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Essential Corporate News – Week ending October 6, 2017

Publication October 6, 2017


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

ESMA: Market Abuse Regulation – Updated Q&As

On September 29, 2017 the European Securities and Markets Authority published another updated version of its Q&As on the Market Abuse Regulation (MAR). ESMA has added a second question to its section on the disclosure of inside information. It specifically addresses how an issuer should deal with a situation where it has delayed a disclosure of inside information in accordance with Article 17(4) of MAR but subsequently the information loses the element of price-sensitivity and accordingly its inside nature.

While Article 17(1) of MAR states that issuers must inform the public as soon as possible of inside information that directly concerns that issuer, Article 17(4) allows issuers to delay the disclosure of inside information to the public provided that certain conditions are met.

ESMA states that:

  • Where the issuer has delayed the disclosure of inside information in accordance with Article 17(4) of MAR and the information subsequently loses the element of price sensitivity, that information ceases to be inside information and therefore is considered outside the scope of Article 17(1) of MAR.
  • The issuer is neither obliged to publicly disclose that information nor to inform the competent authority in accordance with the last paragraph of Article 17(4) that disclosure of such information was delayed.
  • However, since the information was inside information for a period of time, issuers must comply with all relevant obligations relating to the drawing up and updating of insider lists, and the maintenance of information relating to the delay of disclosure, stemming from MAR and its delegated and implementing regulations.

(ESMA, MAR Q&As, 29.09.17)

LSE: AIM Disciplinary Notice – Public censure and fine of Management Resource Solutions plc

On October 5, 2017 the London Stock Exchange (LSE) published AD 16, a Disciplinary Notice announcing a consent order agreed between the LSE and Management Resource Solutions plc (the Company) for a public censure and fine of £125,000 for breaches by the Company of the AIM Rules.

The disciplinary action relates to a proposed acquisition by the Company of a Dutch company which was notified on March 5, 2015. At the time of the notification, the Company disclosed that it had entered into a debt facility with a finance provider to fund the acquisition.  By March 19, 2015, certain of the directors had received further information which gave rise to real concerns that the monies might not be forthcoming from the finance provider and they could not contact the provider to drawdown the funding.  The finance director of the Company was not informed of this and while the nominated adviser was informed of a possible delay due to the release of existing security, the nominated adviser was not informed of the difficulties in the drawdown of the funding.  However, the directors with the knowledge did discuss those concerns with some of the Company’s other advisers in Australia.

On March 27, 2015, the Company issued a notification that the final condition for completion of the acquisition would soon be met but the Company failed to caveat the information in its notification with details of the risk to completion created by the uncertainty in respect of the financing.

The LSE considers that it was misleading to issue such a definitive notification on March 27, 2015 at a time when the Company knew that the funding was uncertain and it also considers it unacceptable for the nominated adviser not to have been informed of this, or for the Company not to have sought its advice on the AIM Rule implications. When the finance director became aware of the issues he informed the nominated adviser and the Company’s AIM securities were suspended on April 8, 2015 pending clarification of the funding position.  The funding was not provided and the acquisition did not proceed.  When trading was restored on June 15, 2015, the Company’s share price fell over 26 per cent.

The Company was found to have breached the following AIM Rules:

  • AIM Rule 10 by failing to include in its notifications the fact that it was aware of difficulties in obtaining funds from the entity that was financing the acquisition.
  • AIM Rule 31 by failing to keep its nominated adviser informed of the difficulties it was having in obtaining the funds and failing to seek the nominated adviser’s advice on the AIM Rules.
  • AIM Rule 22 as the board, as comprised at the time of the events, did not fully cooperate with the LSE during its investigation into those breaches.

The LSE notes in the Disciplinary Notice that, as far as Rule 10 is concerned, companies must ensure that notifications provide a clear understanding of the matters being disclosed and are properly caveated where necessary. The LSE will bring to account companies that fail to meet the standards of disclosure required on AIM where there is actionable evidence. The censure also demonstrates the importance of keeping the nominated adviser informed of developments and of the need to seek advice. Discussing matters with other advisers is not a substitute for an AIM company’s obligations to seek advice from its nominated adviser and to keep its nominated adviser informed. In addition the LSE reminds AIM companies that if they are under investigation by AIM Regulation, they are required to use due skill and care to ensure that information provided to the LSE is correct, complete and not misleading. Failure to do so is considered to be a serious matter as it has the potential to interfere with the LSE’s work in bringing action where appropriate.

(LSE, AIM Disciplinary Notice AD16, 05.10.17)

Financial Reporting Lab: Lab implementation study on disclosure of dividends – policy and practice

On October 4, 2017 the Financial Reporting Lab of the Financial Reporting Council published a report examining how companies have responded, in the second year of reporting, to suggestions for enhanced disclosure which were made in the Lab’s Disclosure of dividends – policy and practice report published in November 2015.

In the summer of 2016 the Financial Reporting Lab undertook a review of FTSE 350 dividend disclosures to assess how early practice had developed following the November 2015 report. The results of that review were published in a report published in December 2016.

For the purposes of this review, the Lab reviewed all the FTSE 350 annual reports published in 2016 that were also in the FTSE 350 at the end of 2015 to assess the extent to which disclosure practice had changed. It identified developments in how companies described their dividend policies, the risks to dividend payments and the factors considered in setting the dividend policy.  58 per cent of FTSE 100 companies now disclose information about distributable profits or distributable reserves, an increase from 40 per cent in 2015.  However, progress in the FTSE 250 has been less significant, with only 30 per cent of companies making some disclosure on distributable profits or distributable reserves.

The study includes examples of practice in the following areas:

  • Disclosure that details the policy and provides insight into factors relevant to the setting of the dividend.
  • Disclosure which provides information about factors relevant to setting the dividend and level of reserves.
  • Disclosure which highlights level of reserves.
  • Disclosure which highlights the link between risk and distributable reserves.

The Financial Reporting Lab believes that there are a number of areas where improvements could still be made, or where there are opportunities to take disclosures further. Key areas include the following:

  • Identifying the explicit links between dividend, principal risks and viability.
  • Enhancing disclosure on constraints, either by providing details on the sustainability of the dividend or by clarifying the level of distributable profits/cash or other constraining factor.
  • Explaining more fully what the policy means in practice.

(Financial Reporting Lab: Lab implementation study on disclosure of dividends – policy and practice, 04.10.17)

CORE: Risk Averse: Company reporting on raw material and sector-specific risks under the Transparency and Supply Chains clause in Modern Slavery Act 2015

On October 4, 2017, CORE, a UK civil society coalition on corporate accountability, published a report which provides a snapshot of company slavery and human trafficking statements published in compliance with section 54 Modern Slavery Act 2015. The report looks at 50 companies’ statements.  25 companies source raw materials known to be linked to labour exploitation (cocoa from West Africa, mined gold, mica from India, palm oil from Indonesia and tea from Assam) and 25 operate in sectors known to be at risk of modern slavery (clothing and footwear, hotels, construction, Premier League football and service outsourcing).

Key findings include the following:

  • A number of top cosmetic companies make no mention in their statements of child labour in mica supply chains. Mica is a mineral used in make-up and a large proportion of it comes from North East India where around 20,000 children are estimated to work in hundreds of mica mines.
  • A number of chocolate companies do not provide information in their statements on their cocoa supply chains, in spite of those companies acknowledging in other publicly available documents that they source from West Africa, where child labour and forced labour are endemic in cocoa production.
  • A number of jewellery firms do not include any detail on the risks of slavery and trafficking associated with goldmining.
  • Only one company made one specific reference to Assam in its statement although much tea comes from there and low wages are a contributing factor to human trafficking on tea estates in the region.

However, the report also notes examples of good practice reporting:

  • Mars specifically acknowledges that that severe human rights risks including forced labour may be present in the cocoa supply chain.
  • Lidl has published a list of tier-1 factories for all its own-brand textiles and footwear.
  • Nestle reports on 11 key human rights risks in its business, seven related to labour rights.
  • Unilever’s 2015 Human Rights Report notes that low minimum wages are an issue in many tea producing countries.
  • Three construction companies acknowledge specific risks of modern slavery in the construction sector and in their own business.

CORE concludes that overall compliance with the reporting requirement in the Modern Slavery Act is low with an estimated 9,000-14,000 companies still to publish. In relation to the published statements examined, in general, many are not compliant with the basic requirements of the legislation and the majority do not address in substantive detail the six topic areas listed in the Modern Slavery Act. Many companies are not reporting on human rights due diligence and are not considering how their own business models can create risks of severe labour rights abuses.

(CORE, Risk Averse: Company reporting on raw material and sector-specific risks under the Transparency and Supply Chains clause in Modern Slavery Act 2015, 04.10.17)

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