Takeover Panel: Response Statement on asset valuations – RS 2018/1
On March 6, 2019 the Code Committee of the Takeover Panel (Panel) published Response Statement RS 2018/1 following the receipt of comments on Public Consultation Paper 2018/1 which proposed amendments to Rule 29 of the Takeover Code (Code) which relates to asset valuations.
Having conducted a review of the purpose and operation of Rule 29, the Panel has noted that it does not currently reflect certain aspects of the Panel Executive’s practice. Although it is not intended to materially alter the way in which Rule 29 is currently applied, the Code Committee proposed that a revised Rule be introduced in order to (amongst other things) provide better clarity in certain areas and codify current practice. In light of responses to the consultation, the Code Committee has adopted the amendments proposed in PCP 2018/1 subject to certain modifications.
The following are the key changes to Rule 29
- Valuations to which Rule 29 applies – Rule 29 will apply to an asset valuation published by the offeree company or a securities exchange offeror: during the offer period; in the 12 months prior to the commencement of the offer period; or more than 12 months prior to the commencement of the offer period, but only if attention is drawn to that valuation by the offeree company or the securities exchange offeror (as applicable) in the context of the offer. However, irrespective of when it is published, Rule 29 will not apply to a valuation that is not considered by the Panel to be material to offeree company shareholders in making a properly informed decision as to the merits or demerits of the offer and this will be determined by the Panel on the particular circumstances. The Code Committee also does not believe it is appropriate for the Panel to be able to disapply certain requirements of Rule 29 in relation to an “ordinary course” asset valuation to which Rule 29.1 would otherwise apply.
- Types of asset to which Rule 29 applies – The current practice of applying Rule 29 principally to valuations of land, buildings, plant or equipment, mineral, oil or gas reserves and unquoted investments held by any company (not just an investment company), is being codified. However, it will continue to be capable of being applied to valuations of other types of assets in addition to these, as well as to valuations of liabilities.
- Net asset values and adjusted net asset values – If an offeree company or a securities exchange offeror publishes, or has published, a net asset value figure or an adjusted net asset value figure in circumstances where Rule 29 would apply if a valuation had been published in respect of the underlying assets, Rule 29 will require a valuation of those underlying assets to be published.
- Requirements for a valuation report – A valuation published during an offer period will need to be in the form of, or accompanied by, a valuation report and a valuation published before the commencement of an offer period will need to be confirmed in, or updated by, a valuation report. A valuation report will need to be prepared by a valuer who satisfies a number of criteria (including that they are considered by the Panel to be independent and appropriately qualified) and the report must also comply with specific contents requirements. If the date as at which the assets were valued is not the same as the date of the document or announcement in which the valuation report is published, the relevant document or announcement must include a statement that the valuer has confirmed to the directors that an updated valuation would not be materially different.
- Other proposals – The current requirement for a statement as to the tax consequences if the assets the subject of the valuation were to be sold at the amount of the valuation is being retained, but the new Rule 29 clarifies that an estimate of the amount of the tax liability which would arise should also be given unless the Panel consents otherwise. If the Panel does give its consent, an explanation will have to be provided as to why an estimate cannot be given and describe the tax consequences of a sale of the assets.
A new requirement to consult the Panel in advance if the publication of information contained in valuation report could constitute a profit forecast is also being introduced in Rule 29.7.
The existing rule that a party to an offer is not normally permitted to publish a valuation of the assets of another party unless supported by an unqualified valuation report is being retained with minor amendments in Rule 29.8.
The amendments to the Code being introduced by RS 2018/1 will take effect on April 1, 2019. The Code, as amended, will be applied from that date to all companies and transactions to which it relates, including those on-going transactions which straddle that date, except where to do so would give the amendments retroactive effect.
(Takeover Panel: Response Statement on asset valuations – RS 2018/1, 06.03.19)
Takeover Panel: Response Statement on the UK’s withdrawal from the EU – RS 2018/2
- On March 6, 2019 the Code Committee of the Takeover Panel issued Response Statement RS 2018/2, following receipt of responses to Public Consultation Paper 2018/2 (PCP) which set out proposed amendments to the Takeover Code in relation to the withdrawal of the UK from the EU. Having considered those responses, the Code Committee intends to adopt the amendments proposed in the PCP subject to one minor amendment to section 3(b) of the Takeover Code’s Introduction.
The Takeovers Directive (Directive 2004/25/EC) will cease to apply in the UK on exit day and section 943(1) Companies Act 2006 (CA 2006), which requires the Takeover Panel to make rules giving effect to certain Articles of the Takeovers Directive, will be amended to require the Takeover Panel to make rules in accordance with the new Schedule 1C to the CA 2006 (which will replicate the relevant requirements of the Takeovers Directive, other than those relating to the shared jurisdiction regime, discussed below). This amendment, and certain other amendments to the CA 2006, will be made by the Takeovers (Amendment) (EU Exit) Regulations 2019 (2019 Regulations).
Key changes to the Takeover Code
Upon the new section 943(1) CA 2006 coming into force, the Takeover Panel will no longer have a statutory obligation to give effect to Article 4.2 of the Takeovers Directive which sets out a system of shared jurisdiction if a takeover bid is made for a company which has its registered office in one EEA member state and its securities admitted to trading on a regulated market in another EEA member state (but not also on a regulated market in the EEA member state in which the company has its registered office) (the shared jurisdiction regime). Upon the new section 943(1) CA 2006 coming into force, section 3(a)(iii) of the Introduction to the Takeover Code, which implements the shared jurisdiction regime in the UK, will be deleted. Upon the deletion of section 3(a)(iii) of the Introduction, the Takeover Code will no longer apply to an offer for
- A company which has its registered office in an EEA member state (but not in the UK) and whose securities are admitted to trading on a regulated market in the UK (but not in that EEA member state).
- A company which has its registered office in the UK and whose securities are admitted to trading on a regulated market in an EEA member state (and not on a regulated market in the UK) and which does not satisfy the “residency test” in section 3(a)(ii) of the Introduction to the Takeover Code.
The Takeover Code will, however, apply in full to an offer for a company which has its registered office in the UK and whose securities are admitted to trading on a regulated market in an EEA member state (but not on a regulated market in the UK) if that company satisfies the residency test in section 3(a)(ii) of the Introduction to the Takeover Code.
Minor amendments are being made to the General Principles of the Takeover Code which will be the same as the general principles in new Schedule 1C of the CA 2006, save that it is being made clear that the Takeover Code’s General Principles will apply to all transactions to which the Takeover Code applies and not only transactions which fall within the definition of a “takeover bid” in paragraph 20(1) of the new Schedule 1C. A few amendments are also to be made to other Rules and Appendices, including providing in Rule 30.4 that documents, announcements and information should be made available to shareholders and employees in the UK, the Channel Islands and the Isle of Man.
The Response Statement notes that it is not yet possible to determine with certainty the date on which these amendments will take effect. The date on which the UK leaves the EU could be extended. Alternatively, if a transition period is agreed in the final version of the Withdrawal Agreement currently being negotiated between the EU and the UK (and the Withdrawal Agreement receives the necessary Parliamentary approvals), then the amendments to the Takeover Code set out in the Response Statement would be expected to come into effect following the end of the transition period. However, if the UK withdraws from the EU in a “no deal” scenario, then the amendments to the Takeover Code set out in the Response Statement will come into effect at 11:00pm on March 29, 2019.
In the case of an offer for a shared jurisdiction company to which the Takeover Code initially applies but to which it will not apply when the Takeovers Directive ceases to apply in the UK, the Takeover Panel’s regulation of that offer will cease when the shared jurisdiction provisions are deleted from the Takeover Code as an offer for the company would cease to be subject to the Takeover Code from that time. The Code Committee would expect the documentation in relation to an offer for such a shared jurisdiction company to make clear that the Takeover Panel’s regulation of the offer would cease on that date. However, in the case of offers for shared jurisdiction companies to which the Takeover Code will apply in full once the Takeovers Directive ceases to apply in the UK, the full requirements of the Takeover Code will be applied to the company and to the transaction with effect from that time (except where to do so would give those requirements retrospective effect) and this should also be made clear in the offer documentation.
(Takeover Panel: Response Statement on the UK’s withdrawal from the EU, 06.03.19)
AIM: Amendments to AIM Rulebooks in event of hard Brexit
On March 7, 2019 the London Stock Exchange (LSE) published proposed changes to its rulebooks, including the AIM Rules for Companies and the AIM Rules for Nominated Advisers, that will apply if no transitional or other agreement is reached before the UK withdraws from the EU on March 29, 2019. The purpose of the amendments is to enable the LSE to continue to operate its markets effectively and meet its regulatory objectives.
The AIM Rules for Companies and the AIM Rules for Nominated Advisers refer to EU legislation and to UK law which relates to or refers to the EU, as well as to EU concepts. The changes proposed reflect the UK’s new legal and regulatory framework in the event of a hard Brexit and follow amendments the Government is proposing to make under the European Union (Withdrawal) Act 2018. The changes are set out in marked up copies of the AIM Rules for Companies and the AIM Rules for Nominated Advisers attached to LSE Notice N04/19.
The amendments will become effective as at 11pm on March 29, 2019 in the event of a hard Brexit but will otherwise not come into effect on that day.
(AIM Notice 55, Brexit: Amendments to the AIM Rulebooks, 07.03.19)
(LSE Notice N04/19, Brexit: Amendments to London Stock Exchange Primary Market Rulebooks, 07.03.19)
(Mark up of AIM Rules for Companies – Attachment B to LSE Notice N04/19, 07.03.19)
(Mark up of AIM Rules for Nominated Advisers – Attachment C to LSE Notice N04/19, 07.03.19)
FRC: Position paper on 2016 Ethical and Auditing Standards
On March 5, 2019 the Financial Reporting Council (FRC) published a position paper setting out how Ethical and Auditing Standards will be developed to respond better to the needs of users of audited financial information, following a recent call for feedback. The position paper addresses the issues that will be developed to support a public consultation on the text of revised standards in the summer of 2019, the intention being that the revised standards will apply to audits for financial periods commencing on or after December 15, 2019.
The position paper makes several proposals, including the following
- There will be a consultation on whether ethical requirements in respect of Public Interest Entity (PIE) audits should apply to other audit engagements which are of significant public interest (even if the entity is not a PIE) and a consultation on a principles-based regime for PIE audits whereby certain audit-related services, closely linked to the audit, can be provided by the auditor. These will likely include those services that were exempt for the purposes of the non-audit services cap, because they are required by law or regulation, and certain other services where there is a clear justification for the auditor to undertake the work. Services not within this category will no longer be able to be provided by the auditor.
- There will be a consultation on an outright prohibition on contingent fee arrangements for all non-audit/additional services.
- There will be a consultation on measures to enhance the authority of the Ethical Partner and the ethics and compliance function within an audit firm, including through strengthening the links with the audit firm’s independent non-executives and governance.
- In consideration of the of the Kingman Review recommendation relating to the definition of a PIE, there will be a consultation on making requirements applicable to PIEs also applicable to other entities of public interest.
The position paper addresses implications for auditors and audited entities if the UK leaves the EU without a withdrawal agreement and no transition period (no-deal scenario). The position paper sets out changes that will be made to the standards to reflect changes to the law, including that PIEs will only be UK-incorporated entities; that the prohibition on the provision of non-audit services will apply globally for periods commencing on or after March 29, 2019, and that non-audit services required by EU law will no longer be exempt for the non-audit services fee cap.
The position paper also highlights how the FRC’s work on the standards responds to certain recommendations made by Sir John Kingman in his independent review of the FRC, how proposals are being developed to support the Competition and Market Authority’s Market Study of the UK Statutory Audit Market; and how revisions made to the international Code of Ethics will be incorporated into the FRC Ethical Standard.
The FRC intends to consult on the revised text in July 2019, and for those standards to apply to the audit of financial periods commencing on or after December 15, 2019.
(FRC: Position Paper on 2016 Ethical and Auditing Standards, 05.03.19)
(FRC: Position Paper on 2016 Ethical and Auditing Standards press release, 05.03.19)
FRC: Consultation on revisions to International Standard on Auditing (ISA) (UK) 570 - Going Concern
On March 4, 2019 the Financial Reporting Council (FRC) launched a consultation on revisions to International Standard on Auditing (ISA) (UK) 570 – Going Concern. The Consultation follows concerns about the quality and rigour of audit and well-publicised corporate failures where the auditor’s report failed to highlight concerns about the prospects of entities which collapsed shortly after as well as findings from recent FRC Enforcement cases. Under the proposed revisions, requirements on UK auditors will be significantly stronger than those required by international standards.
The proposed revisions include
- Ensuring that auditors make greater effort to more robustly challenge management’s assessment of going concern, thoroughly test the adequacy of the supporting evidence, evaluate the risk of management bias, and make greater use of the viability statement.
- An improved transparency with a new reporting requirement for the auditor to provide a conclusion on whether management’s assessment is appropriate, and to set out the work they have done in this respect.
- A stand back requirement to consider all of the evidence obtained, whether corroborative or contradictory, when the auditor draws their conclusions on going concern.
Responses to the consultation are requested by 5pm on June 14, 2019.
(FRC: Consultation on revisions to International Standard on Auditing (ISA) (UK) 570 – Going Concern, 04.03.19)
(FRC: Revisions to International Standard on Auditing (ISA) (UK) 570 - Going Concern, 04.03.19)
European Commission: New framework for foreign investment screening
On March 5, 2019 the Council of the European Union approved a proposed regulation to establish a framework for the screening of foreign direct investments into the EU.
The text is in substantially the same form as that adopted by the European Parliament on February 14, 2019 and will, amongst other things
- Create a cooperation mechanism where Member States and the European Commission will be able to exchange information and raise concerns related to specific investments.
- Allow the European Commission to issue opinions when an investment poses a threat to the security or public order of more than one Member State, or when an investment could undermine a project or programme of interest to the whole EU.
- Encourage international cooperation on investment screening, including sharing experience, best practices and information on issues of common concerns.
- Set certain requirements for Member States who wish to maintain or adopt a screening mechanism at national level; including determining whether a specific investment operation should be allowed or not in their territory.
- Take into account the need to operate under short business-friendly deadlines and strong confidentiality requirements.
The approved regulation will be published on March 21, 2019 and will enter into force twenty days later and will apply 18 months after that date.
(European Commission: New framework for Foreign Investment Screening press release, 05.03.19)
(European Commission: New framework for Foreign Investment Screening, 05.03.19)
European Commission: Non-binding guidelines on the standardised presentation of the remuneration report under the Shareholder Rights Directive
On March 1, 2019 the European Commission launched a Consultation seeking feedback on draft Guidelines on the standardised presentation of the remuneration report under the Shareholder Rights’ Directive.
The aim of the Guidelines is to assist companies in disclosing clear, understandable, comprehensive and comparable information on individual directors’ remuneration which meets the requirements of Shareholder Rights’ Directive. The draft Guidelines provide direction on several matters, including the following
- Companies are required to provide a remuneration report annually to explain how the remuneration policy has been implemented in the most recent financial year under review. The report should follow the structure and order of presentation set out in the Guidelines. If there is nothing to report for a specific section, table or data field, such elements can be omitted from the remuneration report. However, companies are encouraged to explicitly state that they have nothing to report under a certain section or data field.
- The remuneration report should be clear, concise, meaningful and understandable. This should be taken into account when companies assess the need to include additional information not explicitly required in the Shareholder Rights’ Directive.
- Companies should be transparent on the methodology applied and maintain consistency over the reported financial years. Where the methodology has been changed compared with a previous remuneration report, a note would be helpful to explain the change and the effect of this change.
- The remuneration report should be self-standing and contain all the necessary information in one place. Nonetheless, besides the information regarding remuneration awarded or due during the reported financial year, the remuneration report could also include relevant background information via cross-references to published information, when appropriate, in order to avoid unnecessary duplications.
- All the monetary amounts in the remuneration report should be presented gross.
- To the extent applicable, the remuneration report should distinguish between directors with different functions (for example executive/non-executive or supervisory board member, CEO, CFO).
- Ex-post disclosure of performance targets could be provided to help establish the link between the remuneration of directors and the performance of the company.
Responses to the Consultation are requested by March 21, 2019.
(European Commission: Draft guidelines on the standardised presentation of the remuneration report under the Shareholder Rights Directive, 01.03.19)
(European Commission: Consultation on the draft guidelines on the standardised presentation of the remuneration report under the Shareholder Rights Directive, 01.03.19)