Essential Corporate News – Week ending October 23, 2015

Publication October 23, 2015


Introduction

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

Takeover Panel: Response Statement 2015/1 – Dividends

On October 23, 2015 the Code Committee of the Takeover Panel (the Code Committee) published Response Statement 2015/1 following consultation on PCP 2015/1 published in May 2015 which contained proposed amendments to the Takeover Code (the Code) in relation to the treatment of dividends paid by an offeree company to its shareholders. The proposed amendments were intended primarily to clarify the application of existing provisions of the Code and to ensure greater alignment of the Code with the existing practice of the Panel Executive.

The Code Committee notes that respondents were generally supportive of the proposals. However, concern was expressed that a potential offeror that made a possible offer announcement which included the terms on which an offer might be made for the offeree company, but which (possibly as the result of an inadvertent mistake) did not reserve the right to reduce the offer consideration by the amount of all or part of a dividend subsequently paid by the offeree company, would not be permitted to introduce such a reservation in a subsequent firm offer announcement or offer document, and that this could result in potentially significant consequences for the offeror.

Having considered the responses to the consultation, the Code Committee has adopted the substance of the amendments to the Code which were proposed in PCP 2015/1. However, the Code Committee has decided that the new Note 4 on Rule 2.5, the new Note 4 on Rule 2.7 and the new Note 5 on Rule 24.3 should not be adopted in the forms proposed in the PCP. The Code Committee has instead concluded that, in summary, the Code should require an offeror, in a statement made under Rule 2.5(a)(i), a firm offer announcement and an offer document, to state that the offeror will have the right to reduce the offer consideration by the amount of any dividend (or other distribution) which is paid or becomes payable by the offeree company to offeree company shareholders, unless, and to the extent that, the offeror expressly states that offeree company shareholders will be entitled to receive all or part of a specified dividend in addition to the offer consideration.

A draft of an Executive Practice Statement in relation to the application of certain provisions of the Code to the payment of dividends by an offeree company was set out in Appendix C to PCP 2015/1. The Code Committee understands from the Panel Executive that, in view of the final form of the amendments to the Code adopted in this Response Statement, it considers that it is not currently necessary to publish a Practice Statement in this area.

The amendments to the Code will take effect from November 23, 2015.

(Takeover Panel, Response Statement 2015/1: Dividends, 23.10.15)

Takeover Panel: Response Statement 2015/2 - Restrictions and suspensions of voting rights

On October 23, 2015 the Code Committee of the Takeover Panel (the Code Committee) published Response Statement 2015/2. This follows the publication in July 2015 of PCP 2015/2 which contained proposed amendments to the definition of ‘voting rights’ in the Takeover Code (the Code). The changes relate to the treatment of restrictions and suspensions of voting rights for these purposes.

The proposed amendments in the consultation paper were intended to address two main points:

  • to make it clear that, where a shareholder is currently restricted from exercising the voting rights attaching to shares for any reason, those (restricted) voting rights should nevertheless be taken into account in considering the application of the Code to that person and other shareholders in the company (i.e. when calculating total voting rights and percentage interests therein); and
  • to eliminate the existing scope for a company to issue ‘suspended voting shares’ to avoid the normal application of Rule 9 of the Code. Suspended voting shares are shares which rank pari passu with the company’s voting ordinary share capital but (under the company’s articles of association) the holder of those shares is not entitled to vote them at a general meeting of the company other than on limited matters. However, such shares typically convert automatically into voting ordinary shares on a one-for-one basis upon their transfer to another person (other than certain designated categories of person).

In light of responses, the Code Committee has adopted the amendments to the Code proposed in PCP 2015/2 with some minor modifications. The changes will take effect on November 23, 2015.

Any company which has in the past issued suspended voting shares which remain in issue is advised to contact the Panel Executive to obtain a ruling regarding the application of the Code to the company, taking account of the facts of the particular case.

(Takeover Panel, Response Statement 2015/2: Restrictions and Suspensions of Voting Rights, 23.10.15)

Takeover Panel - Response Statement 2015/3 - Additional Presumptions to the Definition of Acting in Concert

On October 23, 2015 the Code Committee of the Takeover Panel (the Code Committee) published Response Statement 2015/3 following consultation on PCP 2015/3 published in July 2015 which contained proposed amendments to the definition of ‘acting in concert’ in the Takeover Code (the Code) through the introduction of three new categories of persons presumed to be acting in concert.

The definition of acting in concert under the Code currently includes six categories of person who the Panel Executive will presume to be acting in concert with other persons in the same category (although these presumptions are capable of being rebutted). It has been the Panel Executive’s practice for a number of years to also presume certain other categories of persons to be acting in concert with each other even though they are not specifically covered by the existing presumptions in the definition. Although the Code Committee considers practitioners are generally aware of the Panel Executive’s approach in respect of these groups, it believes that this approach should be codified and so proposed to introduce three new presumptions to the definition such that the following categories of persons will be presumed to be acting in concert:

  • a person, the person’s close relatives, and the related trusts of any of them, all with each other;
  • the close relatives of a founder of a company to which the Code applies, their close relatives, and the related trusts of any of them, all with each other; and
  • shareholders in a private company who sell their shares in that company in consideration for the issue of new shares in a company to which the Code applies or who, following the re-registration of that company as a public company in connection with an IPO or otherwise, become shareholders in a company to which the Code applies.

It is also proposed to include a definition of the term ‘close relatives’ clarifying that this will normally include: (a) the person’s spouse, civil partner or co-habitant; (b) the person’s children, parents, brothers, sisters, grandchildren and grandparents, and those of any person described in (a); and (c) the spouse, civil partner or cohabitant of any person described in (b).

Having considered the responses to the consultation, the Code Committee has adopted the amendments to the Code proposed in PCP 2015/3 and the amendments will take effect on November 23, 2015.

(Takeover Panel, Response Statement 2015/3: Additional Presumptions to the Definition of Acting in Concert, 23.10.15)

FRC: Corporate Reporting Review – Annual Report 2015

On October 22, 2015 the Financial Reporting Council (FRC) published its corporate reporting review. This report provides an overview of the corporate reporting review activities of the FRC for the year ended 31 March 2015. The report:

  • includes the FRC’s assessment of the quality of corporate reporting in the UK, based on the results of its work;
  • sets out its findings;
  • explains how the FRC approached the year’s focus areas;
  • identifies the FRC’s current and likely future focus areas;
  • includes case studies illustrating its approach to selected areas of focus; and
  • highlights those areas where the FRC most often challenged companies during the year.

The FRC makes the following comments on several key areas:

  • The quality of corporate reporting: The overall quality of corporate reporting is generally good, but the FRC has a potential concern about how some boards assess materiality, which should not be used to conceal errors or achieve a particular presentation. Boards need to look at issues through the 'right lens', focussing on what investors expect to see. The FRC will continue to monitor this by liaising with its own and others’ audit regulators.
  • Smaller companies: Some smaller companies fail to explain their story and comply fully with the relevant standards.Smaller companies are also more likely to have inadequate explanation of their results and descriptions of principal risks in their strategic reports. The FRC will continue to question smaller companies proportionately.
  • The new consolidation, joint venture and associate accounting standards: Boards made appropriate effort to implement the new consolidation, joint venture and associate accounting standards, and to produce the new strategic report. The implementation of 'de facto' consolidation requirements was generally successful and most companies effectively explained their strategy and described their business model.
  • Investor interest and diversity in accounting for pension deficit funding commitments: This means that boards need to explain judgements made around pension assets or excess deficit funding liabilities and disclose the amount of deficit funding obligations.
  • The FRC concluded its enquiries into the reports and accounts of Quindell Plc, blur Group plc and fastjet Plc: The FRC found that these entities made material restatements to their reports and accounts and that six additional companies agreed to refer to FRC enquiries in their accounts, following significant changes.
  • The FRC’s call for improved disclosures about complex supplier arrangements: This resulted in a good response and the FRC identified improved narrative disclosures. However the FRC wishes to remind boards that they need to discuss the effect of changes in estimates.
  • Strategic reports: The FRC encourages boards to create comprehensive strategic reports by focussing on relevant disclosures, not including extraneous material, and to cover the position at the end of the year as well as the full year’s performance.

The FRC’s 2015/16 reviews

The FRC comments that it spends an increasing proportion of its time evaluating the significant accounting judgements that boards make and the quality of their conclusions, as these areas are important to investors. These significant judgements involve the consideration of materiality. Boards should consider both the quantitative and qualitative aspects of materiality when making judgements. The FRC may challenge these conclusions, particularly if it believes the board may be using a quantitative materiality argument to achieve a particular accounting treatment, to justify giving insufficient prominence to relevant information or to avoid the transparency surrounding an error correction. The FRC reminds boards that an error can be less than a previously calculated quantitative threshold for materiality but still be material in nature when the issue is relevant to investors.

The FRC’s 2015/16 reviews will also be influenced by macro-economic factors that may affect corporate reporting in the UK, specifically:

  • Volatility in commodity prices and in equity and bond markets may affect asset valuations. Disclosures of measurement sensitivity will be particularly important, including short-term estimation uncertainty for assets directly affected and whether reasonably possible changes in sensitivities would result in goodwill impairment.
  • Tax uncertainties may be increasing given recent challenges by global and European institutions and national governments. Disclosures of tax risks, accounting policies, judgements and estimates will be increasingly important.

Areas of corporate reporting most frequently raised

The FRC identified the following areas of corporate reporting that were most frequently raised with companies during the year and it includes case studies in some areas to explain its approach and views:

  • Strategic reports;
  • Accounting policies;
  • Critical judgements;
  • Clear and concise reporting;
  • Business combinations;
  • Exceptional and similar items;
  • Revenue;
  • Pensions;
  • Taxation;
  • Cash flow statements.

The FRC also published the technical findings of the Conduct Committee’s Financial Reporting Review Panel (the Panel). The Panel summarises the resolution of certain issues arising from the reviews undertaken in the past year and reminded quoted companies that paragraph 8(c) of Section 414 C of the Companies Act 2006 requires absolute numbers of employees of each sex at various levels within the company to be disclosed and of the requirements in Schedule 7 of SI 2008/410 to disclose greenhouse gas emissions. The Panel also identified companies that did not disclose an intensity ratio, the methodology used or total emissions in CO2 equivalent.

(FRC, Corporate Reporting Review - Annual Report 2015, 10.15)


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