Essential Corporate News – Week ending May 19, 2023

FCA: Engagement papers - New regime for public offers and admissions to trading

On May 18, 2023 the Financial Conduct Authority (FCA) published its first engagement papers in connection with the reform of the UK prospectus regime. Based on the draft legislation published by HM Treasury (HMT) in December 2022 as part of the Edinburgh Reforms, these set out the FCA’s initial thinking on how (under the new regime) it might write rules in the following areas:

• Admission to trading on a regulated market.
• Further issuances of equity on regulated markets.
• Protected forward-looking statements.
• Non-equity securities.

These form part of the FCA’s engagement process in relation to the new regime which, as discussed on its website, will also include online focus groups to be convened in due course. 

Any written responses to the engagement papers are requested by September 29, 2023.

A brief summary of each of the engagement papers is set out below.

Engagement Paper 1 (EP1): Admission to trading on a regulated market

The FCA recognises there are strong arguments that it is important (for investor protection/market effectiveness) to stick broadly with existing requirements as set out in the UK Prospectus Regulation. However, EP1 sets out for discussion a number of areas where there may be opportunities to make small changes which, cumulatively, the FCA considers could represent a significant improvement on current requirements. These include:

• Exemptions to the requirement for a prospectus in connection with admission: In particular, EP1 focuses on exemptions in the context of takeovers, mergers and divisions and in relation to transfers between regulated markets.
• Prospectus content requirements for initial admissions: EP1 seeks views on these, including whether the FCA should keep these the same, consider being more prescriptive in setting certain requirements, or give issuers greater flexibility in places. Particular areas discussed in EP1 include the prospectus summary, financial information, incorporation by reference, and ESG disclosures.
• The format of the prospectus: The FCA is minded to transpose the current requirements in relation to the prospectus format into its Handbook as a starting point from which (if justified by market practice or other factors) it may consult on changes following transposition. Other areas discussed in EP1 include whether the FCA should allow issuers to publish a prospectus on a voluntary basis and whether it should remove the option for issuers to use growth prospectuses/universal registration documents.
• Changes to rules/rights associated with a prospectus: Areas discussed include who is responsible for a prospectus (the FCA’s initial view is that it should not change the current regime), the period for which an IPO prospectus must be available to retail investors (the FCA is minded to shorten the current “six day rule” to three days), the period for which a prospectus could be valid, and whether or not changes should be made to the prospectus approval process. 

The FCA notes its initial thinking is that changes to other adjacent regimes, such as the advertisement regime or the rules under COBS 11A (in relation to the sequencing of documents on an IPO), would not be within the scope of the current policy discussion, but that it could revisit this once the first phase of the transposition of rules under the new regime is complete. 

Engagement Paper 2 (EP2): Further issuances of equity on regulated markets

The FCA sets out possible ways in which it may approach scaling back current requirements for a prospectus in connection with further issues of equity securities, but notes that its analysis is not intended to be exhaustive and that it is interested in views on other possible options not considered in EP2. Feedback is sought on a number of areas, including:

• Reduced requirements for further issuances: The FCA’s starting assumption is that it should seek to be more ambitious in reducing the requirements for a prospectus for further issues than for IPOs. 
• Effect of current regime on issuers: The FCA is interested in views on the analysis presented in EP2 on the effects of the current regime and whether, in practice, the existing rules create the barriers discussed/whether it has missed frictions that currently exist.
• Setting a threshold for requiring a prospectus: The FCA is seeking views on whether it should set a percentage threshold (based on the size of the further issue as a percentage of existing share capital) for a requirement to publish a prospectus and (if so) at what level.
• What document should be required if a prospectus is not required: The FCA notes that it could choose to require a different type of document to be published below the prospectus threshold – for example, an announcement as proposed by the UK Secondary Capital Raising Review, or a document modelled on one that is used or proposed in other jurisdictions. The FCA makes the point that, in practice, it has some flexibility to develop options which are calibrated across a number of different permutations of the scale of the issuance, the conditions the FCA may set in relation to which issuers can use the exemptions, and the type of document or prospectus required. An indicative table of how the FCA may use calibration between options is included in EP2.
• Further issuances by funds: The FCA considers whether there may be specific issues in relation to further issues of equity securities by closed-ended funds and whether it should tailor its requirements in a different way for these.

Engagement Paper 3 (EP3): Protected forward-looking statements

The reformed UK prospectus regime set out in the draft legislation published by HMT introduces a different liability threshold (based on fraud and recklessness) for certain forward-looking information in prospectuses and gives the FCA responsibility for specifying which categories of information this will apply to. The FCA notes that this revised liability treatment is intended to encourage issuers to include “protected forward-looking statements” (PFLS) in prospectuses by reducing the risk of successful investor claims compared with the existing prospectus liability standard.

EP3 sets out the FCA’s initial considerations regarding the rules it will make to specify what types of information can be considered PFLS for these purposes, any conditions as to how such information must be prepared, and how such information should be presented within a prospectus. The FCA notes that it does not intend to be unduly prescriptive around the type of information that can be considered PFLS so long as such information can be useful to investors when making investment decisions.

Particular questions on which the FCA would welcome views include:

• The types of forward-looking statements that should be allowed as PFLS and how these should be defined (whether broadly or more specifically).
• Whether the FCA should set minimum criteria or expectations as to how PFLS is produced.
• Whether certain types of forward-looking information should be excluded from the definition of PFLS.
• Whether the FCA should consider including sustainability-related disclosures as PFLS and (if so) what types.
• How PFLS should be presented or labelled within a prospectus.
• Any data from stakeholders which may provide insight into the likely costs and/or benefits of any changes the FCA may consider in this area.

Engagement Paper 4 (EP4): Non-equity securities

The FCA’s view is that the current regime for non-equity securities does not require major overhaul, but should be reviewed to see if there are any areas that could be improved. Topics covered in EP4 include:

• How the debt programme may be made more efficient.
• Facilitating broader access to listed debt.
• Structured finance and investment products.
• Secondary issuances.
• Green, social or sustainably labelled debt instruments.
• The Professional Securities Market (PSM). 

Views are sought on a number of issues including:

• Whether the current UK prospectus regime broadly works well in the context of wholesale debt capital markets (and whether there are any particular areas that work less well and should be considered for amendment). The FCA would also be interested in views on the exemptions from the requirement for a prospectus discussed in EP1 in the context of wholesale debt capital markets.
• Whether stakeholders would welcome removal of the dual disclosure standards in non-equity prospectuses, and whether they agree that the existing wholesale disclosure annexes should be the starting point for a new single standard. The FCA is also seeking views on whether there are any key items from the retail disclosure annexes which stakeholders believe would add value to such a revised disclosure regime.
• Whether the FCA should require additional disclosure for certain types of non-equity securities that are structured finance products or traded investment products and (if so) what additional information stakeholders think would be useful for investors.
• Whether disclosure requirements for secondary issuances of non-equity securities should be revised and views on the various options discussed in EP4 on further issuances.
• Whether the ESG disclosures discussed in EP4 would represent an improvement on the information available to investors and the benefits/limitations of the options described.

(FCA, New regime for public offers and admissions to trading, Engagement papers, 18.05.2023)

Takeover Panel: Review of Rule 21 (Restrictions on frustrating action) and other matters – PCP 2023/1

On May 15, 2023 the Takeover Panel published a Public Consultation Paper, PCP 2023/1, proposing certain amendments to the Takeover Code (Code) in relation to Rule 21 (Restrictions on frustrating action) and other matters. The consultation closes on July 21, 2023 with final rule changes expected to be published in the Autumn. Our briefing, Frustrating action: UK Takeover Panel proposes significant changes to Rule 21 restrictions, sets out an overview of the key proposed changes, together with our thoughts on these.

UK Finance: UK Capital Markets – Building on Strong Foundations

On May 16, 2023 UK Finance published a report, based on research conducted by EY, which analyses the current state of the UK’s capital markets. It identifies areas that require further attention and makes a number of recommendations for consideration to enhance the UK’s competitiveness globally.   

EY’s research is based on detailed quantitative analysis, supplemented with qualitative insights gathered through more than 100 interviews and survey inputs from, among others, pre-IPO companies, publicly traded companies, advisers (including investment banks, law firms, and accountancy firms), investment managers, infrastructure providers and trade bodies and industry organisations. 

Key challenges identified

Four key challenges that interviewees felt needed to be addressed to maintain and enhance the global competitiveness of UK capital markets were as follows:

• SMEs need more help to access UK capital markets - Companies, especially in non-traditional or tech sectors, find attracting the appropriate growth capital at various growth milestones challenging. The listing process and the journey to becoming a publicly traded company were also seen as overly complex and costly.
• UK capital does not always reach UK companies - It was felt by some market participants interviewed that UK investors (depending on their characteristics) prioritise: (a) capital returns over the patience needed for longer-term returns in growth companies and (b) saving in cash or other liquid products rather than investing for the future. Some respondents consider that this was due to historical changes to insurance rules and pension reforms. UK retail investment in equities was also seen as an area that could be improved when comparing rates of retail participation against the US and the EU.
• Too much friction is stifling capital flows - There is a demand to simplify and streamline operational processes, such as introducing technology to improve efficiency, addressing the burden of duplicative continuous obligations, and considering the benefits of tokenisation. A better transition from AIM to the Main Market was also identified as an area for improvement.
• The UK’s profile overseas is suffering – Respondents and interviewees considered the UK has an opportunity to redefine how it showcases itself to global market participants. There is perceived to have been a disproportionate focus on corporate failure rather than championing success, contrasting to the perception of the US as a pro-business environment. Many cited as an example, the difficulty in attracting and retaining global talent.

Influencing criteria when choosing market to trade on

Companies were asked to rank features they look for in deciding which exchange to be traded on and the following were the top five key criteria:

• Access to a strong investor base: Access to sophisticated investors with a sector and business model understanding.
• Valuation and research coverage: Research analysts with appropriate depth of knowledge to be able to provide insights for investors.
• Liquidity: Sufficient market volume in the aftermarket, index eligibility and volume of trading in indices.
• Comparable companies: Presence of comparable companies on the relevant market.
• Ease and cost of being publicly traded: Cost and complexity of the process, driven by regulatory, accounting and disclosure requirements, and the availability of support during the process.

Recommendations

The report makes a series of recommendations under four separate themes to address the issues identified as follows:

• Recommendation 1 – Address the structural challenges hindering UK growth companies by providing larger and more sustained R&D incentives for targeted sectors, improve investment products to help companies scale and grow, establish a “web summit”-style annual conference in the UK and provide a glide path to becoming a listed company and beyond. 
• Recommendation 2 – Reboot the nation’s culture towards financial empowerment and entrepreneurship through education and engagement with the personal financial future, and through incentivising UK equity investment.
• Recommendation 3 – Continue to improve “the plumbing” by continuing to improve information flows in the market, revisiting and refreshing UK indexation policies to check they are still fit for purpose, harnessing technology to improve market infrastructure for issuers and investors, and encouraging global investors to vote consistently on key shareholder resolutions across global markets. 
• Recommendation 4 – Reinforce the UK as a destination of choice by developing UK success stories, rewarding companies for choosing to trade publicly in the UK, identifying potential non-UK targets for an IPO or secondary listing in the UK, actively supporting non-UK companies and working towards deference mechanisms to remove unnecessary legal and regulatory duplication for international companies and those that trade in more than one jurisdiction.  

(UK Finance, UK Capital Markets – Building on Strong Foundations, 16.05.2023)

Parliament: Digital Markets, Competition and Consumers Bill - Call for written evidence

On May 18, 2023 the House of Commons Public Bill Committee invited written views on the Digital Markets, Competition and Consumers Bill that it is now proposing to scrutinise. That Committee intends to have its first sitting to consider the Bill on June 13, 2023, with the Committee scheduled to report by July 18, 2023. 

The Bill covers both digital markets and proposed competition law reforms (Parts 1 and 2 of the Bill) and proposed reforms of consumer law enforcement and new consumer rights (Parts 3 and 4 of the Bill).

(Parliament, Digital Markets, Competition and Consumers Bill, Call for written evidence, 18.05.2023)