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Essential Corporate News – Week ending November 27, 2015

Publication November 27, 2015


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

FCA: Provisions to delay disclosure of inside information within the FCA’s Disclosure and Transparency Rules

On November 20, 2015 the Financial Conduct Authority (FCA) published a consultation paper seeking views on its proposals to amend the guidance in DTR 2.5.5G on when an issuer can legitimately delay disclosure of inside information. This follows a review by the FCA of its rules and guidance about delaying disclosure of inside information in the Disclosure and Transparency Rules (DTRs) following the Upper Tribunal decision in Ian Hannam v FCA in 2014.

The FCA notes in the consultation paper that it is in the interests of both issuers and investors to have a clear understanding of the basis for classifying information as inside information so that they can properly understand their obligations. The consultation paper looks at the test of what “inside information” is within section 118C Financial Services and Markets Act 2000. It considers the link with “significant effect on price” and the meaning of “precise” information. It then considers the ability for issuers to delay disclosing inside information to protect their legitimate interest, for example, while negotiating a transaction. DTR 2.5.5G currently contains further UK specific guidance which states that “other than in relation to impending developments or matters described in DTR 2.5.3R or DTR 2.5.5AR, there are unlikely to be other circumstances where delay would be justified”. The FCA has been told that a combination of factors is causing practical difficulties for issuers in deciding what should be disclosed and there is concern that these factors could begin to force issuers into disclosure of information at a stage where it is still significantly unformed and would be of little benefit to the market.

The FCA states that its aim is to ensure the maintenance of a regime which produces transparency which is useful to investors. As a result it has been considering whether to leave the rules unchanged or make changes to the rules now. The FCA has decided that it is not appropriate to issue further guidance in relation to legitimate interest or the DTR provisions to delay disclosure or generally but has decided to propose amending the guidance to remove the last sentence of DTR 2.5.5G which will clarify, for the avoidance of doubt, that issuers may have a legitimate reason to delay disclosure in circumstances other than the non-exhaustive examples listed in DTR 2.5.3R or the circumstances described in DTR 2.5.5AR. The FCA does not believe that this proposed change will have a negative impact on the type of transparency it expects the regime to produce, or on the quality or amount of disclosures, but that it will align the rules more closely with the Market Abuse Directive and the Market Abuse Regulation’s policy intent. It will also provide clarity that an issuer can have a legitimate interest in delaying disclosure in other situations than the non-exhaustive circumstances the rules currently set out.

In the consultation paper, the FCA notes that ESMA is to issue guidelines which will create a non-exhaustive indicative list of issuers’ legitimate interests as required by Article 17(11) of the Market Abuse Regulation. The FCA will look at this when it is available. It also makes the following points:

  • In deciding if there is a legitimate interest, and if an issuer can therefore consider delaying disclosure of inside information under the DTRs, the issuer must be clear that publishing the inside information would actually prejudice its interest. An example of where this would not be the case and where it would not be appropriate to delay disclosure would be if an issuer has a commercial or PR-related preference to delay disclosure, but public disclosure would not actually damage its interests;
  • Delaying disclosure to protect the price of the relevant security does not fall within the meaning of a legitimate interest as an issuer does not gain any direct benefit from its security price staying at a specific level. As a result, it is unlikely an issuer trying to delay disclosure of inside information for this reason could demonstrate that the delay would not have a misleading effect.

Comments on the consultation paper are requested by February 20, 2016.

(FCA, Provisions to delay disclosure of inside information within the FCA’s Disclosure and Transparency Rules, 20.11.15)

FCA: Primary Market Bulletin No. 12

On November 23, 2015 the Financial Conduct Authority (FCA) published the twelfth edition of its Primary Market Bulletin. The FCA confirms several amendments that have been made to the UKLA Knowledge Base, which were consulted on in the eleventh Primary Market Bulletin, and also proposes some further changes for consultation.

Confirmed amendments to the UKLA Knowledge Base

Proposed amendments to the UKLA Knowledge Base

The FCA also notes that it is considering making further changes to those previously proposed in its eighth Primary Market Bulletin to the Procedural Note on the UKLA decision-making and review process (see UKLA/PN/908.1 – UKLA decision making and individual guidance processes) and that it expects to finalise this note or reconsult, if appropriate, in the next edition of the Primary Market Bulletin.

(FCA, Primary Market Bulletin No. 12, 23.11.15)

Financial Reporting Lab: Disclosure of dividends – policy and practice

On November 24, 2015 the Financial Reporting Lab published a lab project report on the policy and practice in relation to disclosures about dividends, which sets out the findings from its discussions with investors on what they want to know about dividends and how dividend disclosures can be improved.

The report points to the following key areas relating to dividends that should be disclosed:

  • Why the company’s dividend policy was selected: Good dividend disclosure provides an understanding of the board’s considerations in setting the policy, including the rationale for the policy selected. Good disclosure relates the policy to the company’s strategy; explains how it will be implemented; and makes clear the associated risks, constraints and judgements. This disclosure promotes an understanding of the board’s stewardship, including how capital is being maintained.
  • What the policy will mean in practice: Project participants identify two main types of policy: progressive (i.e. clarity on the level and period of progression) and payout ratio (i.e. the defined basis for the ratio, its rationale, and whether a minimum, range, target or specified ratio is adopted). Investors also want to understand the timeframe over which the policy is expected to operate, and the governance process in determining the policy.
  • What the risks and constraints of the policy are: For some companies, the binding constraint in respect of dividends may be related to availability of cash, gearing levels, debt covenants or regulatory capital requirements. For others, it may be distributable profits (the level of reserves legally available for distribution). Investors want to understand the nature of the material risks and constraints that the board considered in setting the policy.
  • What was done in practice to deliver under the policy: Participants agree that disclosure around the declaration of dividends, linking back to the policy and elements of the progressive or payout ratio approach, could be improved. Participants suggest disclosing the key judgements and constraints considered in applying the policy, and highlighting any changes made to, or departure from, the policy. When the parent company is reliant on entities below it for dividend resources, additional disclosures can help explain where resources exist and the company’s approach to moving cash to and/or generating distributable profits at the parent company level.
  • Bringing disclosures together: Participating investors also agreed that it would be helpful to group together similar or related disclosures where possible, or draw links between disclosures, as dividend disclosures are currently often spread across a wide range of company communications. In addition to annual report disclosures, participants also recommended having the up-to-date and historical information on the dividend policy on the company’s website so that it is easy to locate.
  • Additional insight: The report provides similar feedback for disclosures relating to special dividends and share buybacks. In respect of buybacks, investors are looking for disclosure of the maximum price the company is prepared to pay, and the target minimum rate of return. Summary information on the weighted average cost of shares bought, total cost, and the effect on key metrics for buybacks undertaken during the year, also help investors assess the interaction between buybacks and management performance metrics. Retail investors, in particular, also want boards to explain their assessment of how buybacks benefit shareholders.

(FRC, Lab project report: Disclosure of dividends – policy and practice, 24.11.15)

ISS: Updates to Proxy Voting Guidelines

On November 20, 2015 Institutional Shareholder Services Inc (ISS) published an update to its UK & Ireland Proxy Voting Guidelines, following consultation on a number of aspects in October 2015.

The updated Guidelines include the changes mentioned in the October consultation, as well as several other minor amendments.

Changes adopted from October consultation

  • Director overboarding: The updated policy makes explicit reference to a recommended maximum number of boards on which directors should sit, and indicates that ISS may recommend voting against the election or re-election of "overboarded" directors. Specifically, ISS sets out the following: executive directors are not expected to hold other executive or chairmanship positions but may hold up to two other non-executive directorships; a board chairman is not expected to hold an executive position elsewhere, or more than one other chairmanship position; the chairman may hold up to three other non-executive directorships; and a non-executive director who does not hold executive or chairmanship positions may hold up to four other non-executive directorships.
  • Authority to issue shares without pre-emptive rights: The update clarifies that a disapplication of pre-emption rights up to 10 per cent of the issued share capital is acceptable, provided that the extra 5 per cent above the original 5 per cent is to be used only for the purposes of an acquisition or a specified capital investment in accordance with the Pre-Emption Group's revised Statement of Principles published in March 2015.
  • Audit fees at smaller companies: ISS' policy on non-audit service fees is being extended to smaller companies. ISS will suggest a general recommendation to vote for proposals authorising the board to fix the fees payable to the external auditors and the chairman of the audit committee, unless the fees for non-audit services have exceeded the standard audit-related fees for more than one year and the company appears unwilling to address the issue.

New changes

  • Authority to call general meeting on two weeks' notice: If a company is viewed as using this authority inappropriately by calling short notice general meetings which are not obviously time-sensitive, ISS may recommend a vote against a resolution seeking the authority at the next AGM.
  • Accepting financial statements and statutory reports of smaller companies: Greater detail has been added, to expand upon the specific issues which ISS takes into account when recommending votes against this resolution at smaller companies.
  • Remuneration in small companies: The current policy and the reasons for a potential negative vote recommendation do not differentiate between a remuneration policy resolution and a remuneration report resolution. The update makes this distinction, recognising that a number of companies covered by ISS' smaller companies policy are required by law to present separate policy and report resolutions, and that other companies choose to do so on a voluntary basis. The list of issues which drive a negative vote recommendation has been expanded, to ensure that the policy captures a greater number of key issues of potential concern.
  • Voting disclosure and the response to significant shareholder dissent: A discussion on the reaction of companies to high levels of dissent will be brought forward to become part of the introduction to the Guidelines, with an additional note regarding how ISS will take this issue into account when formulating vote recommendations. This will clarify that ISS may recommend a vote against resolutions in certain circumstances.

ISS will publish its updated Guidelines in December 2015 and they will become effective for shareholder meetings from February 1, 2016.

(ISS, 2016 EMEA Proxy Voting Guidelines Updates, 20.11.15)

Companies House: Further updated schedule of implementation of the Small Business, Enterprise and Employment Act 2015

On November 17, 2015 Companies House published a further updated implementation schedule relating to the Small Business, Enterprise and Employment Act 2015, initially published on August 20, 2015. The update provides that the date of implementation has been moved to April 2016 for the provisions on director disputes and registered office address disputes, which were previously set to come into force in December 2015.

(Companies House, The Small Business, Enterprise and Employment Act is here, 17.11.15)

BIS: De-regulatory changes to financial reporting requirements for LLPs and Qualifying Partnerships

On November 23, 2015 the Department for Business Innovation & Skills (BIS) published a consultation paper on the financial reporting requirements for Limited Liability Partnerships (LLPs) and the creation of a new micro-entity regime for LLPs and for those general partnerships and limited partnerships that are Qualifying Partnerships as defined in the Partnerships (Accounts) Regulations 2008, that is a partnership where each of its members is a limited company, an unlimited company, or a Scottish partnership, each of whose members is a limited company.

The main proposed changes to the accounting and audit requirements for LLPs are:

  • increasing the thresholds to determine size for LLPs in order to save costs for some LLPs, which will be categorised in a lower size category;
  • lessening the administrative burden on small LLPs by reducing the number of mandatory notes required;
  • permitting small LLPs to prepare an abridged balance sheet and an abridged profit and loss account if this is agreed by all members of the LLP;
  • allowing greater flexibility within layouts of profit and loss accounts and balance sheets, permitting the use of sector-specific layouts;
  • allowing participating interests to use the equity method in individual LLP statements; and
  • requiring LLPs to include information on any subsidiaries within the notes to the consolidated financial statements.

The Government also proposes to introduce micro-entity regimes for LLPs and Qualifying Partnerships, which will enable them to access a much less burdensome administrative regime, whilst still meeting their business needs and the needs of their members and other stakeholders.

Responses to the consultation are requested by December 21, 2015, with the regulations to be made by summer 2016 and applying to financial years commencing on or after January 1, 2016.

(BIS, De-regulatory changes for Limited Liability Partnerships (LLPs) and Qualifying Partnerships, 23.11.15)

FCA: New standard form for home member state notification under the Transparency Directive

On November 20, 2015 the Financial Conduct Authority (FCA) published a new standard form for issuers to use to disclose their home member state, as well as an accompanying statement. The member state rules have changed due to the implementation of the Transparency Directive Amending Directive (TDAD) in the UK, and consequently, from November 26, 2015, all issuers must disclose their home member state to:

  • the competent authority of the member state where it has its registered office, where applicable;
  • the competent authority of the home member state; and
  • the competent authorities of all host member states.

The FCA notes that:

  • issuers who have a choice of home member state but who have not yet notified the FCA of their choice, should do so by February 26, 2016;
  • issuers incorporated in a member state who do not have a choice of home member state should inform the FCA of their home member state by November 26, 2015; and
  • although issuers who have already disclosed their home member state to the FCA do not have to do so again under the TDAD, the new form seeks more detail than is currently requested and the FCA therefore asks all existing issuers to update their notifications using the revised form.

The information provided to the FCA in the home member state notifications will be sent to ESMA who will maintain a centralised list of all issuers regulated by EU National Competent Authorities.

(FCA, Standard form for the notification of Home Member State, 20.11.15)

FRC: Audit Committee Chairs survey 2015

On November 23, 2015 the Financial Reporting Council (FRC) published an article discussing the Audit Committee Chairs’ (ACCs) Survey 2015. The survey was sent to ACCs at all FTSE 350 and at some smaller listed companies to provide a suitable sized sample for the six largest audit firms. ACCs were asked eight questions about audit quality and were asked to rank their responses.

ACCs scored their auditors highly across all questions. There was evidence of improvement in all categories with the highest being that of independence and objectivity. The lowest overall scores, for a second year, were for questions on professional scepticism and the auditor’s response to regulatory oversight.

(FRC, Audit Committee Chairs believe audit is improving, 23.11.15)

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