CDBS) and the CPD (formerly the Carbon Disclosure Project (CDP)) have published a document which purports to contain the "'building blocks"' for disclosures using CDP data and the CDSB Framework which are aligned with the TCFD methodology.  
  • The CDSB, in collaboration with TCFD, has developed the TCFD Knowledge Hub which provides tools, resources, case studies and insights to help organisations implement the TCFD Recommendations. For further detail, please read our Governance & Compliance update - Issue 163.
Narrative Financial Reporting
FR Lab report: Workforce-related corporate reporting

Earlier in the year, the FR Lab published a report on "'Workforce-related corporate reporting – Where to next?"', as well as a summary of the key issues and questions for companies to consider. For further detail, please read our Governance & Compliance update - Issue 151. 

ESMA publishes report on issuers' use of APMs

ESMA has published a report on EU issuers’ use of Alternative Performance Measures (APMs) and their compliance with ESMA's 2015 Guidelines (2015 Guidelines). The report covers:

  • the use of APMs in management reports, ad hoc disclosures and announcements and in primary financial statements; and
  • the compliance of issuers with the 2015 Guidelines in management reports, ad hoc disclosures and prospectuses.

For further detail, please read our Governance & Compliance update - Issue 150.

Subsequent to this, ESMA also published guidance on the use of APMs when reporting on the impacts of COVID-19. For further detail, please read our Governance & Compliance update – Issue 160.

AIM good governance review analyses governance disclosures

The QCA has published the AIM Good Governance Review 2019–20 which analyses the governance disclosures of 50 AIM companies. The review is divided into five specific areas dealing with the strategic report, stakeholder engagement, board dynamics, board expertise and succession planning. The Review also includes the views of leading small & mid-cap fund managers. 

PERG publishes annual report on disclosure and transparency in PE

The Private Equity Reporting Group (PERG) has published its twelfth annual report on disclosure and transparency relative to the Guidelines for Disclosure and Transparency in Private Equity, formerly the Walker Guidelines. PwC has also published its latest Good Practice Reporting Guide for portfolio companies. For more information, please read our Governance & Compliance update, Issue 149.

BEIS committee launches a follow-up inquiry on audit reform

The Business, Energy and Industrial Strategy Select Committee has launched a follow-up inquiry on "'Delivering Audit Reform"' to help map out a path for implementing meaningful change in the UK audit market in light of its own inquiry, those of Sir Donald Brydon and Sir John Kingman and that of the Competition and Markets Authority. The provisional closing date for the submission of written evidence was 4 May 2020. The FRC has also published its strategy for reform over the medium term.

FRC publishes study of audit quality indicators

The FRC has published a review of the use of tools to flag signs of poor quality audits, encouraging more effective use of them in order that timely corrective action can be taken. For further detail, please read our Governance & Compliance update – Issue 163.

FRC updates practice aid for audit committees

The FRC has updated its Practice Aid for Audit Committees. The Practice Aid provides guidance on audit quality evaluation to help audit committees with their assessment of the external audit process. For further detail, please read our Governance & Compliance update - Issue 149.

Financial Promotions
HM Treasury consults on proposed changes to the financial promotions regime

HM Treasury has published a consultation paper proposing reforms to the process for the approval of financial promotions communicated by unauthorised firms. Currently where an unauthorised firm wishes to communicate a financial promotion, unless an exemption under the Financial Services and Markets Act (Financial Promotion) Order 2005 (FPO) applies, the promotion must be approved by an authorised firm. However, any authorised firm is able to approve any financial promotion of an unauthorised firm without having to go through any process to be assessed as suitable or competent to perform this role, and the FCA has identified cases of authorised firms failing to satisfy its requirements in approving such financial promotions.

The consultation seeks views on two options for a 'regulatory gateway' to strengthen the FCA's ability to ensure financial promotion approvals operate effectively. The first option would require authorised firms to obtain the FCA's consent in order to be able to provide approval of financial promotions of unauthorised firms. The second option would see the approval of unauthorised firms' financial promotions constitute a regulated activity, meaning that only firms with a Part 4A permission from the FCA would be able to undertake them. 

In a second consultation, the government is proposing to bring certain cryptoassets within the scope of financial promotions regulation. To achieve this, certain unregulated cryptoassets would be included in the list of controlled investments, and a number of the current controlled activities detailed in the FPO would be amended.

The deadline for responses to the consultations is 25 October 2020.

Key Contacts

Simon Wood

Simon Wood

Partner, Corporate Finance
London, UK

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Jeremy Cruse

Jeremy Cruse

Legal Director, Corporate Finance

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