Essential Corporate News – Week ending June 3, 2022

The Takeover Panel: Presumptions of the definition of “acting in concert” and related matters (PCP 2022/2)

On May 26, 2022 the Takeover Panel (Panel) published public consultation paper PCP 2022/2 (the PCP) setting out proposed amendments to the definition of “acting in concert” and related matters. 

We will be publishing a more detailed briefing on the PCP in due course, but the key proposed changes relate to the presumptions contained in the definition of acting in concert and, in particular, current presumption (1). This presumption refers to a company, its parent, subsidiaries and fellow subsidiaries, and their associated companies, and companies of which such companies are associated companies being presumed to be acting in concert with each other and sets the threshold for associated company status at 20%. The PCP proposes this presumption is deleted and replaced with two new presumptions as follows:

1. A company (“X”) and any company which controls, is controlled by or is under the same control as X all with each other. For these purposes “control” would be defined as being interested in (a) shares carrying 30% or more of the voting rights or (b) a majority of the equity share capital.
2. A company (“Y”) and any other company (“Z”) where Y is interested, directly or indirectly, in 30% or more of the equity share capital in Z, together with any company presumed to be acting in concert with either Y or Z under (1), all with each other.

New presumptions (1) and (2) would be applied to funds in the same way as to companies, thereby (in effect) treating an investment in a fund as equivalent to an investment in a company’s equity share capital.

The PCP also explains how the new 30% threshold would apply differently to interests in voting share capital and (voting or non-voting) equity share capital when held through a chain of ownership. In summary, in the case of new presumption (1) interests would not dilute through a chain of ownership whereas in the case of new presumption (2) they would. 

Various changes are also proposed to other presumptions to the definition of acting in concert as well as to other related provisions of the Code.
The PCP includes commentary and diagrams explaining the application of the proposed new rules in practice. The Panel has also indicated that it intends to hold a webinar on the proposed changes in late June or early July 2022.

The period for responding to the PCP closes on September 23, 2022. The Panel expects to publish a response statement setting out the final amendments to the Code in late 2022 and anticipates that the amendments would come into effect approximately two months thereafter. 

(Takeover Panel: PCP 2022/2 - Presumptions of the definition of "acting in concert" and related matters, 26.05.2022)

FCA: Primary Markets Effectiveness Review - Feedback to the discussion of the purpose of the listing regime and further discussion (DP 22/2)

On May 26, 2022 the Financial Conduct Authority (FCA) published DP22/2 (the DP) setting out for discussion a potential new single segment approach to UK listings of equity shares in commercial companies. This is the latest step in the ongoing listing review process initiated by the publication of the Hill Review in spring 2021 and builds on elements of the FCA’s previous paper on this topic (CP21/21) published in summer 2021. 

In this briefing, we discuss the key features of the single segment regime outlined in the DP and some of the drivers behind discussions in this area.

FCA: Primary Market Bulletin 40

On May 27, 2022 the Financial Conduct Authority (FCA) published Primary Market Bulletin 40 (PMB 40) in which it provides feedback on proposed changes to the Knowledge Base consulted on in PMB 34 (published in June 2021) and explains the final changes it is making to its knowledge base. 

The proposals made by the FCA in PMB 34 included:

• Creating a new technical note to adapt, as FCA Guidance, the European Securities and Markets Authority’s (ESMA) Guidelines on disclosure requirements under the Prospectus Regulation (augmented with the measures on specialist issuers in the ESMA update of the CESR Recommendations).
• Incorporating certain explanations included in the ESMA Prospectus Directive Q&A into technical notes.

As a result of feedback received, the FCA has made certain further changes to the procedural note and four of the technical notes as identified in the table set out in PMB 40. The other notes have been adopted in the form proposed in PMB 34.

On the same day, the FCA published Handbook Notice No 99, setting out, among other things, its response to feedback received to its proposals, as set out in Chapter 6 of FCA Quarterly Consultation No 33, to make various amendments to the Prospectus Regulation Rules and Listing Rules as a consequence of the changes to the Knowledge Base proposed in PMB 34, together with the instrument to implement the changes. The FCA is proceeding with its proposed changes to the Handbook, and the instrument is in substantially the same form as the draft instrument in the Quarterly Consultation. 

(FCA: PMB 40, 27.05.2022)

BEIS: Restoring trust in audit and corporate governance – Government response to consultation

On May 31, 2022 the Department for Business, Energy and Industrial Strategy (BEIS) published a document summarising responses to and its plans for action following its consultation on the White Paper it published in March 2021 setting out wide-ranging reforms to the UK’s audit and corporate governance framework.  

In broad terms, the Government intends to put in place a new UK approach to regulating in the areas of audit, corporate reporting and corporate governance. Since this will involve a broad range of actors, not just the Government, the response document does not set out a precise timetable, but outlines the actions to be taken, including what the Government intends to ask of the new regulator and other stakeholders. 

We will be publishing a more detailed briefing on this response in due course but key points to note include the following:

• A new regulator, the Audit, Reporting and Governance Authority (ARGA), will be established with greater statutory responsibilities and powers than the Financial Reporting Council currently has. 
• The definition of public interest entities (PIEs) will be expanded to include large private companies with both 750+ employees and an annual turnover of £750m+. Companies traded on AIM or other multilateral trading facilities will be PIEs if they meet this 750:750 test, but smaller companies on those markets will not become PIEs. Limited Liability Partnerships (LLPs) that meet the 750:750 test will also be PIEs.
• In relation to internal controls and fraud, ARGA will be invited to strengthen the UK Corporate Governance Code to provide for an explicit directors’ statement about the effectiveness of the company’s internal controls and the basis for that assessment, and to work with companies, investors and auditors to develop appropriate guidance. The Government intends to legislate to require directors of PIEs with 750+ employees and an annual turnover of £750m+ to report on actions they have taken to prevent and detect fraud.
• ARGA will be requested to issue guidance on what should be treated as “realised” profits and losses for the purposes of determining distributable reserves. PIEs with 750+ employees and an annual turnover of £750m will be required to disclose their distributable reserves and explain the board’s long-term approach to the amount and timing of shareholder returns. The directors of such companies will also have to make an explicit statement confirming the legality of proposed dividends and any dividends paid in-year. Appropriate lead in times for these requirements will be considered.
• Requirements for a new statutory Resilience Statement and a new statutory Audit and Assurance Policy to be prepared by PIEs with 750+ employees and an annual turnover of £750m+ will be introduced. Appropriate lead in times for these requirements will be considered.
• ARGA’s corporate reporting review powers will be extended. For example, ARGA will be able to direct changes to company reports and accounts, rather than having to seek a court order, and have powers to publish summary findings following a review. It will also be able to require or commission an expert review to support its corporate reporting review work and ARGA’s powers will cover the entire contents of the annual report and accounts so that it can review elements such as corporate governance statements, directors’ remuneration and audit committee reports, and the CEO's and chairman’s reports.
• ARGA will be given powers to investigate and, if necessary, sanction directors of PIEs for breaches of their corporate reporting and audit-related duties and responsibilities. The Government will also invite ARGA to consult on changing the UK Corporate Governance Code to provide greater transparency about the malus and clawback arrangements that companies have in place so remuneration can be withheld or recovered from directors for misconduct, misstatements, and other serious failings.
• To improve the quality of audit ARGA will be tasked with driving improvements in audit quality, in line with its quality objective and it will take on responsibility for the registration of PIE auditors.
• There will be a package of measures to increase choice, to improve resilience in the audit market for the largest companies and to enhance professional scepticism. These include:  a ‘managed shared audit’ regime, to be introduced on a phased basis, to give challenger audit firms the opportunity to audit a meaningful proportion of subsidiary audits conducted for FTSE 350 companies, subject to certain exemptions; powers to give ARGA the ability to operate a ‘market share cap’, either in the event of a significant audit firm collapse or if further intervention is required once managed shared audit is in place; and powers for ARGA to require ‘operational separation’ of the largest firms, improving governance of the audit practice with a view to promoting greater professional scepticism within multidisciplinary firms. 

(BEIS, Restoring trust in audit and corporate governance – Government response to consultation, 31.05.2022) 

30% Club Investor Group UK: Reporting on Diversity - A guidance toolkit for companies by investors

On May 24, 2022 the 30% Club Investor Group, UK (30% Club Investor Group) published a guidance toolkit for companies prepared by investors to (i) establish a shared understanding of what constitutes useful reporting on diversity to assist with investors’ decision-making processes and engagements; and (ii) help companies better understand what investors value most in disclosure on diversity and provide insights on how company reporting can be made more effective and comprehensive. The guidance is primarily aimed at FTSE 350 companies, but unlisted companies are invited to use it for guidance too.

Investors want to see more integrated reporting that shows how diversity is being treated as a core strategic consideration. As a result, the document is meant to be used as a high-level reporting framework so that companies can use the various elements to enhance their existing reporting over time and fill in any gaps where needed. 

The 30% Club Investor Group identifies the following key principles of good diversity reporting:

• Authentic and strategic – reports should reflect the realities of the business; 
• Quality over quantity –  reports should be concise yet meaningful; 
• Action-led – reports should be action-led, emphasising what is actually being done by the company to encourage and improve diversity;
• Explanatory and informative – reports should put data into context; and 
• Flexible but comparable – reports should let companies develop their own framework while encouraging common features to allow investors to make comparisons.

The guidance also provides examples of useful reporting to illustrate approaches companies use in different areas of reporting on governance and oversight in relation to diversity issues. 

(30% Club Investor Group, UK: Reporting on Diversity – a guidance toolkit for companies by investors, 24.05.2022)