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Essential Corporate News – Week ending April 1, 2016

Publication April 1, 2016


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

PRA: Supervisory Statement on corporate governance and board responsibilities

On March 31, 2016 the Prudential Regulation Authority (PRA) published Policy Statement PS13/16 setting out responses to feedback on its May 2015 consultation on corporate governance and board responsibilities, CP18/15, together with a final Supervisory Statement on board responsibilities, SS5/16.The Supervisory Statement identifies, for PRA-regulated firms, those aspects of governance to which the PRA attaches particular importance and to which it will pay particular attention in its supervisory role. The PRA notes that an effective board is one which establishes a sustainable business model and a clear strategy consistent with that model, articulates and oversees a clear and measurable statement of risk appetite against which major business options are actively assessed, meets its regulatory obligations, is open with the regulators and sets a culture that supports prudent management.

The Supervisory Statement covers the following areas:

  • Setting strategy – A key role of the board is to set the firm’s strategy, to ensure that key goals in that strategy are within the agreed risk appetite and oversee executive implementation of that strategy. While the strategy must be owned by the whole board, the chairman and chief executive have key roles to play in this area.
  • Culture -  The board should articulate and maintain a culture of risk awareness and ethical behaviour for the entire organisation to follow in pursuit of its business goals.
  • Risk appetite, risk management and internal controls - The business strategy should be supported by a well-articulated and measurable statement of risk appetite, which is clearly owned by the board, integral to the strategy the board has signed off and actively used by them to monitor and control actual and prospective risks and to inform key business decisions.
  • Board composition - The principles of good governance should apply to all boards, including parent and subsidiary companies. In the case of listed firms, established best practice is that at least half of the board, excluding the chairman, is comprised of independent non-executives, but even smaller firms should ensure that they have at least two independent non-executives. The PRA also expects firms to have a non-executive chairman, who is independent on appointment, in line with the UK Corporate Governance Code.
  • The respective roles of executive and non-executive directors - Unitary boards comprise a combination of executive and non-executive directors. Executive directors have specific management responsibilities for which they are accountable to the board and non-executive directors’ responsibilities require them to both support and oversee executive management.
  • Knowledge and experience of non-executive directors - Between them the non-executive directors need to have sufficient current and relevant knowledge and experience, including sector experience, to understand the key activities and risks involved in the business model and to provide effective challenge across the major business lines of the firm.
  • Board time and resources - Non-executive directors should ensure they have sufficient time to fulfil their duties and boards should set clear expectations when recruiting new non-executives.
  • Management information and transparency - The PRA considers the provision to the board by executive management of timely, accurate, complete and relevant management information, including the aggregation of exposures across businesses, to be a fundamental component in supporting the board to fulfil its duties and responsibilities.
  • Succession planning - The PRA expects boards to pay close attention to the skills, experience and effectiveness of its members. Boards should ensure they have robust succession plans that recognise current and future business needs and requirements.
  • Remuneration - The PRA expects boards to oversee the design and operation of the firm’s remuneration system, ensuring the incentives are aligned with prudent risk taking.
  • Subsidiary boards - The PRA recognises the fiduciary duties of directors of subsidiaries, including the duty of company directors to promote the success of the company for the benefit of its shareholders. However, subsidiary boards must be capable of acting in the best interests, and safeguarding the safety and soundness, of the firm for which they are responsible. In general, therefore, the principles of good governance also apply to significant PRA-regulated subsidiaries, including independence of the chairman and having a substantial and effective independent presence across the board.
  • Board committees - The role of a board sub-committee is to support the board. Committees are accountable to the board, but should not relieve the board of any of its responsibilities.

In PS13/16 the PRA notes that responses were generally supportive of the approach taken in CP18/15 though there were requests for additional clarity on certain points that the PRA has taken account of in the Supervisory Statement. While the Supervisory Statement underscores the collective responsibilities of board members, it complements the individual accountabilities introduced through the Senior Managers and Senior Insurance Managers Regimes.

(PRA, Policy Statement PS13/16 Corporate governance: Board responsibilities, 31.03.16)

(PRA, Supervisory Statement SS5/16 Corporate governance: Board responsibilities, 31.03.16)

FCA: Primary Market Bulletin No. 13

On March 29, 2016 the Financial Conduct Authority (FCA) published the thirteenth edition of its Primary Market Bulletin, which consults on a large number of changes to the UKLA Knowledge Base.

The proposals include the following changes:

  • As a result of the amendments to the Prospectus Rules arising from Commission Delegated Regulation (EU) No. 2016/301 regarding the approval and publication of prospectuses and advertisements, which came into force on March 24, 2016, the FCA proposes changes to several Procedural Notes to ensure they are in line with this Regulation and the updated Prospectus Rules. These Procedural Notes are UKLA/PN/901.3 (eligibility process), UKLA/PN/903.3 (review and approval of documents), UKLA/PN/904.3 (public offer prospectus – drafting and approval), and UKLA/PN/905.2 (passporting).
  • As changes have recently been made by Directive 2014/51/EU to the requirements of the Prospectus Directive regarding the filing and communication of final terms, the FCA proposes including additional text in UKLA/PN/902.2 (listing securities via final terms) which explains the interaction of these different requirements.
  • Under the concurrency provisions in the Financial Services and Markets Act 2000 (FSMA), the FCA has competition law powers, including powers under the Competition Act 1998 in relation to agreements and conduct relating to the provision of financial services (which includes the provision of sponsor services). The FCA is bound by statutory provisions to give ‘primacy’ to Competition Act enforcement in certain situations. The FCA aims to exercise its functions as transparently as possible, recognising the importance of ensuring that appropriate information is provided on its decision-making process and being open and accessible to stakeholders. As such, the FCA has updated UKLA/PN/910.2 (additional powers to supervise sponsors) and UKLA/TN/712.2 (additional powers to supervise and discipline sponsors) to include reference to the Competition Act primacy obligation whenever considering using its powers under FSMA.

The FCA also proposes the addition of several new Technical Notes as follows:

  • UKLA/TN/312.1 – Shareholder votes in relation to hypothetical transactions, clarifying the position on early production of circulars required for voting purposes;
  • UKLA/TN/314.1 - Reverse takeovers and uncapped consideration, clarifying how uncapped consideration may affect the classification of a transaction as a reverse takeover;
  • UKLA/TN/242.1 - Removal from the Official List of listed equity shares of individual funds of Open-Ended Investment Companies (OEICs), which makes the position of OEICs clearer, and removes listed equity shares of individual sub-funds from the Official List;
  • UKLA/TN/425.1 - Open-ended investment companies and transfer restrictions, which highlights a scenario in which an issuer may not be able to meet Listing Rule requirements; and
  • UKLA/TN/717.1 - Sponsors: Record keeping requirements, providing additional guidance on the application of the record keeping requirements in LR8.6.16AR and supplements the guidance in LR8.6.16BG and LR8.6.16CG.

The FCA is also re-consulting on the addition of new Technical Note, UKLA/TN/713.1 (Sponsors: Application of principle to deal with the FCA in an open and co-operative manner), which was initially proposed in Primary Market Bulletin No. 7 and has been amended, following feedback received and the FCA's resulting update of the guidance.

Additionally, the FCA confirms that it has made changes to the Knowledge Base as proposed in Primary Market Bulletin No.12, including the amendment of one existing Procedural Note, the re-consultation on one new Technical Note, initially proposed in Primary Market Bulletin No. 11, and the amendment of thirteen existing Technical Notes.

The FCA also notes that it is giving further consideration to the feedback received on Technical Note UKLA/ TN/541.2 (Scope and application of vote holder and issuer notification rules) in Primary Market Bulletin No.12 and intends to respond to it in the next Primary Market Bulletin.

The FCA has requested comments on these proposals by May 10, 2016.

(FCA, Primary Market Bulletin No. 13, 29.03.16)

HM Treasury: Government response to consultation on changing legislation for private equity investments

On March 24, 2016 HM Treasury published a summary of responses to its July 2015 consultation on using a Legislative Reform Order (LRO) to amend the Limited Partnerships Act 1907 for private equity investments so as to ensure that limited partnerships remain the market standard for European private equity and venture capital funds, together with the Government's responses to the comments received.

The Government intends to put forward draft legislative amendments in an LRO to be laid before Parliament in due course, with the intention being that the changes should be fully operational within a year.

Having listened to respondents’ concerns about some of the proposed changes, the Government has made changes to the details of some of the proposals, including the following:

  • The Government will remove the requirement for a solicitor’s certificate and instead require the general partner to confirm that the partnership fulfils the requirements to qualify as a Private Fund Limited Partnership (PFLP) at the point of registration.
  • The one year transition period will be removed, so that a limited partnership will always have the option of applying for PFLP status if it fulfils the required criteria. However, when a partnership becomes a PFLP, it will not be able to return to limited partnership status.
  • With respect to the definition of a collective investment scheme, the Government understands concerns about the burden and complexity involved in ascertaining whether a fund falls into one of the exceptions under section 235(5) Financial Services and Markets Act 2000. A limited partnership which would meet the definition of a collective investment scheme but for one of the exceptions will fall under the PFLP structure.
  • The Government will amend the white list of activities that a limited partner may undertake without being considered to take part in the management of the business to ensure the list is not exhaustive, to clarify the rights of limited partners in relation to an underlying fund within a feeder fund, to ensure that the creation of a white list does not mean that the activities on the list are permissible for limited partners by right, and to clarify that the list does not create any adverse presumptions for limited partners in other limited partnerships.
  • The Government has decided to carve out a different treatment for limited partnerships established prior to the implementation of the LRO. If the limited partnership was established prior to the LRO coming into force, capital contributions made prior to the limited partnership transferring into the PFLP regime will be treated as under the former regime. Capital which is contributed after the designation as a PFLP will be permitted to be withdrawn without liability, and without the declaration requirement. However, in the case of limited partnerships which are registered after the enactment of the LRO, if the partnership transfers to PFLP status, the treatment of capital contributions will also transfer so that all of the capital (whether contributed before or after designation as a PFLP) does not need to be declared and is withdrawable.

(HM Treasury, Proposal on using Legislative Reform Order to change partnership legislation for private equity investments: summary of consultation responses, 24.03.16)

FRC: Revised operating procedures for reviewing corporate reporting

On April 1, 2016 the Conduct Committee of the Financial Reporting Council (FRC) published a revised version of its operating procedures for reviewing corporate reporting. The changes to the operating procedures, which take effect immediately, primarily reflect the changes being made to the FRC’s governance and executive structure.

In its corporate reporting review work the FRC seeks to ensure that the financial information provided by public and large private companies to investors and other stakeholders complies with relevant reporting requirements. The Conduct Committee’s scope includes both reports required to be issued under the Companies Act 2006 and reports that are produced by issuers of listed securities that are required to comply with any accounting requirements imposed by the Financial Conduct Authority’s Listing Rules.

A further review of the operating procedures will take place over the coming months. The FRC notes that this is likely to result in more extensive changes being proposed which will be subject to public consultation.

(FRC, The Conduct Committee: Operating procedures for reviewing corporate reporting, 01.04.16)

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