Essential Corporate News – Week ending December 4, 2015

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

On November 30, 2015 the European Commission adopted a legislative proposal for a new Prospectus Regulation to replace the current Prospectus Directive (2003/71/EC), together with corresponding implementing measures. The new Prospectus Regulation is part of the European Commission’s Capital Markets Union action plan which aims to unlock funding for business and provide more opportunities for investors in the EU. It is also part of the European Commission’s commitment to simplify and make EU laws more effective and efficient.

A prospectus has to be drawn up, approved by the supervisor of the home Member State and published whenever securities are either offered to the public or admitted to trading on a regulated market. However, there are already certain exemptions from the requirement to produce a prospectus and additional exemptions as well as other changes are proposed in the new Prospectus Regulation. The changes include the following:

• Exempting the smallest capital raisings: there will be a higher threshold to determine when companies must issue a prospectus. No EU prospectus will be required for capital raisings below €500,000 (currently the threshold is €100,000). Member States will also be able to set higher thresholds for domestic markets provided the offer is only made in that Member State and the total consideration of the offer is between €500,000 and €10 million.
• Creating a lighter prospectus for smaller companies: small and medium-sized enterprises (SMEs) will be able to draw up a distinct, tailor-made prospectus when they offer securities to the public provided they have no securities admitted to trading on a regulated market. The prospectus schedules for such companies will focus on information that is material and relevant for companies of their size. There will be a new optional “question and answer” format that should help SMEs in drawing up their own prospectus and all SMEs with a market capitalisation under €200 million (the current limit is €100 million) would qualify for this new regime.
• Shorter prospectuses and better investor information: the aim is to support shorter and clearer prospectuses by specifying more clearly the amount of information that is required and this will include a new prospectus summary which will be subject to a maximum of six sides of A4-sized paper when printed.
• Simplifying secondary issues for listed companies: companies already listed on a public market that want to issue additional shares or raise debt will benefit from a new, simplified prospectus. This new disclosure regime for secondary issues would apply to offers or admissions concerning securities issued by companies already admitted to trading on a regulated market or an SME growth market for at least 18 months.
• Fast track and simplified frequent issuer regime: companies that frequently access the capital markets will be able to use an annual “Universal Registration Document” which will be a form of “shelf registration” containing all the necessary information on the company that wants to list shares or issue debt. Issuers who regularly maintain an updated Universal Registration Document with their supervisors will benefit from a five day fast track approval when they want to issue shares, bonds or derivatives.
• Single access point for all EU prospectuses: it is proposed that the European Securities and Markets Authority will, for the first time, provide free and searchable online access to all prospectuses approved in the EEA. Investors will have a single portal to find information on companies that have listed shares or corporate bonds on markets where the general public can invest.

The draft Regulation will now be sent to the European Parliament and the Council of the EU for discussion and adoption. New implementing measures will be adopted to set out the minimum information contents of prospectuses and the proposed Prospectus Regulation will enter into application only after such implementing measures are adopted.

(European Commission, Proposal for a Regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading, 30.11.15)

(European Commission, Fact Sheet - Revamping the prospectus, the gateway to European capital markets, 30.11.15)

(European Commission, Press Release - The Commission proposes to overhaul prospectus rules to improve access to finance for companies and simplify information for investors, 30.11.15)

On December 1, 2015 the Financial Reporting Council (FRC) announced that it will be conducting a thematic review of FTSE 350 companies’ tax reporting to encourage more transparent recording of the relationship between tax charges and accounting profit. The FRC will write to a number of FTSE 350 companies prior to their year-end, informing them that the Corporate Reporting Review Team will review the tax disclosures in their next published reports.

The FRC plans to take a particular interest in:

• the transparency of tax reconciliation disclosures and how well the sustainability of the effective tax rate is conveyed; and
• uncertainties relating to tax liabilities (and assets) where the value at risk in the short term is not identified.

Companies are required to disclose the principal risks and uncertainties they face and are expected to explain the actions they propose to mitigate the impact of those risks. The FRC’s targeted review will consider the totality of the company’s reporting including relevant disclosures in their strategic and other narrative reports, as well as their detailed accounting disclosures.

Following its review, the FRC will consider how to publically share the best of what has seen to help others raise the quality bar on this aspect of their reporting.

(FRC, FRC calls for transparent disclosure of tax risks in corporate reports, 01.12.15)

On November 24, 2015 the Department for Business, Innovation and Skills (BIS) published regulations amending The Reports on Payments to Governments Regulations 2014 (the 2014 Regulations), along with an explanatory memorandum and transposition note.

The 2015 Regulations correct errors in the 2014 Regulations which derive from an unduly restrictive definition in the 2014 Regulations of the term “undertaking”, which affected other definitions and provisions in the 2014 Regulations. In particular, Regulation 8 of the 2014 Regulations (as amended by the 2015 Regulations) imposes a duty on the directors of certain UK parent undertakings to prepare a consolidated report, and Regulations 9 to 11 of the 2014 Regulations make provision about the content of such a report and provision for exemptions. The amendments made by Regulation 2 of the 2015 Regulations ensure that the subsidiary undertakings to be included in consolidated reports are not restricted to UK entities by expanding the definition of “subsidiary undertaking”, as required by Chapter 10 of the Accounting Directive.

The 2015 Regulations also address specific issues relating to documents delivered to the Registrar of Companies under the 2014 Regulations by partnerships or limited partnerships, namely public inspection of those documents and language requirements for those documents, as required by Part 35 of the Companies Act 2006.

The 2015 Regulations will come into force on December 18, 2015.

(BIS, The Reports on Payments to Governments (Amendment) Regulations 2015 (SI 2015/1928), 24.11.15)

From January 1, 2016 Article 5(4) of the Prospectus Directive will no longer require issuers to send final terms to the competent authority of host member states. On November 27, 2015 the Financial Conduct Authority (FCA) released a statement setting out how issuers can file their final terms if the FCA is their home competent authority.

The statement sets out the required information to be emailed to the FCA. The FCA notes that submitting final terms to the provided email address will not result in admission of securities to the Official List under Part 6 of the Financial Services and Markets Act 2000 and sets out how issuers wishing to apply to list securities that are subject to final terms can go about this.

Further, if the FCA is the host competent authority, it will receive final terms directly from the issuer’s home competent authority for the purposes of the Prospectus Directive only. If an issuer wishes the securities subject to the final terms to be admitted to the FCA’s Official List, they will need to send the final terms directly to the FCA.

(FCA, Upcoming changes to sending final terms to host competent authorities under the Prospectus Directive, 27.11.15)

On December 2, 2015 HM Treasury published a preliminary draft of the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 (the draft Regulations). The draft Regulations propose a number of amendments to the Financial Services and Markets Act 2000 (FSMA), in part to provide some clarification on the implementation of the Market Abuse Regulation (MAR).

The draft Regulations propose the following:

General provisions

• Clarification on the meaning of the term “persons closely associated”, as mentioned in Article 19(1) MAR.
• When a company delays disclosure of inside information under Article 17(4) MAR, it must provide a record of its written explanation of how the conditions set out in Article 17(4) were met to the Financial Conduct Authority (FCA) upon written request.
• Any application to the FCA under MAR must be made in such manner as the FCA may direct and contain, or be accompanied by, such other information as the FCA may reasonably require.
• Any notification to the FCA under MAR must be made in such manner as the FCA may direct.

Amendments to Part 6 of FSMA

These include the following:

• references to "disclosure rules" in section 73A are deleted;
• deletion of section 91(1ZA) (penalties for breach of Part 6 rules) which empowers the FCA to impose a penalty for contravention of the disclosure rules on an issuer, a person discharging managerial responsibilities (PDMR) within such an issuer or a person connected with a PDMR;
• deletion of section 96A (disclosure of information requirements);
• deletion of section 96B (persons responsible for compliance with disclosure rules, which includes the definition of PDMRs)
• deletion of Schedule 11B (connected persons);
• deletion of section 96C (suspension of trading);
• deletion of the definitions of "disclosure rules" and "inside information" from section 103(1) (definitions);
• section 102A(4) (meaning of "financial instrument") has been substituted with a new sub-section (4) that cross references the definition of "financial instrument" in the markets in financial instruments directive (MIFID);
• in section 102B(5)(c) (meaning of "offer of transferable securities to the public" etc.), the reference to "a market prescribed by an order under section 130A(3)" has been replaced with a reference to "a prescribed market"; and
• the introduction of a new section 102(B)(5A) to give the Treasury power to make regulations to specify the markets which are prescribed markets for the purposes of sub-section (5)(c).

Amendments to Part 8 of FSMA

These include the following:

• deletion of sections 118 to 122 (which, among other things, define the offence of market abuse, the behaviours that constitute market abuse, what constitutes "an insider" and "inside information" for the purposes of Part 8, and the requirement for the FCA to produce a code giving guidance to those determining whether or not behaviour amounts to market abuse (the Code of Market Conduct);
• changing the title of Part 8 from "Penalties for market abuse" to "Provisions relating to market abuse";
• replacing section 123 (power to impose penalties in cases of market abuse) with a new section 123 on the FCA's power to impose penalties or issue censure for contravention of the provisions of MAR or contravention of the information requirements and other requirements of new sections 122A to 122C and 122G to 122I and new sections 123A and 123B;
• sections 122A, 122B and 122C are to be added, giving the FCA various powers to require information from issuers, PDMRs and persons closely associated with PDMRs for the purpose of protecting investors, the orderly functioning of the markets and to exercise its functions under MAR;
• the addition of section 122D which provides for the entry of premises under warrant for the purpose of enforcing the information requirements and section 122F which sets out the offences for failure to comply with the information requirements under sections 122B or 122C and for providing false or misleading information under those requirements; and
• the addition of a number of other administrative powers for the FCA (set out in new sections 122G to 122I), including: the power to require an issuer to publish specific information or a specific statement where it considers this necessary to protect investors or for the orderly functioning of the markets; the power, subject to certain conditions, to require publication of a corrective statement, correcting false or misleading information made public, or a false or misleading impression given to the public, by a person; and the power to suspend trading in financial instruments in certain circumstances.

Other provisions

The draft Regulations propose to amend section 139A(4) FSMA (power of the FCA to give guidance), to extend this to also refer to MAR or any directly applicable EU regulation made under MAR.

The draft Regulations also provide some minor proposed amendments to the Criminal Justice Act 1993 and the Financial Services Act 2012, and revoke the Financial Services and Markets Act 2000 (Prescribed Markets and Qualifying Instruments) Order 2001.

HM Treasury requests any comment on the draft Regulations by February 4, 2016. The draft Regulations are not available online but are being provided by HM Treasury on request.

On December 3, 2015 the London Stock Exchange (LSE) issued Market Notice N19/15, announcing that it is conducting a market-wide consultation on certain amendments to the Admission and Disclosure Standards (the Standards) and High Growth Segment Rulebook (HGS Rulebook).

The majority of the proposed changes to the Standards relate to the structure of the Standards and are of an administrative or clarificatory nature. They include the following:

• A consolidated rulebook: The Standards have been restructured so that they may serve as a consolidated resource for issuers and advisers. The Standards incorporate schedules containing further detail on the admission process and criteria for each of its markets and segments, with the exception of AIM and the London Stock Exchange Derivatives Market.
• Clarification of the definition of Main Market: The definition of Main Market has been clarified to make clear that it encompasses all securities where application is made for admission to trading on the LSE’s EU Regulated Market, whether listed or unlisted. Further, the Specialist Fund Market has been renamed the Specialist Fund Segment, to clarify that it is a segment of the LSE’s Regulated Market, and that issuers must meet the associated requirements contained within the relevant EU directives and regulations for Regulated Markets. Securities admitted to the SFS (and High Growth Segment) are not admitted to the Official List.
• Change to Executive Panel’s sanctions: It is proposed to increase the Executive Panel’s ability to impose a fine from a maximum of £50,000 to £100,000 per breach. Public censures and fines over £100,000 per breach will continue to be heard by the Disciplinary Committee.
• Amendments to the HGS Rulebook: The LSE proposes to make amendments to the HGS Rulebook to include an exemption for life science companies. It is recognised that some life science companies (those classified as “scientific research based issuers” under the UKLA’s Listing Rules) may not be able to meet the free float requirements of the Official List primarily due to cornerstone investors’ commitments at the point of IPO. It is proposed to amend the HGS Rulebook so that in the case of companies that would be classified as “scientific research based issuers” under the Listing Rules, the LSE may, at its absolute discretion, waive the requirements on the issuer to be a trading business, to control the majority of its assets and to demonstrate consolidated revenue growth of at least 20% over a three year period. This exemption will be considered based on certain factors proposed in the new rules.

Comments on this consultation are requested by January 8, 2016 and the LSE will confirm the final rules soon after the closure of the consultation.

(LSE, Consultation on amendments to the Admission and Disclosure Standards and the High Growth Segment Rulebook, 03.12.15)

On December 2, 2015 the Quoted Companies Alliance (QCA) and UHY Hacker Young published their annual review of corporate governance behaviour, which focuses on the disclosures made by 100 small and mid-size quoted companies taken from the Main List, AIM and ISDX and compares these disclosures against the minimum disclosures set out in the QCA Corporate Governance Code for Small and Mid-Size Quoted Companies (the QCA Code).

The review includes a measure of corporate governance behaviour by showing the percentage of the sample that included the minimum disclosures required by the QCA Code. The review also sets out five governance reporting tips based on the information gathered, as follows:

• Make the ‘boring’ information more interesting: Companies should focus on improving the quality of the routine or ‘boring’ information that is required in the annual reports and accounts or on a company’s website. For example, they should add more detail about why a particular director is on the board and what skills and experience he or she adds to the board, rather than just rehashing his or her biography.
• Focus on the bumps in the road ahead: Companies should focus on trying to make a synopsis of the key risks, how the company plans to manage them, and how its approach to risk management links into other aspects of the company (i.e. strategy, key performance indicators and corporate governance).
• Ensure that there is consistency: Companies should ensure consistency within their reports and explain clearly what the company is doing and how it is protecting and enhancing shareholder value.
• Tell your company’s story: The message from investors is be honest and truthful in drafting the company’s report. In general, it should focus on the ‘explain’ aspect of corporate governance, rather than just blind compliance. Investors want to know what the company does and why. Even if the company complies with certain aspects of a code, the directors should be trying to explain why that approach is best for the company.
• Link strategy and corporate governance: Chairmen should be managing boards to not only help develop good governance, but also to help companies clearly articulate how their approach supports their plans for sustainable long-term growth in shareholder value. A good starting point is to focus on producing a clear synopsis of the business model. If a company has described its business model clearly to investors, then it should be easier to define how its governance links to strategy. Issues to focus on include how the company’s strategy is relevant to its business and how the company’s strategy and its corporate governance arrangements benefit shareholders.

(QCA, Corporate Governance Behaviour Review 2015, 02.12.15)