Essential Corporate News - week ending 21 September 2012

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

In a press release published on 20 September 2012, the Department for Business, Innovation and Skills (BIS) has announced that it is developing proposals with the London Stock Exchange (LSE) to encourage entrepreneurs and high-growth companies, particularly internet and technology companies, to conduct their flotation in London. The press release describes the proposals as acting as a ‘launch pad’ for companies seeking a full Premium Listing, and they will include a planned new route to the UK IPO market for such companies with revised rules on free float, eligibility criteria and reporting requirements.

In addition, the Government is to investigate the current regulatory rules that may be deterring investors from funding growth companies and is to work with the LSE to widen the availability of equity capital for both UK and international businesses looking to base themselves in London.

The notes to the press release state that the new route to market will complement the UK’s existing markets, including AIM and the Premium segment of the Main Market, and suggest that further details on the eligibility criteria and benefits of this new route to market will be published before the end of 2012. They also refer to the consultation on aspects of the listing regime set out in the Financial Services Authority (FSA) consultation paper CP12/2 and note that the FSA has indicated that it intends to present its proposals in relation to CP 12/2 in October 2012.

(BIS, Bold action to open up London’s equity markets to high-growth companies, 20.09.12)

On 20 September 2012, the Accounting Standards (Prescribed Bodies) (United States of America and Japan) Regulations 2012 (the Regulations) were published. Under current rules, companies in the UK use either UK Generally Accepted Accounting Principles (UK GAAP) or International Accounting Standards (IAS) in preparing their accounts. Companies choosing to relocate their headquarters to the UK may use other accounting systems before relocating and then generally change their accounting system to UK GAAP or IAS in time for the preparation of the first set of annual accounts (often with a view to filing the first set of financial accounts at Companies House in UK GAAP or IFRS within 18 months). The Regulations aim to reduce the associated costs that arise for a company when converting its accounts in such a short timeframe by providing an explicit transition period of three years to allow companies relocating to the UK whose securities are registered with the SEC in the US or are admitted to trading on Japanese stock exchanges (but are not admitted to trading on a regulated market in the EEA) to move their accounting principles to IAS or UK GAAP.

The Regulations recognise as prescribed bodies for the purposes of section 464 Companies Act 2006:

• the Financial Accounting Standards Board, in respect of the group accounts of parent companies with securities registered with the SEC in the US; and
• the Accounting Standards Board of Japan, in respect of the group accounts of parent companies with securities admitted to trading on stock exchanges in Japan.

These bodies will only be prescribed bodies in respect of group accounts for financial years ending on or before 31 December 2014.

The Regulations come into force on 1 October 2012 and will cease to have effect on 31 December 2015.

(Accounting Standards (Prescribed Bodies) (United States of America and Japan) Regulations 2012, 20.09.12)

On 17 September 2012, the Financial Reporting Laboratory (the Financial Reporting Lab) published a project report on ‘net debt reconciliations’. The Financial Reporting Lab was launched in October 2011 by the Financial Reporting Council (FRC) and in November 2011, the FRC listed net debt reconciliations as one of its initial list of topics to be covered. The project report shows how some companies are defining net debt and disclosing various cash and non-cash movements that might not otherwise be apparent from the financial report. The Financial Reporting Lab worked with five companies (BT Group, National Grid, Royal Dutch Shell, Vodafone and Xchanging) who provided illustrative excerpts from their annual reports (including a net debt reconciliation, a reconciliation of net cash flows to net debt, or both) to be used in a series of discussions with investors to identify those voluntary practices that investors find useful, indicating why this is the case and how the information is used.

According to the project report, a strong majority of investors indicated they use a net debt reconciliation or reconciliation of net cash flows to net debt in their analysis when one is presented, and given the importance, attempt to construct them when they are not. The two typical uses of these reconciliations are equity valuations and analysis or ‘investigation’ which involves looking into perceived problems with debt or equity. The project report also lists the characteristics of reconciliations investors feel are most helpful. The Financial Reporting Lab encourages companies to consider whether the suggested approaches described are relevant to their own circumstances, and if so, to enhance their reporting to meet investors’ needs more fully. It argues that more dialogue and development of enhanced disclosure is needed in this area.

Readers of the project report are invited to comment on its content and presentation as any feedback will be taken into account in producing two further reports on debt and cash flow disclosure scheduled in the near future.

(Financial Reporting Laboratory: Report on net debt reconciliations, 17.09.12)

On 18 September 2012, Commission Delegated Regulation (826/2012/EU) and Commission Implementing Regulation (827/2012/EU) were published in the Official Journal.  The Delegated Regulation and the Implementing Regulation were adopted by the European Commission in June 2012.  They set out regulatory and implementing technical standards in relation to  Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps (the Short Selling Regulation) which will apply from 1 November 2012.  The texts of the Delegated Regulation and Implementing Regulation are broadly the same as the draft versions adopted in June 2012.

The Implementing Regulation lays down implementing technical standards specifying the following:

• the means by which information on net short positions may be disclosed to the public by natural or legal persons as well as the format of information to be provided to the European Securities and Markets Authority (ESMA) by competent authorities pursuant to Article 9(6) and Article 11(4) of the Short Selling Regulation;
• the types of agreements, arrangements and measures that adequately ensure that the shares are available for settlement and the types of agreements or arrangements that adequately ensure that the sovereign debt is available for settlement pursuant to Articles 12(2) and 13(5) of  the Short Selling Regulation; and
• the date and period for principal trading venue calculations, notification to ESMA and the effectiveness of the relevant list pursuant to 16(4) of the Short Selling Regulation.

The Delegated Regulation lays down regulatory technical standards specifying the following:

• the details of the information on net short positions to be provided to the competent authorities and disclosed to the public by a natural or legal person pursuant to Article 9(5) of the Short Selling Regulation;
• the details of the information to be provided to ESMA by the competent authority pursuant to Article 11(3) of the Short Selling Regulation; and
• the method for calculation of turnover to determine the principal venue for the trading of a share pursuant to Article 16(3) of the Short Selling Regulation.

Both the Delegated Regulation and Implementing Regulation enter into force on 19 September 2012 and will apply from 1 November 2012, save for certain provisions (Article 6 of the Delegated Regulation and Articles 9,10 and 11 of the Implementing Regulation) which will apply from 19 September 2012.

(European Commission, Delegated Regulation (EU) No 826/2012 of 29 June 2012 (OJ L251/1),18.9.2012)

(European Commission, Implementing Regulation (EU) No 827/2012 of 29 June 2012 (OJ L251/11), 18.9.2012)

On 17 September 2012, the European Securities and Markets Authority (ESMA) published a consultation paper on proposed guidelines in relation to remuneration policies and practices under the Markets in Financial Instruments Directive (MiFID). The guidelines aim to strengthen investor protection by seeking to improve the implementation of the MiFID rules on conflicts of interest and conduct of business requirements relating to remuneration.

MiFID sets out conduct of business obligations (including an overarching obligation on firms to act honestly, fairly and professionally in accordance with clients’ best interests) on firms when providing investment and/or ancillary services. MiFID requires supervisors to react in the event that firms have in place remuneration policies and practices that are not compatible with these requirements. Evidence gathered by ESMA points to a divergence in the way firms determine how to address conflicts of interest and conduct of business risks arising from their remuneration policies. As a result, ESMA is hoping to develop appropriate guidelines based on MiFID requirements to address this issue. In developing the guidelines, ESMA has noted other relevant remuneration initiatives being undertaken under the Alternative Investment Fund Managers Directive and the revised Capital Requirements Directive.

Key elements of the guidelines include the following:

General obligations

• Firms should ensure that remuneration is not paid in a manner that aims at circumventing the MiFID requirements and/or the ESMA guidelines.
• Firms should design and monitor their remuneration policies and practices to take account of the conduct of business and conflicts of interest risks that may arise.
• Firms should set up adequate controls on the implementation of their remuneration policies and practices to ensure that they deliver the intended outcomes.

Types of remuneration

• For the purposes of the guidelines, remuneration consists of all forms of payments or benefits provided directly or indirectly by firms to relevant persons involved in the provision of investment and/or ancillary services to clients.
• Remuneration can be divided into either fixed remuneration (payments or benefits without consideration of any performance criteria) or variable remuneration (additional payments or benefits linked to performance or, in certain cases, other contractual criteria).

Staff covered

• The guidelines focus on staff involved in the provision of investment and/or ancillary services, in particular, staff who can have a material impact on the service provided, on the conduct of business risk profile, and who can influence corporate behaviour. This includes client facing front-line staff, sales force staff, and/or other staff indirectly involved in the provision of investment services whose remuneration may create inappropriate incentives to act against the best interests of their clients.

The consultation period for the guidelines closes on 7 December 2012. The final report, and the final guidelines, should be published by the second quarter of 2013.

(ESMA, Consultation paper on remuneration policies and practices, 17.09.12)