Essential Corporate News – week ending May 7, 2019

FCA: Policy statement - Changes to align the FCA Handbook with the EU Prospectus Regulation: feedback to CP19/6 (PS19/12)

On May 31, 2019 the Financial Conduct Authority (FCA) published its policy statement, Changes to Align the FCA Handbook with the EU Prospectus Regulation: Feedback to CP19/6 (PS19/12). The Policy Statement summarises the feedback the FCA received on CP19/6 and its response to that feedback, setting out its near-final rules to align the FCA Handbook with the new Prospectus Regulation which comes into effect on July 21, 2019.

These near-final rules replace the existing FCA Prospectus Regulation sourcebook and will be named the Prospectus Regulation Rules sourcebook (PRR sourcebook). The PRR sourcebook replicates key provisions of the new Prospectus Regulation and other relevant EU legislation and domestic law. The final rules will include references to, and extracts from, additional EU legislative materials that are finalised in time. The FCA plans to finalise its rules once changes to the Financial Services and Markets Act 2000 (FSMA) and relevant EU legislation are in place.

The near final rules, as well as implementing the new Prospectus Regulation which specifies the information companies need to disclose to investors and potential investors through a prospectus when raising capital, also contain new rules on sending data to the FCA and the timing for the FCA publishing approved prospectuses

The near-final rules address issues including:

• Timing of publications - CP19/6 flagged that without additional rules to coordinate the timing of publication, the FCA could publish an approved prospectus before an issuer. If a prospectus contains inside information, it is important that the FCA not publish the approved prospectus before the issuer discloses the inside information. Respondents to CP19/6 expressed a preference for issuers to continue to control the timing of publication and asked the FCA to consider introducing a clear mechanism to determine the timing of publication of a prospectus. Accordingly, the FCA has clarified at PRR 3.2.6G, that it intends to send approved prospectuses to the UK NSM after 6:00 pm on the working day after the FCA has approved a prospectus. In doing so, the FCA aims to address concerns by allowing the issuer to control the timing of its announcement to the market during the one-day window between the FCA approving the prospectus and submitting it to the NSM.

• Data submission requirements – In CP19/6 the FCA highlighted that ESMA had recommended to the European Commission an express provision for National Competent Authorities (NCAs) to require issuers to provide them with Regulatory Technical Standards (RTS) data. As the new Prospectus Regulation gives the FCA the power to require applicants to provide information, the FCA plans to go ahead with proposed rules in PRR 3.2.7 R and 3.2.8 R, which require issuers to provide the FCA with RTS data since it believes that asking issuers to provide RTS data is the most cost effective and efficient way to meet the FCA’s new data submission obligations. In addition, the FCA has raised the question with ESMA of how RTS data requirements apply to depositary receipts, where there are separate issuers of the depository receipt and the underlying share, as ESMA are the ultimate recipients of the RTS data.

Any issuer seeking approval of a draft prospectus on or after July 21, 2019 must do so under the new Prospectus Regulation and in line with the PRR sourcebook. If the UK withdraws from the EU in a no-deal scenario before July 21, 2019, the FCA will not proceed with its proposals.

(FCA: Policy statement - Changes to align the FCA Handbook with the EU Prospectus Regulation: feedback to CP19/6 (PS19/12), 30.05.2019)

FCA: Proposals to promote shareholder engagement – Feedback to CP19/7 and final rules

On May 31, 2019 the Financial Conduct Authority (FCA) published a Policy Statement, PS19/13, following its earlier consultation on proposals to improve shareholder engagement. This consultation, CP19/7, set out the FCA’s proposals to implement requirements of the revised Shareholder Rights Directive (SRD II) as they apply to issuers in respect of certain transactions they enter into with a related party (Related Party Transactions or RPTs), as well as the requirements of SRD II as they apply to life insurers and asset managers regulated by the FCA.

The transparency requirements in relation to related party transactions are set out in Article 9c of SRD II and they allow a number of choices to be made as part of SRD II’s implementation. The FCA has sought to design a regime to implement SRD II’s minimum obligations in a proportionate manner for all companies within its scope, but, at the same time, impose minimum change on issuers that already comply with the existing premium listing requirements in Chapter 11 of the Listing Rules.

One key difference between the premium listing regime and the SRD II regime is that SRD II uses the definition of related party for accounting purposes in IAS 24 which is wider than the premium listing regime, so there will be instances where existing premium listing requirements do not cover SRD II requirements.

The new rules are set out in DTR 1B and DTR 7.3 of the FCA’s Disclosure Guidance and Transparency Rules (DTRs). The minimum requirements of SRD II as set out in the DTRs apply to UK incorporated issuers with voting shares admitted to a regulated market in the UK or wider EEA (including UK issuers with a premium or standard listing of voting shares and non-listed shares admitted to regulated markets including the London Stock Exchange’s Specialist Fund Market). There are then new continuing obligations in the Listing Rules, extending the application of these provisions to other issuers, including issuers incorporated outside a Member State, described as “Rest of World” or “RoW Issuers” with either standard or premium listed equity shares, and issuers with premium listed Global Depository Receipts. This is to maintain the principle underlying the Listing Rules that all issuers in a given listing category must meet the same requirements.

In light of responses to the consultation, the FCA has made some changes to its original proposals as follows:

• The materiality threshold for RPTs in the new DTRs will be 5 per cent rather than 25 per cent as was originally proposed so that the threshold is aligned with the retained premium listing requirements.
• As originally proposed, a distinction between premium listing and the DTR rules in what is required of issuers in terms of approvals and associated share rights is being maintained. Under the rules on RPTs, only the existing premium Listing Rules will require shareholder approval and a third-party report. Under the revised DTRs, only board approval will be required in addition to the disclosure requirements.
• The FCA is not going to proceed with offering an exemption for compliance with “equivalent” overseas RPT regimes. However, to reduce the compliance burden and associated costs for RoW Issuers, RoW Issuers will not be subject to the specific board approval rules but will still be required to announce their material RPTs no later than when the terms of the transaction are agreed. In addition, RoW Issuers will be able to use a definition of a related party from the “equivalent” non-IFRS accounting standards, where these are already used. However, premium listed RoW Issuers will have to continue to meet their premium listing obligations in full for RPTs. This includes a shareholder vote and sponsor opinion for material RPTs.
• While the FCA is exempting Companies Act compliant transactions for directors’ remuneration from the new DTR rules as permitted by SRD II, that exemption cannot be extended to RoW Issuers as they are not subject to UK domestic company law requirements. The FCA notes that in practice, remuneration paid to directors may be disclosable by RoW Issuers under the extension of the FCA’s requirements via the new Listing Rules if the director is a related party (under the IFRS definition or the definition in the alternative “equivalent” accounting standards) and the transaction is not in the ordinary course of business and concluded on normal market terms. In that case, the RoW Issuer will need to assess the materiality of the transaction and disclose it where the five per cent threshold is met.
• Under SRD II, issuers must aggregate transactions with the same related party over the previous 12 months. Where the aggregated transactions meet the materiality threshold, the board approval and disclosure requirements will apply to all of the transactions included in the aggregation, and not just the one that results in the materiality threshold being reached. The FCA states that issuers proposing to enter into a sequence of smaller transactions with the same related party will need to take into account and plan for how they will be able to meet their future obligations for those individual transactions under the aggregation rules.

Timing

The new rules will come into force on June 10, 2019. Issuers who are within scope of the new regime for RPTs and RoW Issuers to whom the extension applies via the Listing Rules, will be required to comply with the new requirements from the start of their first financial year after June 10, 2019.

(FCA, Proposals to promote shareholder engagement – Feedback to CP19/7 and final rules, Policy Statement PS19/13, 31.05.19)

FCA: Decision Notices concerning Cathay International Holdings Limited, Mr Jin-Yi Lee and Mr Eric Siu

On June 3, 2019, the Financial Conduct Authority (FCA) published three Decision Notices concerning Cathay International Holdings Limited (Cathay) and two of its directors, Mr Jin-Yi Lee and Mr Eric Siu. The FCA considers that Cathay breached the FCA’s Listing Principles and Disclosure Rules and Transparency Rules (DTRs) and has imposed a fine of £411,000 as a result. The FCA believes that Mr Lee, Cathay’s CEO, was knowingly concerned in Cathay’s breaches and so has been fined £217,300. The FCA also believes that Mr Siu, Cathay’s Finance Director, was knowingly concerned with one of Cathay’s breaches and so has been fined £40,200.

Decision Notice concerning Cathay

Cathay is a holding company based in Hong Kong with a premium listing on the London Stock Exchange. On December 6, 2015 it issued a trading update which informed the market that due to operating expenses being significantly higher than anticipated, it expected a material loss before tax for the year ending December 31, 2015, a performance which would be markedly below market expectations. It also disclosed a significant financial penalty imposed on one of its subsidiaries and its share price dropped that day by 18.2 per cent.

The FCA found that Cathay breached Listing Principle 1 as during the relevant period in 2015 it did not have adequate procedures, systems and controls to comply with its obligations under Chapter 2 of the DTRs in relation to how it would forecast and monitor how it was performing against market expectations of its financial performance. Cathay failed to take reasonable steps to monitor its financial performance, until December 6, 2015 it failed to produce any completed year-end forecasts covering the whole of its business as to its expectations of its financial performance for the financial year ending December 31, 2015 and its performance monitoring did not include any means of assessing whether the performance of Cathay constituted inside information satisfying the test set out in section 118C Financial Services and Markets Act 2000 (FSMA). Its senior management appreciated the risk that their actions or inaction could result in a failure to take reasonable steps to establish and maintain adequate procedures, systems and controls and it failed adequately to mitigate that risk so Cathay acted recklessly in this regard.

As a result of these failings, the FCA also considers that Cathay recklessly failed to disclose to the market as soon as possible on or shortly after December 6, 2015 a material change in its actual and expected performance for the year ended December 31, 2015 compared to market expectations. This breached DTR 2.2.1R and meant relevant information was not released to the market as soon as it should have been, in breach of Premium Listing Principle 6.

The FCA also considers that between February 29, 2016 and August 16, 2016 Cathay breached Listing Principle 2 which requires a listed company to deal with the FCA in an open and co-operative manner. Cathay responded to a request by the FCA for the actual forecasting procedures undertaken at the relevant times in 2015. However, in the FCA’s view, the information Cathay provided on two occasions was materially different to the actual procedures followed at the relevant times in 2015 and this was done without any explanation.

The FCA considers the breaches by Cathay to be particularly serious. Cathay was unable to comply with its obligations as a listed company, and its procedures, systems and controls were so inadequate that it was unable to keep the market properly informed of its financial performance. As a result, there was a risk that investors would make decisions based on incomplete information. The FCA points out that it relies on listed companies to provide clear, accurate and complete information to it in order effectively to monitor and regulate the integrity of the financial markets in the UK. The provision of inaccurate information to the FCA impacts its ability to do this.

Decision Notice concerning Mr Jin-Yi Lee

Mr Lee was Cathay’s Chief Executive Officer at all material times and, by virtue of that role and his knowledge of and involvement in, the matters which gave rise to Cathay’s breaches, the FCA has found that he was knowingly concerned in each of Cathay’s breaches of Listing Principle 1, DTR 2.2.1R and Premium Listing Principle 6 and Listing Principle 2.

As CEO, Mr Lee failed to ensure Cathay was able to comply with its obligations as a listed company. As a result, a financial penalty has been imposed on him of £214,300 pursuant to section 91 FSMA. This permits the FCA to impose a penalty, of such amount as it considers appropriate, on a director who was knowingly concerned in the contravention of the FCA’s rules. A person is knowingly concerned when he or she has actual knowledge of the facts and is aware of his or her involvement in the contravention.

Decision Notice concerning Mr Siu

Mr Siu was the Cathay Finance Director at all material times. The FCA considers that he was knowingly concerned in Cathay’s breach of Listing Principle 2 since he was responsible for drafting the correspondence with the FCA and knew that the information being provided was not a contemporaneous record of events. As a result, a financial penalty of £40,200 was imposed on him.

The FCA notes that on May 31, 2019, Cathay, Mr Lee and Mr Siu announced that they were considering whether to refer the FCA’s decision to the Upper Tribunal. If the Decision Notices are referred, the Upper Tribunal will determine what, if any, the appropriate action is for the FCA to take, and remit the matter to the FCA with such directions as the Upper Tribunal considers appropriate to give effect to its determination.

(FCA: Decision Notice concerning Cathay International Holdings, 03.06.19)

(FCA: Decision Notice concerning Mr Jin-Yi Lee, 03.06.19)

(FCA: Decision Notice concerning Mr Eric Siu, 03.06.19)

(FCA: Decision Notices concerning Cathay International Holdings Limited, Mr Jin-Yi Lee and Mr Eric Siu press release, 03.06.19)

High Court: Schemes of arrangement - adequacy of explanatory statement

In Re Ophir Energy plc [2019] EWHC 1278, the court considered whether to sanction a scheme to enable Medco Energi Global PTE Ltd to acquire the ordinary share capital of Ophir Energy plc, excluding shares held in treasury.

In exercising its discretion to sanction the scheme, the court took comfort from Medco's consideration of 57.5 pence per Ophir share having resulted from some competitive tension following interest from two other potential bidders, and Ophir's largest shareholder indicating it would not be willing to support an offer at the original price of 55 pence per share.

The main issue, of whether the explanatory statement provided to members under section 897, Companies Act 2006 was adequate, was raised by one of Ophir's larger institutional shareholders (LGIM) shortly before the court meeting. LGIM asked Ophir about challenging the scheme if it could be demonstrated that all necessary information had not been disclosed to shareholders. LGIM did not respond to Ophir's invitation to raise concerns about the disclosure of information, nor did LGIM send a representative to the court meeting. Three days before the sanction hearing, LGIM emailed Ophir explaining why it considered shareholders had not been given all necessary information to make a balanced assessment of the offer. However, LGIM did not attend the hearing to oppose the scheme's sanction.

The court considered that if there was reasonable cause to doubt all necessary information had been disclosed for shareholders to make an informed decision, it would have power to require disclosure (subject to appropriate safeguards to preserve confidentiality) of documents or information to members wishing to oppose the scheme, or require matters to be addressed directly in evidence from the company to enable it to determine whether the statement was adequate.

However, in the absence of LGIM appearing to raise its concerns and explain the background to its points, it was impossible to judge whether the matters identified were material and should have been dealt with differently in the explanatory statement. The court reiterated that parties with genuine issues as to the adequacy of information provided to members should not be deterred from appearing at a sanction hearing by costs concerns. The court found it difficult to believe that, as a well-resourced entity with the benefit of legal advice, LGIM would not have raised its points in more detail and earlier, if it had genuine concerns about the level of disclosure. The court granted the application.

(Re Ophir Energy plc [2019] EWHC 1278, 21.05.19)

Court of Appeal: Piercing the corporate veil (From Counsel Case feature)

In Rossendale Borough Council v Hurstwood Properties (A) Ltd [2019] EWCA Civ 364, the Court of Appeal was concerned with claims brought by a local authority in relation to two schemes designed to avoid the payment of National Non-Domestic Rates (NDR) on properties. The schemes involved the granting of leases of the properties to special purpose vehicle companies (SPVs) without assets or liabilities. The SPVs were then placed into voluntary liquidation or allowed to be struck off the register as dormant companies. Among the issues before the Court of Appeal was whether the corporate veil could be pierced in respect of the SPVs so as to allow recovery of NDR from the defendant freehold or leasehold proprietors.

In an application to strike out the claims, the High Court considered (i) whether the leases were sham transactions; (ii) if the scheme leases were genuine, whether the Ramsay principle of statutory construction applied (that the relevant statutory provisions, construed purposively, were intended to apply to the transaction viewed realistically); and (iii) if the Ramsay principle did not apply, whether the separate corporate existence of the relevant SPVs could be disregarded, effectively by piercing the corporate veil.

The judge struck out the parts of the application relating to the Ramsay principle and the allegations that the leases were shams, but dismissed the application to strike out the claim so far as it related to piercing the corporate veil. He considered that it was at least arguable that the ‘evasion principle’, where a court may be justified in piercing the corporate veil where there is an abuse of a company’s separate legal personality for the purpose of some wrongdoing (as referred to by Lord Sumption in his Supreme Court decision in Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34), could be applied, or extended to apply, to disregard the separate corporate existence of the relevant SPV.

The defendants appealed on the issue of whether the corporate veil could be pierced, and the local authority appealed on the application of the Ramsay principle. The Court of Appeal allowed the defendants’ appeal on piercing the corporate veil, dismissing the High Court’s suggestion that the evasion principle applied in this case, or that it could be extended to apply. The court will only pierce the corporate veil when the evasion principle applies, and any extension beyond that will only be in very rare and novel cases. However, the Court of Appeal rejected the appeal of the local authority, holding that the Ramsay principle could not be used to disregard the lease because the relevant legislation was not amenable to a wider, purposive construction which would allow scope for the Ramsay principle to operate.

FromCounsel has published an FC Case Feature in which Michael Todd QC of Erskine Chambers considers the Court of Appeal’s decision.

(Rossendale Borough Council v Hurstwood Properties (A) Ltd [2019] EWCA Civ 364, 07.03.19)