Corporate Law Update
The Financial Conduct Authority (FCA) has published two policy statements and a feedback statement as part of its review of the effectiveness of the UK’s primary markets (previously reported on here and here). Following consultation, the papers set out final rules to:
- clarify and enhance the listing regime (taking effect on 1 January 2018); and
- reform the availability of information in the UK equity initial public offering (IPO) process (taking effect on 1 July 2018).
The papers also identify certain areas that merit further exploration.
The three papers are as follows:
- Feedback statement (FS17/3) sets out the response to a discussion paper (DP17/2) issued in February on the UK primary markets landscape.
- Policy statement (PS17/22) sets out the response to a consultation paper (CP17/4) issued in February on enhancements to the listing regime.
- Policy statement (PS17/23) sets out the response to a consultation paper (CP17/5) issued in March on reforming the availability of information in the UK equity IPO process.
Some key points from the papers are summarised below. The papers do not consider the proposal for a new listing segment for issuers that are controlled by sovereign companies (reported on here).
Enhancements to the Listing Regime – effective 1 January 2018
In addition to the rule changes referred to below, various new technical notes are being issued and old technical notes are being updated.
The profits test
Premium issuers must run four “class tests” when proposing to enter into a transaction. If any test gives a result of 5% or more, the deal is a class 2 transaction and the issuer must make certain disclosures. If any result is 25% or more, it is a class 1 transaction and shareholder approval is required. If any result is 100% or more, it is a reverse takeover, shareholder approval is required, and the issuer’s shares may be suspended and (ultimately) its listing cancelled.
One test – the profits test – involves dividing the profits attributable to the assets being bought or sold (e.g. shares in a target company) by the issuer’s profits. However, this can give an unrepresentative result, particularly if there have been historic exceptional items or genuine one-off costs.
Currently, issuers can seek FCA consent to apply adjusted figures or substitute tests where any of the class tests produce an anomalous result or are inappropriate as a result of the company’s activities.
Except where the transaction is a related party transaction, the new rules will allow issuers to:
- Apply an adjusted profits figure if the results of the profits test are 25% or more and this result is anomalous.
- Disregard the profits test altogether if the results of the profits test are 25% or more and this result is anomalous and all of the other percentage ratios are below 5%.
Issuers will have to consult with their sponsor but they will no longer be required to consult with the FCA. The FCA has adopted the proposals presented in the consultation paper without amendment.
Further guidance on the meaning of “anomalous” is not being proposed on the basis that sponsors are familiar with making an assessment as to whether the result of any class test is anomalous.
As stated above, if any of the class tests give a result of 100% or more, the transaction will be classified as a “reverse takeover” (or if the transaction would result in a fundamental change in the issuer’s business, board or voting control). This applies to both premium and standard issuers.
A consequence of this is that the FCA will often suspend the issuer’s listing. This is on the basis there will be insufficient public information on the target of the transaction unless the issuer can provide that information, and that this could, in turn, lead to a disorderly market in the issuer’s securities.
The FCA has adopted the proposals set out in the consultation paper reversing this presumption. The FCA will now assume that proper price formation can happen on the basis of the information that listed companies are already required to make public (principally disclosure of inside information under the Market Abuse Regulation). Suspension will therefore not usually be necessary (unless the issuer is a shell company).
Routes to listing for specialist companies
A company applying for a premium listing must demonstrate a three-year revenue-earning track record by reference to published historical financial information. However, there are currently concessions to this rule available to scientific research-based companies (SRBCs) and mineral companies.
Minor changes were proposed to these rules as well as a new concession for property companies based on a property valuation report. These proposals have been adopted without amendment.
Clarifications to Chapter 6 of the Listing Rules
Various amendments and clarifications were proposed to LR 6 (which sets out the requirements that an applicant must meet in order to obtain a premium listing). The aim of these is to simplify and clarify the provisions and, in certain cases, bring them into line with market practice. These proposals have been adopted with only minor amendments.
Availability of information in the UK equity IPO process – effective 1 July 2018
During an IPO, a company seeking to come to market will engage a range of investment banks to place the company’s shares in the market and (potentially) to underwrite any shares that are not placed. Alongside this, analysts within those investment banks (“connected analysts”) will typically prepare research on the company in order to provide information to potential investors. This “connected research” is invariably published before the prospectus is made available.
The FCA was concerned that connected analysts may be influenced by pressure on the banks to “sell” the company, even though they are supposed to be independent from the book-running team. “Unconnected” analysts typically do not get access to the company’s management team until late in the process (if at all). In addition, due to the timing of a typical IPO, investors may place more reliance on connected research than on the prospectus itself.
In order to address these concerns, the FCA proposed new rules in the Conduct of Business Sourcebook (COBs). These have been adopted as proposed, with some minor and technical amendments. The new rules contain the following requirements:
- Firms will be required to provide a range of “unconnected analysts” with access to the issuer’s management. This requirement can be satisfied by unconnected analysts joining in meetings between the company and connected analysts or by unconnected analysts being given identical information as that given to connected analysts.
- Firms will need to undertake and keep for five years a written assessment of the potential range of unconnected analysts and ensure that those analysts have a reasonable prospect of enabling investors to make a better-informed assessment.
- Where unconnected analysts are given separate access to the issuer’s management , firms must retain written records of the information shared with both connected and unconnected analysts for five years.
- Firms may not publish their connected research until after the prospectus or registration document has been published.
By incorporating the new mechanism into COBS, the FCA is placing the onus of ensuring adequate access for unconnected analysts on the investment banks, rather than on the prospective issuer.
The new rules will not apply to IPOs on multilateral trading facilities (MTFs) although banks are encouraged to adopt the reformed practice when managing an offering on an MTF. This will be revisited as part of the post-implementation review of the rules (but not before 1 July 2019).
The new rules have been welcomed by the Investment Association.
UK primary markets landscape
Premium and standard listings
In DP17/2, the FCA discussed the current split between standard and premium listings. In particular the FCA looked at whether the distinction between premium listings (which carry a higher burden of compliance) and standard listings (which are based on EU minimum requirements) remains relevant.
The FCA noted that the standard segment is thought to be less well understood and less attractive, especially to international issuers. The FCA asked whether the creation of an international segment with differential treatment of international and UK issuers, which compliance-wise would be an intermediate option between standard and premium listings, would address any of these concerns.
Responses to the consultation indicated that there was little support for the creation of an international segment and the FCA will not therefore take this proposal forwards. However, the FCA received diverse responses to questions on the premium and standard segments. Responses indicated that, as previously thought, there is “strong support” for the premium segment but it is unclear what, if any, enhancements to the standard segment are desirable. The FCA decided that further debate is required in the hope this will generate more consensus. The FCA therefore intends to engage stakeholders further on this topic and publish proposals for consultation in due course.
The FCA also indicated that it will take a further look at the growth of science and technology companies, particularly improvements to the Listing Rules that might facilitate investment, and perceived barriers to retail access to debt markets.
The Financial Reporting Council (FRC) has published a Feedback Statement and Impact Assessment setting out the results of a consultation on the role of the auditor in preliminary announcements (previously reported on here).
The majority of responses indicated that the current regime is fit for purpose and does not require significant change. The FRC is therefore proposing only minor changes to the current auditor guidance (Bulletin 2008/2).
The FRC is not proposing to convert Bulletin 2008/2, which is guidance, into a standard that auditors would be required to follow and it is not proposing to require audits to be complete and auditor’s reports to be signed before the preliminary results can be released. The FRC will consult with the UKLA about various issues, including the introduction of a formal requirement for auditors to follow the updated FRC guidance.
The updated guidance will include a new voluntary ‘auditor’s responsibilities statement’. This will set out the status of the statutory financial statements and the procedures that the auditor has carried out.
The updated guidance will be published by the end of November.
The European Securities and Markets Authority (ESMA) has added six new questions to its Q&A document on alternative performance measures (APMs). APMs are financial measures of performance not defined by a financial reporting framework. The Q&A accompany ESMA’s guidelines on APMs.
The new Q&A include information on the definition of APMs, the scope of the APM guidelines and the application of the scope exemption, the definition of the APM measure ‘organic growth’, carrying out reconciliation, and applying the fair review principle.
ISS launches benchmark voting policy consultation period
Amongst other things, ISS is seeking views on a new policy that it is proposing to add to the UK/Ireland and European Voting Guidelines on virtual and hybrid meetings. ISS currently envisage recommending proposals that allow for the convening of hybrid shareholder meetings where shareholders are present both physically and online but opposing proposals that allow virtual only meetings.
Comments are requested by 9 November 2017. The revised policies will apply to shareholder meetings held on or after 1 February 2018.
In its formal response to the November 2016 green paper consultation on the governance of UK companies (previously reported on here), the Department for Business, Energy and Industrial Strategy (BEIS) indicated that it had invited the Investment Association (IA) to implement its proposal to keep a public register of listed companies that encounter opposition of 20% or more on executive pay and other resolutions.
The IA has now written to all FTSE companies who received votes of 20% against any resolution or withdrew a resolution in 2017. The IA will provide those companies an opportunity to explain how they have addressed shareholder concerns prior to appearing on the public register. A link to the companies’ response will be included alongside their voting data.