United Kingdom | Publication | December 2021
On December 2, 2021 the Financial Conduct Authority (FCA) published Policy Statement PS21/22 which summarises the feedback the FCA received on certain consultation questions concerning targeted changes to the FCA’s Listing Rules to remove immediate barriers to listing and to improve the accessibility of the FCA’s rulebooks. These and other questions concerning the functioning of the listing regime were raised in a Consultation Paper published in July 2021, CP21/21 and resulted in part from recommendations in the UK Listing Review and the Kalifa Review of UK Fintech. PS21/22 also includes final rules and details of transitional arrangements where applicable.
Changes to the Listing Rules include the following:
DCSS involves a class of shares that allows a shareholder (or group of shareholders) to retain voting control over a company that is disproportionate to their economic interest in the company. The current Listing Rules make it impractical for a company with DCSS to list shares in the premium listing segment, though they can list shares in the standard listing segment. A conditional 5 year exception to the current rule that restricts votes on matters relevant to premium listing to holders of premium listed shares only is being introduced. This will enable holders of unlisted weighted voting rights shares, within a specific kind of DCSS, to participate in these votes. In line with the UK Listing Review’s recommendations, the exception will apply where the class of shares with weighted voting rights meets certain conditions.
In CP21/21 the FCA proposed increasing minimum market capitalisation (MMC), from £700,000 to £50m. Following further analysis and consideration of responses noting that a high threshold may exclude smaller companies that may prefer listing to unlisted public markets, the FCA has decided to set a lower market capitalisation threshold of £30m compared to its consultation approach. However, it is also introducing some transitional provisions in relation to this as follows:
The FCA is finalising rules as consulted on, setting a revised 10 per cent level for the minimum value of shares in public hands, following strong support for this. This replaces the current level of 25 per cent and the discretionary ability for the FCA to modify the rule to accept a lower level. The FCA does not intend to proceed with a suggested idea to require more specific transparency on free float, following more negative views on this suggestion.
In CP21/21, the FCA explored the case for making changes to the existing requirements for the financial track of premium listed companies, noting that requirements for track record are also set as part of the prospectus regime and changes would require primary legislation. The Treasury has recently consulted on changes to this regime that may result in the FCA being granted additional powers. Separately to the outcome of this consultation, the FCA may therefore consider track record requirements as part of a wider review of the prospectus regime. The FCA also considered specific instances where the requirements under the Listing Rules go further than the requirements under the prospectus regime, and whether they constitute a significant barrier to listing. The FCA did not put forward specific proposals in CP21/21 but instead sought to clarify its willingness to provide flexibility on existing requirements.
The FCA received more compelling evidence to suggest a wider review of this requirement is necessary, rather than relying on a ‘case by case’ assessment and potential waivers by exception. The FCA proposes to review the track record obligation as it considers the potential for wider reforms to the listing regime.
In CP21/21 the FCA proposed a number of changes to remove conflicting requirements, some of which result from changes to the Prospectus Regulation, made before EU withdrawal and to update certain requirements for technological changes, for example by removing the need for multiple copies of documents, or to remove gender charged terms. The FCA is proceeding broadly as consulted on, with some minor changes to reflect useful feedback that certain changes did not quite achieve the intended policy effect. In one area related to the significant transaction rules, the FCA disagreed with feedback proposing a change in drafting and has maintained its approach as consulted on in making final rules.
The new rules come into force on December 3, 2021, but the package of minor changes to modernise and streamline the FCA’s primary markets rule books will come into force on January 10, 2022.
PS21/22 does not provide feedback on the responses the FCA received to the discussion of the functioning of the listing regime set out in Chapter 3 of CP 21/21. The FCA will provide further feedback and indicate next steps on this broader consideration of the listing regime’s purpose and structure in the first half of 2022.
On December 2, 2021 the Takeover Panel (Panel) published PCP 2021/1 (the Consultation) setting out proposed amendments to the Takeover Code (Code) in a number of different areas.
The Consultation closes on February 18, 2022 and the Panel has indicated that it expects to publish a Response Statement setting out the final amendments to the Code in Spring 2022, with the new rules coming into effect approximately one month thereafter.
The key areas covered by the proposed Code changes are summarised briefly below.
The Consultation proposes that, at the start of an offer period, publicly identified potential bidders should be required to disclose any obligation they have under Rule 6 or Rule 11 to offer a particular level or type of consideration (Rules 6 and 11 impose such pricing/consideration requirements in certain circumstances as a result of acquisitions of interests in target company shares made by the bidder or its concert parties).
It is also proposed that, where any such obligations arise following the commencement of the offer period, these should be announced immediately.
It is proposed that a bidder making a mandatory bid under Rule 9 of the Code (and any persons acting in concert with it) should be restricted from acquiring interests in target shares during the 14 days up to and including the unconditional date of the offer. This is intended to ensure that, when making their acceptance decision during this period, target shareholders know the maximum percentage of target shares the bidder and its concert parties would be interested in if the offer lapsed. The same restriction is also proposed to apply in the 14 days prior to the expiry of an acceptance condition invocation notice published by a bidder in connection with a mandatory bid.
A new note is proposed on Rule 9.5 to clarify the application of the “look-back period” for determining the minimum price of a mandatory offer. Essentially, if an offer is not announced immediately on triggering an obligation under Rule 9, the look-back period should be calculated by reference to that date on which the offer ought to have been announced.
The chain principle applies (in summary) where a person, or group of persons acting in concert, acquire over 50% of the voting rights of a company (the first company) and will thereby acquire or consolidate control of a second company.
Note 8 on Rule 9.1 currently provides that a chain principle offer will not normally be required unless either:
(a) the “material significance” test is met (i.e. the interest in shares which the first company has in the second company is significant in relation to the first company – relative values of 50 per cent or more will normally be regarded as significant) or
(b) securing control of the second company might reasonably be considered to be a significant purpose of acquiring control of the first company.
The Consultation proposes the deletion of limb (b) of this test, thereby making the more objective limb (a) the sole test other than in exceptional circumstances. It also proposes amending the limb (a) test to refer to relative values of 30 per cent (rather than the current 50 per cent).
The Consultation proposes certain clarificatory and other amendments in relation to: the ability of a lapsed bidder that has made a “no increase” or acceleration statement to make a new offer where it did not reserve the right to set that statement aside with the agreement of the target company board; the period of time for which a potential bidder should be bound by a statement as to the terms on which a possible offer might be made; and the circumstances in which a lapsed bidder can proceed to make a new bid following a third party firm offer announcement.
(Takeover Panel: PCP 2021/1: Miscellaneous Code Amendments, 02.12.2021)
On November 26, 2021 the Financial Conduct Authority (FCA) published Policy Statement PS21/16, summarising feedback to a Consultation Paper (CP21/25) it published in July 2021. In CP21/25 the FCA consulted on moving some decision-making on statutory notices from its Regulatory Decisions Committee (RDC) to Executive Procedures so that the RDC would focus on contentious enforcement cases. Decisions under Executive Procedures would focus on areas where the FCA needs to prevent or stop harm to consumers or the market occurring or increasing, by preventing firms from offering financial services in the first place or intervening to restrict the financial services offered to consumers. The FCA also proposed some modifications to its existing Executive Procedures framework.
PS21/16, as well as summarising the feedback received, sets out the FCA’s response to that feedback and the final changes to the FCA Handbook.
The FCA comments that while the vast majority of respondents agreed with the aims of the proposals in CP21/25, they did not agree with how the FCA would implement them. There was a concern that speed and efficiency were being emphasised unduly and would increase the potential risk of a lack of fairness and objectivity in decision-making. Most respondents who opposed the changes did so on the basis that the RDC is seen as an essential element in providing procedural fairness because of its ability to act as a check and balance on the Executive, and because of its independence and objectivity. Concerns were raised about the risk of bias and the difficulty of maintaining proper separation between the process of investigation and the decision being made under Executive Procedures. It was felt by some that the operational independence of the RDC made these risks easier to avoid.
The FCA states that it considered whether to make any changes in light of the comments received in consultation, but intends to implement its proposals as consulted on. As a result, the changes to the Decisions Procedures and Penalties manual (DEPP) and the Enforcement Guide (EG) in the Handbook (and as set out in Appendix 1 to PS21/16) are to be made as proposed in the consultation. This means that the FCA’s senior managers, rather than RDC, are now able to take decisions on the following:
The changes to DEPP and EG come into force on November 26, 2021. However, the FCA will carry out a six month post-implementation review to assess the effectiveness of the changes, and will include in its Annual Report similar data on Executive decisions and outcomes that is currently provided for the RDC once such data is available.
(FCA, Issuing statutory notices – A new approach to decision makers: PS21/16, 26.11.2021)
On November 30, 2021 the London Stock Exchange plc (LSE) published details of a public censure of Sensyne Health plc (Sensyne) for breaches of AIM Rules 13 (related party transactions) and 31 (liaison with nominated adviser) which resulted in a fine of £580,000, discounted to £406,0000 for early settlement.
The public censure is being issued as a reminder of the expected standards of conduct for AIM companies under the AIM Rules. It relates to the following:
Three months after admission to AIM, Sensyne awarded bonuses to its two executive directors (so related parties) which were outside the usual remuneration parameters of those directors and exceeded the 5 per cent threshold pursuant to the class tests in Schedule Three of the AIM Rules. The board failed to consider the AIM Rule 13 implications before agreeing the bonuses and did not seek advice from the nominated adviser, Peel Hunt LLP. Disclosure of the bonuses was also delayed in breach of AIM Rule 13 and Peel Hunt could not support the fair and reasonable statement. Sensyne failed to ensure all members of its board properly understood and took responsibility for its compliance with the AIM Rules and while it was recognised that there could be AIM Rules implications, the board did not properly engage with Peel Hunt to understand those obligations.
There were a number of serious failures in Sensyne’s compliance with its AIM Rule 31 responsibilities including failures to:
The AIM Notice points out that Sensyne’s approach in not taking appropriate care and responsibility for compliance with its AIM Rules obligations had the effect of undermining important protections afforded by the role of the nominated adviser within the AIM regulatory model.
The LSE reminds AIM companies that they are required to engage openly and transparently with their nominated adviser so that the nominated adviser is in a position to advise and guide on the AIM Rules on a fully informed basis. An AIM company’s obligations in this regard are not discharged by merely mentioning a matter or providing incomplete and/or misleading information. Failing to properly engage with the nominated adviser creates a higher risk of non-compliance with the AIM Rules and is not an acceptable approach for an AIM company.
In this instance, the direct and reasonably foreseeable consequence of Sensyne’s failure to engage properly with its nominated adviser, was to prevent transparency and scrutiny of the payment of the directors’ bonuses by the nominated adviser and by its shareholders, thereby undermining the protections afforded by AIM Rule 13 and Sensyne’s conduct fell below the expected standards required by the AIM Rules for an AIM public company.
(LSE, AIM Disciplinary Notice – Public censure and fine for Sensyne Health plc, AD 24, 30.11.2021)
On December 1, 2021 the Financial Reporting Council (FRC) published a report on reporting under the UK Stewardship Code 2020 (the Stewardship Code). This sets high standards for asset owners, asset managers, and the service providers that support them, to report on their stewardship activities and their outcome. The aim of the report is to encourage fair, balanced and understandable reporting about stewardship and to explain what the FRC expects stewardship reports to include. This is illustrated with examples of good reporting.
While the FRC observed good efforts from many Stewardship Code applicants and encouraging disclosures on governance, resourcing and the integration of stewardship and ESG factors into investment decision-making, reporting on the activities and outcomes relating to conflicts of interest, review and assurance, and monitoring agents was poorer.
Part 1 of the report focuses on reporting expectations which apply across the Stewardship Code, including the presentation and format of reporting. Here, the FRC reiterates and expands on points made in the Stewardship Code and in its Review of Early Reporting published in 2020. The FRC also outlines how it assesses reports and identifies the factors it uses to ensure a fair and proportionate approach.
The remaining sections of the report focus on the areas where investors and their agents can have the most impact and where most improvement is needed; market-wide and systemic risks, asset classes other than listed equity, focusing on outcomes, and effective engagement.
Part 2 of the report looks at how investors and their agents can work more effectively with others to promote a well-functioning market and address risks of a market-wide and systemic nature. The FRC identifies where reporting between Principle 4 is aligned with Principle 10 and where it is distinct. The FRC expects signatories and applicants in 2022 to focus more intently on how they can work with others to promote a well-functioning market and address risks of a market-wide and systemic nature.
Part 3 of the report highlights examples of effective reporting and lists some activities that may be considered when exercising rights and influence in other assets and strategies. The FRC observed some good reporting in asset classes other than listed equity, mainly in fixed income and real estate. However, reporting was often not proportionate to the distribution of assets under management. The report notes that the Stewardship Code places a strong emphasis on outcome reporting in a move away from boilerplate policy disclosures.
Part 4 of the report examines the components of effective outcome reporting and highlights the features of outcome reporting on operational procedures and on stewardship that involves external stakeholders.
The final section of the report is a Guide to Effective Engagement Reporting. Although the FRC generally observed better reporting on engagement than some other areas of the Stewardship Code, it notes that there is still room for improvement. This section of the report pulls together elements covered earlier in the report to provide a comprehensive Guide to what makes good reporting on engagement. Effective reporting means clearly presenting data from the reporting period, using case studies that clearly set out objectives, methods, rationale and details of an investor’s role, contribution and next steps.
To support asset owners and their advisers, the FRC is considering how it might introduce differentiation of reporting for asset managers and service providers in the future. It is engaging with stakeholders to seek input on the timing and approach and will provide an update at the end of Q1.
Early in 2022, the FRC will publish the results of commissioned research that explores what has changed in the landscape of stewardship in the past few years, the drivers for change and the influence the Stewardship Code has had on these.
(FRC: Effective Stewardship Reporting – Examples from 2021 and Expectations for 2022, 01.12.2021)
On December 1, 2021 the Quoted Companies Alliance (QCA) and Hacker Young published their annual review which outlines the key trends of small and mid-sized quoted companies’ corporate governance performance, tracking progress and informing areas for future focus.
The three key themes assessed for this year’s report are: recovering from COVID-19 and returning to workplaces, looking at the future of workplaces; Environmental, Social and Governance (ESG); and board performance evaluations.
In terms of COVID-19 and returning to the workplace, the report looks at the continued resilience of companies to the extended uncertainty, the wider economic recovery and how companies have begun their processes of returning to workplaces after lockdowns. It notes that the post lockdown world of work means very different things at a sector and company level but, for the most part, greater flexibility is anticipated as a key feature of the return to workplace trends.
The report comments that companies are considering how to ensure their strategies for morale and mental health can be effective in a hybrid environment, which links to the ESG area of the report. Within this area, for companies, the report states that the social impact can also be measured by their approach to diversity throughout their workforces with a particular spotlight at management and leadership roles.
It is thought that in light of these issues, there may be more formal and regular board performance reviews. The report comments that, with agility and responsiveness vital to company survival during the pandemic and a greater spotlight on diversity in company leadership from both investors and regulators, regular assessment of boards appears ever more important.
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