Essential Corporate News – Week ending January 9, 2015

Publication | January 9, 2015

Introduction

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

Takeover Panel: Response Statement 2014/2 – Post-offer undertakings and intention statements

On December 23, 2014, the Code Committee of the Takeover Panel published Response Statement 2014/2 (RS 2014/2) following its consultation on proposed amendments to the Takeover Code (Code) set out in PCP 2014/2 in relation to post-offer undertakings and intention statements. In PCP 2014/2, the Code Committee sought to introduce a new framework for the regulation of statements made by the parties to an offer (i.e. offerors and offeree companies) which would draw a clear distinction between statements relating to any particular course of action they commit to take, or not take, after the end of the offer period and statements relating to any particular course of action they intend to take, or not take, after the end of the offer period. The proposals were in response to concerns arising out of the offer for AstraZeneca plc by Pfizer Inc in May 2014 in which Pfizer stated that, subject to successful completion of its combination with AstraZeneca on the basis proposed by Pfizer, it would make a number of commitments, and that those commitments would be made for a minimum of five years. This statement was made voluntarily and not as result of a requirement of the Code.

In RS 2014/2, the Code Committee confirms that it has, in most cases, adopted the amendments to the Code which were proposed in PCP 2014/2, although it has introduced modifications to certain of the proposals and adoption of some of the suggestions made by respondents has resulted in changes to the drafting of certain provisions of the Code. These amendments will take effect on January 12, 2015. Statements made by a party to an offer before the implementation date will continue to be governed by the provisions of the Code currently in force, including the current Note 3 on Rule 19.1. Statements made by a party to an offer on or after the implementation date will be governed by the provisions of the Code as amended as a result of RS 2014/2.

Changes to the Code include the following:

New definitions of post-offer intention statement and post-offer undertaking

  • Post-offer intention statement: This is defined as a statement made by a party to an offer in any document, announcement or other information published by it in relation to the offer relating to any particular course of action that the party intends to take, or not take, after the end of the offer period, other than a post-offer undertaking.
  • Post-offer undertaking: This is defined as a statement made by a party to an offer in any document, announcement or other information published by it in relation to the offer relating to any particular course of action that the party commits to take, or not take, after the end of the offer period and which is described by that party as a post-offer undertaking.

New Rule 19.7 - Post-offer undertakings

  • A post-offer undertaking must: (i) state that it is a post-offer undertaking; (ii) specify the period of time for which the undertaking is made or the date by which the course of action committed to will be completed; and (iii) prominently state any qualifications or conditions to which the undertaking is subject (Rule 19.7(a)).
  • The terms of any post-offer undertaking made by a party to an offer, including the course of action committed to be taken, or not taken, and the qualifications or conditions to which it is subject, must: (i) be specific and precise; (ii) be readily understandable and capable of objective assessment; and (iii) not depend on subjective judgements of the party to the offer or its directors (Rule 19.7(b)).
  • Any post-offer undertaking made by a party to an offer other than in a document published by that party in connection with the offer must be included in the next such document published by that party. The Takeover Panel may, in addition, require a document to be sent to the offeree company’s shareholders and persons with information rights and made readily available to its and the offeror’s employee representatives (Rule 19.7(c)).
  • A party to an offer must comply with the terms of any post-offer undertaking for the period of time specified in the undertaking and must complete any course of action committed to by the date specified in the undertaking (Rule 19.7(e)).
  • A party to an offer will be excused compliance with the terms of a post-offer undertaking only if a qualification or condition set out in the undertaking applies. If a party to an offer wishes to rely on a qualification or condition to a post-offer undertaking in order to take, or not take, a course of action otherwise than in compliance with the terms of that undertaking, that party must consult the Takeover Panel in advance and obtain the Takeover Panel’s consent to rely on that qualification or condition (Rule 19.7(f)).
  • Except with the consent of the Takeover Panel, if such a course of action is then taken or not taken (as appropriate) with the Takeover Panel’s consent, the party must promptly make an announcement in accordance with the requirements of Rule 2.9 describing the course of action it has taken, or not taken, and explaining how and why the relevant qualification or condition applies where it has taken such an action as described in (Rule 19.7(g)).
  • A party to an offer which has made a post-offer undertaking must submit written reports to the Takeover Panel after the end of the offer period at such intervals and in such form as the Takeover Panel may require. Such reports must include information about actions taken or completed, progress to date and the expected completion timetable as well as certain specified information (Rule 19.7(h)).
  • The Takeover Panel may require a party to an offer which has made a post-offer undertaking to appoint a supervisor to monitor compliance with that undertaking and submit reports on compliance to the Takeover Panel (Rule 19.7(i)).
  • The Takeover Panel may decide not to permit a party to an offer to make a post-offer undertaking where the Takeover Panel determines that the proposed commitment would more appropriately be given in a different form (including, for example, a commitment to a specified person which could be included in a private contract with that person) (Note 1 (a) on Rule 19.7).
  • A party that proposes to make a commitment to take, or not take, any particular course of action after the end of the offer period other than by means of a post-offer undertaking must consult the Takeover Panel in advance. The Takeover Panel will consider whether the commitment would more appropriately be made as a post-offer undertaking. If the party proceeds to make a commitment other than by means of a post-offer undertaking (with the Takeover Panel's agreement), the party should make it clear, when referring to the commitment, that it has not been made as a post-offer undertaking in accordance with Rule 19.7 and would not therefore be enforceable by the Takeover Panel as a post-offer undertaking (Note 1 (a) on Rule 19.7).
  • A party that has made a post-offer undertaking subject to qualifications and conditions should not be able to avoid compliance with it by taking action, or omitting to take action, which causes an event, act or circumstance referred to in a qualification or condition to occur (Note 2 on Rule 19.7).

New Rule 19.8 - Post-offer intention statements

Any post-offer intention statement made by a party to an offer must be: (i) an accurate statement of that party’s intention at the time that it is made; and (ii) made on reasonable grounds. A party to an offer must consult the Takeover Panel where it has made a post-offer intention statement and, during the period of 12 months from the date on which the offer period has ended, or such other period of time as was specified in the statement, that party decides either: (i) to take a course of action different from its stated intentions; or (ii) not to take a course of action which it had stated it intended to take.

Note 3 on Rule 24.16 - Fees and expenses

There is no requirement to disclose an estimate of any fees and expenses expected to be incurred in relation to a supervisor appointed under Rule 19.7(i).

(Takeover Panel, Response Statement 2014/2 - Post offer undertakings and intention statements, 12.23.14)

(Takeover Panel: Instrument 2014/4: Post-offer undertakings and intention statements, 12.23.14)

(Takeover Panel Statement 2014/10: Post-Offer Undertakings and Intention Statements: Publication of RS 2014/2,12.23.14)

Takeover Panel: Panel Statement 2015/1

On January 2, 2015, the Takeover Panel published Panel Statement 2015/1 which follows the publication in November 2014 of Response Statement 2014/1 (RS 2014/1) which confirmed a number of miscellaneous amendments to the Takeover Code as proposed in consultation paper PCP 2014/1. As a result of the amendments made by RS 2014/1, the Takeover Panel Executive confirms that it has withdrawn Practice Statements 8 (Timetable extensions in potentially competitive situations) and 16 (Note 5 on the definition of acting in concert – standstill agreements) and has amended the following Practice Statements:

  • Practice Statement No 28: Rules 2.8 and 35.1 – Entering into talks during a restricted period. The changes are in line with those made to Note 2 on Rule 2.8 in relation to when restrictions in Rule 2.8 will no longer apply.
  • Practice Statement No 22: Irrevocable commitments, concert parties and related matters. The amendments made reflect the changes made to the Takeover Code in relation to the disclosure of irrevocable commitments.
  • Practice Statement No 20: Rule 2 – Secrecy, possible offer announcements and pre-announcement responsibilities. A new paragraph 6.5 has been added to clarify that where an announcement is made under paragraph(b) of Note 4 on Rule 2.2 and the former potential offeror makes a “no intention to bid” statement, the restrictions in Rule 2.8 will apply for a period of six months from the date of that announcement (and the restrictions in Note 4 on Rule 2.2 will then cease to apply). However, if, in the announcement made under paragraph (b) of Note 4 on Rule 2.2, the former potential offeror or the offeree company confirms only that it was granted a dispensation under Note 4 on Rule 2.2 on the date specified in the announcement, the restrictions set out in Note 4 will continue to apply from that date.
  • Practice Statement No 12: Rule 9 and the interests in shares of clients whose funds are managed on a discretionary basis. This has been amended so that the exemption available to a principal trader applies only to shares acquired and held by a principal trader in a client-serving capacity.

(Takeover Panel, Panel Statement 2015/1, 01.02.15)

(Takeover Panel,  Practice Statement No 28: Rules 2.8 and 35.1 – Entering into talks during a restricted period, 01.02.15)

(Takeover Panel. Practice Statement No 22: Irrevocable commitments, concert parties and related matters, 01.02.15)

(Takeover Panel, Practice Statement No 20: Rule 2 – Secrecy, possible offer announcements and pre-announcement responsibilities, .01.02.15)

(Takeover Panel, Practice Statement No 12: Rule 9 and the interests in shares of clients whose funds are managed on a discretionary basis, 01.02.15)

ISS: UK and Ireland Proxy Voting Guidelines 2015

On January 7, 2015, Institutional Shareholder Services (ISS), a US provider of proxy voting and corporate governance services, published its first standalone “UK and Ireland Proxy Voting Guidelines: 2015 Benchmark Policy Recommendations” (the Guidelines). Prior to June 2014, there was a formal relationship between ISS and the National Association of Pension Funds (NAPF) in which ISS used the NAPF Corporate Governance Policy and Voting Guidelines as its standard reference. The new Guidelines align with the NAPF Corporate Governance Policy and Voting Guidelines 2014/15 and contain recommendations for UK and Irish listed companies, as well as companies incorporated in other territories. The Guidelines have been designed to be in alignment with the four key tenets of ISS Global Voting Principles: accountability, stewardship, independence and transparency. The Guidelines are effective for meetings on or after February 1, 2015.

Points to note in relation to the Guidelines include the following:

Operational items

ISS sets outs its views in relation to annual reports, articles of association, appointment of external auditors and audit fees. It states that while the NAPF Guidelines generally provide that investors will normally support changes to articles of association (provided there is not reduction in shareholder value or material reduction of shareholder rights), voting recommendations on amendments to the articles of association should be decided on a case-by-case basis.

Board of directors

Issues covered include director elections, controlling shareholders, director independence, board and committee composition and election of a former CEO as chairman. The Guidelines call for details of the relationship between a company and any controlling shareholder to be disclosed to investors.

Remuneration

ISS states that its approach to remuneration is aligned with the five remuneration principles for building and reinforcing long-term business success developed by the NAPF and that the Guidelines are also influenced by the Investment Association’s Principles of Remuneration and the GC100 and Investor Group’s Directors' Remuneration Reporting Guidance.

Capital structure

Topics covered by the Guidelines include the issue of shares and pre-emption rights, market purchases of ordinary shares, related party transactions, waivers for mandatory takeover bids and shareholder proposals in relation to social and environmental proposals.

Smaller companies

ISS applies its smaller companies approach to companies which are members of the FTSE Fledgling index, those listed on AIM and other companies which are not widely-held. Its recommendations are based on the NAPF Corporate Policy and Voting Guidelines for smaller companies, although it adds that the QCA Corporate Governance Code for Small and Mid-Size Quoted Companies 2013 may also be helpful in respect of AIM listed companies.

Other points to note

ISS notes that the UK Corporate Governance Code 2014 provides that when, in the opinion of the board, a significant proportion of votes have been cast against a resolution at any general meeting, the company should explain when announcing the results of voting what actions it intends to take to understand the reasons behind the vote result. It notes that the Financial Reporting Council has not set a threshold for significant dissent, adding that across other markets globally, it sees a consensus emerging, with a figure somewhere in the range 20 per cent to 30 per cent consistently seen as a threshold for significant dissent.

(ISS UK Proxy Voting Guidelines 2015, 07.01.15)

FCA: Final Notice for Execution Noble & Company Limited for breaches as a sponsor of Listing Rules

On January 6, 2015 the Financial Conduct Authority (FCA) published a Final Notice addressed to Execution Noble & Company Limited (Execution Noble & Company) imposing a fine of £231,000 in relation to breaches of Listing Rules 8.3.5R (obligation to deal with the FCA in an open and co-operative way at all time) and 8.7.8R(1)(a) (obligation to notify the FCA in writing where a sponsor ceases to satisfy the criteria for approval as a sponsor set out in LR 8.6.5R or where a sponsor becomes aware of any matter which, in its reasonable opinion, would be relevant to the FCA in considering whether the sponsor continues to comply with LR 8.6.6R). This is the first use of the FCA’s power to fine sponsors, introduced in 2013.

Background

Execution Noble & Company, a London subsidiary of a Portuguese bank, was an approved sponsor under the FCA’s sponsor regime. Guidance published by the UKLA in July 2013, amongst other things, reminds sponsors of the need to notify the UKLA of significant personnel changes and specifically notes that notification to other FCA personnel (such as its Authorisations department) is not adequate to discharge a sponsor’s duties in respect of LR 8.7.

The UKLA had applied an enhanced level of scrutiny to Execution Noble & Company’s activities, including enhanced levels of engagement between September 2011 and June 2013 because of concerns about its level of activity. As a result, the circumstances of its failure were considered more serious.

In June 2013, the UKLA confirmed it would revert to a normal supervisory relationship with Execution Noble & Company. This was due to two reasons: Execution Noble & Company was working on a sponsor transaction in June 2013 (and so refreshed its sponsor experience) and the UKLA was reassured regarding the Execution Noble & Company’s competency.

However, between June and November 2013, there were significant changes to Execution Noble & Company’s Sponsor Team as ten individuals left, including three individuals who comprised the core Sponsor Team (Key Individuals). Execution Noble & Company did not inform the UKLA of the resignation or subsequent departure of any of these individuals. The UKLA discovered the departures of the staff in November 2013 through its monitoring of press coverage. The UKLA asked Execution Noble & Company to cease performing any sponsor services from November 11, 2013. On December 9, 2013, Execution Noble & Company asked to be suspended.

FCA’s findings in relation to breaches of the Listing Rules

  • LR 8.3.5R(1): Given its experience as a sponsor and the enhanced level of interaction between Execution Noble & Company and the UKLA during September 2011 and June 2013, it should have been aware of the duty to act in an open and cooperative manner with the FCA. The staff departures, including the Key Individuals responsible for leading and executing sponsor services and responsible for compliance oversight, were material to the Sponsor Team.
  • LR 8.7.8R(1)(a): Execution Noble & Company should have notified the UKLA in writing of the personnel changes between June and November 2013. Due to the number of individuals who left, and the seniority of the Key Individuals, Execution Noble & Company should have considered the departures as a material change to its Sponsor Team. Execution Noble & Company therefore should have, in accordance with LR 8.7.8R (1)(a), realised that the departures of the Key Individuals and other Sponsor Team members would be relevant to FCA’s decision as to whether it continued to comply with the criteria for approval as a sponsor in LR 8.6.5R (which includes remaining competent to provide sponsor services).

Penalty

The UKLA considers the failure to notify changes that might impact on a sponsor’s ability to meet the criteria for approval as a sponsor to be serious. The premium listing regime places great reliance on sponsors. Factors considered by the FCA in determining the penalty included the following:

  • The FCA issued guidance in July 2013 in the form of a Technical Note in relation to a sponsor’s notification obligations under LR 8.7 (DEPP 6.5A.3G (2)(k)). This should have reminded Execution Noble & Company of its obligation to notify the UKLA, given that personnel changes are specifically noted.
  • The failure of Execution Noble & Company to notify the UKLA meant that the UKLA was not able to make a timely assessment of whether it continued to satisfy the criteria for approval to remain on the UKLA’s list as an approved sponsor and continued to market itself as available to perform sponsor services, performing one sponsor service during this period. This posed a risk to consumers and to market confidence in the sponsor regime
  • There was no actual loss to consumers or investors.
  • here was no evidence that the breaches were committed deliberately or recklessly. Rather, the breaches were committed negligently or inadvertently. Execution Noble & Company had separately notified the FCA as required by the FCA Handbook, although this was as part of a separate notification related to individual approval under the Approved Persons Regime.

Execution Noble & Company qualified for a 30 per cent discount under the FCA’s executive settlement procedures owing to its decision to settle at an early stage, therefore reducing the financial penalty from £330,000 to £231,000.

(FCA, Final Notice, Execution Noble & Company Limited)

FCA: Changes to the DTRs and Policy Statement on the early implementation of the Transparency Directive’s requirements for reports on payments to governments

On December 22, 2014 the Financial Conduct Authority (FCA) published the Transparency Rules (Reports on Payments to Governments) Instrument 2014, which implements, via changes to the Disclosure and Transparency Rules (DTRs), certain country by country reporting requirements for issuers in the extractive or logging industries, as required by the Transparency Directive (2004/109/EC) (as amended by Directive 2013/50/EU). The Instrument is in substantially the same form as that contained in the FCA’s August 2014 consultation paper, CP 14/17, save for minor drafting amendments. The changes to the DTRs came into force on December 22, 2014 and apply to financial years beginning on or after January 1, 2015.

On January 2, 2015, the FCA published Policy Statement PS 15/1. The Policy Statement summarises the FCA’s response to feedback on CP 14/17. Points to note in relation to the Policy Statement include the following:

  • The FCA is not currently imposing a prescribed reporting format for reports on payments to governments as a format is not specified by the Transparency Directive.
  • DTR 4.3A.8G clarifies that the FCA will consider a report prepared in accordance with the Reports on Payments to Governments Regulations 2014 (SI 2014/3209) to be in compliance with DTR 4.3A.7R(1) which requires reports on payments to governments to be prepared in accordance with Chapter 10 of the Accounting Directive. However, the guidance purposely does not cross refer to DTR 4.3A.7R(2) which requires payments to be reported at a consolidated level. This is a Transparency Directive requirement not an Accounting Directive requirement and the FCA states that it should not be assumed that this requirement under the Transparency Directive can be met through the Accounting Directive. The FCA states that the Accounting Directive and the Transparency Directive are two different regimes, and the requirement to report at consolidated level in a Transparency Directive context, therefore, has to remain separate from the Reports on Payments to Governments Regulations 2014. The FCA may provide guidance on the requirement for consolidated reporting in future when the reporting regime is in place and practice develops.
  • The FCA is required to treat reports on payments to governments as regulated information under the Transparency Directive, but intends to consider further the suggestion that an RIS announcement containing a link to the report on a company’s website (in addition to sending the report to the National Storage Mechanism) should satisfy the publication requirements in relation to DTR 4.3A.
  • The FCA will apply the new country by country reporting requirements to listed companies who are required by LR 9.2.6BR, LR14.3.23R and LR18.4.3R to comply with DTR 4 as if they were an issuer for the purposes of the DTRs, and to issuers of securitised derivatives who, pursuant to LR19.4.11BR, the FCA consider should comply with DTR4 as if they were an issuer of debt securities as defined in the DTRs.

(FCA, Transparency Rules (Reports on Payments to Governments) Instrument 2014, 12.22.14)

(FCA, PS 15/1 Early implementation of the Transparency Directive’s requirements for reports on payments to governments including feedback on CP14/17 and final rules, 01.02.15)

ESMA: MiFID and MiFIR - Final report containing technical advice on delegated acts and consultation paper on draft regulatory technical and implementing standards

On December 19, 2014 the European Securities and Markets Authority (ESMA) published a final report containing its technical advice to the European Commission on the possible content of delegated acts and a consultation paper on draft regulatory technical and implementing standards regarding the implementation of the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) and the Markets in Financial Instruments Regulation (600/2014) (MiFIR). MiFID II and MiFIR require ESMA to develop draft regulatory technical standards and implementing technical standards in several areas for submission to the European Commission by, respectively, 12 and 18 months from entry into force of MiFID II and MiFIR. The European Commission published a formal request in April 2014 following the approval of the legislative texts for MiFIR and MiFID II by the European Parliament on April 15, 2014. The final report is broadly similar to the draft technical advice published by ESMA in May 2014.

Points to note in relation to the final report are as follows:

Requirements applying on and to trading venues on small and medium-sized enterprise (SME) Growth Markets - Article 33(3)(a) MiFID II

Article 33(3)(a) of MiFID II requires that at least 50 per cent of the issuers whose financial instruments are admitted to trading on a multi-lateral trading facility (MTF) registered as a SME Growth Market are SMEs at the time the MTF is registered as an SME Growth Market and in any calendar year thereafter. ESMA states that:

The assessment whether at least 50 per cent of issuers on an SME Growth Market are SMEs should be made on an annual basis.

The percentage of issuers whose financial instruments are admitted to trading and which can be classified as SMEs should be assessed on the basis of the number of issuers only, disregarding other factors (e.g., the size/turnover of the enterprise, the issuance size of the financial instruments or the number of different financial instruments issued by the same enterprise).

  • The composition of issuers should be checked based on the figures at December 31 in each calendar year in order to verify whether at least 50 per cent of the issuers admitted to trading on the SME growth market were SMEs based on an average of each month of the calendar year.An entirely new market applying to become an SME Growth Market should be granted such authorisation if there is an expectation that at least 50 per cent of the prospective issuers will be SMEs.
  • Non-equity issuers should be considered as SMEs for the purpose of determining whether an SME Growth Market meets the requirement of having at least 50 per cent SME issuers if: (i) the overall nominal value of the debt securities issued by the issuer does not exceed €200m; or (ii) the issuer is classified as a SME pursuant to Article 2(1)(f) of the Prospectus Directive.

Remuneration

  • Investment firms should define their remuneration policies under appropriate internal procedures taking into account the interests of all the clients of the firm, with a view to ensuring that clients are treated fairly and their interests are not impaired by the remuneration practices adopted by the firm in the short, medium or long term.
  • Remuneration and similar incentives should not be solely or predominantly based on quantitative commercial criteria, and should take fully into account appropriate qualitative criteria reflecting compliance with the applicable regulations, the fair treatment of clients and the quality of services provided to clients.
  • An appropriate balance between fixed and variable components of remuneration should be maintained at all times, so that the remuneration structure does not favour the interests of the investment firm or its relevant persons against the interests of any client.
  • ESMA considers that an attempt to prescribe requirements in relation to corporate governance, systems/controls or working capital at a MiFID II level would diminish the flexibility afforded to market operators.  ESMA considers that it is inappropriate for MiFID II or its implementing measures to prescribe detailed eligibility criteria in relation to an issuer’s corporate governance or framework of systems/controls.

Appropriate on-going periodic financial reporting

  • Issuers on SME Growth Markets should publish annual and half-yearly reports. Such reports should be regarded as having been published where a publication method that satisfies Article 33(3)(f) of MiFID II is followed.
  • Issuers should make public annual reports within six months after the end of each financial year and half-yearly financial statements within four months after the end of the first six months of each financial year.
  • The content of those reports should follow local financial reporting rules as a minimum. Market operators are free to require adherence to additional requirements and should be ready to accept the use of standards adhering to additional requirements by their issuers. National Competent Authorities have to assess that investors will receive appropriate information, in light of any financial reporting standards applicable under local law or regulation and practices in its markets.

Compliance with the Market Abuse Regulation (MAR)

  • Issuers on SME Growth Markets should comply with the same rules as established in MAR, except for those specific cases where MAR grants additional exemptions to SME Growth Market issuers.
  • All regulatory information should be published on the website of the market operator of the SME Growth Market so that this website can be used as a natural point of convergence of information for investors.
  • Such publication can also be effected by the market operator providing a direct link to the part of the website of the issuer where the regulatory information is published.
  • A publication on the website of the market should be considered as dissemination for the purposes of this provision.
  • The information published and disseminated should be available on the website of the market operator for a period of at least five years.
  • In order to maintain an adequate level of consistency of rules applying across all MiFID II trading venues no additional specifications to the rules laid down in MAR and MiFID II for MTFs should be implemented specifically for SME Growth Markets.

The technical advice will be sent to the European Commission, while the draft regulatory technical and implementing standards will be open for comment until March 2, 2015. ESMA will use the input received to finalise its draft regulatory technical standards, which will be sent for endorsement to the European Commission by the middle of 2015. The implementing technical standards will be sent to the European Commission by January 2016. MiFID II/MiFIR and its implementing measures will be applicable from 3 January 2017.

(ESMA, Final Report on technical advice to the European Commission on MiFID II and MiFIR, 12.18.14)

(ESMA, Consultation paper on draft regulatory technical and implementing standards, 12.18.14)

ESMA: Consultation papers published in relation to the CSD Regulation

On December 18, 2014 the European Securities and Markets Authority (ESMA) published three consultation papers in relation to Regulation 909/2014 on improving securities settlement in the European Union and on central securities depositories (the CSD Regulation), which was published in the Official Journal in July 2014. The CSD Regulation introduces an obligation to represent all transferable securities in book entry form and harmonises settlement periods and settlement discipline regimes across the EU. The consultation papers relate to technical standards under the CSD Regulation, draft technical advice on penalties for settlement fails and on the substantial importance of a CSD and draft guidelines on the access to Central Clearing Counterparty (CCP) or trading venues by CSDs.

Points to note in relation to the consultation papers are as follows:

Consultation paper on technical standards under the CSD Regulation

The CSD Regulation requires ESMA to prepare draft regulatory technical standards and implementing technical standards to be submitted to the European Commission covering the following areas:

  • settlement discipline;
  • CSD authorisation, supervision and recognition;
  • CSD requirements (including CSD record keeping, reconciliation measures, CSD operational risk, CSD investment policy);
  • access (between a CSD and its participants, access between CSDs and access between CSDs and other market infrastructures); and
  • internalised settlement.

Consultation paper on draft technical advice on penalties for settlement fails and on the substantial importance of a CSD

ESMA is seeking views from stakeholders in relation to technical advice it intends to provide to the European Commission on proposed penalties for settlement fails, and arrangements to identify CSDs of substantial importance for the functioning of the securities markets and the protection of investors in a host Member State. The proposed level of penalties is based on average borrowing costs for the relevant securities.

Consultation paper on draft guidelines on the access to CCPs or trading venues by CSDs

Article 53 of the CSD Regulation (Access between a CSD and another market infrastructure) provides that a CCP and a trading venue should provide transaction feeds on a non-discriminatory and transparent basis to a CSD upon request by the CSD. It also requires a CSD to provide access to its securities settlement systems on a non-discriminatory and transparent basis to a CCP or a trading venue. The CSD Regulation provides that a party refusing access shall provide the requesting party with full written reasons for such refusal based on a comprehensive risk assessment. This consultation paper covers the risks to be taken into account by a CCP or a trading venue when carrying out a comprehensive risk assessment following a request for access by a CSD, as well as when the competent authority of the CCP or the competent authority of the trading venue assesses the reasons for refusal to provide services by the CCP or by the trading venue, in accordance with Article 53 of CSD Regulation.

ESMA intends to organise an open hearing on the consultation papers on January 13, 2015. The closing date for comments is February 19, 2015 and ESMA will finalise the technical standards and technical advice for submission to the European Commission by June 18, 2015. ESMA states that it will consider the responses it receives to the consultation paper on guidelines on the access to a CCP or a trading venue by a CSD in conjunction with the responses received to its consultation paper on the draft technical standards. It will finalise and publish the guidelines in correlation with the entry into force of the regulations regarding the technical standards under the CSD Regulation.

(ESMA, Consultation paper on technical standards under the CSD Regulation, 12.18.14)

(ESMA, Consultation paper on draft technical advice on penalties for settlement fails and on the substantial importance of a CSD, 12.18.14)

(ESMA, Consultation paper on draft guidelines on the access to CCPs or trading venues by CSDs, 12.18.14)

QCA: Corporate Governance Behaviour Review (2014)

The Quoted Companies Alliance (QCA) has published it second Corporate Governance Behaviour Review of Small and Mid-Size Quoted Companies (the Review). Like the first report , which was published in March 2014, the review was conducted in conjunction with UK accountancy firm, UHY Hacker Young and looks at the corporate governance disclosures of small and mid-size quoted companies against the 2013 QCA Corporate Governance Code for Small and Mid-Size Quoted Companies (the QCA Code). It is designed to help the directors of quoted companies improve the communication of their corporate governance arrangements and how they support long term growth.

The Review looks at the impact of what the QCA considers to be the three most significant external corporate governance changes in 2014: (i) the new narrative reporting framework and the introduction of the Strategic Report; (ii) the changes to the UK Corporate Governance Code for financial years beginning on or after October 1, 2014 and; (iii) the amendments to AIM Rule 26 which relate to corporate governance disclosures.

The QCA comments that company disclosures have improved slightly in areas such as audit committee reporting and risk management disclosures, and regressed in others, noticeably in the posting of voting decisions of general meetings on corporate websites. It states that companies continue to have difficulty with:

  • linking the application of corporate governance to corporate strategy;
  • making board evaluation disclosures; and
  • describing the role of external advisers in the boardroom.

The QCA notes that the linkage of corporate governance to corporate strategy is difficult to achieve but that this is an area of significant interest for institutional investors. It argues that improvement in this area may arise as a result companies becoming more acquainted with the Strategic Report. It comments that investors want to see companies assessing the quality of directors and the skills that directors have, so as to address any skills gap on the board, adding that this assists investors in understanding the reasons behind the composition of a board.

The QCA notes that, unlike companies listed on the Main Market of the London Stock Exchange, AIM companies are generally not obliged to announce general meeting voting decisions (whether on their corporate website or through a Regulated Information Service). It comments that investors have indicated that this is something that they would expect to see and so companies should focus on improving disclosure in this area.

This review recommends the following five disclosures that companies should focus on in 2015:

  • Link strategy and corporate governance: Investors want to see companies clearly articulating their strategy and explaining how the application of their chosen corporate governance code supports the company’s long term success and strategy for growth. Although this is difficult to do, it is key to ensuring that a company’s corporate governance structures and processes are appropriate and helping to deliver long term growth and increasing shareholder value.
  • Understand your risks and explain how they link to strategy: Companies should focus on articulating their risks without the use of boilerplate text and explain how their risks impact on the company’s strategy and link into key performance indicators (KPIs), remuneration policies and corporate social responsibility activities. Investors want companies to demonstrate that they are thinking about risks and KPIs over the long term, moving beyond just a one-year time period and potentially reporting on these over a longer time frame.
  • Focus on the audit committee report: Investors are keen to see companies clearly articulating the significant issues considered by the audit committee in relation to the financial statements and how these were dealt with
  • Describe board evaluation procedures: Companies should focus on improving their disclosures, ensuring that they not only explain the performance procedures, but also the result of the evaluation, consideration of succession issues both within the board and senior management and actions taken.
  • Explain why each director is on the board: Investors are most interested in why the director is on the board and the specific skills he or she brings to the table and this cannot always be gleaned from a biography in the annual report and accounts.

(QCA Corporate Governance Behaviour Review (2014), 12.14)


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Martin Scott

Martin Scott

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Jo Chattle

Jo Chattle

London
Jo Chattle

Jo Chattle

London