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Essential Corporate News – Week ending March 31, 2017

Publication March 31, 2017


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

FCA: Final Notice – Tesco PLC and Tesco Stores Limited

On March 28, 2017 the Financial Conduct Authority (FCA) published a Final Notice setting out its reasons for requiring both Tesco PLC and Tesco Stores Limited to pay compensation (by way of restitution) to certain shareholders and bond holders in accordance with the arrangements set out in Annex 2 to the Final Notice.


On August 29, 2014 Tesco PLC published a trading update, stating that it expected trading profits for the six months ending August 23, 2014 to be in the region of £1.1 billion (August Statement). The Tesco PLC board relied on incorrect information from Tesco Stores Limited in issuing the August Statement. Tesco PLC published a further trading update on September 22, 2014 (September Statement) in which it announced an over-statement of expected profits for the half year. Information in the August Statement gave a false or misleading impression as to certain Tesco PLC shares and group bonds, and this constituted engagement in market abuse on the part of Tesco PLC and Tesco Stores Limited contrary to section 118(7) Financial Services and Markets Act 1986 (FSMA).

FCA’s findings

The FCA notes in the Final Statement that there is no suggestion any Tesco board member knew, or could reasonably be expected to have known, that the information in the August Statement was false or misleading. However, the FCA has found that there was knowledge at a sufficiently high level but below the level of the Tesco PLC board as to the false or misleading nature of the August Statement for that knowledge to constitute the knowledge of Tesco PLC, within the specific context of, and for the purpose of, market abuse. As a result of the market abuse, a false market was created in relation to certain shares and group bonds which substantially came to an end when the September Statement was published. As a result, the FCA has exercised its power under section 385(5) FMSA to require Tesco PLC and Tesco Stores Limited to pay restitution to investors who were net cash purchasers of Tesco shares between August 29 and September 19, 2014 or net purchasers of certain Tesco listed bonds between those dates and suffered loss, in accordance with the arrangements set out in Annex 2 to the Final Notice. Losses mitigated by hedging are not covered by the compensation arrangements.

The FCA notes that Tesco Stores Limited has entered into a deferred prosecution agreement with the Serious Fraud Office and that it will pay a substantial penalty pursuant to that agreement. It notes that both Tesco PLC and Tesco Stores Limited have co-operated in an exemplary manner with the FCA and taken steps to ensure similar misconduct will not occur in future and so the FCA has decided not to impose a further financial penalty on either Tesco Stores Limited or Tesco PLC. In terms of co-operation, the Final Notice states that both companies were proactive in offering information to the FCA, responded promptly and constructively to requests made of them, refrained (at the FCA’s request) from interviewing witnesses or taking statements and disclosed voluntarily material which appeared to them to be significant to the FCA’s enquiries.

Restitution scheme

Annex 2 to the Final Notice sets out the arrangements for the restitution scheme. These include the following:

  • information about the Fund Administrator, which will be KPMG;
  • identification of a notification to potential claimants;
  • claims process;
  • plan of compensation;
  • payment process;
  • termination of the scheme; and
  • reporting.

Annex 2 also includes the form of release which eligible claimants who wish to accept an offer will need to sign and return to the Fund Administrator as a condition of receiving a compensation payment.

(FCA, Final Notice: Tesco PLC and Tesco Stores Limited, 28.03.17)

SFO: Confirmation of DPA in principle with Tesco

On March 28, 2017 the Serious Fraud Office (SFO) confirmed that it had reached an agreement with Tesco Stores Limited which, if approved by the Crown Court at a public hearing on April 10, 2017, will result in a Deferred Prosecution Agreement becoming effective.

The SFO has also confirmed that, if approved, the Deferred Prosecution Agreement will result in Tesco Stores Ltd paying both a financial penalty of £128,992,500 and the SFO’s full costs.

(SFO, SFO confirms DPA in principle with Tesco, 28.03.17)

ICSA: Terms of reference for the audit committee – Guidance note

In March 2017, the Institute of Chartered Secretaries and Administrators (ICSA) published a revised guidance note on the terms of reference for audit committees. It reflects the changes to the UK Corporate Governance Code (Code) published in April 2016 and to the Guidance on Audit Committees published by the Financial Reporting Council (FRC) in April 2016.

Key changes to the model terms of reference include the following:

  • Where possible the audit committee should include a member of the remuneration committee so as to address the issue of board committees working independently while having some overlapping agenda items.
  • A provision permitting notices, agendas and supporting papers to be sent electronically to recipients who have agreed to electronic receipt is included. 
  • In terms of financial reporting, it is made clear that the audit committee should review any other statements requiring board approval which contain financial information first, where to carry out a review prior to board approval would be practicable and consistent with any prompt reporting requirements under any law or regulation, including the Listing Rules and Disclosure Guidance and Transparency Rules.
  • In advising the board on whether the annual report and accounts is fair, balanced and understandable and provides shareholders with the information necessary to assess the company’s performance, business model and strategy, the audit committee should also advise whether it informs the board’s statement in the annual report on these matters as required under the Code.
  • As well as keeping under review the company’s internal financial controls, the audit committee should keep under review the systems that identify, assess, manage and monitor financial risks and the viability statement is added to the list of statements in the annual report that the audit committee should review and approve. 
  • In terms of the internal audit, the audit committee should approve the internal audit charter annually, review and approve the annual internal audit plan, ensure internal audit has unrestricted scope and ensure there is open communication between different functions. It should also ensure it is satisfied that the quality, experience and expertise of internal audit is appropriate for the business, review management’s actions to implement internal audit’s recommendations and consider whether an independent third party review of internal audit processes is appropriate.
  • In relation to the external audit, the terms of reference refer to the FRC Ethical Standard published in June 2016. In relation to developing and recommending to the board a formal policy on the provision of non-audit services by the auditor, the terms of reference reflect the FRC’s 2016 Guidance on Audit Committees.
  • When the audit committee works and liaises with other board committees, it should take particular account of the impact of risk management and internal controls being delegated to different committees.

(ICSA, Guidance note: Terms of reference for the audit committee, 30.03.17)

FCA: Primary Market Bulletin No. 17

On March 30, 2017 the Financial Conduct Authority (FCA) published its Primary Market Bulletin No. 17. The Bulletin covers several different topics.

Feedback on the FCA’s call for views on sponsor conflicts

The FCA notes that it has recently completed discussions with stakeholders focused on the rules and guidance on sponsor conflicts of interest in Chapter 8 of the Listing Rules. In 2014 the FCA published a Call for Views (CFV) in CP14/21 ‘Feedback and Policy Statement on CP14/02, consultation on joint sponsors and call for views on sponsor conflicts’. In this Bulletin the FCA highlights the key themes which emerged from the responses to the CFV and its discussions with stakeholders more generally, and sets out its proposed response to them. The FCA is consulting on a new guidance note – Technical Note (TN) 701.3 – which will replace the existing guidance on sponsor conflicts in TN 701.2.

FCA’s proposed new guidance on sponsor conflicts

The FCA is proposing to provide guidance in TN 701.3 which modifies and updates existing guidance in TN 701.2. Its proposals are summarised below:

  • Perceived conflicts – the ‘perception test’ and the reasonable market user – In order to introduce a level of objectivity to the assessment of perceived conflicts, the FCA proposes that sponsors should assess the circumstances from the point of view of a theoretical reasonable market user; a sponsor should consider whether, irrespective of any arrangements it may have in place to manage the conflict, a perception remains that it may not be able to perform its functions properly. 
  • Identifying conflicts – factors to take into account when a transaction involves the provision of finance – As a basic premise, the FCA accepts that there can be an alignment of interest between the provision of sponsor services and the provision of non-sponsor services (for example, underwriting or financing) to an issuer. However, the FCA considers that the interests of a firm acting as lender and sponsor may be misaligned and conflicts that could adversely affect the ability of a sponsor to perform its functions properly, or market confidence in sponsors, are more likely to arise in a lending scenario. TN 701.3 sets out that, in relation to the provision of finance by a sponsor group, the FCA expects the firm to assess all the circumstances when determining whether a conflict exists and whether it can manage the conflict in a way that does not adversely affect either the sponsor’s ability to perform its functions properly or market confidence in sponsors. In response to sponsors’ request for clarity in relation to ‘materiality’ of loan size, proposed TN 701.3 sets out that, where a sponsor or sponsor’s group is proposing to make a loan to an issuer in connection with a sponsor service (for example, in relation to a merger or acquisition transaction) which is of strategic importance to the sponsor group due to its size, a conflict (or perceived conflict) can arise. Therefore, where the amount of a loan (prior to syndication) is equal to or in excess of 0.5% of the sponsor group’s total assets by reference to its last published consolidated accounts, the sponsor should contact the FCA prior to accepting the sponsor appointment. 
  • Systems and controls/organisational and administrative arrangements – Proposed TN 701.3 acknowledges that contact between the sponsor team and another part of the sponsor group (e.g. the area of the sponsor or sponsor’s group responsible for a loan) may be appropriate in circumstances where the sponsor team needs factual information about the existence and type of finance being provided by the sponsor’s group. When this is the case, such contact should be carefully managed.
  • When to contact the FCA – Sponsors (and their representatives) who responded to the CFV requested more guidance on the circumstances in which they should contact the FCA to discuss conflicts of interest and what to expect when such contact is made. TN 701.2 currently sets out that where a sponsor is reasonably satisfied, either that no conflict exists or that it can manage the conflict, the FCA does not ordinarily expect it to contact the FCA. This position in proposed TN 701.3, but a number of exceptional circumstances are set out where the FCA would ask that a sponsor contact it at the earliest opportunity. These circumstances include where the size of a proposed loan meets the new metric outlined above and where, in the context of a related party transaction, a sponsor firm proposes to provide a fair and reasonable opinion and is also acting in another capacity, such as providing acquisition finance, for the related party or other party to the transaction.

UK Financial Reporting Standards (FRS) 102

FRS 102, which took effect in 2015, exempts investment funds that meet certain conditions from preparing statements of cash flows. However, Annex 1 Part 20.1 of the Prospectus Directive requires that audited financial information in a prospectus prepared according to national accounting standards must include a cash flow statement. The FCA is considering the interaction of these requirements. In the meantime, should specific guidance on this matter be required, a written request for guidance should be submitted detailing the facts of the particular case, in accordance with Chapter 9 of the Supervision manual (SUP).

New TR-1 form

On October 22, 2015, the European Securities and Markets Authority (ESMA) published a new standard form for the notification of major holdings. On implementation of the Transparency Directive Amending Directive (2013/50/EU) (TDAD), Policy Statement PS15/26 (Implementation of the Transparency Directive Amending Directive (2013/50/EU) and other Disclosure Rule and Transparency Rule changes) referenced this new standard form and the FCA advised it would implement this and discontinue use of the current TR-1 form in the future. The FCA now proposes that the new TR-1 form will come into force on June 30, 2017 which will give vote holders time to make any necessary amendments to their current notification procedures.

Member States have discretion to make changes to the ESMA standard notification form as they see appropriate. In the UK, the FCA has decided to make some amendments to the content of the form as follows:

  • include a new box to identify non-UK issuers;
  • include a box to indicate the date on which issuer was notified (to reflect the current TR-1 form requirement); and
  • include an email address to which the form and annex should be sent to the FCA (

The FCA encourages issuers to send the TR-1 form to it in Microsoft Word format, as opposed to readable PDF.

Legal Entity Identifiers (LEIs)

In Chapter 6 of Quarterly Consultation Paper No. 15 (QCP) published in December 2016, the FCA consulted on proposed changes to the Disclosure Guidance and Transparency Rules sourcebook following the adoption of the RTS by the European Commission and its publication in the Official Journal. Those proposed changes consisted of adding new rules in DTR 6.2 under the heading ‘Filing of information with FCA’ to require issuers to supply a legal entity identifier (LEI) and classify regulated information according to the RTS Annex when they file regulated information with the FCA.

The consultation period for this chapter of the QCP is now closed and the FCA is currently analysing the feedback received with the aim of publishing feedback in a Handbook Notice shortly. However, the FCA encourages issuers to consider what arrangements they will need to have in place so that, if and when the rule comes into force, they are able to comply, and even though there is no obligation for issuers to provide LEIs or classify regulated information yet, the FCA encourages issuers to do so as it will ensure that regulated information which they file will be searchable through the European electronic access point when it becomes operational.

Consultation feedback and changes to the Knowledge Base

The FCA is consulting on the addition of a new procedural note on the procedural mechanics of replacing a debt issuer on the Official List through a substitution and on amendments to the following two existing technical notes:

  • Sponsors: conflicts of interest (UKLA/TN/701.3); and 
  • Shareholder obligations (UKLA/TN/543.3).

Confirmed changes to the Knowledge Base include the following:

New technical notes

  • Reverse takeover and uncapped consideration (UKLA/TN/314.1);
  • Financial information on guarantors in debt prospectuses and requests for omission (UKLA/TN/634.1);
  • Shareholder votes in relation to hypothetical transactions (UKLA/TN/312.1);
  • Removal from the Official List of listed equity shares of individual funds (individual sub-funds) of Open-ended Investment Companies (OEICs) (UKLA/TN/424.1);
  • Open-ended investment companies and transfer restrictions (UKLA/TN/425.1);
  • Sponsors: Application of principle to deal with the FCA in an open and co-operative manner (UKLA/TN/713.1); and
  • Sponsors: Record Keeping Requirements (UKLA/TN/717.1).

Amended technical and procedural notes

  • Eligibility process (UKLA/PN/901.3);
  • Listing securities via final terms (UKLA/PN/902.2);
  • Review and approval of documents (UKLA/PN/903.3);
  • Public offer prospectus – drafting and approval (UKLA/PN/904.3);
  • Passporting (UKLA/PN/905.2); 
  • Additional powers to supervise sponsors (UKLA/PN/910.2);
  • Compliance with the Listing Principles and Premium Listing Principles (UKLA/TN/203.3);
  • Reverse takeovers (UKLA/TN/306.3);
  • Related party transactions - Modified requirements for smaller related party transactions (UKLA/TN/308.3);
  • Preliminary statement of annual results (UKLA/TN/502.2);
  • Assessing and handling inside information (UKLA/TN/521.3);
  • Disclosure of lock-up agreements (UKLA/TN/522.2);
  • Final Terms (UKLA/TN/629.3);
  • Significant change statements (UKLA/TN/628.2);
  • Sponsor's role on working capital confirmations (UKLA/TN/704.3); and 
  • Additional powers to supervise and discipline sponsors (UKLA/TN/712.2).

Deleted technical notes

  • Share buyback programmes (UKLA/TN/201.1);
  • Close periods (UKLA/TN/505.1); and 
  • Transactions by persons discharging managerial responsibilities and their connected persons (UKLA/TN/540.2).

(FCA, Primary Market Bulletin No. 17, 30.03.17)

Department for Exiting the European Union: White Paper on Legislating for the UK's Withdrawal from the European Union

On March 30, 2017 David Davis, the Secretary of State for Exiting the European Union, presented the Government's White Paper on legislating for the UK's withdrawal from the EU to Parliament. The White Paper follows the notification given by the Prime Minister on March 29, 2017 of the UK's intention to leave the EU and the triggering of the procedure under Article 50 of the Treaty on European Union.

The White Paper sets out the Government’s intended approach to the Great Repeal Bill. This includes:

  • repealing the European Communities Act 1972 on the day the UK leaves the EU;
  • converting existing EU law into domestic UK law so that wherever practical and sensible, the same laws and rules will apply immediately before and immediately after the UK’s departure; and
  • creating powers for the Government to make secondary legislation which will enable corrections to be made to the laws that would otherwise no longer operate appropriately once the UK has left the EU, and in order to reflect the content of any withdrawal agreement.

The White Paper also sets out the Government’s strategy for interaction with the devolved administrations, Crown dependencies and overseas territories.

For more information, see our Inside Brexit blog and our Brexit website.

(Department for Exiting the European Union, Legislating for the United Kingdom’s withdrawal from the European Union, 30.03.17)

BEIS: FTSE 350 chief executives urged to improve diversity and inclusion

On March 28, 2017 the Department for Business, Energy and Industrial Strategy (BEIS) announced that Business Minister Margot James has written to the chief executives of all FTSE 350 companies urging them to improve diversity and inclusion in the workplace, and referring them to the key recommendations made in the McGregor-Smith Review of February 2017.
Companies are encouraged to:

  • publish a breakdown of their workforce by race and pay;
  • set aspirational targets; and
  • nominate a board member to deliver on those targets.

(BEIS, Business Minister urges FTSE 350 to improve diversity and inclusion, 28.03.17)

Financial Reporting Lab: Call for participants in risk and viability reporting

On March 16, 2017 the Financial Reporting Lab published a lab project call for listed companies, investors and analysts to participate in a project on risk and viability reporting. This project follows the publication of the Lab report on business model reporting which was published in October 2016. The new report will explore how companies can develop effective principal risk reporting and viability statement reporting to meet the needs of investors.

While the scope of the project may evolve to explore the needs of companies and investors identified during the project, it is expected to examine characteristics including:

  • how companies identify their principal risks, the controls that mitigate the risks and how they are communicated;
  • the linkages to the business model, strategy and other parts of the annual report;
  • how companies develop the viability statement and how this links to the risk and control framework;
  • communication of key judgements made, including any qualifications and assumptions, and the rationale for the number of years the statement is covering; 
  • communication of the approach to modelling and stress testing; and 
  • how investors use principal risk disclosures and viability reporting to inform investment decisions and their stewardship of companies.

The Lab is requesting that companies, investors and analysts indicate their interest in participating by April 21, 2017 as the project will commence in May 2017. It is hoped that the results of the project will be published in time to assist those preparing December 2017 year-end annual reports.

(Financial Reporting Lab, Lab Project Call for Participants: Risk and viability reporting, 16.03.17)

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