One deal, two jurisdictions – interpreting competing jurisdiction clauses
The Court of Appeal has provided comfort to the derivatives market by giving a wide, commercial interpretation to an exclusive English jurisdiction clause.
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On February 14, 2017 the Financial Conduct Authority (FCA) published a discussion paper which seeks feedback on how the UK primary capital markets can most effectively meet the needs of issuers and investors. The FCA has structured the discussion paper based on the initial feedback received from stakeholders as part of its review of the effectiveness of primary markets (effectiveness being reviewed by reference to providing access to capital for issuers and investment opportunities for investors). These initial discussions identified a number of areas where immediate technical enhancements could be made to the listing regime to increase its effectiveness, and therefore the FCA has published a consultation paper alongside the discussion paper to address these issues.
The discussion paper covers the following topics:
The primary market context
In order to provide context for the discussion, the FCA provides an overview of the UK’s primary markets, the place within this of the listing regime, and of its own regulatory role. The FCA also sets out some key trends in the UK’s primary equity markets.
The current split between standard and premium listing
The key components for inclusion in the premium listing segment are broad equivalence between economic ownership and voting rights (typically expressed through single-class share structures), pre-emption rights and the need to demonstrate an independent business. The FCA’s discussions with stakeholders have provided strong endorsement for the existing regime. It is widely regarded as having evolved in line with market feedback to serve the interests of investors and issuers. It is also seen as an example of high corporate standards leading to high levels of investor confidence and, in turn, a vibrant market. However, the FCA has identified some important questions about whether the boundary of the premium listing regime is appropriately drawn, and whether re-drawing that boundary might improve effectiveness for issuers and investors.
The listing regime currently offers overseas issuers a choice of three routes to access UK markets. Overseas issuers can apply for a premium listing or standard listing of global depositary receipts (GDRs) or a standard listing of equity shares.
The FCA’s discussions with stakeholders, and experience of IPOs since the segmentation of listing was introduced, suggest that the listing regime could be usefully reconsidered for overseas issuers. The FCA has observed very few issuers seeking a standard listing of equity shares because issuers for which premium listing is an inappropriate option overwhelmingly favour a standard listing of GDRs. However, GDRs are securities generally targeted at sophisticated investors and may therefore be inaccessible to a large body of investors who might wish to invest in mature overseas companies. A number of stakeholders have also questioned whether there should be a route to listing for overseas companies that wish to observe higher standards of conduct, though UK corporate structures required for premium listing may be inappropriate.
Exchange traded funds (ETFs)
When the premium and standard listing segments were created, the FCA decided that premium listing should be the exclusive route to market under the listing regime for investment trusts and investment companies. Taking into consideration the broader regulatory framework which those issuers operated within, the FCA considered this to be necessary to ensure appropriate levels of investor protection.
The FCA remains of the view that this decision was correct, and notes that there are no significant calls for it to be revisited. However, the FCA would like to discuss further whether requiring premium listing is unnecessarily demanding for ETF issuers when compared with the limited benefits provided by the requirements in Chapter 16 of the Listing Rules.
A broader question that stakeholders raised, and which the FCA discusses in this paper, is whether standard listing is sufficiently understood or valued by issuers and investors to be effective. Closely linked to this question is whether the current split of listing into standard and premium segments is too binary and could be revisited to produce more effective outcomes.
Potential gaps in the UK’s primary market framework
When the FCA takes a broader view, it sees potentially more fundamental gaps that may not be properly accommodated by the current market structure.
Supporting the growth of science and technology companies
A number of stakeholders raised concerns about the effectiveness of the UK’s primary equity markets in providing growth capital, particularly for early-stage science and technology companies. In its Green Paper published in January 2017, ‘Building our Industrial Strategy’, the Government also explored this issue, noting the argument put forward by supporters of dual class share structures that the enhanced voting rights they give to companies’ founders allow those individuals to focus more on long-term performance, and less on short-term market pressures.
However, the Green Paper also noted that institutional investors and shareholder representative groups in the UK have opposed dual class shares structures due to the risk they perceive to high-quality corporate governance and the interests of minority shareholders. At present under the Listing Rules the FCA permits such structures only for companies with a standard listing of shares. The FCA is keen to explore further the effectiveness of the UK’s primary equity markets in providing patient capital, and particularly to discuss the extent to which different primary market structures might provide a solution, and the role primary market regulation might play in helping to shape those structures.
The listing of debt securities and debt MTFs
The FCA has committed to give further consideration to whether there is a role for a UK primary debt multilateral trading facility (MTF) market, similar to those in Luxembourg and Ireland, and, if so, how it should be structured. The FCA takes this discussion forward in this paper, and sets out some options for further consideration.
Retail access to debt markets
A number of market participants have called for measures to support greater retail participation in debt markets, particularly in relation to routine issuance by established issuers. Some stakeholders have suggested the FCA’s current approach, requiring that prospectuses relating to retail issuance be easily analysable and comprehensible, discourages issuers from issuing such securities to retail investors.
Other potential areas for reform
The FCA has sought to structure this paper based on the initial feedback it received from stakeholders. This has resulted in a focus on specific areas within a wide-ranging subject. The FCA remains keen to receive feedback on other areas relating to the UK’s primary markets not mentioned in this paper where stakeholders consider that enhancements could be made.
The FCA has requested responses to the discussion paper by May 14, 2017.
On February 14, 2017 the Financial Conduct Authority (FCA) published a consultation paper on the effectiveness of primary markets. This consultation paper was published alongside a discussion paper that considers the broader market landscape and sets out a number of areas where the FCA wants to explore opportunities for structural enhancements to UK primary markets. The consultation paper sets out more developed proposals to enhance certain aspects of the Listing Rules.
Clarifications to the premium listing eligibility requirements for commercial companies
Chapter 6 of the Listing Rules (LR 6) sets out the requirements an applicant has to meet in order to obtain a premium listing. The FCA has amended this chapter a number of times. While the premium listing eligibility requirements are strongly endorsed by stakeholders, the FCA has identified several areas where the rules could provide greater clarity on what is required. The FCA is therefore making a range of proposals to present the existing requirements more clearly and ensure the drafting better reflects the intention of the rules and how they are applied in practice. The FCA is also proposing new Technical Notes with additional guidance to give greater context to the rules.
Changes to the concessionary routes to premium listing
As well as redrafting sections of LR 6, the FCA is are also proposing changes to what are known as the ‘concessionary routes’ to premium listing. Applicants for premium listing are usually required to have a three-year revenue earning track record in order to be eligible for premium listing. However, there are specific rules for companies in some sectors which exempt an applicant from this requirement. Instead, they enable it to gain a premium listing by complying with other conditions (the ‘concessionary routes’).
In this consultation paper, the FCA proposes a new concessionary route to premium listing for certain property companies that cannot meet the LR 6 track record requirements. The proposed new concession would recognise that a property valuation report might be considered as a more appropriate way to judge the maturity of a property company when assessing its eligibility for premium listing.
The FCA has also looked at the existing concessionary routes to premium listing to assess if they are still up to date and comprehensive enough. The FCA has decided that they are still appropriate, and so is not proposing any substantial changes. However, the FCA has decided that they would benefit from new guidance in some areas to ensure they are properly understood. As a result, the FCA is consulting on two new Technical Notes and replacing an existing one with new content.
Classifying transactions – changes for premium listed issuers
The obligation for premium listed issuers to provide certain disclosures or seek shareholder approval for large transactions that are outside the ordinary course of business (typically acquisitions, disposals and joint ventures) is an important feature of the governance requirements and shareholder protections imposed by the Listing Rules.
To ensure the class test regime is effective, the method for assessing the size of a transaction must be clear and result in appropriate classifications. However, stakeholder feedback and the FCA’s own experience dealing with requests from issuers and their advisers for individual guidance on the application of the class tests suggests that one of the class tests - the ‘profits test’ – often produces anomalous results. The FCA has considered the feedback received, and now proposes two changes to the profits test:
These would apply where the transaction would otherwise be classed as a class 1 or reverse takeover and the issuer has obtained the guidance of a sponsor under LR 8.2.2R in relation to the application of the Listing Rules on classifying the transaction. As part of this, the FCA proposes updating the guidance in its separate Technical Note (UKLA/TN/302.1) on adjusting the profit figures.
The FCA is also proposing certain adjustments to the figures used to classify assets and profits. Currently, these figures must be those in the latest published audited consolidated accounts or preliminary statement (or subsequently published interim balance sheet), which are adjusted to take account of subsequently completed transactions that meet or exceed the threshold for a class 2 transaction. The FCA is now proposing to amend the rules to require the figures used for classifying assets and profits to be adjusted for such transactions completed during the last financial year. While this approach is currently set out in a separate Technical Note (UKLA/ TN/302.1), the FCA thinks it would be more appropriate to include it explicitly in the Listing Rules themselves.
The FCA’s approach on reverse takeovers to date has been to assume that, when in contemplation, there will be insufficient information in the market about the target unless the listed company can provide it. The information that will generally satisfy the FCA that a suspension is not required is specified in the Listing Rules and is broadly equivalent to that required to be disclosed to the market on a listed company. Where the information is not provided, the FCA’s view has historically been that the market will not operate smoothly and it will often use its powers to suspend the issuer’s listing until either the ‘information gap’ is bridged or the issuer confirms that the reverse transaction is no longer in contemplation.
However, in response to stakeholder feedback and its own experience with reverse takeovers, the FCA proposes to change its approach. Under the proposals, the assumption of insufficient information being available in the market will no longer apply. Instead the FCA will assume that the market can operate smoothly on the basis of the information that listed companies already make publicly available as part of their compliance with existing obligations, principally the obligation to disclose inside information under the Market Abuse Regulation (MAR).
The proposed change also addresses stakeholder feedback that suspending a listing is a disproportionate action which harms investors because it means they cannot trade in the securities of the acquiring party, potentially for a long period of time. Stakeholders have told the FCA that issuers want to avoid any possibility of this kind of detriment, but are concerned they may not be able to provide the specific information needed to decide not to suspend their listing. Feedback suggests that this has the practical effect of deterring some issuers from pursuing transactions altogether.
However, the FCA proposes keeping the existing approach for shell companies and its proposals do not include changing the premise in LR 5.6.19G that it will generally seek to cancel an issuer’s listing when it completes a reverse takeover. They also do not include changing or removing the FCA’s general power to suspend listing in LR 5.1.1R and the related guidance in LR 5.1.2G.
The FCA has requested responses to the consultation paper by May 14, 2017.
On February 16, 2017 the Financial Reporting Council (FRC) announced that it will be undertaking a fundamental review of the UK Corporate Governance Code (the Code). The review will take account of work done by the FRC on corporate culture and succession planning, and the issues raised in the Government’s Green Paper on corporate governance reform and the BEIS Select Committee inquiry.
The FRC will commence a consultation on its proposals later in 2017, based on the outcome of the review and the Government’s response to its Green Paper.
On February 17, 2017 the Institute of Chartered Secretaries and Administrators (ICSA) published the first in a series of reports on the future of UK corporate governance, which will look at some of the principal issues in the governance environment and seek to identify solutions to them.
This report, “Untangling corporate governance”, argues that the different components of corporate governance require untangling, in order for each of them to be addressed effectively. While the “comply or explain” framework remains appropriate for its original purpose, it is not well suited for delivering some of the other expected objectives of corporate governance. In particular, it is not capable of preventing or effectively sanctioning bad behaviour by boards or directors or of delivering public policy objectives that are relevant to the UK economy or society as a whole. Encouraging good business practices, punishing bad business behaviour and promoting the public interest are interrelated objectives, but they are not the same and cannot all be achieved through the same mechanisms. As a result, the report argues that the different components of corporate governance need to be untangled in order to address each of them effectively.
The report identifies actions that should be considered, in addition to those set out in the Government’s Green paper on corporate governance reform, including:
The Court of Appeal has provided comfort to the derivatives market by giving a wide, commercial interpretation to an exclusive English jurisdiction clause.