Essential Corporate News – Week ending January 29, 2016

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

On January 25, 2016 the draft Register of People with Significant Control Regulations 2016 were published for parliamentary approval. An explanatory memorandum and draft impact assessment were also published. The Regulations are largely the same as those proposed by the Department for Business, Innovation and Skills (BIS) in its June 2015 consultation paper.

Changes from the proposed regulations in the 2015 consultation paper include the following:

• Regulation 3 provides that companies with voting shares admitted to trading on a regulated market in an EEA state other than the UK or on certain specified markets in Israel, Japan, Switzerland and the US are exempt from keeping a register of people with significant control (PSC register);
• Regulation 4 extends the list of companies deemed subject to their own disclosure requirements to include the companies exempt under Regulation 3;
• Schedule 1 sets out a definitive list of the markets in Israel, Japan, Switzerland and the US that Regulations 3 and 4 apply to;
• Regulation 6 provides that there will be a flat fee of £12 for a copy of a company’s PSC register, or any part of it;
• Regulation 8 specifies characteristics of foreign limited partners in connection with determining whether a person has significant control over a company;
• The time limit in Regulation 25 for the Registrar of Companies to send an applicant notice of its determination regarding an application to refrain from disclosing an individual’s usual residential address information to a credit reference agency has been extended from five working days to seven days beginning with the date that the determination is made; and
• Schedule 5 outlines the amendments necessary to make the Companies (Disclosure of Address) Regulations 2009 consistent with the Regulations for the protection of directors' addresses from disclosure.

The Regulations will come into force on April 6, 2016 other than paragraph 6 of Schedule 5, which comes into force on June 30, 2016.

(Draft Register of People with Significant Control Regulations 2016, 25.01.16)

On January 25, 2016 the draft Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016 were published, together with an explanatory memorandum, a mark up of Part 21A of and Schedules 1A and 1B to the Companies Act 2006 and a mark up of the Register of People with Significant Control Regulations 2016.

The draft Regulations include:

• A new Part 8A to the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 which applies the provisions of Part 21A of and Schedules 1A and 1B to the Companies Act 2006 (CA 2006), modified as necessary, so that they require limited liability partnerships (LLPs) to keep a register of people with significant control (PSC register);
• Amendments to Parts 1 and 2 of Schedule 1A of the CA 2006, which provide the circumstances where an individual will be considered a person with significant control in the context of an LLP;
• Modifications to the draft Register of People with Significant Control Regulations 2016 are set out in Schedule 2 and will apply when considering control of an LLP; and
• Amendments to related legislation as a result of the new requirements for LLPs are set out in Schedule 3 and include a new section 2(2)(g) of the Limited Liability Partnerships Act 2000, which will require a statement of initial control to be filed at Companies House on the incorporation of an LLP.

The majority of the Regulations will come into force on April 6, 2016, but the changes to sections 790M(9)(c), and 790W to 790ZD of the CA 2006, as they apply to LLPs, together with paragraphs 1 and 3 of Schedule 3 to the draft LLP Regulations, will come into force on June 30, 2016.

(Draft Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016, 25.01.16)

On January 27, 2016 the Department for Business, Innovation and Skills (BIS) published draft amended statutory guidance on the meaning of “significant influence or control” over companies in the context of the register of people with significant control (PSC). The new PSC regime comes into effect on April 6, 2016 as a result of amendments to the Companies Act 2006 (CA 2006) made by the Small Business, Enterprise and Employment Act 2015. Paragraph 24 of Schedule 1A to the CA 2006 requires the Secretary of State to publish guidance on the meaning of “significant influence or control” and draft guidance was published for consultation in December 2015.This amended guidance has now been laid before Parliament and is awaiting approval.

The amended guidance provides examples of what might constitute a right to exercise significant influence or control. They include examples of absolute decision rights or absolute veto rights over decisions related to the running of the company’s business. The amended guidance also sets out examples where rights relating to minority protection would not constitute a right to exercise significant influence or control on their own. Examples of situations which could be indicative of a person actually exercising significant influence or control are also provided and they include a person who is a shadow director for the purposes of the CA 2006. The examples in all cases are not exhaustive.

The amended guidance provides a non-exhaustive list of roles and relationships which would not, on their own, result in that person being considered to be exercising significant influence or control. The list of “excepted roles” has been added to so, for example, rights held by all or a group of employees for the purpose of representing employees’ interests in an employee-owned company would not, on their own, result in those persons being considered to be exercising significant influence or control.

(BIS, Draft Statutory Guidance on the meaning of “Significant Influence or control” over companies in the context of the Register of People with Significant Control, 27.01.16)

On January 27, 2016 the Department for Business, Innovation and Skills (BIS) published draft amended statutory guidance on the meaning of “significant influence or control” over limited liability partnerships (LLPs) in the context of the register of people with significant control (PSC). The new PSC regime comes into effect on April 6, 2016 as a result of amendments to the Companies Act 2006 (CA 2006) made by the Small Business, Enterprise and Employment Act and as applied to LLPs by the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016 (2016 LLP Regulations). Paragraph 24 of Schedule 1A to the CA 2006 requires the Secretary of State to publish guidance on the meaning of “significant influence or control” and draft guidance was published for consultation in relation to LLPs in December 2015.

The amended guidance provides examples of what might constitute a right to exercise significant influence or control. They include examples of absolute decision rights or absolute veto rights over decisions related to the running of the LLP’s business. The amended guidance also sets out examples where rights relating to protection of a member’s own or minority interest would not constitute a right to exercise significant influence or control on their own. Examples of situations which could be indicative of a person actually exercising significant influence or control are also provided and they include a person who is a shadow member of an LLP. The examples in all cases are not exhaustive.

The amended guidance provides a non-exhaustive list of roles and relationships (“excepted roles”) which would not, on their own, result in that person being considered to be exercising significant influence or control over an LLP.

The amended statutory guidance cannot be laid in Parliament until the 2016 LLP Regulations have come into force. This means they will be laid in Parliament on April 6, 2016 and will come into force after sitting in Parliament for 40 days.

(BIS, Draft Statutory Guidance to the meaning of “significant influence or control” over Limited Liability Partnerships (LLPs) in the context of the register of People with Significant Control, 27.01.16)

On January 26, 2016 the Government provided a written statement in the House of Lords on transparency in connection with the people with significant control (PSC) regime relating to companies and limited liability partnerships (LLPs), as set out in the new Part 21A Companies Act 2006 (CA 2006). The written statement notes that draft regulations concerning companies and LLPs have been laid before Parliament and these provide for applications to be made to withhold the personal information of PSCs from public disclosure, although the information must still be provided, and the fact that the information exists but is protected, will be made public.

Section 790J CA 2006 enables the Secretary of State to make general exemptions to the new requirements. The written statement notes that the Secretary of State has not granted any such exemptions, and would only be prepared to grant exemptions in very limited circumstances, specifically, if the exemption is in the interests of national security, the economic wellbeing of the UK, or in the support of the prevention or detection of serious crime. An exemption would also only be granted if the Secretary of State received satisfactory assurances on other matters, such as that the company or LLP was not being run for the personal benefit of any individual and that the exemption was necessary for the person seeking it to achieve their lawful objectives.

(House of Lords, Written Statements and Written Answers, 26.01.16)

On January 28, 2016 the European Securities and Markets Authority (ESMA) published a consultation paper on draft guidelines relating to the Market Abuse Regulation (MAR). Article 11(11) of MAR  requires ESMA to issue guidelines addressed to persons receiving market soundings and Article 17(11) of MAR requires ESMA to issue guidelines on legitimate interests of issuers to delay inside information and situations in which the delay of disclosure is likely to mislead the public. This consultation paper follows a November 2013 discussion paper on implementing measures under MAR and it comments on responses to that discussion paper.

Legitimate interest for issuer to delay disclosure of inside information

The draft guidelines provide non-exhaustive examples of situations where immediate disclosure of the inside information is likely to prejudice the issuer’s legitimate interests and these include the following circumstances:

• there are ongoing negotiations where the outcome of those negotiations would be likely to be jeopardised by immediate public disclosure of that information;
• the financial viability of the issuer is in grave and imminent danger, although not within the scope of the applicable insolvency law, and immediate public disclosure of the inside information would seriously prejudice the interests of existing and potential shareholders, jeopardising the conclusion of the negotiations aimed at ensuring the financial recovery of the issuer;
• the inside information relates to decisions taken or contracts entered into by the management body of an issuer which need the approval of another body of the issuer in order to become effective(subject to certain conditions being met);
• the issuer has developed a product or an invention and the immediate public disclosure of that information is likely to jeopardise the intellectual property rights of the issuer;
• the issuer is planning to buy or sell a major holding in another entity and the disclosure of such an information would jeopardise the conclusion of the transaction; and
• a transaction previously announced is subject to a public authority’s approval, and such approval is conditional upon additional requirements, where the immediate disclosure of those requirements will be likely to affect the ability of the issuer to meet them and therefore prevent the final success of the deal or transaction.

Situations where delay in disclosure is likely to mislead the public

The proposed guidelines set out the following non-exhaustive circumstances where delay of disclosure of inside information is likely to mislead the public:

• the inside information the issuer intends to delay the disclosure of is materially different from a previous public announcement of the issuer on the matter to which the inside information relates to;
• the inside information the issuer intends to delay the disclosure of relates to the fact that the issuer’s financial objectives are likely not to be met, where such objectives were previously publicly announced; and
• the inside information the issuer intends to delay the disclosure of is in contrast with the market’s expectations, where such expectations are based on signals that the issuer has previously set.

Market soundings

The consultation paper also provides draft guidelines for persons receiving market soundings. These include guidance on the following:

• appointing a designated person within the entity receiving the market sounding entitled to receive market soundings;
• communicating the wish not to receive market soundings;
• assessing whether the person receiving the market sounding is in possession of inside information as a result of the market sounding and when they cease to be in possession of inside information;
• discrepancies of opinion between disclosing market participants and the person receiving the market sounding;
• internal procedures and staff training to be established by persons receiving market soundings;
• listing of staff that are in possession of the information communicated in the course of each market sounding;
• the assessment of related financial instruments by persons receiving market soundings;
• written minutes or notes and recording of telephone calls in relation to market soundings; and
• record keeping by persons receiving market soundings.

ESMA has requested all comments on the draft guidelines by March 31, 2016. It will then finalise the two sets of guidelines and publish a final report by early Q3 2016.

(ESMA, Draft guidelines on the Market Abuse Regulation, 28.01.16)

On January 28, 2016 the Financial Reporting Council (FRC) published a report on the results of its survey, “Extended auditor’s reports: A further review of experience”. Changes were made to the Auditing Standards in 2012 so as to require the auditor’s report to provide an overview of the risks of material misstatement identified by the auditor, the application of materiality and the scope of the audit. This is the FRC’s second report on the experience of extended auditor reporting and is intended to highlight new trends, innovations and good practice and to highlight how extended auditor’s reports have continued to develop. The report includes feedback from investors in order to identify the areas of best current practice in auditor reporting and those areas where there is scope for further improvement.

Key findings include:

• Investors welcome the information included in extended auditor’s reports, and particularly for smaller companies where there tends to be less independent information available.
• In general, auditors have continued to move away from generic language and descriptions of risk, making their reports more relevant and insightful.
• The reports which have earned the greatest praise from investors tend to be well structured, signposting key information and often make innovative use of graphics, diagrams and colour.
• Many investors feel that more could be done to enhance auditor’s reports, including providing more complete information about the sensitivity ranges used in audit testing; giving greater insight into the auditor’s assessment of the quality of an entity’s internal controls informing their significant risk assessment; and being more explicit about the auditor’s view on the appropriateness of management estimates.
• Areas where auditor’s reports could be further enhanced include more frequent inclusion of commentary about what the auditor found as a result of the work done on risks of misstatement; explanations of changes to the audit approach, materiality or risk assessment over time; and more auditors should include information about ‘performance materiality’ – how it is derived and how it impacts on the audit.

(FRC, Extended auditor’s reports: a further review of experience, 28.01.15)