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Essential Corporate News – Week ending September 21, 2018

Publication September 21, 2018


Introduction

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

Court of Appeal: Decision in relation to privilege and internal investigations

The Court of Appeal recently handed down an eagerly awaited decision addressing, in particular, fundamental issues as to the ambit of litigation privilege in investigations.

The appeal, in ENRC v SFO, sought to overturn the High Court’s decision that various communications connected with an internal investigation (including notes of interviews and forensic accounting materials) were not protected by litigation privilege.  The High Court had held that litigation privilege did not apply because a Serious Fraud Office investigation was not sufficiently adversarial for the purposes of litigation privilege, it could not be said that litigation was in contemplation, and that even if litigation was in contemplation, the documents were not created for the dominant purpose of use in the litigation.

However, the Court of Appeal reversed the decision in relation to litigation privilege, holding that litigation was in reasonable contemplation from the outset of the investigation and that the materials in question (including interview notes and forensic accounting materials) were created for the dominant purpose of resisting or avoiding contemplated criminal proceedings, and so protected by litigation privilege.

For a detailed briefing which summarises the Court of Appeal’s decision and provides key practical takeaways in relation to the application of privilege to investigations, click here.

(ENRC v SFO [2018] EWCA Civ 2006)

IOSCO: Equity capital raising - Final report and guidance on conflicts of interest and associated conduct risks

On September 18, 2018 the International Organization of Securities Commissions (IOSCO) published a final report containing guidance to its members on conflicts of interest and associated conduct risks during the equity capital raising process. The report follows a consultation launched on February 21, 2018. The guidance contained in the final report is non-binding, but IOSCO encourages its members to consider the guidance and the extent to which it should be implemented in the context of their legal and regulatory framework.

The guidance takes the form of eight measures, and is broadly in the form set out in the consultation. The measures are as follows:

  • Measure 1 - In the context of pitches to secure a mandate to manage an equity securities offering, regulators should consider requiring firms to take reasonable steps to prevent their analysts from coming under pressure to take a favourable view on the offering from the issuer’s representatives.
  • Measure 2 - Regulators should consider requiring that once an underwriting or placing mandate has been awarded, firms take reasonable steps to prevent a connected analyst’s views and research on the equity securities offering from being improperly influenced and to ensure that the analyst remains independent.
  • Measure 3 - Regulators should consider requiring that once an underwriting or placing mandate has been awarded, firms have appropriate controls to manage potential conflicts of interest and associated conduct risks arising from connected analysts performing an internal advisory role within the firm while also producing research on an equity securities offering.
  • Measure 4 - Regulators should encourage the timely provision of a range of information to investors in an equity securities offering, where distribution of such information is permitted under local law.
  • Measure 5 - Regulators should consider requiring firms to maintain an allocation policy that sets out their approach for determining allocations in an equity securities offering and to provide the issuer with an opportunity to be involved in the process.
  • Measure 6 - Regulators should consider requiring firms to maintain records of the allocation decisions made in an equity securities offering to demonstrate that any conflicts of interest are appropriately managed.
  • Measure 7 - Regulators should consider requiring firms to manage any conflicts of interest that arise in relation to pricing an equity securities offering, keep the issuer informed of key decisions or actions which can influence the pricing outcome, and give the issuer an opportunity to be involved in decisions regarding the pricing of an issue during the pricing process.
  • Measure 8 - In the context of an equity securities offering, regulators should consider requiring firms to take all reasonable steps designed to prevent any employees who have access to confidential information on the issuer or the offering from entering into or causing any personal transactions in situations where such transactions would involve misuse or improper disclosure of the information. Regulators should also consider requiring firms to prevent any employees from entering into personal transactions where such transactions would otherwise give rise to any conflicts of interest.

The guidance is the first stage of IOSCO´s work to examine conflicts of interest and associated conduct risks in the capital raising process, with the second phase considering conflicts of interest and associated conduct risks during the debt capital raising process. IOSCO will consider whether any regulatory response is necessary.

(IOSCO, final report and guidance on conflicts of interest and associated conduct risks – 18.09.18)

FRC: Board diversity reporting

On September 17, 2018 the Financial Reporting Council (FRC) published a report which assesses the current extent and manner of reporting by FTSE 350 companies on diversity at board and senior management levels in their annual reports.

Data was collected from the annual reports of FTSE 350 companies published as at March 1, 2018 and the report’s key findings include the following:

  • The quality of reporting on diversity of boards has improved since it was first included in the UK Corporate Governance Code in 2012. Then 56 FTSE 100 companies stated they had a broad diversity policy, all of which focussed on gender, whereas now 98 per cent of FTSE 100 and 88 per cent of FTSE 250 companies have one, with roughly 33 per cent referring to ethnicity as well as gender.
  • Only 15 per cent of FTSE 100 companies discussed all four elements in Provision B.2.4 of the 2016 UK Corporate Governance Code (this calls for a description of the nomination committee’s process in relation to board appointments, the board’s policy on diversity, including gender, measurable objectives set for implementing the policy and progress on achieving those objectives). Only 6 per cent of FTSE 250 companies discussed all four elements.
  • There is a range of approaches to diversity reporting, with some clearly understanding that diversity is the best utilisation of talent and a significant strategic issue, while others follow a “tick-box” approach.
  • 20-30 per cent of the FTSE 100 and 10 per cent of the FTSE 250 are “best in class”, demonstrating maturity of approach to gender diversity and beginning to consider how best to increase ethnic diversity.
  • The majority of FTSE companies still need support to develop their approach to diversity.
  • Figures for reporting on diversity in the context of succession planning, diversity and board evaluations, ethnic diversity and initiatives aimed at senior management are substantially lower.

The report identifies examples of reporting that lead the way in terms of quality, in some cases providing real insight into the approach of companies. The FRC notes in the report that it is considering the nature and scope of future monitoring against the 2018 UK Corporate Governance Code given that represents a significant increase in emphasis on succession planning and diversity in the management pipeline. It also encourages boards to think beyond gender diversity and to ensure appointment and succession planning practices are designed to promote diversity more broadly.

(FRC, Board diversity reporting - 17.09.18)

LSE: Admission and Disclosure Standards - Feedback on consultation and amended Standards

On September 17, 2018 the London Stock Exchange (LSE) published Notice N15/18. The Notice sets out feedback on the LSE’s consultation on amendments to the Admission and Disclosure Standards contained in Notice N13/18.

The consultation document, which was published on July 10, 2018, set out amendments which will apply to issuers applying to admit depositary receipts, or with depositary receipts admitted, to trading on the Shanghai-London Stock Connect Segment of the Main Market.

The limited response to the consultation has meant that no additional changes are required to the proposed amendments and the changes in the consultation document are to be implemented in full.

The amended Admission and Disclosure Standards are contained in Attachment 1 to the Notice and will come into effect on October 1, 2018.

(Market Notice N15/18: Feedback on N13/18 - Consultation on amendments to the Admission and Disclosure Standards – 17.09.18)

(LSE amended Admission and Disclosure Standards – 17.09.18)


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