Takeover Panel: Response Statement 2020/1 – Conditions to offers and the offer timetable
On March 31, 2021, the Takeover Panel (Panel) published response statement RS 2020/1 on conditions to offers and the offer timetable (Response Statement). This follows on from the previous consultation PCP 2020/1 published by the Panel in October 2020 (Consultation).
The changes to the Takeover Code (Code) are being adopted largely in the form proposed with only limited (and relatively minor) changes to the drafting set out in the Response Statement. You can access our briefing on the Consultation here and we will be producing a full briefing on the Response Statement in due course. The amendments represent some of the most far-reaching changes to the Code since 2011.
The amendments to the Code set out in the Response Statement will take effect on July 5, 2021 (Implementation Date) and will apply to all offers announced in accordance with Rule 2.7 of the Code on or after that date.
The current Code rules will continue to apply to any ongoing firm offers which straddle the Implementation Date and also to any offers announced after the Implementation Date which are in competition with such ongoing offers.
(Takeover Code, Response Statement 2020/1 - Conditions to offers and the offer timetable, 31.03.2021)
FCA: Primary Market Bulletin No. 33
On March 29, 2021, the Financial Conduct Authority (FCA) published the latest edition of its Primary Market Bulletin (PMB) which includes the FCA’s review work on compliance by issuers with the DTR 5 major shareholder notification requirements and the FCA’s response to feedback received following publication of its review on the delayed disclosure of inside information.
Audit of financial statements by EEA audit firms
The FCA reminds third country issuers (including EEA issuers) that use an auditor from an EEA State, that the auditor will need to register with the Financial Reporting Council as a “third country auditor” in time for the publication of annual financial statements for financial years beginning on or after January 1, 2021. Failure to do so will mean that the financial statements will not be considered to be audited for DTR 4.1.7R purposes.
Major shareholding notification requirements
The FCA reminds issuers that it has developed a new online portal for the submission of major shareholding notifications to the FCA which went live on March 22, 2021. Only notifications sent via this new portal will be considered for the purpose of monitoring compliance with DTR 5 reporting requirements.
Short Selling Regulation reminders
The PMB includes reminders about the need for timely disclosures of net short positions and the importance of net short position disclosures, as well as a number of other requirements under the Short Selling Regulation.
Review of net changes to share capital: Total voting rights and major shareholding disclosures – DTR 5
In 2020, the FCA conducted a review of the way that UK issuers announced changes to total voting rights and the effect on major shareholding notifications. The rules relating to this are set out in DTR 5 and DTR 6 is concerned with the filing of information with the FCA.
From those notifications made between January 1, 2017 and July 1, 2020, the FCA identified 549 relevant issuers in scope of DTR 5 which had not produced announcements headlined ‘Total Voting Rights’ in the period under review. From that, the FCA identified those with a change in total voting rights over the period of more than 1 per cent and then selected a sample of 100 issuers from this list and analysed their regulatory announcements in the sample for the period to:
- Locate information relating to the changes to total voting rights; and
- Where an announcement containing total voting rights had been made, assess whether major shareholders had disclosed resulting changes to their holdings, assuming that the number of shares held by these holders had not changed.
The FCA is concerned that some disclosures of total voting rights lacked clarity and there are several issues it wants to bring to issuers’ attention:
- New total voting rights figures following the changes to share capital were reported in several ways, often without mentioning total voting rights or referencing the applicable DTR rules at all. Issuers should ensure that all financial instruments to which voting rights are attached are included in the calculation of the total voting rights figure.
- A significant minority of issuers failed to use the appropriate announcement headline to report new total voting rights figures or reported this information as a part of another announcement regarding an acquisition or disposal of shares by the issuer. Immediate disclosure of voting rights following an acquisition or disposal of shares by an issuer in accordance with DTR 5.5.1R and DTR 5.6.1AR does not exempt the issuer from the obligation to report a new total voting rights figure at the end of the calendar month.
- Often, information regarding new total voting rights was disclosed as a part of proposed or conditional equity placing announcements or share repurchases, before these transactions were formally approved or took place. This does not exempt an issuer from the obligation to report a new total voting rights figure following settlement and at the end of the calendar month.
The FCA states that knowledge of the major shareholdings in companies is an important piece of market transparency and it is concerned that a significant number of major shareholding notifications are not being made. While the proportion of issuers making their total voting rights available in some form was high, the FCA believes that the lack of clarity from issuers regarding their total voting rights is contributing to the level of missing notifications by major shareholders.
As a result of this review, the FCA reminds position holders that DTR 5.1.2R(2) places a responsibility on them as shareholders to assess whether their position has changed as a result of an event changing the breakdown of voting rights. In addition, issuers are reminded to report changes to total voting rights clearly and on time as required by the DTR:
- To report total voting rights at the end of each calendar month during which an increase or decrease occurred, even if this information was disclosed before in accordance with DTR5.5.1R and DTR5.6.1AR; and
- To report total voting rights figures as a distinct announcement, use ‘Total Voting Rights’ as a headline and to select the proper classification of regulated information as ‘Total number of voting rights and capital’ in accordance with DTR 6.2.2AR, DTR 6.2.2.BR and DTR 6 Annex 1R.
Review of payments to governments disclosures by issuers in the extractive industries – DTR 4.3A
Following a review of disclosures against DTR 4.3A in 2019 (reported on in PMB 20), the FCA conducted a further review of disclosures by UK issuers for the financial year ending 2019 and has identified certain issues it wishes to relay to the market.
In the PMB, the FCA issues a reminder of the rules around DTR 4.3A and who they apply to, focusing on the main requirements where the FCA saw the biggest deviation from the rules – the payment threshold; the production, publication and filing of a report; equivalence; and content of the report. It then notes that the main points arising from its review are as follows:
- When using the National storage Mechanism (NSM) to file the Payments to Governments Report, issuers should be aware that uploading the report in human-readable format alone (and not also in XML format using the prescribed XML data schema) is not enough to meet the DTR 4.3A requirements. This concerns the FCA, as reports in XML format were located for only a minority of issuers in scope of its review.
- The FCA identified that nearly a fifth of Payments to Governments Reports reviewed were missing sufficient breakdowns by project.
- Over 10 per cent of all Payments to Governments Reports for the period were not filed with the NSM, which is required by DTR 4.3A.10R (filing of reports on payments to governments).
- Several Payments to Governments Reports were disclosed as a part of the annual financial report rather than as a standalone report.
- Several issuers in scope omitted publication of the report stating that no payments have been made, or payments have been below the threshold. This does not exempt them from the obligation to prepare, publish and file a report, disclosing this information.
- Several issuers in scope omitted publication of the report stating they are exempt on the basis of similar filings. The FCA reminds issuers that no determinations of equivalence have been made by the FCA in respect of DTR 4.3A. Therefore, all issuers within scope of DTR 4.3A are required to comply with those rules.
The FCA notes that it has opened preliminary enquiries (The Enforcement Guide (EG), 2.7 Sources of cases) into several issuers’ compliance with DTR 4.3A. Overall, it is concerned that compliance did not improve markedly after the 2019 review. The FCA will revisit this review in the future and assess whether stronger interventions are required (including, where appropriate, enforcement investigations).
Feedback on review of delayed disclosure of inside information
The FCA published the results of its review in PMB 31 and has since received queries which it responds to as follows:
- Periodic financial information – The FCA notes that its guidance for periodic financial information and Article 17(4) of MAR is contained in Technical Note 506.2. The review repeated existing FCA guidance which encourages issuers to begin with the assumption that information relating to financial results could constitute inside information and states that the FCA expects issuers to exercise judgement in assessing whether inside information exists. The review was not intended to change this guidance. The factors that highlighted in the review do not indicate that the FCA wished to challenge market practice. This practice might reasonably be expected to involve considerations like the extent to which:
- The periodic financial information contains an item or items that are themselves inside information for which no legitimate interest to delay disclosure exists. Article 17 of MAR requires that the inside information is announced without delay. Where there is no delay in disclosure of inside information or no inside information exists, no notification under Article 17(4) of MAR would be required.
- The totality of the periodic financial information is inside information. This typically includes an assessment of whether the results and other content differ from market expectations, where such expectations can be ascertained. Where a decision is reached that periodic financial information is not itself and does not contain inside information no notification needs to be submitted.
- Board changes – The FCA received some feedback about challenges with complying with Article 17 of MAR in the context of board changes. Comments were around the extent to which information is ‘precise’ for the purposes of Article 7 of MAR and also noted the desire among issuers to present an orderly transition. The FCA appreciates the ‘precise’ definition requires judgement and this is factored into its surveillance, monitoring and case selection when considering potential investigation via our enforcement division. However, with regard to the desire to present an orderly transition, the FCA’s view remains as contained in Technical Note 521.3: ‘It is generally not acceptable for issuers to attempt to choreograph the assessment and possible disclosure of various and offsetting information that may individually meet the tests for inside information. It is vital that issuers disclose all inside information they have in accordance with MAR and do not attempt to delay the publication of negative news, for example, until there is offsetting positive news’.
- Share price movements - Further feedback noted the approach the FCA took when assessing the share price impact of the announcements (how the FCA logged the price impact only on the day of announcement). A query was raised on whether the results showed an incomplete picture. The FCA considered this as part of its work and confirms that its methodology accounted for announcements disclosed outside of trading hours – which represented a small proportion of the notifications. All announcements disclosed on non-trading days were automatically adjusted to reflect closing price percent change between the latest trading day before to the announcement and the latest trading day afterwards.
(FCA, Primary Market Bulletin No.33, 29.03.2021)
FCA: Future consultation on strengthening investor protections in SPACs
On March 31, 2021 the Financial Conduct Authority (FCA) announced that it will be consulting shortly on amendments to the Listing Rules and related guidance to strengthen protections for investors in Special Purpose Acquisition Companies (SPACs). This follows a recommendation of the UK Listing Review led by Lord Hill that the Listing Rules which can require trading in the shares of SPACs to be suspended on announcement of a potential acquisition be revised.
The consultation will consider the structural features and enhanced disclosure, including a minimum market capitalisation and a redemption option for investors, required to provide appropriate investor protection. The aim is to ensure that SPACs operate within a framework of high regulatory standards and oversight. Where such protections are in place, the FCA considers that the existing presumption of suspension of the listing for such companies at the point of announcement of an acquisition target is no longer required and the FCA will consult on this basis, aligning this element of its rules more closely with other major jurisdictions.
The consultation will be open for four weeks and subject to that process, the FCA aims to make the new rules and/or guidance by early summer 2021.
(FCA, Future consultation on strengthening investor protections in Special Purpose Acquisition Companies (SPACs), 31.03.2021)
FRC: New approach to reporting corporate reporting reviews announced
On March 26, 2021, the Financial Reporting Council (FRC), for the first time, published summaries of its corporate reporting reviews. These are conducted to assess whether company reports and accounts comply with relevant accounting and reporting requirements.
This increased transparency results from a recommendation of Sir John Kingman’s Independent Review of the FRC that such reviews should be made publicly available but currently summaries can only be published with the consent of individual companies. As part of the recent consultation, Restoring trust in audit and corporate governance, the Government is consulting on proposals to allow the regulator to publish summaries without the consent of companies, once sufficient safeguards around confidential information are in place.
The publication by the FRC of summaries of its findings of recently closed substantive reviews is an interim step towards greater transparency of its corporate reporting review function. The publication sets out two tables. The companies listed in the first table are those performed under the FRC Conduct Committee’s previous operating procedures, which did not allow for the publication of case summaries so no summary has been provided for those cases in which the FRC entered into substantive correspondence. the summaries can only be disclosed with the consent of the relevant companies. The case summaries presented in the second table are in respect of those companies where consent for publication was given.
(FRC, FRC announces new approach to publishing corporate reporting reviews, 26.03.2021)
ESMA: Public Statement on Brexit and clarifications on application of TD requirements by UK issuers with securities admitted to trading on regulated markets in EU
On March 31, 2021, the European Securities and Markets Authority (ESMA) issued a Statement concerning the application of transparency requirements by UK issuers with securities admitted to trading on regulated markets in the EU (UK issuers) under Article 4 of the Transparency Directive (Directive 2004/109/EC, TD).
Article 4(1) of the TD requires issuers with securities admitted to trading on a regulated market in the EU (EU issuers) to make public their annual financial report at the latest four months after the end of each financial year. Article 4(3) specifies the requirements concerning the disclosure of the issuers’ financial statements within their annual financial reports and the accounting standards to be applied.
Following the end of the transition period, issuers with a registered office in the UK are considered in the EU as third country issuers as of January 1, 2021. Article 23(1) of the TD allows National Competent Authorities (NCAs) to exempt third country issuers from the obligations under Article 4 of the TD provided that the third country sets equivalent requirements. ESMA is publishing the Statement to promote common supervisory practices among NCAs when exempting UK issuers from their TD requirements.
In order for UK issuers required by UK law to prepare consolidated financial statements to be exempted from the requirements in Article 4(3) (that EU issuers shall draw up their consolidated accounts in accordance with EU IFRS, and the annual accounts of the parent company in accordance with the national law of the Member State in which the parent company is incorporated), the Statement notes that the NCA should verify that such UK issuer publishes:
- Its consolidated financial statements drawn up in accordance with EU IFRS, or IFRS as issued by the IASB, as these have been declared equivalent, or third country national accounting standards deemed equivalent by the EC to EU IFRS (e.g. US GAAP, Chinese GAAP, Canada GAAP, Japan GAAP, Republic of Korea GAAP); and
- The minimum information specified in Article 17 of Commission Directive 2007/14/EC (notably, for issuers of shares, dividends computation and ability to pay dividends and, for all issuers, where applicable, minimum capital and equity requirements and liquidity issues) in the consolidated financial statements of the issuer. Given that the issuer must also be able to provide the competent authority of the home Member State with additional audited disclosures giving information on the individual accounts of the issuer, for consistency purposes, NCAs are encouraged to request UK issuers to publish the annual accounts of the parent company. Those disclosures may be prepared under UK GAAP.
For UK issuers not required by UK law to prepare consolidated financial statements to be exempted from the requirements in Article 4(3), the Statement notes that the NCA should verify that such UK issuer publishes its individual financial statements in accordance with EU IFRS, or IFRS as issued by the IASB, or third country national accounting standards deemed equivalent by the EC to EU IFRS. It also notes that for the purposes of equivalence, if such financial information is not in line with any of these standards, the individual financial statements must be presented in the form of restated financial statements.
The Statement notes that it is based on European legislation and so does not take into account potential additional national provisions in relation to the exemption of TD requirements for third countries’ issuers.
(ESMA, Public Statement, Brexit: Clarifications on application of TD requirements by UK issuers with securities admitted to trading on regulated markets in EU, 31.03.2021)
ESMA: Q&A on Prospectus Regulation updated
On March 31, 2021 the European Securities and Markets Authority (ESMA) updated its Questions and Answers (Q&A) on the Prospectus Regulation (PR) with four new Q&A.
The new Q&A cover the following:
- The application of the exemption in Article 1(5)(b) PR in a situation concerning non-transferable securities;
- The application of the PR where shares can be exchanged for global depositary receipts (and vice versa);
- Dissemination of amended advertisements; and
- The status of transferable securities.
(ESMA, Questions and Answers on the Prospectus Regulation, 31.03.2021)