Essential Corporate News – Week ending July 14, 2017

Publication | July 14, 2017

Introduction

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

ESMA: Consultation papers containing draft technical advice for purposes of the Prospectus Regulation

The EU Prospectus Regulation (2017/1129) was published in the Official Journal on June 30, 2017.  It requires the European Commission to adopt delegated acts in a number of areas within 18 months of its entry into force.  In February 2017, the European Securities and Markets Authority (ESMA) received requests for technical advice from the European Commission in a number of areas and on July 7, 2017 ESMA published three draft versions of ESMA’s technical advice in these areas.

Consultation paper on the format and content of the prospectus

While ESMA proposes largely maintaining the existing regime for prospectuses required when securities are offered to the public or admitted to trading on a regulated market, it does propose a number of alleviations to reduce the burden and costs on issuers. These include removing the requirement for a report by the auditors or independent accountants on profit forecasts.

ESMA has also developed draft requirements for a new Universal Registration Document which would operate as a type of shelf registration document. Its content requirements are based on those for the share registration document.

In relation to secondary issuance, ESMA proposes reduced disclosure in order to take greater account of publicly available information, particularly in the case of registration documents.

Consultation paper on content and format of EU Growth prospectus

ESMA has developed draft technical advice dealing with the format and content of the Small and Medium Enterprise (SME) focused EU Growth Prospectus. These identify the minimum disclosure requirements, their order of presentation and the format and content of the specific summary.  ESMA has adapted individual disclosure items to take account of the size of issuers and the complexity of their operations in order to ensure a proportionate regime for SMEs.

The proposal consists of a schedule of registration document information and a separate schedule for information concerning the securities, each of which can be used for both equity and non-equity issuances.

Consultation paper on scrutiny and approval

This set of draft technical advice sets out criteria for scrutiny and procedures for approval and filing of the prospectus. ESMA proposes that standard criteria for scrutiny of the completeness, comprehensibility and consistency of the prospectus be adopted but that, beyond the standard criteria, national competent authorities will be able to have a certain level of flexibility to ensure investor protection.

Next steps

The consultations close on September 28, 2017. ESMA will deliver the necessary technical advice to the European Commission by March 31, 2018.

(ESMA, Consultation paper on the format and content of the prospectus, 07.07.17)

(ESMA, Consultation paper on content and format of EU Growth prospectus, 07.07.17)

(ESMA, Consultation paper on scrutiny and approval, 07.07.17)

LSE: Discussion Paper – AIM Rules review

On July 11, 2017 the London Stock Exchange (LSE) published AIM Notice 46, together with a discussion paper inviting feedback regarding proposed changes to the AIM Rules for Companies (AIM Rules) and the AIM Rules for Nominated Advisers (Nomad Rules).  The proposals relate to early clarity for applicants and nominated advisers in the administrative process, consistency of approach across the nominated adviser community in respect of appropriateness considerations and appropriate levels of corporate governance. The discussion paper also provides detail as to how the LSE enforces the AIM Rulebooks and considers further supervisory powers and sanctions to ensure consistency of standards across the market within the LSE’s remit.

The LSE is seeking feedback on the proposals below:

Formalising the early notification process

The LSE is considering extending and codifying the existing early notification process whereby nominated advisers are required to approach the LSE at an early stage of a new application to discuss a company, where there are any atypical features or potential issues that may be of concern. In terms of formalising the process, the nominated adviser would be required to enter into confidential discussions with the LSE at an earlier stage in the Schedule One process, setting out key information regarding the company and its proposed admission to AIM.  The discussion paper sets out some of the main types of information that would be essential to these discussions, including details of the company’s business and its country of incorporation and operation, details of its proposed board and any persons discharging managerial responsibilities who are not directors, significant shareholders pre-admission and expected post-admission and details of the shares not in public hands.  The proposal would extend the practice of early discussions to all proposed admissions and codify this into the rules.  However, the LSE makes it clear that this would not diminish a nominated adviser’s overall obligations to the LSE to be satisfied about a company’s appropriateness or its ongoing obligation to update the LSE about any new information or any changes of circumstances that arise during the admission process.

Guidance on when the LSE may exercise its AIM Rule 9 powers

While the nominated adviser is obliged to assess the appropriateness of an AIM company, the LSE has ultimate discretion to refuse or impose conditions on an admission if any issues identified prior to admission remain unaddressed. In practice, the LSE rarely needs to exercise this power as issues are either addressed satisfactorily or the application is withdrawn.  However, to ensure consistency of approach from nominated advisers and to provide further certainty about the LSE’s expectations as to what nominated advisers should take into account when meeting their obligations, the LSE proposes to include in the Nomad Rules a non-exhaustive list of factors as guidance about the types of issues that may give rise to concern.

The discussion paper sets out those factors and they include concerns as to the good character, skills, experience or previous history of a director, key manager, senior executive, consultant or shareholder, formal criticism of the applicant and/or any of its directors by other regulators, governments, courts, law enforcement or exchange bodies and corporate structure or business models that give rise to concerns regarding appropriateness for a public market.

The development of AIM and eligibility criteria

The LSE is seeking views from stakeholders about whether the current entry criteria in terms of minimum size and percentage free float criteria remain appropriate:

  • Free float – maintaining an orderly market: The discussion paper notes that the AIM Rules do not include a specific numerical or percentage threshold for free float as the LSE considers a qualitative approach rather than a prescribed threshold to be appropriate for AIM companies. It asks whether this current approach strikes the right balance or whether the introduction of a minimum “shares in public hands” requirement should be introduced? If a specific free float requirement is introduced, it asks what types of shareholders should be considered as “shares in public hands”?
  • Minimum fund raising requirement for new applicants to AIM – The LSE asks whether it would be beneficial to apply a minimum fund raising criteria at admission or whether it should continue to only apply to AIM investing companies. If a minimum fund raising criteria is introduced, the discussion paper asks whether it should apply to all applicants or just non-revenue generating businesses at admission and whether, if a threshold is introduced, the level of minimum fund raising should be £2 million, £3 million, £6 million or some other figure. It also asks for views on the circumstances where a company should not have to meet a minimum fund raising criteria, for example, where a company is admitted to another market and already has a track record as a public company.

Corporate governance for AIM companies

The LSE is particularly interested in stakeholder views on the following areas:

  • Composition of boards – The discussion paper asks whether the current requirements in relation to the composition of boards (which do not mandate specific composition requirements nor that non-executive directors be independent of the AIM company), including the duties of the nominated adviser at admission to consider the efficacy of the board and the adoption of appropriate corporate governance standards and disclosure under AIM Rule 26, are effective.
  • Disclosure – The discussion paper asks whether AIM companies should be required to report annually against a governance code. An option would be to make it mandatory for AIM companies to comply or explain against one of the industry codes of their choosing.

Standards of conduct and approach to non-compliance with the AIM Rulebooks

The discussion paper points out that the LSE’s remit is limited to its Rulebooks i.e. a company’s conduct in relation only to its AIM Rules obligations, or, in the case of a nominated adviser, the duties it owes to the LSE in its role as a nominated adviser. Matters such as directors’ duties, shareholder rights, takeover obligations, short selling, prosecution of market abuse cases and fraud in relation to AIM companies fall within the remit of other authorities.  The discussion paper asks whether there are ways in which the LSE can helpfully educate market participants, particularly individuals, as to what the LSE can and cannot do in respect of its remit, beyond the information already available on its website.

Breaches of the AIM Rulebooks

The discussion paper sets out the approach of the LSE to potential breaches of the AIM Rules and the Nomad Rules. It sets out the tools it has available where there is evidence of a breach of those rules and asks whether there should be automatic fines for explicit breaches of the AIM Rules.  If so, it seeks views on the types of breaches that the fines should be applied to and the appropriate level of fines.  It also asks whether there are other changes to the Disciplinary Handbook that the LSE should consider.

Next steps

Responses to the discussion paper are requested by September 8, 2017. The LSE will then consider the feedback and evaluate whether any changes to the AIM Rules or the Nomad Rules should be drafted for consultation.

(LSE, Discussion Paper – AIM Rules Review, 11.07.17)

FCA: Proposal to create a new premium listing category for sovereign controlled companies – CP17/21

On July 13, 2017, the Financial Conduct Authority (FCA) published consultation paper CP17/21 (the Consultation) setting out proposals to create a new category of premium listing for commercial companies controlled by a shareholder that is a sovereign country. In creating this new category the FCA hopes to make UK markets more accessible to sovereign controlled companies whilst ensuring protections remain in place where they are valued by investors.

Under the proposals set out in the Consultation, companies seeking a listing in the new category would largely be subject to the same eligibility requirements and ongoing obligations as any other commercial company with a premium listing, subject to the following key exceptions:

  • Related party rules: The sovereign controlling shareholder would not be considered to be a related party for the purposes of the related party provisions set out in Chapter 11 of the Listing Rules.
  • Controlling shareholder rules: The controlling shareholder rules would not apply in respect of the sovereign controlling shareholder.
  • Securities to be listed: Unlike the current premium listing categories which are only available for a listing of equity shares, companies seeking admission to the new category could alternatively choose (subject to certain provisos) to list depositary receipts.

To qualify for the proposed new listing category, 30 per cent or more of the company’s voting rights would need to be controlled by a sovereign shareholder (i.e. the sovereign or other head of State in his/her public capacity, the government of that State, a department of that State, or an agency or special purpose vehicle of that State).

The Consultation notes that the small number of existing premium listed companies that would be eligible for the new category would be entitled to apply to transfer their listing if they wished to do so, but that this would require prior approval by a vote of independent shareholders (excluding the sovereign controlling shareholder and any other controlling shareholder).

Next steps

The consultation closes on October 13, 2017 and the FCA expects to publish its new rules in a policy statement towards the end of the year.

(FCA, CP17/21, 13.07.17)

Takeover Panel consultation – Asset sales in competition with an offer and other matters

On July 12, 2017 the Code Committee of the Takeover Panel (the Code Committee) published consultation paper PCP 2017/1 (the Consultation).

The Consultation proposes amendments to various aspects of the Takeover Code (the Code) in relation to the sale by an offeree company of assets in competition with an offer or possible offer, as well as certain other amendments regarding the use of social media, ‘no intention to bid’ statements made under Rule 2.8 and the dispensations from Rule 9.

The Consultation closes on September 22, 2017.

Asset sales in competition with an offer

The Consultation notes that the Code Committee is concerned that an offeror or potential offeror may be able to circumvent certain provisions of the Code (which would otherwise operate so as to prevent further, increased, or revised offers) by instead purchasing the assets of an offeree company. In this context, the Code Committee has reviewed the application of the Code to transactions under which, in competition with an offer, the board of an offeree company agrees to sell some or all of the company’s assets to a third party, and the Consultation sets out a number of proposed amendments to the Code intended to address this concern.

Preventing an offeror from circumventing the Code by purchasing significant assets of an offeree company

Where a person is subject to Rule 2.8 (Statements of intention not to make an offer), Rule 12.2 (Competition reference periods) or Rule 35.1 (Delay of 12 months) they are, during the period for which the relevant rule applies, restricted from, amongst other things, making further offers for the offeree company or making any statement which raises or confirms the possibility that an offer might be made. The Consultation proposes amendments to prevent persons circumventing the application of these restrictions by purchasing, agreeing to purchase, or making any statement which raises or confirms the possibility they are interested in purchasing, assets which are significant to the offeree company (with relative values of more than 50 per cent normally being regarded as ‘significant’) during the period for which the relevant rule applies.

The proposed amendments would also have the effect of preventing:

  • offerors that have made unqualified ‘no extension’ or ‘no increase’ statements from avoiding the application of Rules 31.5 and 32.2, as applicable (which are designed to restrict increased or revised offers being made by the offeror); and
  • potential offerors that have made an unqualified statement regarding the terms on which they might make an offer from avoiding the application of Rule 2.5(a) (which provides that the potential offeror will be bound by any such statement if it subsequently makes an offer for the offeree company),

by purchasing, agreeing to purchase, or making any statement which raises or confirms the possibility they are interested in purchasing, assets which are significant to the offeree company for three months following the date on which (a) their offer lapsed (in the case of the first bullet above); or (b) they announced they had no intention of making an offer (in the case of the second bullet above).

Asset sales and other transactions subject to Rule 21.1 (Restrictions on frustrating action)

Where the board of an offeree company is considering selling assets to a third party, a number of Code provisions apply, in particular Rule 21.1 which (amongst other things and subject to certain exceptions) restricts the offeree company from taking frustrating action, selling or agreeing to sell assets of a material amount or entering into contracts outside the ordinary course of business unless the proposed action is approved by its shareholders in general meeting.

In the Consultation, it is proposed that Rule 21.1 be amended so as to:

  • make it clear that shareholder approval will not be required under Rule 21.1 if the taking of the proposed action is conditional on the offer being withdrawn or lapsing;
  • require that where shareholder approval is sought under Rule 21.1 for a proposed action (a) the offeree board obtains competent independent advice as to whether the financial terms of the proposed action are fair and reasonable and (b) the Takeover Panel is consulted regarding the proposed date of the general meeting;
  • require that the offeree board sends a circular to shareholders containing specified information where (a) shareholder approval is being sought for a proposed action under Rule 21.1 or (b) such approval would be sought but for the fact that the taking of the proposed action is conditional on the offer being withdrawn or lapsing; and
  • permit an offeree company to agree to pay an inducement fee to a counterparty to transaction to which Rule 21.1 applies, provided the fee is de minimis.

Sales of all or substantially all of the offeree company’s assets in competition with an offer

The Consultation set outs various amendments to the Code in relation to circumstances where, in competition with an offer or possible offer, an offeree company board states that it is proposing to sell all or substantially all of the company’s assets and return all or substantially all of the company’s cash balances to shareholders. These include proposals that, in these circumstances:

  • any statement made by the offeree company quantifying the cash sum expected to be paid to shareholders if the offer lapses or is withdrawn should be treated as a quantified financial benefits statement and therefore subject to the reporting and other applicable requirements of Rule 28 (note that the definition of quantified financial benefits statement currently refers to statements quantifying financial benefits expected to accrue to the offeree company and so does not apply to statements quantifying financial benefits expected to accrue to its shareholders); and
  • a purchaser of some or all of the offeree company’s assets should be put on a level playing field with a competing offeror (which would not be able to purchase shares at above its offer price) and therefore should be restricted from acquiring interests in shares of the offeree company during the offer period unless the offeree company has made a statement quantifying the cash sum expected to be paid to shareholders – even where such a statement has been made by the offeree company, interests can only be acquired to the extent that the price paid does not exceed the value per share that the offeree board has stated it expects to return to shareholders (if a range is stated, the price paid must not exceed the bottom of the range).

The Consultation also proposes the introduction of a new Note on Rule 21.3 (Equality of information to competing offerors) to clarify that, where the board of an offeree company commences discussions in relation to the sale of all or substantially all of its assets during an offer (or following the date on which the board has reason to believe a bona fide offer might be imminent) Rule 21.3 will, subject to certain caveats, apply to information given by the offeree company to the potential asset purchaser(s).

Other proposed amendments

The Consultation also proposes amendments in a number of other areas including:

  • requiring persons who make a ‘no intention to bid’ statement under Rule 2.8 to specify in that statement the circumstances in which they reserve the right to set the statement aside;
  • amending Rule 20.4 (which currently restricts the use of social media to publish information relating to an offer or a party to an offer) so that it only restricts publication of information relating to an offer and also amending it to permit publication via social media of videos that have been approved by the Panel in accordance with Rule 20.3 – these proposed changes essentially recognise the increased use of social media by parties to an offer to release information on themselves and that the current prohibition on the release of such information is unduly restrictive;
  • amending Note 1 on Rule 19.1 to clarify that financial advisers are responsible for guiding their clients with regard to the publication of information via social media in the same way as information published by other means during the course of an offer; and
  • amending Note 5 of the Notes on dispensations from Rule 9 to reflect existing practice that the Takeover Panel will consider granting a waiver in the context of an issue of new securities if independent shareholders holding shares carrying more than 50 per cent of the voting rights capable of being cast on a ‘whitewash’ resolution provide certain written confirmations.

(Takeover Panel, Asset sales in competition with an offer and other matters, 12.07.17)

Takeover Panel: New Practice Statement No. 31, withdrawal of Practice Statements Nos. 3 and 6 and amendment of Practice Statement No. 20 – 2017/12

On July 7, 2017, the Panel Executive published Practice Statement No. 31 (Strategic reviews, formal sale processes and other circumstances in which a company is seeking potential offerors).

Practice Statement No. 31 describes the way in which the Panel Executive normally interprets and applies certain aspects of Rule 2 (Secrecy before announcement; the timing and contents of announcements), Rule 21.2 (Inducement fees and other offer-related arrangements) and Rule 21.3 (equality of information to competing offerors) where a company wishes:

  • to make an announcement that it is conducting a strategic review of its business which, in certain cases, may include an offer for the company as a possible outcome;
  • to conduct a “formal sale process” and benefit from the dispensations in Note 2 on Rule 2.6 and Note 2 on Rule 21.2; or
  • otherwise to seek one or more potential offerors.

Section 2 of the Practice Statement incorporates the relevant contents of Practice Statement No. 6 so that has been withdrawn. However, the Panel Executive has confirmed in Practice Statement No. 31 that if, at the time that a strategic review announcement which refers to an offer is made, the offeree company is not in talks with any potential offeror and is not in receipt of any approach with regard to a possible offer, this should be stated in the announcement.

Section 3 of Practice Statement No. 31 incorporates the relevant contents of Practice Statement No. 3 so that has been withdrawn. The Panel Executive has confirmed in Practice Statement No 31 that the announcement of the commencement of a formal sale process will be treated as equivalent to the announcement of the existence of a potential offeror to which information has been given.  As a result, under Rule 21.3, following the announcement of a formal sale process, any information passed to any potential offeror participating in the process must, on request, be passed to a bona fide potential competing offeror, even if that party is not participating in the formal sale process.

A cross-reference in Practice Statement No. 20 has been updated to refer to Practice Statement No. 31.

(Takeover Panel, Publication of Practice Statement No. 31 withdrawal of Practice Statements Nos. 3 and 6 and amendment of Practice Statement No. 20, 07.07.17)

(Takeover Panel, Practice Statement No. 31, 07.07.17)

(Takeover Panel, Practice Statement No. 20, 07.07.17)

ESMA: Updated Q&A on Alternative Performance Measures Guidelines

On July 12, 2017 the European Securities and Markets Authority (ESMA) updated its Q&As on Alternative Performance Measures (APMs). The Q&As are intended to promote common supervisory approaches and practices in the application of the ESMA Guidelines on APMs published in June 2015 (the Guidelines). The Guidelines are aimed at promoting the usefulness and transparency of APMs included in prospectuses and/or regulated information.

The updated Q&As cover the following additional areas:

  • Interim financial statements – Confirmation that paragraph 31 of the Guidelines applies to APMs related to quarterly financial figures included in ad-hoc disclosures published in accordance with Article 17 of the Market Abuse Regulation even when the issuer is not required to publish quarterly financial statements in accordance with the Transparency Directive.
  • Concept of Prominence – As the Guidelines do not define the concept of prominence, issuers should use their judgment when complying with this principle. Judgement should be made on a case-by-case basis depending on the documents in which the APMs are included. Issuers should ensure that measures stemming from financial statements are not displayed with less prominence, emphasis or authority than APMs. Factors that could help issuers when exercising their judgement include: attention paid to APMs in comparison with measures directly stemming from financial statements; the location of APMs within the document; frequency of use; size of font, use of bold and italics; and length of analysis of the APMs. Illustrative examples are also included.
  • Compliance by reference – Whilst issuers may use the compliance by reference principle in order to avoid repetition of information in regulated information documents, the principle cannot be used when complying with the following requirements: comparatives (paragraph 46 of the Guidelines); meaningful labels to the APMs used (paragraph 22 of the Guidelines); prominence and presentation of APMs (paragraphs 35 and 36 of the Guidelines) and consistency (paragraph 41 of the Guidelines – although the explanations required therein may be complied with by reference).
  • Definition of an APM – Unless the applicable financial reporting framework defines or specifies ‘result of operating activities’, this measure is an APM for the purpose of the Guidelines. Operating results or results from operating activities are not defined or specified in International Financial Reporting Standards (IFRS) so, under the IFRS framework, measures labelled as ‘operating results’, ‘results of operating activities’ or other similar labels are within the scope of the Guidelines when presented outside financial statements.

(ESMA, Updated Q&A on APMs, 12.07.17)

ESMA: Consultation paper on evaluation of certain elements of Short Selling Regulation

On July 7, 2017 the European Securities and Markets Authority (ESMA) published a consultation paper on the evaluation of certain elements of the Short Selling Regulation (Regulation 236/2012) (SSR).  In January 2017, the European Commission sent a formal mandate to ESMA seeking technical advice on the evaluation of certain elements of the SSR and this advice must be delivered by December 31, 2017.

The consultation paper has been published to seek the views of market participants on the three main elements of the European Commission’s mandate, on the concerns they may raise and on possible ways forward to address them. These three elements are as follows:

  • Exemption for market making activities – ESMA has been asked to analyse whether the exemption for market making activities and the definition of market making activities is sufficiently clear, whether the scope of such exemption is appropriate in view of its objective to safeguard the positive role of market making activities with respect to market liquidity and efficiency, and whether the notification procedure in Article 17(5) SSR is adequate, effective and efficient. In particular, ESMA has been asked to assess the impact of the membership requirement featured in the definition of Article 2(1)(k) on those entities making markets in financial instruments which are only traded over the counter, and to assess the consequences, if any, of the absence of alignment between the definition of “market making activities” in Article 2(1)(k) in the SSR and that of “market making” in Article 4(1)(7) of the MiFID II Directive (Directive 2014/65/EU).
  • Procedure for imposing short-term restrictions on short selling in case of a significant decline in price – ESMA has been asked to analyse whether the procedure in Article 23 SSR for imposing short-term restrictions on short selling in the case of a significant decline in price is efficient, effective and relevant and fosters consistent approaches across the EU, and whether and how the procedure could be simplified.
  • Transparency of net short positions and reporting requirements – ESMA has been asked to analyse whether the method of notification and disclosure of net short positions is appropriate, effective and efficient, whether it can be made less burdensome and costly for notifying entities while still providing competent authorities with the information needed for proper supervision, whether further harmonisation of the notification process is needed, and whether public disclosure of net short positions in shares are efficient, effective and relevant in view of their effects on trading behaviours, market efficiency and volatility.

Responses to the consultation paper are requested by September 4, 2017. ESMA expects to publish its final report on the technical advice on the evaluation of certain elements of the SSR to the European Commission by December 31, 2017.

(ESMA, Consultation paper on evaluation of certain elements of Short Selling Regulation, 07.07.17)

FRC: Call for participants in audit committee reporting project

On July 10, 2017 the Financial Reporting Council (FRC) invited audit committee members, companies, investors and audit firms to take part in a pilot project of the FRC’s Audit and Assurance Lab, to explore the role of the audit committee reporting in promoting audit quality.

The project will investigate how investors’ confidence in the audit can be maintained through:

  • Phase 1 – the external reporting by audit committees in the annual report, in accordance with the UK Corporate Governance Code; and
  • Phase 2 – auditors’ reports to audit committees, including how they can better support audit committee reporting.

Next steps

The project will be got underway by July 2017. The Phase 1 project report will be published in time for consideration for December 2017 year-ends and will focus on the good practice elements of existing audit committee reporting, and encourage audit committees to consider adopting the practices, if appropriate, in the context of their own reporting. The Phase 2 project report will be published in the first half of 2018.

(FRC, Call for participants, 10.07.17)

FCA: Prospectus Rules (Miscellaneous Amendments) Instrument 2017 – FCA 2017/40

The Prospectus Rules (Miscellaneous Amendments) Instrument 2017 comes into force on July 20, 2017 and makes amendments to the Financial Conduct Authority’s (FCA) Handbook by way of amendments to the Glossary of definitions and the Prospectus Rules sourcebook.

The amendments made to the FCA Handbook reflect the provisions of the new Prospectus Regulation that are to apply from July 20, 2017 and update the definition of “ESMA Prospectus Questions and Answers” to refer to the most recent version of that document.

The provisions of the Prospectus Regulation which apply from July 20, 2017 relate to the exemptions from the obligation to publish a prospectus on the admission to trading on a regulated market of certain types of transferable securities.

(FCA, Prospectus Rules, 07.07.17)


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