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Essential Corporate News – Week ending October 27, 2017

Publication October 27, 2017


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

FCA: Review of the effectiveness of primary markets: Enhancements to the Listing Regime – PS17/22

On October 26, 2017 the Financial Conduct Authority (FCA) published Policy Statement PS17/22 - Review of the effectiveness of primary markets: Enhancements to the Listing Regime.

PS17/22 sets out changes to the Listing Rules in a number of areas as summarised below, and follows on from CP17/4 which was published in February 2017.

Clarifications to Chapter 6 of the Listing Rules

In Chapter 2 of CP17/4 the FCA proposed various changes to Chapter 6 of the Listing Rules, intended to make the relevant provisions clearer and more transparent. The proposed changes included:

  • splitting the existing independence provisions in LR 6.1.4R into three distinct provisions to set out more clearly what an applicant has to demonstrate to meet the criteria;
  • redrafting and clarification of the financial track record requirements;
  • removing references to the FCA’s ability to waive the requirement for a clean working capital statement and to waive the financial track record requirements (on the basis that, in practice, they do not waive these requirements); and
  • new and amended technical notes in relation to the rules in this area.

The FCA confirms that, in light of the feedback received, it has finalised the rules as presented for consultation subject to minor clarificatory amendments.

In response to queries from some respondents about the removal of references to its ability to waive working capital/financial track record requirements, the FCA notes that this does not mean that its waiver power has been removed (as there is still a general ability for it to modify or dispense with rules under LR 1.2.1R) and that a new applicant would therefore still be able to seek a waiver, although it is noted that past experience suggests this would be highly unusual.

Concessionary routes to premium listing

In Chapter 3 of CP17/4 the FCA consulted on:

  • minor amendments to the existing concessionary routes to listing for mineral companies and scientific research-based companies arising from the proposed re-ordering and amendment of LR 6;
  • a new concessionary route to listing for certain types of property company; and
  • new and amended technical notes in relation to the rules in this area.

The FCA notes that feedback on the proposals was supportive and it has therefore finalised the rules as presented in the consultation.

Classifying transactions for premium listed issuers

In Chapter 4 of CP17/4, the FCA proposed:

  • certain changes to the profits test set out in Annex 1 to LR 10 – namely that premium listed issuers should be permitted, in each case without the need to consult the FCA in advance: (i) to disregard an anomalous profits test result of 25 per cent or more when all the other applicable class test results are below 5 per cent; and (ii) in limited circumstances to make specified adjustments to the figures used to calculate the profits test if the classification would otherwise be anomalous and above 25 per cent; and
  • moving certain guidance on the figures used for classification from technical note UKLA/TN/302.1 into the rules.

The FCA has finalised the revised rules as presented in the consultation. It also notes that, at this stage, it does not propose to issue further guidance on the meaning of “anomalous” (as its view is that sponsors are familiar with making judgments on whether the result of any class test is anomalous), but that it will monitor the situation when the new requirements are introduced and may produce further guidance should it identify the need in the future. It is also noted that sponsors can, as currently, seek guidance from the FCA if in doubt as to how any of the rules or guidance applies in a particular situation.

In the consultation the FCA had also asked whether there were any other possible enhancements respondents felt could be made to the calculation of the profits test or alternative profit measures that should be used either in conjunction with or in place of the profits test. However, since there was no agreement from stakeholders on which alternative profit measures to use instead of, or in conjunction with, profit before tax, the FCA is not planning to make any further changes to these rules at this stage.

Suspensions of listing for reverse takeovers

In Chapter 5 of CP17/4 the FCA proposed removing the rebuttable presumption of suspension in relation to reverse takeovers other than for shell companies (i.e. issuers whose assets consist wholly or predominantly of cash or short-dated securities or whose predominant objective is to undertake an acquisition or a merger or a series of acquisitions or mergers). Given the positive feedback received on these proposals, the FCA has finalised the rules as presented in the consultation.

Next steps

The new rules will take effect from January 1, 2018.

Companies seeking admission to premium listing after January 1, 2018 should prepare any submission regarding their eligibility on the basis of the new requirements as presented in PS17/22.

(FCA, Policy Statement – PS17/22, 26.10.17)

FCA: Reforming the availability of the information in the UK equity IPO process – PS17/23

On October 26, 2017 the Financial Conduct Authority (FCA) published Policy Statement PS17/23 – Reforming the availability of the information in the UK equity initial public offering (IPO) process. This follows on from Consultation Paper CP17/5 which was published in March 2017 and an earlier Discussion Paper (DP16/3) which was published in 2016. To see our briefing produced when CP17/5 was published earlier this year, please click here.

PS17/23 sets out a series of new Conduct of Business Sourcebook (COBS) provisions that are being introduced in relation to IPOs and which seek to ensure that, before any connected research is released, an approved prospectus or registration document is published and unconnected analysts have access to the issuer’s management. The rules are being introduced broadly as was proposed in CP17/5, subject to some minor technical amendments.

New COBS guidance is also being introduced to reflect the underlying conflicts of interest arising when analysts within prospective syndicate banks interact with the issuer’s representatives when an underwriting or placing mandate and subsequent syndicate positioning are being considered. Following feedback received from respondents to CP17/5, amendments have been made to the guidance in order to deal better with offerings where the issuer already has securities admitted to trading.

In CP17/5 the FCA also asked whether the new rules should apply to IPOs on multilateral trading facilities (MTFs) such as AIM. The FCA notes that feedback on this issue was mixed, and that it does not intend to apply the new rules to IPOs on MTFs at this point. However, given there is some overlap between larger companies on MTFs and smaller companies on regulated markets, the FCA encourages banks managing offerings on MTFs to consider adopting the reformed practice used on regulated markets.

PS17/23 also considers the application of the Market Abuse Regulation (MAR) to IPOs, including the application of the market soundings regime and the disclosure of information in analyst presentations. The FCA notes that its work assessing the implementation of MAR will consider these issues further.

Next steps

The FCA recognises the need for an implementation period in order to minimise potential disruption to existing or prospective IPOs. The new provisions will therefore take effect on July 1, 2018.

The FCA notes that this will provide a window for it to work with relevant trade associates to develop industry guidelines to support firms following the new rules requiring syndicate banks to provide unconnected analysts with management access.

(FCA, Policy Statement – PS17/23, 26.10.17)

FCA: Feedback Statement to DP17/2 Review of the effectiveness of primary markets: the UK Primary Markets Landscape – FS17/3

On October 26, 2017 the Financial Conduct Authority (FCA) published Feedback Statement FS17/3 – Feedback Statement to DP17/2 Review of the effectiveness of primary markets: the UK Primary Markets Landscape.

FS17/3 follows on from Discussion Paper DP17/2 which was published in February 2017 in order to prompt a broad debate about the effectiveness of UK primary capital markets and how they serve their purpose of providing access to capital for issuers, and investment opportunities for investors. DP17/2 presented four areas for discussion:

  • the current split between standard and premium listing with a focus on an international segment;
  • how to support the growth of science and technology companies;
  • the listing of debt securities and debt MTFs; and
  • retail investor access to debt markets.

FS17/3 provides a summary of the views received from respondents to DP17/2. It also focuses on three areas that the FCA thinks merit further exploration in light of such feedback, namely:

  • the relative positioning of standard versus premium listing and, in particular, the scope to raise minimum requirements in the standard list where these do not come from parts of EU Directives that require maximum harmonisation (note that the FCA has indicated it does not intend to do further work on an international segment at this time);
  • supporting the growth of science and technology companies, focusing on patient capital – the FCA proposes to continue to explore areas where improvements to the Listing Rules might facilitate the right environment for investment; and
  • retail access to debt markets.

Next steps

The FCA wants to further engage stakeholders on the three bullet points highlighted above and to publish proposals for consultation where appropriate in due course. The initial overview of the feedback received to DP17/2, which is contained in in FS17/3, is intended to aid such discussions. Persons who are interested in discussing any of these topics should contact the FCA at the email address set out in the Feedback Statement.

The FCA also notes that it will decide whether to proceed with the specific proposal on a sovereign controlled issuer category once feedback to that consultation (CP17/21, published in July 2017) has been considered.

(FCA, Feedback Statement – FS17/3, 26.10.17)

FRC: Annual review of corporate reporting 2016/2017

On October 23, 2017 the Financial Reporting Council (FRC) published its annual assessment of corporate reporting in the UK, based primarily on the FRC’s own monitoring work in the year to March 31, 2017 and more recently performed thematic reviews. The report is aimed at helping preparers and auditors aid companies in improving the quality of their reporting. The FRC notes that while the standard of corporate reporting, particularly by the largest listed companies, remains generally good, there is still more work to be done in improving the quality of reporting.

The report notes that companies should pay particular attention to the following four areas:

  • properly explaining and quantifying key judgements and estimates;
  • providing a fair and balanced assessment of performance and prospects that covers both positive and negative aspects;
  • ensuring the links between the financial statements and discussions of strategy, performance including Key Performance Indicators (KPIs), financial position and cash flows, including the use of alternative performance measurements, are clear; and
  • providing information that is company-specific and material to an understanding of the business, its performance and prospects.

Other areas the FRC comments on include the following:

  • Companies can expect to be questioned and encouraged to improve where their strategic report lacks balance. If changes in performance measures are reported, the reasons for the changes and their impact should also be reported.
  • Most companies reviewed reported on the continuing uncertainties resulting from the effects of the EU referendum and while many stated that it was too early to measure the longer term effects of the decision and how business strategies would be impacted, many are beginning to identify in more detail the specific nature of the likely risks. The FRC notes that it expects companies to provide increasingly focused disclosures, identifying the company specific risks and opportunities as the economic and political effects of the vote develop and become more certain.
  • The FRC notes that further improvements to the viability statement are needed, as many annual reports lack proper explanation as to how the company has carried out its analysis.
  • Reference should be made to the impact of climate change where relevant for an understanding of the company’s activities.
  • Companies have responded to investor calls to add clarity to disclosures around distributable profit/reserves but companies are urged to further enhance dividend disclosures such as information on distributable reserves, risks and constraints to the dividend policy and links to viability.
  • There is room for improvement in the quality of remuneration reporting. Companies are encouraged to demonstrate a link between strategy and remuneration in their annual reports and the FRC calls upon remuneration committees to improve quality by using their report to demonstrate accountability and justify the pay of their executives.

The report notes that expectations of corporate reporting are evolving with an increased demand for information about how a company promotes its long-term success in line with section 172 Companies Act 2006. Requirements are also changing alongside the implementation of new standards for Financial Instruments, Revenue from Contracts with Customers and Leases (IFRS 9, 15 and 16) and the Non-Financial Reporting Directive.

The report sets out a number of future developments that may affect corporate reporting in coming years, in particular, the implications of Brexit for the UK’s accounting framework and developments in relation to the FRC’s Guidance on the Strategic Report, in respect of which a consultation document was published in August 2017.

(FRC, Corporate Reporting Review – Technical findings 2016/17, 23.10.17)

(FRC, Annual review of corporate reporting 2016/17, 23.10.17)

FRC: Auditors and preliminary announcements – Feedback Statement

On October 24, 2017 the Financial Reporting Council (FRC) published its Feedback Statement following its consultation via a Discussion Paper published in April 2017 on the role of the auditor in preliminary announcements.

The FRC notes that the majority of respondents believe the current regime for preliminary announcements is adequate and does not require significant change. As a result, the FRC is proposing only minor changes to its current auditor guidance as follows:

  • it does not propose to convert the current guidance (Bulletin 2008/2) into an engagement standard;
  • the FRC sees a potential benefit to a formal requirement being established by the FCA/UK Listing Authority for auditors to follow the FRC’s guidance, or any potential engagement standard, when agreeing to the publication of preliminary announcements as this would formalise current arrangements, but this is something the FRC will have to discuss with the UK Listing Authority;
  • the FRC will revise the Bulletin to ensure it is relevant to all listed entities, including AIM companies;
  • the FRC does not propose to require auditors to have completed the statutory financial statement audit and sign the auditor’s report before agreeing to the publication of preliminary announcements. Nonetheless the FRC will continue to highlight that this is best practice and consistent with most market practice;
  • the FRC will amend its guidance to include a draft report which sets out clearly the status of the statutory financial statements and the procedures which the auditor has carried out to agree the publication of the preliminary announcement;
  • neither the definition of a preliminary announcement nor the scope of the engagement will be changed as part of the revision of Bulletin 2008/2 and there will be no significant changes to the guidance on materiality;
  • the FRC will make a final assessment of the viability of the option to encourage or require auditors to make an assessment of whether the material included within preliminary statements is “fair, balanced and understandable”, mirroring the UK Corporate Governance Code requirements in respect of the annual report, when its wider investor outreach is complete and its corporate reporting team, in liaison with the FCA/UK Listing Authority, has finalised any relevant proposals;
  • the FRC will not change its guidance to require auditors to have completed their review of “other information” before agreeing to the publication of preliminary announcements, although the FRC will reiterate its view that it is best practice for the audit to be complete and the auditor’s report to be signed before auditors agree to the publication of preliminary announcements;
  • the FRC will revise its guidance to reflect developments since 2007, including ESMA’s guidelines on alternative performance measures (APMs), to the extent that they are relevant to the auditor’s work on preliminary announcements.

(FRC, Auditors and Preliminary Announcements – Discussion Paper, 24.10.17)

Investment Association: FTSE companies asked to explain how they have tackled shareholder concerns

On October 26, 2017 the Investment Association (IA) announced that it is writing to FTSE companies that are due to appear on the Public Register of shareholder votes. The letter is being sent to companies in the FTSE All-Share who received votes of 20 per cent against any resolution or withdrew a resolution in 2017.

The Government announced the setting up of the Public Register in its August 2017 response to the Green Paper on corporate governance reform. The IA is prompting companies to provide a public explanation on how they have addressed their shareholders concerns since the shareholder vote before the Public Register goes live later this year. The main aim of the Public Register is to focus attention on those companies who have received a significant vote against and to track whether and how they are responding to shareholder concerns.

The Public Register will be launched in the fourth quarter of this year and will be updated regularly. The Public Register will include:

  • a description of the resolution;
  • the result of the shareholder vote;
  • a link to the AGM results announcement (including any statement the company has made under Provision E 2.2 of the UK Corporate Governance Code); and
  • a link to any further statement the company has made on the actions they have taken since the vote.

(IA, FTSE companies asked to explain how they have tackled shareholder concerns, 26.10.17)

EMSA: Updated Prospectuses Q&As

On October 20, 2017 the European Securities and Markets Authority (ESMA) updated its Questions and Answers (Q&A) on prospectus related issues.

This update includes the deletion of one Q&A (Q&A 27 on convertible or exchangeable securities) and updates to four others (Q&A 29,31,32 and 44):

  • Q&A 29: Conversion or exchange of non-transferable securities and exemption from publishing a prospectus – this now refers to point (b) of the first sub-paragraph of Article 1(5) of the Prospectus Regulation, rather than Article 4.2(g) of the Prospectus Directive.
  • Q&A 31: Exemption for admission to trading provided for in point (a) of the first sub-paragraph of Article 1(5) of Prospectus Regulation (EU) 2017/1129 – this has been amended to refer to point (a) of the first sub-paragraph of Article 1(5) of the Prospectus Regulation, rather than Article 4.2(a) of the Prospectus Directive, to refer to securities (rather than shares), and to update the dates and figures used to take account of the increased threshold for issuing securities without a prospectus in Article 1(5)(a) of the Prospectus Regulation.
  • Q&A 32: Exemptions from the obligation to publish a prospectus in Article 1(5) Prospectus Regulation (EU) 2017/1129 as stand-alone exemptions – this has been altered to refer to Article 1(5) of the Prospectus Regulation rather than Article 4 of the Prospectus Directive.
  • Q&A 41: Obligation to publish a prospectus for admission of securities to trading on a regulated market (Article 3(2) Directive) – this now clarifies that, for securities issued on or after July 20, 2017, ESMA maintains the view that exemptions in relation to offers and exemptions in relation to admission to trading are stand-alone, and that exempt offers under the Prospectus Regulation will require a prospectus for admission to trading unless one of the exemptions set out in points (a) to (c) of the first sub-paragraph of Article 1(5) of the Prospectus Regulation apply.

(ESMA, Press release, 20.10.17)

(ESMA, Prospectuses Q&A document, 20.10.17)

FCA: Handbook Notice 48 – Changes to Listing Rules

On October 20, 2017 the Financial Conduct Authority (FCA) published Handbook Notice 48, which includes changes to the FCA Handbook made by the FCA board on October 19, 2017. The changes include new Conduct of Business Sourcebook (COBS) provisions intended to improve the range, quality and timeliness of information that is made available to participants during the UK equity initial public offering (IPO) process, and changes to the Listing Rules to improve and clarify aspects of those rules.

New COBS provisions

These are set out in the Conduct of Business (Initial Public Offering Research) Instrument 2017 which will take effect from July 1, 2018. The changes were proposed in CP17/5, published in March 2017 and feedback has been provided in FS17/3 published in October 2017.

New Listing Rules provisions

These are set out in the Listing Rules Sourcebook and Fees Manual (Redesignation and Miscellaneous Amendments) Instrument 2017 which comes into effect on January 1, 2018. The changes were proposed in CP17/4 published in February 2017 and feedback has been provided in PS17/22 published in October 2017.

(FCA, Handbook Notice 48, 20.10.17)

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