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Essential Corporate News – Week ending May 12, 2017

Publication May 12, 2017


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

FMLC: Issues of legal uncertainty arising in the context of the Market Abuse Regulation

On May 5, 2017 the Financial Markets Law Committee (FMLC) published a discussion paper concerning issues of legal uncertainty in the context of the Market Abuse Regulation (MAR) which came into effect in July 2016. Stakeholders have brought a number of practical and legal issues raised by MAR to the attention of the FMLC and the FLMC has identified and analysed those uncertainties in the discussion paper and included proposed solutions.

Legal uncertainties

The paper highlights the following legal uncertainties:

  • Uncertainty as to the scope of MAR – Article 2(1)(d) of MAR means market abuse can be committed in respect of instruments which are not themselves admitted to trading in the EU but whose price or value depends on or has an effect on the price or value of EU traded securities. There is limited guidance and considerable uncertainty over the meaning of “or has an effect on” in this context.
  • Uncertainty as to the meaning of “transaction” within the market soundings definition – It is not clear whether transactions contemplated by Article 11 of MAR (which concerns market soundings) are only transactions in securities traded (or admitted to trading) on a regulated market, MTF or OTF, or whether they may include any transactions in securities referred to in Article 2 of MAR or all transactions of an issuer.
  • Uncertainty as to the meaning of “announcement” – The market soundings regime only applies in relation to communications which take place “prior to the announcement of a transaction” but “announcement” is not defined. In the discussion paper, the FMLC considers when an “announcement” occurs in an IPO or debt offering.

Impact analysis

The FMLC has found that such uncertainties are having a practical impact, especially with third country issuers. Moreover, if the interpretations of certain phrases are not clarified, a sizable burden will be imposed upon issuers and underwriters in respect of securities transactions with little or no connection to the EU.

Proposed solutions

The FMLC suggests additional guidance and clarification concerning the scope of MAR and its practical application to capital markets transactions outside the EU could usefully be developed. This could be by way of additions to the existing MAR Q&A document produced by the European Securities and Markets Authority (ESMA), or other guidance by national competent authorities.

(FMLC, Issues of legal uncertainty arising in the context of the Market Abuse Regulation, 05.05.17)

Investment Association: Long term reporting guidance

On May 9, 2017, the Investment Association (IA) published new guidance on various aspects of long term reporting including the reporting of the long term drivers of value creation and productive enterprise. This guidance applies to companies whose shares are admitted to the Premium Segment of the Official List of the UK Listing Authority. Companies whose shares are admitted to the Standard Segment of the Official List, to trading on AIM or to the High Growth Segment of the London Stock Exchange’s Main Market are encouraged to adopt the guidance as best practice. Companies are urged to read the guidance in conjunction with the Financial Reporting Council’s (FRC) 2014 Guidance on the Strategic Report.

Expectations of future long term reporting include the following:

Business models and long term reporting

  • Quarterly reporting – IA members would prefer companies to stop issuing quarterly reports and quarterly earnings guidance, in favour of greater attention being given to longer term performance and strategic issues. If, however, a company continues to report quarterly, it should publicly explain this position and how it is relevant to the achievement of the company’s long term strategy. The IA also refers to its public position paper on quarterly reporting published in November 2016.
  • Business model disclosures – Companies should review their current approach to business model disclosures against the FRC Reporting Lab’s Business Model Reporting recommendations published in October 2016. The guidance highlights certain key findings in that publication.
  • Focusing on the longer term – Reporting should strive to provide insight into the significant strategic issues and potential risks that may face the company over the next three to five years – or longer time horizons wherever possible.


  • The drivers of productivity – The Strategic Report should include a narrative discussion of how productivity is regularly assessed within the business and the main drivers of productivity should be described, together with their influence on operations and planned investments to improve productivity. Companies are urged also to outline both the significant opportunities and challenges that may affect productivity in the forthcoming year.
  • Measures of productivity – Companies are encouraged to provide evidence of the investments they are making, or are planning to make, in improving productivity. The IA suggest a series of Key Performance Indicators (KPI) such as infrastructure, innovation, skills and culture, which companies should use to enable improvements in productivity to be measured over time.

Capital management

  • Investors’ expectations of capital management – IA members are keen to understand a company’s capital position, how it manages its capital and measures the performance of its capital allocation decisions. Capital ought to be allocated efficiently, and open and effective dialogue on capital management issues between investors and companies would be welcomed.
  • Understanding a company’s capital management strategy – IA members expect the narrative discussion in the Strategic Report to set out the objectives and investment priorities of the company’s capital management strategy, the policies governing what it regards as capital, the process by which capital allocation decisions are made and the board’s role in setting the capital management strategy.
  • Capital allocation decisions in practice – A company should keep all capital allocation decisions under regular review and provide shareholders with updates on significant developments. The guidance sets out the types of disclosure on capital management to be included in the Strategic Report.
  • Supporting quantitative disclosures – Companies should work to develop financial metrics, suitable for each sector or market they operate in, that support a framework for long term growth. Results should be displayed either in a table or a clear signpost system with the following quantitative disclosures: working capital, investment capex, research and development, capital distribution (including debt servicing, dividends and buybacks) and investment in skills and training.
  • Merger and Acquisition transaction data – Disclosures on the rationale and performance of merger and acquisition activities should include the following: information on the full price paid, debt reconciliation, annualised sales, returns and margins, tax planning, and ROCE or ROI on the transaction.
  • Nature of funding – Information regarding a company’s funding arrangements and the nature of funding in relation to its capital management strategy should be provided. This should include: company policy and approach to leverage, a mix of funding approaches (such as bonds, bank loans and other funding sources), a net debt reconciliation, key maturity dates, impact of bonds/the state of bank covenants and actuarial assumptions.
  • Cost of capital – A company’s cost of capital (including an explanation of how this is calculated), its capital allocation decisions (including an explanation of how a discount rate is applied for risky or volatile activities) and the extent to which the expected return on investment will exceed the cost of capital should be made clear to shareholders in the annual report.
  • Demonstrating return on investment – Companies are expected to demonstrate the returns generated as a direct result of the capital allocation decisions made.

Disclosure of material environmental and social risks

  • Importance of ESG issues – The IA supports increased disclosure on environmental, social and governance (ESG) matters in long term reporting.
  • Role of the board in addressing ESG issues – The annual report should state whether the board takes into account the significance of ESG matters to the company’s business, whether ESG risks that may affect the short and long term value of the company are assessed and whether there are effective systems for managing and mitigating those risks.
  • ESG disclosures in annual reports – With regards to policies, procedures and verification, annual reports should include information on ESG related risks and opportunities, how companies can combat such risks and ways to achieve a reasonable level of credibility in relation to verification of ESG disclosures.
  • ESG issues being considered by the remuneration committee – Companies are expected to state in their remuneration report whether the remuneration committee can include corporate performance on ESG issues when setting the remuneration of executive directors and if not, a reason should be provided for its absence.

Human capital and culture

  • Human capital and productivity – Annual disclosures on human capital management should be reported to improve the productivity of a company’s workforce over the longer term.
  • Understanding a company’s approach to human capital management – Companies should provide shareholders with narrative discussion in the Strategic Report on: significant investments a company has and will make to improve the productivity of its workforce; opportunities and principal risks that relate to human capital management; and how the workforce is incentivised to become more productive. Reporting on human capital management issues should demonstrate how it will improve the business’ long term strategy.
  • Metrics to support human capital disclosures – There should be an appropriate mix of quantitative and qualitative disclosures to explain human capital management to shareholders. Some key metrics that should be considered are: total headcount (broken down by full-time and part-time employees, gender and diversity); annual turnover; investment in training, skills and professional development; and a calculated employee engagement score.
  • Culture – Companies should review their current approach to corporate culture and consider how it is assessed and reported. The board should determine the purpose of the company and ensure that the company’s values, strategy and business model reflect this purpose.

Implementation and monitoring

Going forward, the IA encourages companies to adopt this guidance at the earliest possible opportunity. The IA’s Institutional Voting Information Service (IVIS) will monitor the implementation of this guidance by analysing annual reports for financial year-ends on or after September 30, 2017. IVIS will outline to its members those companies that continue to report on a short term basis and where companies are not making the desired disclosures.

(The Investment Association, Long Term Reporting Guidance, 09.05.17)

European Commission: Rules on digital solutions and efficient cross-border operations

On May 10, 2017, the European Commission published an online consultation questionnaire to gather views on facilitating the use of digital technologies throughout a company’s lifecycle and cross-border mergers and divisions. The questionnaire follows on from the European Commission’s 2017 Work Programme where the initiative was first announced. The aim of the public consultation is to collect input from stakeholders on problems in company law, gather what evidence they have of such problems and hear their possible solutions on how to address the problems at EU level.

This new company law initiative seeks to make the best use of digital solutions in companies' interactions with public authorities but also with companies' shareholders. It hopes to provide efficient rules for cross-border mobility of companies  which could include mergers, divisions, conversions and uniform conflict-of-law rules for companies.

The questionnaire is divided into four parts, which each contain a number of specific questions:

  • The reasons to act – To what extent do the differences between Member States’ laws or the overall lack of legal framework constitute obstacles for the proper functioning of the single market?
  • The use of online tools throughout companies' lifecycle – What are the main issues that could be addressed by the use for digital processes or tools by companies in their interaction with national business registers? In which areas could companies (listed and non-listed) be encouraged to use digital tools when interacting with their shareholders?
  • The cross-border mobility of companies (mergers, divisions, conversions) – What are the main issues that could be addressed with respect to cross-border mergers, divisions and conversions?
  • The conflict-of-law rules for companies – What problems arise when national conflict-of-law rules for companies differ? What matters could the lex societatis cover and could certain matters be excluded from the scope of a uniform conflict-of-law instrument reflecting wider policy goals and choices? Could EU-level conflict-of-law rules for company law have universal application, for instance should they also apply to companies incorporated in non-EU countries with operations in the EU?

The European Commission also encourages the public to make additional comments and explanations at the end of the questionnaire. All of the responses will be taken into account in preparation of the 2017 initiative on company law.

(European Commission, Digital solutions questionnaire, 10.05.17)

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