Global | Publication | January 2024
On 20 December 2023 the Financial Conduct Authority (FCA) published Consultation Paper CP23/31 setting out detailed proposals for the reform of the UK listing regime. This follows on from the blueprint contained in its previous consultation (CP 23/10) published in May 2023.
The proposals confirm a radical overhaul of the current rules by the FCA with a marked shift towards a more disclosure-based framework, reflecting its underlying intention of encouraging a more diverse range of issuers to list on UK markets (and to do so at an earlier stage) whilst providing investors with sufficient information to be able to exercise stewardship and other shareholder rights so as to influence company behaviour.
For a discussion of the key requirements for the new equity shares in commercial companies (ESCC) category, some of the main changes from the position outlined in the previous consultation, and the transitional provisions the FCA intends to apply to existing premium listed commercial companies and standard listed share issuers see our separate briefing FCA proposals confirm radical reform of UK listing regime.
On 19 December 2023, the Financial Conduct Authority (FCA) published Primary Market Bulletin No 46 (PMB 46). This addresses specific questions relating to Article 10 of the UK Market Abuse Regulation (UK MAR) and market conduct issues more generally in the context of shareholder co-operation regarding Environmental, Social and Governance (ESG) stewardship. It also reports on an initial assessment the FCA has conducted of sponsor procedures in relation to the TCFD-aligned disclosures made by listed companies.
Article 10 UK MAR and ESG stewardship
Noting that the extent to which any engagement between shareholders, or those between a company and its shareholders might contravene UK MAR or raise other market conduct issues will depend on the specific circumstances in any given case, the FCA draws attention to two publications that it considers are of continuing relevance and assistance to firms in considering their obligations under the market abuse regime. These are:
FCA’s approach to assessing shareholder engagement
The FCA confirms that the ABI letter and the observations in Market Watch 20 are still relevant to considering issues of shareholder activism, engagement and co-operation, including in the context of ESG stewardship. The FCA also confirms that the outcome of the Gent case, as discussed in Primary Market Bulletin No 42, did not change the FCA’s approach to Article 10 and UK MAR in general and should not inhibit or stifle high quality engagement between companies and their shareholders. Collective engagement by institutional shareholders designed to raise legitimate concerns on particular corporate issues, events or matters of governance with the management of investee companies, including matters related to ESG considerations, should be possible.
Strategy and voting intentions
While the FCA is unlikely to consider that market abuse rules have been contravened where a shareholder trades based simply on its own intentions and knowledge of its own strategy, it may reach a different conclusion if other market participants also trade based on the knowledge of that party’s voting intentions or stewardship plans. While the FCA’s approach will always depend on the circumstances, it does not think this situation is likely to arise in the context of bona fide discussions between shareholders in respect of ESG stewardship.
Major shareholders, concerned that their voting intentions or broader stewardship plans concerning an issuer may constitute inside information, are reminded to consider the requirements under Article 8 and 14 UK MAR (Insider dealing, Prohibition of insider dealing and of unlawful disclosure of inside information) and Article 10 UK MAR (Unlawful disclosure of inside information). Where the information is not inside information, shareholders may choose to publish that information and the FCA points out that some shareholders or groups of shareholders voluntarily publish voting intentions for an upcoming “Say on Climate” resolution.
The FCA comments that asset managers and institutional shareholders may make their broad or sector-specific ESG stewardship programmes public and this transparency reduces the risk of inside information arising from stewardship plans for specific issuers and so makes stewardship collaboration between shareholders more straightforward.
Disclosure of major shareholdings
The FCA reminds shareholders that when collaborating, they should bear in mind their disclosure obligations under DTR 5.2.1R(a), which may require shareholdings to be aggregated in certain circumstances. Voting power needs to be aggregated where there is an agreement between two or more persons which obliges them to adopt a lasting common policy towards the management of the issuer through the exercise of their voting rights. While the FCA considers this is unlikely to include ad hoc discussions and understandings which institutional shareholders might reach in relation to particular issues or corporate events, shareholders need to be aware of these rules and take advice as necessary when considering collaborative shareholder discussions in respect of ESG (or other) stewardship.
TCFD-aligned disclosures: sponsor procedures
LR 9.8.6R(8) requires premium listed commercial companies to include a statement in their annual report on whether they have made disclosures consistent with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and to explain any departures. Sponsors also have a responsibility, where a sponsor service is being provided to a new applicant, to assess whether the issuer has established procedures to enable it to comply with the Listing Rules and the Disclosure Guidance and Transparency Rules (DTRs) on an ongoing basis, including compliance with the TCFD-aligned disclosures.
As a result, the FCA has: (i) reviewed the work sponsors have done in relation to assessing issuers’ TCFD-related procedures and controls; (ii) asked wider questions around how sponsors have updated their approach to due diligence in areas where climate related issues may be a material consideration more generally; and (iii) sought to understand in more detail the work that sponsors perform in relation to the obligation in LR8.4.3R(3) as it relates to their assessment of whether the admission of securities would be detrimental to investors’ interests and to verify the climate-related statements made in prospectuses.
Findings of review
The FCA sets out its findings in relation to the following:
FCA’s commentary on its findings
It is pleased to see that sponsors appear to be giving increased focus to climate-related matters, but the FCA believes it is good practice for sponsors to assess their current policies and procedures to consider whether they need to be updated in particular areas. It also provides examples of certain provisions that could be incorporated into sponsors’ systems and controls, and notes that it is good practice to consider, on a case-by-case basis, how the nature and extent of a new applicant’s climate-related risks might be relevant to the due and careful enquiry a sponsor should make to gain assurance in relation to the issuer’s ability to meet the TCFD-aligned disclosure requirements on an ongoing basis. The FCA comments that it may be appropriate for sponsors to undertake a deeper analysis of these issues for a mining company than for a financial services issuer, as an example.
The FCA comments on the upskilling being undertaken by sponsors in this area and the use of third party experts, as well as on sponsors’ record management requirements under LR8.6.16AR in relation to third party reports.
The FCA points out that its expectation that sponsors should have sufficient skills, knowledge and expertise to be able to interpret and apply relevant elements of the FCA Handbook in the specific context of a listed issuer’s business and operations, including where an understanding of a specialist industry sector may be relevant, extends to understanding the climate-related implications of a new applicant’s operations, being able to consider the risks for investors and acknowledging that the amount of due diligence required and the verification of disclosure will vary by the nature of the company and its areas of operation.
However, as with the approach to other specialist areas such as the application of accounting standards, this does not mean that the FCA expects sponsors themselves to be experts in TCFD-aligned disclosures or climate reporting. Having said that, sponsors are reminded that they should consider if they have sufficient access to relevant expertise, internally or externally, to comply with sponsor obligations in relation to TCFD-aligned disclosures and to assess the adequacy of an issuer’s procedures to meet future TCFD or climate-related reporting obligations.
On 3 January 2024, in a blog post, the Registrar of Companies set out a number of changes that will be introduced in March 2024 as a result of provisions in the Economic Crime and Corporate Transparency Act 2023 (ECCTA).
These changes include the following:
The blog post confirms that further changes, including identity verification for directors and others, streamlining accounts filing options for small and micro entity companies, and transitioning towards filing accounts by software only, will be introduced in due course.
(Companies House, A new year and a new challenge for Companies House, 3.1.2023)
On 19 December 2023, ISS announced updates to its 2024 benchmark proxy voting policies. The updated policies for the UK will be applied for shareholder meetings taking place on or after 1 February 2024.
The updates follow consultation in November 2023, and they relate to board diversity, board independence, and authority to issue equity shares where pre-emption rights have been disapplied. The updates are largely due to updated rules and guidance in these areas and are summarised as follows:
Board diversity
The Financial Conduct Authority’s (FCA) updated Listing Rules, which require listed companies to report information and disclose against targets on the representation of women and ethnic minorities on their boards and executive management, applied to companies for financial accounting periods starting from 1 April 2022. In 2023, ISS policy was different depending on whether companies' financial years fell before or after 1 April 2022. The former were assessed against the Hampton-Alexander and Parker Review standards, the latter were assessed in accordance with the new board diversity targets outlined in the updated Listing Rules. As the transitionary stage has passed and the FCA's diversity targets now apply to all standard and premium listed companies, irrespective of when their financial year falls, the amendments to the ISS policy reflect this simplification.
Board independence
As in the UK Corporate Governance Code, ISS is likely to consider a non-executive director non-independent if, among other things, they represent a significant shareholder. A footnote has been added to the ISS policy to define a “significant shareholder” as someone holding 3% or more which reflects the historic application of the policy by ISS and the meaning of “significant” in other market policies.
Share issues and pre-emption rights
The ISS Benchmark Proxy Voting Guidelines previously incorporated the recommendations of the Investment Association’s 2016 Share Capital Management Guidelines. These were updated in November 2022 and the wording of the policy now reflects the changes made in those updated guidelines.
(ISS, UK Benchmark Policy Voting Guidelines for 2024, 19.12.2023)
On 21 December 2023, the Register of Overseas Entities (Verification and Exceptions) (Amendment) Regulations 2023 (Regulations) were published. The Regulations were made on 18 December 2023, were laid before Parliament on 19 December 2023, and come into force on 15 January 2024.
The Regulations relate to the register of overseas entities kept under Part 1 of the Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA). They:
On 18 December 2023, the draft Limited Liability Partnerships (Application of Company Law) Regulations 2024 (Regulations) were published and laid before Parliament. The Regulations are part of a series of Statutory Instruments to be made in relation to the Economic Crime and Corporate Transparency Act 2023 (ECCTA). They are intended to ensure that certain of the amendments made to the Companies Act 2006 by the ECCTA will also apply (with modifications) to limited liability partnerships (LLPs) and that company law applies coherently and without arbitrary differences between companies and LLPs.
The Regulations amend the Limited Liability Partnership (Application of Companies Act 2006) Regulations 2009 (2009 Regulations) and also make certain consequential amendments to the Limited Liability Partnerships Act 2000. The amendments to the 2009 Regulations relate to the application of provisions of the Companies Act 2006 regarding company names, registered offices and email addresses, directors, annual confirmations of accuracy on the register, information about persons with significant control, dissolution and restoration to the register, the registrar of companies, and business names.
The Regulations will come into force when section 1 (the registrar’s objectives) of the ECCTA comes into force.
(The Limited Liability Partnerships (Application of Company Law) Regulations 2024, 18 December 2023)
The Economic Crime and Corporate Transparency Act 2023 (ECCTA) gives the Secretary of State power to make regulations permitting the registrar of companies (Registrar) to change, in certain circumstances, the registered service address or principal office address of directors, secretaries and persons with significant control and the registered office address of companies.
In this context, the following draft regulations were published and laid before Parliament on 18 December 2023.
Registered Office Address (Rectification of Register) Regulations 2024 (ROA Regulations)
The ROA Regulations streamline and expand upon existing avenues of redress for individuals who find their residential addresses have been “hijacked” for use as the registered office address of companies. They establish the process by which the Registrar may change a company’s registered office address to a “default address”. Where a company has had its registered office changed to a default address and then fails to notify an appropriate new address, the ROA Regulations also provide a mechanism for the Registrar to strike the company off the register and also establish associated criminal offences for companies and officers in default.
Service Address (Rectification of Register) Regulations 2024 (Service Address Regulations)
The Service Address Regulations establish the process by which the Registrar may change an address registered as the service address of a director, secretary or person with significant control to a “default address” where it is satisfied that the registered service address does not meet the requirements of the Companies Act 2006. They also create a criminal offence where a person, having had their address changed to a default address by the Registrar, does not take reasonable steps to ensure the company notifies the Registrar of an appropriate new service address within a compliance period of 28 days.
Principal Office Address (Rectification of Register) Regulations 2024 (POA Regulations)
The POA Regulations establish the process by which the Registrar may change an address registered as the principal office of a director, secretary or person with significant control to a “default address” where it is satisfied that the address is not in fact their principal office. It establishes a criminal offence where a person, having had their address changed to a default address by the Registrar, does not take reasonable steps to ensure the company notifies the Registrar of their actual principal office within a compliance period of 28 days.
(The Registered Office Address (Rectification of Register) Regulations 2024, 18.12.2023)
(The Service Address (Rectification of Register) Regulations 2024, 28.12.2023)
(The Principal Office Address (Rectification of Register) Regulations 2024, 28.12.2023)
On 18 December 2023 the Takeover Panel (Panel) published Panel Statement 2023/16 concerning Instrument 2023/4 which has been published on the Panel’s website.
Instrument 2023/4 makes amendments to Note 18 on Rule 9.1 of the Takeover Code to introduce a new paragraph (b). This provides that Rule 9.1 (the mandatory offer requirement) does not apply in relation to any change in interests in shares or other transaction which is effected by the use of CCP resolution tools, powers and mechanisms (within the meaning given in regulation 2 of The Resolution of Central Counterparties (Modified Application of Corporate Law and Consequential Amendments) Regulations 2023 (the “CCP Regulations”).
The amendments to Note 18 on Rule 9.1 will take effect on 31 December 2023.
Publication
EU Member States may allow companies from countries that have not concluded an agreement guaranteeing equal and reciprocal access to public procurement (public procurement agreement) with the EU to participate in public tenders, provided there is no EU act excluding the relevant country.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023
