Included in this issue: Equity Capital Markets; Public M&A; Corporate Governance; Regulation; Audit; Narrative Financial Reporting

Equity Capital Markets

FCA revises its Handbook

The Financial Conduct Authority (FCA) has published Handbook Notice 72 which sets out recent changes to the FCA Handbook. These include updating references to the UK Corporate Governance Code and the introduction of a new rule to the Disclosure Guidance and Transparency Rules to ensure that the requirements for annual corporate reporting in the European Single Electronic Format have been implemented in the UK. The changes are now in force. 

FCA updates Knowledge Base materials

The FCA has published Primary Markets Bulletin (PMB 26) which contains the first stage of updates to its Knowledge Base materials to reflect the changes to the prospectus regime made by the Prospectus Regulation which itself came into full effect on 21 July 2019. The updating process is being undertaken in stages due to the volume of technical and procedural notes affected. The updates being undertaken in this round of changes are to terminology and rule references; they do not change the substance of the materials. PMB 26 also notes the deletion of three technical notes which are no longer relevant.

The remaining technical notes require more substantive amendments, or reference to ESMA materials which are in the process of being reviewed. Further PMBs will be published announcing their amendment in due course. 

FCA publishes Quarterly Consultation Paper

The FCA has published Quarterly Consultation Paper No 26 (CP19/23), in which it consults on proposed amendments to the FCA Handbook including: 

  • changes to the Listing Rules’ requirements (in the Annex to LR 13) relating to information to be put on display, reversing changes introduced in July 2019 to make it clear that a sale and purchase agreement (or equivalent) does not have to be made available online. Note that a hard copy will still need to be made available for inspection; and
  • a new Listing Rule (in LR 4) to set out a requirement mandating the disclosure and continued availability of rights attached to securities by keeping information publicly available in the National Storage Mechanism (NSM). These proposals would require issuers with listed securities to keep publicly available in the NSM either the securities' approved prospectus, a document with the securities' terms and conditions, or a description of the securities' rights and how to exercise those rights.

We will provide a further update if and when the rule changes come into force.

SME Growth Markets Regulation in force

The purpose of the SME Growth Markets Regulation (EU) 2019/2115 (Regulation) is to reduce the administrative burden and compliance costs placed on issuers on SME Growth Markets, such as AIM and the NEX Growth Market, by amending the Prospectus Regulation and Market Abuse Regulation (MAR). The Regulation is now in force as to those aspects of it that amend the operation of the Prospectus Regulation, including the ability to issue a "simplified" prospectus when moving from AIM to a regulated market. Changes to MAR will apply from 1 January 2021. A detailed overview of the content of the Regulation was contained in November's edition of Corporate Finance News.

Public M&A

Just Eat plc: competing bids by Takeaway NV and Prosus NV

One of the most notable deals in the last quarter of 2019 was the contested takeover of UK online food delivery business Just Eat plc. In August 2019, Just Eat and Takeaway NV (a European online food delivery business) announced a recommended all share merger under which Takeaway would acquire Just Eat. The consideration payable in Takeaway shares would have left Just Eat shareholders with 52% of the enlarged group, and the implied value of the offer based on the then prevailing Takeaway share price was £5.05bn. 

The proposed deal was subject to various regulatory and antitrust clearances. While these were being obtained, a third party, Prosus, a global investor in internet consumer businesses, announced a competing cash offer at 710p per Just Eat Share, valuing Just Eat at £4.90bn. Following the announcement by Prosus, the offer timetable for both Just Eat and Prosus switched to the timetable set by the second offer (as is required by Note 2 on Rule 31.6 of the Takeover Code (Code)).

Rule 32.5 of the Code requires that if a competitive situation is still continuing towards the later stages of an offer period, then an auction must be held on Day 46 to determine both offerors’ best and final price, to provide an orderly market for 14 days thereafter during which shareholders may make their investment decisions ahead of the final deadline for acceptance of either offer on Day 60. Under the timetable set by the Prosus offer, Day 46 was December 27th.

In such a competitive situation, the Panel typically engages with the competing offerors and the target to seek to agree an auction procedure to resolve the situation - which ideally would occur and complete out of market hours (such as happened in the 21st Century Fox/Comcast auction for Sky plc in 2019). However, if no agreement is possible between all the parties, the auction will be held on the basis of the default rules set out in Appendix 8, which requires up to five rounds of bidding on consecutive days - the only example of which to date was the auction for KCOM (advised by Addleshaw Goddard) by Macquarie and USS in mid-2019.

The auction for Just Eat would have had the interesting dynamic of share consideration (Takeaway) versus cash (Prosus). In this scenario, there was potentially a tactical advantage for Prosus not to agree bespoke auction rules with the Panel and instead rely on the default Appendix 8 procedure to be run over five consecutive days. This would have given Prosus the advantage of gauging the market reaction to Takeaway’s offer (reflected in the Takeaway share price movement) before making its next competing bid at 5pm the following day. Despite this potential advantage, the Panel would not have been able to force Prosus into agreeing an alternative set of auction rules.

Ultimately, the auction did not come to pass - on 19 December Prosus made a final offer of 800p (£5.5bn). As the purpose of an auction is to set a party’s best and final offer, Prosus’ no increase statement meant that there would not be an auction. Takeaway had until Day 46 (27th December) to amend its offer further. Takeaway countered shortly afterwards on the 19th December with an all share offer under which Just Eat shareholders would receive 57.5% of the enlarged group. This offer was recommended by the board of Just Eat, and ultimately was approved by shareholders.

Inmarsat Plc - Schemes of Arrangement

In December 2019, the Court sanctioned a transfer scheme of arrangement between Inmarsat Plc and its members (Scheme). Prior to the scheme sanction hearing, the Scheme had faced objections from three institutional shareholders (Objectors). The basis of their objection was that Inmarsat, a provider of mobile satellite services, had granted options over some of its radio frequencies to Ligado, a US based satellite communications business, in return for scheduled payments. The future success of such payments are dependent upon Ligado obtaining a licence modification from the US Federal Communications Commission (FCC) in respect of the intended use of the frequencies (Licence Modification). In October 2019, prior to the sanction of the Scheme, a press report was published speculating that the FCC had taken steps to grant the Licence Modification and that the same would be forthcoming.

The Objectors main grounds for objecting to the Scheme were: (i) that the explanatory statement was insufficient in respect of information concerning Ligado; (ii) a contingent value right (CVR) should have been negotiated in respect of the Licence Modification; and (iii) that a material change in circumstance had occurred since the shareholder meetings held in May 2019.

Whilst the Objectors withdrew their objections before the Scheme sanction hearing, Sir Alastair Norris considered it necessary to address the points raised by them and confirmed that:

  • the overall test for the Court is one of fairness - i.e. the Court must be satisfied that the arrangement is such that an intelligent and honest man might reasonably approve them;
  • in formulating an explanatory statement in accordance with section 897(2) of the Companies Act 2006:
    • the focus must be on the question being put to shareholders;
    • shareholders need to be given such up-to-date information as can be reasonably provided about the Scheme and what can be expected as an alternate to the scheme;
    • consideration should be given to information already in the public domain, particularly that published by the company - i.e. in annual reports. The explanatory statement does not need to explore this information in further detail or contemplate different scenarios that may occur; and
    • the statement needs to contain all information reasonably necessary for recipients to determine how to vote but not all information regarding the company and its business,
  • the Court is not interested in the commercial merits of the Scheme nor is it the Court's duty to assess whether the scheme before them is the best scheme possible; and
  • speculation and rumor will not amount to a material change in circumstance nor will the occurrence of an event where such event's prospects remain uncertain.

The judgment follows Sir Alastair Norris' ruling in respect of Lloyds TSB Group plc's acquisition of HBOS plc (Sharp-v-Blank) which similarly explores the requirement for company directors to discharge their 'sufficient information duty' in respect of an explanatory statement.

Corporate Governance

Corporate governance on AIM - QCA publishes results of survey

The Quoted Companies Alliance (QCA) has published results of a survey following changes to the AIM Rules for Companies in 2018 which mandated the adoption of a "recognised" code of governance. According to the QCA, since then almost 90% of AIM companies have adopted the QCA Corporate Governance Code. 

Headlines from the survey include:

  • 39% of respondents stated that the process of adopting a code helped their business;
  • 42% said that the requirement helped formalise new processes;
  • 31% said that the process encouraged their board to consider new points of view; and
  • 20% said that the process made it easier for investors to assess them.


FCA issues first fine for notification failures by PDMR under MAR

The FCA has published a Final Notice imposing a fine of £45,000 on Kevin Gorman, formerly a member of the executive committee at Braemar Shipping Services plc for breaches of the notification regime under Article 19 of MAR. This is the first sanction the FCA has imposed for a breach of Article 19. For further detail, please read our Governance & Compliance update.


Brydon review into the quality and effectiveness of audit

The government has published the report of the independent review by Sir Donald Brydon into the quality and effectiveness of audit. The recommendations of the report focus on improving the audit standards of "public interest entities" – i.e. companies with securities admitted to regulated markets, such as the main market of the London Stock Exchange. An overview of the recommendations can be found in our Governance & Compliance update

FRC updates Ethical Standard and Auditing Standard

The Financial Reporting Council (FRC) has published major changes to its Ethical Standard and Auditing Standard in order to encourage auditor independence, stop conflicts of interest and increase investor protection. The changes include provisions prohibiting auditors from providing recruitment and remuneration services or playing any part in management decision-making, and state that auditors of public interest entities can only provide non-audit services which are closely linked to the audit itself or required by law or regulation.

The changes are intended to "dramatically reduce" the risk of damaging conflicts of interest, where the commercial interests of an auditor are perceived to be the most important factor in an audit relationship, rather than the focus being on high quality audits.

The revisions build on existing changes made to the Standards in 2016, which according to the FRC have seen audit firm fee income from non-audit services provided by auditors to the entities they audit fall by 8 per cent. 

The revised Standards can be found here

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. Further detail can be found in our Governance & Compliance update.

CIIA publishes new Internal Audit Code of Practice

The Chartered Institute of Internal Auditors (CIIA) has published a new Internal Audit Code of Practice (Internal Audit Code). The Internal Audit Code contains principles-based guidance that represents the final recommendations of the independent Internal Audit Code of Practice Steering Committee following a public consultation process. It is intended to be applied by all organisations in the private and third sectors that have an internal audit function and an audit committee, with an acknowledgement that the Code should be applied proportionately depending on the size and complexity of the organisation. Further detail can be found in our Governance & Compliance update

Narrative Financial Reporting

Latest reviews of and guidance on narrative reporting

Our Governance & Compliance updates provide more detail on the following developments:

AIM Good Governance Review analyses governance disclosures

The Quoted Companies Alliance (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 and includes the views of leading small & mid-cap fund managers. 

Financial services - Risk Coalition publishes guidance for board risk committees and risk functions

The Risk Coalition has published guidance for board risk committees and risk functions in the UK financial services sector. The guidance provides a set of good practice principles supplemented with practical guidance on their implementation.

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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