Perhaps the widest ranging changes for listed companies are the provisions of MAR relating to disclosure of, and restrictions on, dealings by directors and other PDMRs. The primary provisions are set out in Article 19 of MAR with further guidance on the types of transactions required to be disclosed and restrictions on trading during “closed” periods set out in a draft delegated Regulation (Draft Regulation) published by the European Commission in December 2015 (following on from ESMA’s final report setting out technical advice on possible delegated acts concerning MAR (Final Report on Delegated Acts)). The draft Regulation set out in Annex XIV to ESMA’s Final Report on Technical Standards also sets out further requirements relating to the format and template for notification and disclosure of transactions.
Disclosure – overview of key MAR requirements
As is currently the case under DTR 3, directors and other PDMRs will be required to disclose certain dealings to the market, as will their closely associated persons (CAPs).12However, there are a number of important differences from the current regime.
MAR introduces a de minimis threshold below which transactions will not require disclosure. This is set at €5,000 per calendar year (note that this should be calculated without netting of transactions). There is flexibility under MAR for competent authorities to increase this threshold (up to €20,000), however in CP 15/35 the FCA has indicated that it does not intend to do this.
The timelines and process for making disclosure have also changed. Under MAR, the PDMR/CAP must make disclosure promptly and within three business days of the date of the transaction (rather than the four business day period currently set out in DTR 3). Disclosure must be made using a specific template 13(although the FCA does currently have a template, its use is not mandatory) and must be submitted to the competent authority at the same time as to the issuer. Unhelpfully, the period for the issuer to make notification to the market is also calculated by reference to the date of the transaction, rather than the date of notification by the PDMR/CAP to the issuer. As a result these two periods (both of three business days) run concurrently rather than consecutively, which could cause problems where the PDMR/CAP only makes notification to the issuer at the end of the period. ESMA has acknowledged this potential issue, but notes it does not have power to rectify the discrepancy given it is contained in the text of MAR itself.
Disclosure is required in respect of “own account transactions” relating to shares or debt instruments of the issuer or derivatives or other financial instruments linked thereto (currently DTR 3 only refers to shares and related derivatives/financial instruments). The types of transactions required to be disclosed are also wide-ranging. A non-exhaustive list of types of transaction is set out in Article 19 of MAR and Article 10 of the Draft Regulation. This includes, amongst other things, transactions executed by a third party under an individual portfolio or asset management mandate on behalf of or for the benefit of a PDMR/CAP, gifts and inheritances, lending/borrowing transactions, entering into or exercise of equity swaps, entering into CFDs and the conversion (including automatic conversion) of a financial instrument into another financial instrument (including the exchange of convertible bonds to shares).
Under amendments proposed to Article 19 of MAR, 14notification will not be required where, at the time of the transaction, the financial instrument:
• Is a unit/share in a collective investment undertaking in which exposure to the issuer’s shares or debt instruments does not exceed 20% of the assets held by the collective investment undertaking.
• Provides exposure to a portfolio of assets in which the exposure to the issuer’s shares or debt instruments does not exceed 20% of the portfolio’s assets.
• Is a unit/share in a collective investment undertaking or provides exposure to a portfolio of assets and the PDMR/CAP does not know (and could not know) the investment composition or exposure in relation to the issuer’s shares/debt instruments and there is no reason for them to believe the 20% threshold is exceeded.15
Article 19 of MAR is also proposed to be amended to clarify that subsequent transactions in the issuer’s securities by the manager of a collective investment undertaking in which a PDMR or CAP has invested do not need to be notified provided the manager operates with full discretion.
Closed periods – overview of key MAR requirements
MAR includes a prohibition (subject to limited exceptions) on PDMRs (this prohibition does not extend to CAPs) conducting any transactions on their own account or for the account of a third party during a “closed period” of 30 calendar days before the announcement of an interim financial report or year-end report which the issuer is obliged to make public under the rules of the trading venue where its shares are admitted to trading or national law. 16The terminology (transactions on own account) is essentially aligned with that used in the context of disclosure of PDMR/CAP dealings, although it is unclear how the closed period prohibition will operate in respect of transactions over which the PDMR has no control (for example, automatic conversion or vesting) and further guidance from the FCA in this area would be helpful.
This definition of “closed period” in MAR differs from the provisions of the Model Code in various ways. For example, the 30 day period is shorter than the Model Code provisions relating to year-end reports (currently 60 days or, if shorter the period between the end of the financial year and publication) and half-year reports (currently the period between the half-year end and publication). It is not entirely clear how the rules will apply where companies produce preliminary results announcements and whether this will end the closed period (as is currently the case under the Model Code). It will be important for the FCA to provide additional guidance in this area prior to the revised rules coming into effect.
It is also worth noting that, unlike the concept of a prohibited period under the Model Code, the prohibition under MAR does not extend to other periods where the company is in possession of unpublished inside information (although dealing by insiders during these periods would of course be restricted by the more general application of the rules around insider dealing).
MAR does envisage that certain transactions should be permitted during a closed period either:
• On a case-by-case basis as a result of exceptional circumstances, such as severe financial difficulty, which require the immediate sale of shares (this is very similar to the current exemption under the Model Code).
• Due to the characteristics of the trading involved for transactions made under, or related to, an employee share or saving scheme, qualification or entitlement of shares, or transactions where the beneficial interest in the relevant security does not change. The list of specific exceptions contained in the Draft Regulation in this context (although expressed to be non-exhaustive) is narrower than the list of exemptions that currently apply under the Model Code. For example, it does not include specific exemptions relating to acceptances of takeovers or rights issues.
Overview of proposed changes to the Model Code and DTR 3
In CP 15/35 the FCA has proposed a number of changes to the Listing Rules and to DTR 3 in order to reflect the requirements of MAR. In particular, the FCA intends to delete the Model Code and replace it with a new requirement for premium listed companies to have effective systems and controls in place regarding the process for PDMRs obtaining clearance to deal.17
Factors to be taken into account by the FCA when considering whether a company’s systems and controls satisfy this requirement are proposed to be set out in a new Annex to Chapter 9 of the Listing Rules. The guidance is broadly procedural in nature, with the question of whether clearance can be granted during a closed period to be decided in accordance with MAR. However, it does note that, where the dealing is proposed to take place outside a MAR closed period, the company may (in deciding whether to grant clearance) want to consider factors such as:
- whether it is appropriate to grant clearance where inside information exists in relation to the company;
- if inside information does not exist, whether there are timeframes during the year in which it would not be appropriate to give clearance due to the perception of shareholders or the market that inside information may exist;
- whether it is appropriate to give clearance to deal where the request is based on considerations of a short term nature; and
- whether, due to the specific nature of the dealing or the circumstances facing the PDMR, it merits exceptional treatment.
The FCA has noted that it is difficult to maintain the current Model Code provisions in relation to dealings by connected persons (on the basis that, as mentioned above, the closed period restrictions under MAR are only expressed to apply to PDMRs). Whilst it has not included provisions in this area, the FCA does note that it would welcome observations or suggestions on this point.18
Other proposed amendments to the relevant UK rules include:
- The deletion of the majority of the provisions of DTR 3 and the inclusion instead of signposts to the relevant provisions of MAR.19
- The deletion of LR 9.2.7 which imposes restrictions on premium listed companies’ own dealings during periods when, under the provisions of the Model Code, a director would be prohibited from dealing. The FCA notes that due to MAR and the FCA’s proposals in respect of the Model Code it is not possible to maintain this rule in its current form.20
We expect that there will be some pushback on the FCA’s proposals in relation to the Model Code, given that they introduce additional restrictions not required under MAR but arguably do not provide companies with sufficiently concrete guidance on what is expected. Possible alternative approaches could include permitting individual companies to determine what restrictions they consider it appropriate to apply outside of MAR closed periods or, if additional restrictions are imposed under the Listing Rules, providing clearer and more specific guidance on the form and content of codes companies should adopt (if the latter route is taken, one possibility could be the development of an industry standard or FCA endorsed code). As mentioned above, guidance on the application of the closed period prohibition to transactions over which PDMRs have no control is also needed (as it is currently unclear how this would operate in practice) as is greater clarity on the relationship between current Model Code exemptions and the exemptions to MAR closed periods.
As a first step, companies will need to ensure that their PDMRs are briefed on the revised rules (and, in due course, formal communications to PDMRs and CAPs in respect of the new rules will need to be prepared once the relevant rules are finalised). It would also be sensible for PDMRs and their CAPs to review their existing investment arrangements and identify any areas that may be complex or problematic under the revised regime so that these can be considered in more detail in advance of the new rules coming into effect. PDMRs should be encouraged to review their list of connected persons to identify whether any changes will be required in light of the CAP definition under MAR. Companies may also want to take this opportunity to review their policy in respect of designating individuals as PDMRs and their lists of non-director PDMRs to ensure that they remain up-to-date.
Notwithstanding that it will be difficult to finalise the details until the final rules in this area have been published by the FCA and industry bodies have commented, companies should also start to consider the likely form and content of their revised share dealing code . Some areas for consideration include:
- Obligation to notify transactions: Although MAR only requires notification to be made to the company (and the market) where the €5,000 threshold is crossed, given the low threshold will it be simpler or more appropriate to require all transactions by PDMRs/CAPs to be notified to the company and announced to the market as under the current rules? If not, who will be responsible for monitoring when the threshold has been reached – will this be done centrally or left to the individual PDMRs?
- In light of the draft guidance that companies may want to consider whether there are timeframes during the year (outside of MAR closed periods) in which it would not be appropriate to give clearance due to the perception of shareholders or the market that inside information may exist, whether to include an additional restricted period prior to commencement of the MAR closed period (e.g. a further 30 days in respect of year-end results to mirror the current 60 day period under the Model Code).
- Timelines for notification of dealings to the company: Will the dealing code impose a shorter deadline than MAR (for example one or two business days) to ensure that the information is provided with sufficient time for the company to meet its own disclosure deadline?
- Obligations on PDMRs in respect of their CAPs: Do companies want to retain certain provisions even if they will no longer be required under MAR/the revised Listing Rules? For example, although the MAR closed periods only apply to PDMRs, companies should consider whether it would be appropriate to retain provisions requiring PDMRs to seek to prohibit dealings by their CAPs during a closed period.
- Application of the code: Companies that currently apply the Model Code to individuals other than directors/PDMRs should consider whether, in light of the more extensive and less flexible nature of the new regime, it would be appropriate to continue with this approach or to produce a separate form of dealing code/process for these individuals.
- The procedures and timelines for requesting/granting clearance to deal.
Where companies have multiple listings, they will also need to look at whether any changes are compatible with the requirements of their other exchanges and whether any consultation or discussion will be required with the relevant listing authorities.