HM Treasury: UK Secondary Capital Raising Review
On October 12, 2021 the UK Government announced that Mark Austin has been appointed the independent chair of the UK Secondary Capital Raising Review (Review), to look into how further capital raising processes by companies that are already listed can be made more efficient. The Review will then make recommendations to the Government.
The setting up of the Review was one of the recommendations of Lord Hill’s UK Listing Review which made a series of recommendations to the Government to help boost the UK as a destination for IPOs and optimise the capital raising process for large and small companies on UK markets.
The Review has been asked in particular to focus on:
- Whether the overall duration of the secondary capital raising process can be reduced including, in relation to rights issues, by reducing the period during which shareholders trade their rights.
- Whether new technology can be brought to bear on the process in order to ensure shareholders can receive relevant information rapidly and exercise their rights.
- Other fund-raising mechanisms that may be worth considering in the UK, including the Australian ‘RAPIDS’ model as well as structures to facilitate enhanced retail investor participation in capital raisings. It should also consider what barriers, if any, there are to wider adoption.
- Whether the greater transparency around short selling brought in after the financial crisis has benefited the rights issue process (noting the contribution short selling makes to price formation) and whether more can be done.
- Whether there are any other ways of improving the capital raising process by UK publicly traded companies which are consistent with the UK's commitment to high standards.
- Whether any outstanding recommendations from the 2008 ‘Rights Issue Review Group should be pursued.
Recommendations are to be reported back to the Government in Spring 2022. The terms of reference for the Review and a Call for Evidence have been published. Responses to the Call for Evidence are requested by November 16, 2021. The Call for Evidence is only part of the consultative process and, once it has closed, the Review will hold a series of discussions with interested parties to explore the issues raised further.
(HM Treasury, Independent report, UK Secondary Capital Raising Review, 12.10.2021)
Takeover Panel: Panel Bulletins
On October 11, 2021 the Takeover Panel (Panel) published Panel Statement 2021/22 noting that it has concluded that it would be beneficial to publish “Panel Bulletins” from time to time intended to remind practitioners and market participants of the operation of specific provisions of the Takeover Code in the light of issues of which the Panel becomes aware.
On the same date the Panel also published Panel Bulletin 1 (Requirements in relation to meetings and telephone calls with shareholders and others) and Panel Bulletin 2 (Management buy-outs or similar transactions) which can be located on the Panel Bulletins page of its website.
(Takeover Panel, Panel Statement 2021/2, 11.10.2021)
FRC: Lab Report on Structured Reporting – Applying DTR 4.1.14 and ESEF
On October 12, 2021 the Financial Reporting Council’s Financial Reporting Lab published a report following its review of 50 early annual financial reports produced in a structured electronic format (structured report) from across the UK and Europe. These reports were either voluntary filings or originated from EU countries where the requirements for structured reports have already come into force. The report sets out the findings of the Lab’s review and highlights some key considerations for companies.
For financial years starting on or after January 1, 2021 companies admitted to trading on UK regulated markets are required to start producing their annual financial reports in a structured electronic format. The FCA introduced this requirement (DTR 4.1.14) as part of the UK implementation of a cross-EU initiative known as the ‘European Single Electronic Format’ or ‘ESEF’.
Key messages from the Lab in light of their review are as follows:
- The majority of reports across the sample fell short of the quality that is expected for companies’ official filings. More than 70 per cent of the files contained tagging errors, more than half had issues limiting their usability and more than 25 per cent had design issues.
- Although many issues were identified during the review, almost all issues could be solved with appropriate care and attention. A focus on quality by companies is crucial for a successful roll-out of structured reporting.
- The Lab has identified practice tips across three broad areas: process, usability and appearance and tagging. Key tips for companies are included in the report and they cover how to set up the structured reporting process, how to enhance the usability of structured reports and common tagging issues to avoid.
- Companies should be aware that the issues identified are clearly visible to users and, therefore, may negatively affect a company's reputation and the willingness of stakeholders to use digital information.
The report also includes questions for companies and their boards to consider as they prepare to apply the structured report requirements.
(FRC: Lab Report on Structured Reporting: An early implementation study – Applying DTR 4.1.14 and ESEF, 07.10.2021)
FRC: Thematic Review – IAS 37 'Provisions, Contingent liabilities and Contingent assets'
On October 14, 2021 the Financial Reporting Council (FRC) published the findings of its Thematic Review into IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, which has been identified as a recurrent problem area by the FRC.
The FRC notes that provisions and contingent liabilities reporting is of particular importance to investors owing to the forward-looking information it can provide about a company’s exposures. The issues giving rise to provisions and contingent liabilities are often long-term in nature, such as climate change and other environmental obligations, or significant to the assessment of future business performance, for example, onerous contracts and regulatory penalties or compensation.
The FRC’s review considers how a sample of 20 companies’ annual reports has met relevant reporting requirements, identifies examples of good practice and outlines its expectations for future disclosures.
The review has found scope for improvements in several areas, in particular in:
- Explaining how the amounts of expected outflows have been estimated, identifying the key assumptions applied and describing the associated uncertainties;
- Disclosing the phasing of outflows companies expect to see as they utilise their provisions; and
- Describing the underlying costs for which companies make provisions.
The FRC also encourages companies to disclose entity-specific accounting policies and to provide more quantitative information about contingent liabilities.
(FRC, Thematic Review – IAS 37 ‘Provisions, Contingent liabilities and Contingent assets’, 14.10.2021)
Cranfield University: The Female FTSE Board Report 2021
On October 7, 2021 Cranfield University published its Female FTSE Board Report 2021. This notes that there has been further progress in terms of the number of women on corporate boards, with the percentage of women in FTSE 100 boards being 38 per cent and 35 per cent in FTSE 250 boards. As a result, all boards in aggregate have met and exceeded the target set by Hampton-Alexander but 21 per cent of the FTSE 100 and 32 per cent of the FTSE 250 still need to meet the 33 per cent target set for the end of 2020.
The report comments that the variance across the FTSE 350 is evidence of the downside to voluntary targets and indicates that it is time to consider how the poorer performing companies can be pressured to take gender diversity seriously. It notes that in 2020 the issue of possible symbolic appointments of women onto boards was raised as their tenure was, in general, shorter than that of their male equivalents and few of them were promoted into senior non-executive director (NED) roles. It comments that this year there has been a reduction in the gap on tenure and an upswing in the appointment of women into both Senior Independent Director (SID) and Chair roles. However, there is still a long way to go as only 14 per cent of Chair roles across the FTSE 100 and FTSE 250 are held by women. The authors of the report think that increasing the number of women in Chair roles should be the target in the short term, given the healthy pipeline of women NEDs and the importance of the role in the future appointment and development of female NEDs and in the appointment of the CEO and the executive team.
In contrast to the continuing progress of women into NED roles, women have made no progress in executive roles across the FTSE 350 companies this year. The report states that it is difficult to explain the lack of women in CFO/FD roles as there is no shortage of women studying finance/accounting but the tiny numbers of women CEOs signal a longer term problem and may indicate that women are not being identified as potential high fliers early enough to acquire the necessary development and experience required. This may indicate that diversity and succession planning need to have greater oversight at board level than has been the case so far. The Financial Reporting Council raised the issue of the lack of attention and poor reporting of succession planning, diversity and board evaluation in their November 2020 report and the authors of this report endorse the need to address this urgent issue.
The relationship between the number of women on the boards of the FTSE 100 companies, the roles they filled and the number of women in executive roles (Executive Committee and Direct Reports) was also considered, using the data from the Hampton-Alexander final Review. The report’s authors found that the majority of companies that had a critical mass of women in executive roles (at least 30 per cent) also had a critical mass of women on their boards and women held influential roles (such as Chair, SID, ED or interlinked NED). The relationship is not thought to be trickle-down, but more likely to be generative.
With the report is a list of women who chair FTSE 350 board committees.
(Cranfield University, The Female FTSE Board Report 2021, 07.10.2021)