Pen & Graph

Essential Corporate News – Week ending December 15, 2017

Publication December 15, 2017


Introduction

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

Investment Association: Position statement on virtual-only AGMs

On December 11, 2017 the Investment Association published a position statement outlining the views of its members on virtual-only annual general meetings (AGMs). It notes that Investment Association members are unlikely to be supportive of amendments to articles of association which allow for virtual-only AGMs.

In the position statement, the Investment Association comments that its members view AGMs and other shareholder meetings as fundamentally important to the exercise of their shareholder rights and as an integral component of the UK corporate governance system. They note that AGMs ensure that boards are publicly accountable and shareholders can make statements and ask questions of the board and so raise particular concerns in a public forum. While investors accept that using technology, such as webcasting the meeting, to complement the physical AGM can be beneficial and increase retail and institutional investor participation, they do not believe companies should adopt a “virtual-only” approach since virtual-only AGMs remove the board’s public accountability and makes it harder for participants to identify the views of fellow participants and register agreement or disagreement.

As a result, Investment Association members will not support amendments to articles of association in relation to electronic meetings that allow for virtual-only AGMs and they expect any amendments to articles to confirm that a physical meeting will be held alongside an electronic meeting element. In addition, the Investment Association’s Institutional Voting Information Service (IVIS) will red-top any company that will have the ability to hold virtual-only AGMs following any amendments to their articles.

(Investment Association, Position Statement, 11.12.17)

FCA: Final notice for failure to disclose inside information under MAR

On December 14, 2017 the Financial Conduct Authority (FCA) issued a final notice to Tejoori Limited for late disclosure under the Market Abuse Regulation (MAR). This marks the first fine of an AIM company for failure to disclose inside information under MAR following its introduction in July 2016.

The FCA fined Tejoori £70,000 (subsequently reduced from £100,000, a 30 per cent discount, due to an early settlement) for breach of the requirement to inform the market of inside information under Article 17(1) MAR. The breach of Article 17(1) occurred when Tejoori failed to inform the public as soon as possible after being notified that there was a reasonable expectation that it would be required to sell one of its two material investments for no initial consideration, with only a possibility of receiving deferred consideration that was materially lower than Tejoori’s valuation of its investment. The failure to promptly disclose inside information misled the market in Tejoori’s shares and prevented investors from making fully informed investment decisions.

Tejoori has now cancelled its admission to trading on AIM.

(FCA, Final notice to Tejoori Limited, 14.12.17)

LSE: Feedback Statement and Consultation – AIM Rules Review

On December 11, 2017 the London Stock Exchange plc (LSE) published AIM Notice 49 which attaches a Feedback Statement to the discussion paper published by the LSE in July 2017 on various areas of the AIM Rules for Companies (AIM Rules) and AIM Rules for Nominated Advisers.  The Feedback Statement sets out an overview of the responses the LSE received and it also sets out proposed amendments to the AIM Rules for consultation.

Proposed amendments to the AIM Rules

The LSE is consulting on a number of Rule changes referred to in the July 2017 discussion paper as follows:

  • Formalising the early notification process: There was strong support for the LSE’s proposal to extend and formalise the early notification process for nominated advisers in respect of key information about AIM applicants. As a result, changes are proposed to AIM Rule 2, to introduce a formal requirement for early notification whilst leaving the exact timing of initial communication to the nominated adviser’s discretion. The type of information required to be disclosed will be published in the form of a new template which will be available on the LSE’s website.
  • Guidance on appropriateness consideration and AIM Rule 9 powers: Following confirmation that such guidance would be helpful and would increase certainty, the LSE is proposing to set out a non-exhaustive list of factors which a nominated adviser should consider in its assessment of the appropriateness of an applicant for AIM. This will be set out at the end of Schedule 3 of the AIM Rules for Nominated Advisers. The non-exhaustive examples include questions as to the good character, skills, experience or previous history of a director, key manager, senior executive, consultant or major shareholder, where the rationale for seeking admission to AIM is not clear, or where the applicant has a vague or ill-defined business model or business operations. In addition, changes are proposed to AIM Rule 9 to emphasise the LSE’s discretion to refuse admission to AIM.
  • Corporate governance requirements for AIM companies: Most respondents supported a requirement for AIM companies to comply or explain against a recognised industry code. As a result, changes to AIM Rule 26 are proposed with AIM companies being required to maintain on their website details of a recognised corporate governance code that the board of the company has decided to apply, how the company complies with that code and where it departs from its chosen corporate governance code, an explanation of the reasons for doing so. The LSE notes that there will be no requirement for an annual update but, under AIM Rule 26, the information will have to be kept up to date and the last date on which it was updated should be included. The LSE notes that it would propose that these requirements take effect from June 30, 2018 to allow AIM companies and nominated advisers adequate time to prepare for the proposed change.

Proposals in discussion paper that are not being taken forward

In the Feedback Statement, the LSE confirms that a number of proposals that it set out in the July 2017 discussion paper are not being taken forward in light of comments received. These comprise the following:

  • Prescriptive criteria regarding free float: Most felt that the current approach to a free float strikes the right balance and that it is fundamentally important that a growth market has flexibility, and is not hampered by numeric constraints which may result in potentially arbitrary outcomes for smaller companies.
  • Minimum fundraising for new applicants to AIM: On balance, respondents were not in favour of this proposed change, nor did they support applying a threshold solely to non-revenue generating companies.
  • Mandatory board composition requirements: The LSE does not propose to introduce these but will normally expect an AIM company’s board to include a chair, finance director and non-executive directors.
  • Automatic fines for certain breaches of the AIM Rules: The LSE had asked whether it would be beneficial for it to introduce concepts such as automatic fines for certain explicit breaches of the AIM Rules and whether there should be any other changes to the disciplinary rules. In light of responses, the LSE does not propose to introduce an automatic fine regime. However, it does expect to issue a consultation on proposed changes to the Disciplinary Handbook in 2018.

Changes to the AIM Rules for Nominated Advisers

In light of the decision to provide guidance to nominated advisers on the appropriateness consideration, the non-exhaustive list of examples that could affect appropriateness is to be included at the end of Schedule 3 of the AIM Rules for Nominated Advisers.

Next steps

The LSE has asked for responses to the consultation on the AIM Rules and the AIM Rules for Nominated Advisers to be submitted by no later than January 29, 2018. The LSE will confirm the results of the consultation as soon as reasonably practicable following the end of the consultation period.

(LSE, Feedback Statement and Consultation, 11.12.17)

AIM: Disciplinary notice for breaches of the AIM Rules – AD 17

On December 14, 2017 the London Stock Exchange (LSE) published a summary of the private disciplinary action it has taken throughout the year for breaches of the AIM Rules for Companies (AIM Rules) and of the AIM Rules for Nominated Advisers (Nomad Rules). This is to provide AIM companies and nominated advisers (nomads) with guidance on expected standards of conduct

It includes breaches to:

  • AIM Rule 10 and AIM Rule 13 – The LSE notes that it issued a private censure of an AIM company and fine of £110,000 for failing to provide all relevant information in a notification (AIM Rule 10) and for failing to apply the related party rules properly (AIM Rule 13).
  • Nomad Rules 16, 19, 23 and 25 – The LSE notes that it conducted a private censure of a (nomad and fine of £190,000 for failing to exercise due skill and care in providing guidance to an AIM company on its AIM Rule obligations (Nomad Rule 16), for failing to liaise with the LSE to the required standard (Nomad Rule 19); and for failing to keep proper records (Nomad Rule 25). These breaches were compounded by failing to ensure proper procedures in providing inadequate oversight of an individual (Nomad Rule 23).
  • Nomad Rules 16, 18 and 19 – The LSE notes that it issued a private censure of a nomad and fine of £150,000 for failing to meet the required standards regarding its admission responsibilities under Schedule Three of the Nomad Rules (Nomad Rules 16 and 18). It also breached Nomad Rule 19 due to the quality of information provided to the LSE during admission discussions.

In addition, the AIM Notice provides additional guidance to nomads on certain of their obligations to the LSE, namely liaison with the LSE (Nomad Rule 19), supervision and controls (Nomad Rule 23 and Nomad Rule 25) and the admission process.

(AIM, Disciplinary notice – AD 17, 14.12.17)

Takeover Panel: Response Statement on asset sales and other matters – RS 2017/1

On December 11, 2017 the Code Committee of the Takeover Panel published Response Statement 2017/1 “Asset sales and other matters” (RS 2017/1) (the Response Statement). This follows the publication of Public Consultation Paper PCP 2017/1 (the Consultation) on July 12, 2017. 

The Consultation proposed amendments to various aspects of the Takeover Code (Code) in relation to the sale by an offeree company of assets in competition with an offer or possible offer, as well as certain other amendments regarding the use of social media, “no intention to bid” statements made under Rule 2.8 and the dispensations from Rule 9. 

In light of responses to the Consultation, the Code Committee has adopted the proposed amendments, subject to certain modifications

Asset sales

In the Consultation, the Code Committee proposed amendments to Rule 2.8 (Statements of intention not to make an offer), Rule 12.2(b)(i) (Competition reference periods) and Rule 35.1 (Delay of 12 months) intended to prevent persons subject to those Rules (which would otherwise operate so as to prevent further, increased, or revised offers) from circumventing their application by instead purchasing assets that are “significant” in relation to the offeree company. The Consultation proposed that relative values of more than 50 per cent should normally be regarded as significant for these purposes.

The Code Committee notes that a number of respondents to the Consultation were concerned that the proposals sought to regulate asset transactions more generally. In this context, the Code Committee has confirmed that it is not seeking to regulate generally sales of assets by a company to which the Code applies to a former offeror or potential former offeror but rather to ensure that they cannot avoid the restrictions which apply under the Rules referred to above by purchasing assets that are significant in relation to the offeree company. It has also included, as an Appendix to the Response Statement, a summary of how the restrictions in revised Rules 2.8, 12.2(b)(i) and 35.1 will operate.

In light of responses to the Consultation, the Code Committee has also reconsidered how significance should be assessed and has amended new Note 5 on Rule 2.8 to provide that relative values of more than 75 per cent will normally be significant.

Assets sales and other transactions subject to Rule 21.1 (Restrictions on frustrating action)

The Consultation proposed various amendments to Rule 21.1 including to:

  • make it clear that shareholder approval will not be required under Rule 21.1 if the taking of the proposed action is conditional on the offer being withdrawn or lapsing;
  • require that where shareholder approval is sought under Rule 21.1 for a proposed action: (a) the offeree board obtains competent independent advice as to whether the financial terms of the proposed action are fair and reasonable; and (b) the Takeover Panel is consulted regarding the proposed date of the general meeting;
  • require that the offeree board sends a circular to shareholders containing specified information where: (a) shareholder approval is being sought for a proposed action under Rule 21.1;or (b) such approval would be sought but for the fact that the taking of the proposed action is conditional on the offer being withdrawn or lapsing; and
  • permit an offeree company to agree to pay an inducement fee to a counterparty to transaction to which Rule 21.1 applies, provided the fee is de minimis.

These changes have been adopted as proposed in the Consultation, subject to certain minor drafting changes and a modification in connection with the requirement for a circular containing certain specified information to be sent to shareholders (as described in the third bullet point above). In light of responses to the Consultation the Code Committee has amended the drafting of this Rule so that, in circumstances where shareholder approval is not being sought because the taking of the proposed action is conditional on the offer being withdrawn or lapsing, the relevant information can instead be published via a RIS. However, the Response Statement also notes that that the Panel may still require a copy of the relevant announcement to be sent to shareholders under Rule 30.1(c) and that it is likely to do so where the information is likely to be important in relation to a shareholder’s decision whether or not to accept the offer and, in particular, where the proposed action is (in effect) being presented to shareholders as an alternative to the offer.

In connection with the requirement to obtain competent independent advice on whether the financial terms of the proposed action are fair and reasonable, the Response Statement notes that a number of respondents queried, for various reasons, whether this was appropriate in such circumstances. However, the Code Committee notes that where the offeree board is seeking shareholder approval for a proposed action in general meeting under Rule 21.1 and that approval is forthcoming, the offeror may then seek to invoke a condition so as to withdraw or lapse its offer. Therefore the Code Committee considers it to be important that shareholders receive the substance of competent independent advice given to the board as to whether the financial terms of the proposed action are fair and reasonable. It has therefore adopted this requirement as proposed in the Consultation.

In the Response Statement the Code Committee also confirms that contracts entered into in connection with the proposed action to which Rule 21.1 applies should be required to be published on a website under the new Note 1 on Rule 21.1, even if those contracts may not otherwise be required to be disclosed under other provisions of the Code and/or applicable listing rules. They should be published on the website until the end of the offer, unless the contracts cease to be relevant for offeree shareholders, in which case the offeree company may wish to seek the Panel’s consent to remove those contracts from the website.

Rule 21.1 is being amended as follows:

  • Where the board of the offeree company seeks shareholder approval for a proposed action under Rule 21.1 in general meeting, shareholders should be sent a circular containing certain specified information, including the substance of competent independent advice given to the board as to whether the financial terms of the proposed action are fair and reasonable. The Code Committee does not believe this should lead to significant additional costs for the offeree company or materially delay the transaction and it does not consider that the requirements of applicable listing rules for material transactions will, of themselves, be sufficient.
  • Where shareholder approval is sought at a general meeting for a proposed action under Rule 21.1, there will be a requirement for the Panel to be consulted regarding the date on which the general meeting is to be held.
  • As mentioned above, where a general meeting is to held in respect of a proposed action which is subject to Rule 21.1, the board of the offeree company must send a circular to shareholders containing the details set out in the new Note 1 on Rule 21.1. Where the Panel has agreed that a general meeting does not need to be held because the proposed action is conditional on the offer being withdrawn or lapsing, the board of the offeree company must make an announcement containing the details set out in the new Note 1 on Rule 21.1. The Code Committee points out that where information with regard to a proposed action which is conditional on an offer being withdrawn or lapsing is likely to be important information in relation to a shareholder’s decision whether to accept the offer, particularly where the proposed action is, in effect, being presented to shareholders as an alternative to the offer, then the Panel is likely to consider that a document which includes the contents of the announcement should be sent to shareholders in accordance with Rule 30.1(c).

Sales of all or substantially all of the offeree company’s assets in competition with an offer

The Consultation proposed a number of amendments to the Code in relation to circumstances where, in competition with an offer or possible offer, an offeree board states that it is proposing to sell all or substantially all of the company’s assets and return all or substantially all of the company’s cash balances to shareholders. These included:

  • A proposal that any statement made by the offeree company quantifying the cash sum expected to be paid to shareholders if the offer lapses or is withdrawn should be treated as a quantified financial benefits statement and therefore subject to the reporting and other applicable requirements of Rule 28 (note that the definition of ‘quantified financial benefits statement’ currently refers to statements quantifying financial benefits expected to accrue to the offeree company and so does not apply to statements quantifying financial benefits expected to accrue to its shareholders). This has been adopted in the form proposed, subject to the inclusion of an additional Note referring to those requirements of Rule 28.6 which are likely to be applicable to such statements and certain other minor amendments of a clarificatory nature.
  • A proposal that a purchaser of some or all of the offeree company’s assets should be put on a level playing field with a competing offeror (which would not be able to purchase shares at above its offer price) and therefore should be restricted from acquiring interests in shares of the offeree company during the offer period unless the offeree company has made a statement quantifying the cash sum expected to be paid to shareholders – even where such a statement has been made by the offeree company, interests can only be acquired to the extent that the price paid does not exceed the value per share that the offeree board has stated it expects to return to shareholders (if a range is stated, the price paid must not exceed the bottom of the range). In the Response Statement, the Code Committee notes that it considers the new Rule should apply regardless of whether the announcement by the offeree company that it has agreed terms on which it intends to sell all or substantially all of its assets is made before or after the possible offer is announced. The new Rule is therefore being amended to remove the reference to “in competition with an offer or possible offer” as well as some other minor drafting changes.
  • The introduction of a new Note on Rule 21.3 (Equality of information to competing offerors) to clarify that, where the board of an offeree company commences discussions in relation to the sale of all or substantially all of its assets during an offer (or following the date on which the board has reason to believe a bona fide offer might be imminent), Rule 21.3 will, subject to certain caveats, apply to information given by the offeree company to the potential asset purchaser(s). This has been adopted as proposed, subject to certain minor drafting changes.

Other matters

The Consultation also proposed amendments in a number of other areas including:

  • Requiring persons who make a ‘no intention to bid’ statement under Rule 2.8 to specify in that statement the circumstances in which they reserve the right to set the statement aside. This proposal is being adopted in the form proposed, subject to an amendment to retain discretion for the Panel to permit an unreserved Rule 2.8 statement to be set aside in appropriate circumstances and to certain minor drafting amendments. The Panel Executive has also produced two examples of Rule 2.8 statements which are set out in an Annex to the Response Statement.
  • Amending Rule 20.4 (which currently restricts the use of social media to publish information relating to an offer or a party to an offer) so that it only restricts publication of information relating to an offer and also amending it to permit publication via social media of videos that have been approved by the Panel in accordance with Rule 20.3 – these proposed changes essentially recognise the increased use of social media by parties to an offer to release information on themselves and that the current prohibition on the release of such information is unduly restrictive. These amendments have been adopted as proposed in the Consultation.
  • Amending Note 1 on Rule 19.1 to clarify that financial advisers are responsible for guiding their clients with regard to the publication of information via social media in the same way as information published by other means during the course of an offer. These amendments have been adopted as proposed in the Consultation.
  • Amending Note 5 of the Notes on dispensations from Rule 9 to reflect existing practice that the Takeover Panel will consider granting a waiver in the context of an issue of new securities if independent shareholders holding shares carrying more than 50 per cent of the voting rights capable of being cast on a ‘whitewash’ resolution provide certain written confirmations. These amendments have been adopted as proposed in the Consultation.

Implementation

The amendments to the Code introduced by RS 2017/1 will take effect from January 8, 2018, including in respect of announcements or statements made on or after that date in relation to ongoing offers.

(Takeover Panel, Asset sales and other matters, 11.12.17)

Takeover Panel: Response Statement on statements of intention and related matters – RS 2017/2

On December 11, 2017 the Code Committee of the Takeover Panel published Response Statement RS 2017/2 confirming a number of amendments to the Takeover Code (Code). These amendments will take effect on January 8, 2018 and follow on from Public Consultation Paper PCP 2017/2 (the Consultation) published in September 2017.  These amendments relate to post-offer intention statements and undertakings and to certain requirements in connection with the timing of publication of offer documents. In light of responses to the consultation, the Code Committee has adopted the amendments to the Code proposed in RS 2017/2, subject to certain modifications as set out in Appendix B to RS 2017/2.

Content requirements for offeror statements of intention

In the Consultation it was proposed that Rule 24.2(a) (Intentions of the offeror with regard to the offeree’s business, employees and pension scheme(s)) should be amended to require an offeror to make specific statements of intention with regard to the offeree company’s research and development functions, the balance of the skills and functions of the offeree company’s employees and management, and the location of the offeree company’s headquarters and headquarters functions.

These proposals are being adopted with one minor amendment which recognises that certain offeree companies may not have a research and development function. As regards the new requirement for an offeror to state its intentions with regard to “any material change … in the balance of the skills and functions of the employees and management”, the Code Committee notes that an offeror will need to consider the consequences of its plans for the offeree company on the composition of the workforce.  If, for example, the proportion of workers with certain technical skills or particular qualifications, or the proportion of employees or management allocated to production, research and development or other functions, would be likely to change following the offer, this will need to be stated.

The Code Committee also considers that any statement made by an offeror under Rule 24.2(a) should be specific and bespoke, appropriately reflecting the offeror’s unique business rationale for seeking to acquire the offeree company and intentions as to what it will do (or not do) in the 12 months following completion of the acquisition. The Code Committee recognises that there may be circumstances where an offeror’s intentions for the offeree change during the course of an offer (for example, the intentions of a hostile offeror may change as a result of negotiations with the offeree company board) but notes that, if this does occur, it would be likely to be a material change to the information previously disclosed and therefore the new intentions would be required to be announced promptly. 

The Code Committee also notes that, if an offeror wishes to state that it will undertake a review of the offeree company’s business following completion of the offer, then a statement that it intends to undertake such a review will not, of itself, satisfy the requirements of Rule 24.2 (or the new Rule 2.7(c)(iv)) and, in such circumstances, the offeror should disclose what the review is likely to cover and its expectations in relation to the review.

Timing requirements for offeror statements of intention

The Consultation also proposed the amendment of Rule 2.7 (Announcement of a firm intention to make an offer) so as to introduce the requirement for an offeror to state in its firm offer announcement its intentions with regard to the business, employees and pension scheme(s) of the offeree company (and, where appropriate the offeror) as currently required by Rule 24.2 in relation to an offer document.

In light of responses, the Code Committee has adopted the amendments to Rule 2.7 and Rule 25.9 (Employee representatives’ opinion and pension scheme trustees’ opinion) as proposed, subject to one minor amendment.

The Code Committee has confirmed that (as is currently the case) there will be no requirement under the revised rules for an offeror to include statements of intention in a possible offer announcement (as opposed to a firm offer announcement under Rule 2.7).

The Code Committee has also confirmed that there is no requirement under the Code for the board of the offeree company to comment on the statements of intention made by an offeror until it publishes its offeree response circular.

Offeror not to publish offer document for 14 days without offeree board consent

The Consultation proposed the amendment of Rule 24.1(a) (Offer document) so as to provide that an offeror must not publish an offer document for 14 days from the announcement of its firm intention to make an offer without the consent of the board of the offeree company.

While the majority of respondents supported these amendments, a significant minority did not. However, the Code Committee noted that it continues to believe that an offeree company board should be provided with the ability to take more than the current period of 14 days to formulate its “defence”. Whilst it recognises that there are various means by which this might be achieved, the Code Committee does not consider that the alternative solutions suggested by respondents were demonstrably better than the amendment which was proposed in the Consultation .  Whilst it accepts that one effect of the amendment to Rule 24.1(a) may be that an offeror’s ability to build a stake in the offeree company is, in practice, delayed, the Code Committee does not consider this to be a disproportionate consequence for offerors.

One respondent to the Consultation queried whether the offeree board could give its consent to earlier publication of the offer document without being in breach of Rule 21.2 which prohibits “offer-related arrangements” between an offeror and offeree company. While the Code Committee considers that a “bid conduct agreement”, or any similar agreement entered into by an offeror and the offeree company, would not be permitted to include an agreement by the board of an offeree company that it will consent to the offeror publishing its offer document within 14 days of its firm offer announcement, it considers that it would be permissible for a firm offer announcement made jointly by an offeror and the board of the offeree company to include a statement that the board had provided its consent to the publication of the offer document and the offeror would then be able to rely on that statement for the purposes of the amended Rule 24.1(a).

The Code Committee considers that the amended Rule 24.1(a) would apply to a subsequent competing offeror in the same way as to the initial offeror. In each case, it will be for the board of the offeree company to decide whether or not it wishes to consent to the publication of the relevant offeror’s offer document within 14 days of the announcement of that offeror’s firm intention to make an offer.

Reports on post-offer undertakings

The Consultation proposed amendments to Rule 19.5(h) (Post-offer undertakings) such that: (i) the requirement for an offeror or offeree company to publish, in whole or in part, any report submitted to the Panel with regard to a post-offer undertaking should apply in all cases and not only at the discretion of the Panel; and (ii) where a post-offer undertaking has a duration of longer than a year, such reports should be published at least annually.

The proposed amendments have been adopted in the form set out in the Consultation.

In response to a query from one respondent about whether (with the consent of the Panel) commercially sensitive text could be redacted from a report published in accordance with Rule 19.5(h)(iv), the Code Committee noted that the revised rule requires the report submitted to the Panel to be published “in whole or in part as required by the Panel”, so this provides scope for the Panel either to require only parts of the report to be published or to consent to the redaction of parts of the report prior to its publication.

Confirmation of post-offer intention statements

The Consultation proposed the introduction of a new Rule 19.6(c) (Post-offer intention statements) to require a party to an offer which has made a post-offer intention statement, at the end of the period of 12 months from the date on which the offer period ends (or such other period of time as was specified in the statement), to confirm in writing to the Panel whether it has taken, or not taken, the course of action described in the post-offer intention statement and to publish that confirmation via a Regulatory Information Service.

The Code Committee has adopted the amendments as proposed. It comments that any such confirmation given to the Panel is likely to be relatively brief and should not contain any material new information.  This is because, if a party to an offer has, contrary to its post-offer intention statement, not taken the intended course of action (or taken a different course of action), the Code Committee would expect the relevant details already to have been announced (as a result of Rule 19.6(b)) prior to the time of the confirmation required under the new Rule 19.6(c).

The Code Committee notes that the Panel Executive will continue to require the parties to an offer to provide to it a schedule of the intention statements made during an offer as one of the supplementary forms submitted with the checklist for an offer document or offeree board circular.

In relation to the question of adviser’s responsibilities after the end of an offer, the Code Committee refers to its comments in Response Statement 2014/2 (paragraphs 2.6, 2.7 and 2.9) and it confirms that these continue to represent the Code Committee’s views on this issue. The points raised in those paragraphs include: that the Code Committee recognises that an adviser’s mandate is likely to come to an end once the offer has ended and would not, therefore, expect an adviser to be responsible for ensuring that its former client complies with a post-offer undertaking after that time; and that an adviser’s involvement in any subsequent investigation or action by the Panel would be limited to responding to questions in relation to the advice which it gave at the time the post-offer undertaking or intention statement was made.

Implementation

These amendments to the Code will take effect on January 8, 2018 and will apply from that date to all companies and transactions to which the Code relates, including ongoing transactions that straddle January 8, 2018 except where to do so would give the amendments retroactive effect.

As regards specific Rules:

  • Rules 2.7 and 24.2: If an offeror announces a firm intention to make an offer under Rule 2.7 before January 8, 2018 and publishes an offer document on or after that date, it will need to comply with the requirements of amended Rule 24.2.
  • Rule 24.1(a): If an offeror announces a firm intention to make an offer prior to January 8, 2018 but has not yet published an offer document, it will only be able to do so within 14 days of its firm offer announcement with the offeree board’s consent.
  • Rule 19.6(c): A party to an offer which makes or repeats a post-offer intention statement on or after January 8, 2018 will be required to give confirmations in relation to those post-offer intention statements under the new Rule 19.6(c) at the end of the period of 12 months from the date on which the offer period ended, or such other period as was specified in the statement.

(Takeover Panel, Statements of intention and related matters, 11.12.17)

Glass Lewis: 2018 Proxy Paper Guidelines

On December 7, 2017 Glass Lewis published their updated Proxy Paper Guidelines (Guidelines) for 2018.

Key changes from Glass Lewis’ 2017 Guidelines include the following:

  • Board skills and diversity: The Guidelines have been updated to reflect Glass Lewis’ belief that companies should disclose sufficient information to allow a meaningful assessment of a board’s skills and competencies. If a board fails to address material concerns regarding the mix of skills and experience of the non-executive element of the board, Glass Lewis will consider recommending voting against the chair of the nomination committee or equivalent (for example, the board chair). From 2018, Glass Lewis’ analyses of director elections at FTSE 100 companies will include board skills matrices in order to assist in assessing a board’s competencies and identifying any potential skills gaps. The Guidelines have also been updated to reflect the recommendation of the Parker Review Committee that each FTSE 100 and FTSE 250 board should strive to have at least one director of colour by 2021 and 2024 respectively.
  • Pay ratios: The Guidelines have been updated to reflect Glass Lewis’ position on the disclosure of pay ratios. They recognise that the disclosure of pay ratios between the CEO and the median or average UK-based employee may be useful in contextualising the levels of executive remuneration both within a business and within industries. As such, Glass Lewis encourages companies to disclose such pay ratios, accompanied by a description of the methodology for their calculation going forward.
  • Restricted share plans: Glass Lewis will assess all restricted share plans on a case-by-case basis. However, in line with the Investment Association’s November 2017 Principles of Remuneration, Glass Lewis will expect, at a minimum, the discount rate from moving from a long-term incentive plan to restricted share awards to be a minimum of 50 per cent, the total vesting and post-vesting holding period should be at least five years, the grant of restricted shares should be accompanied by significant shareholding requirements and restricted share awards should be subject to an appropriate underpin.
  • Incentive plan targets: Glass Lewis may recommend voting against a remuneration policy where performance targets are set below targets provided in guidance to shareholders, absent any compelling rationale for lowering the target. Glass Lewis will also generally expect performance metrics to have a clear and direct link to a company’s strategy, including explicit references, where appropriate, to key performance indicators described in relevant business cycles such as transformation plans.
  • Response to shareholder dissent: Glass Lewis have clarified that they consider that the board generally has an imperative to respond to shareholder dissent from a proposal at a general meeting of more than 20 per cent of votes cast, particularly in the case of a compensation or director election proposal. Glass Lewis will continue to take into account a company’s shareholder structure when determining what constitutes “significant dissent”.

(Glass Lewis, 2018 Proxy Paper Guidelines, 07.12.17)

FRC: Audit quality thematic review on materiality

On December 12, 2017 the Financial Reporting Council (FRC) published its latest audit quality thematic review on the concept of audit materiality and how the major firms determine materiality in practice. The report follows on from the FRC’s 2013 report on materiality.

In order for auditors to determine whether financial statements are true and fair, they must assess the risk and evidence of material misstatement and/or omission. The FRC visited eight audit firms to discuss the concept of materiality and review their related audit methodology and guidance. In total, the procedures performed on the audit of 32 public interest entities entities from a variety of sectors were reviewed by the FRC. The FRC also discussed the views of audit committee chairs on audit materiality and their interaction with their auditors on materiality during the audit and tender process, as well as the views of investors.

The FRC considered the following points:

  • How materiality is assessed across the financial statements as a whole.
  • How the auditor reduces to an appropriately low level the probability that the aggregate of misstatements identified through their audit work exceeds overall materiality.
  • How materiality is assessed for entities or business activities included within the financial statements.
  • How materiality is assessed for particular classes of transactions, account balances or disclosures.

The report sets out key findings for each of the following:

Audit firms

The majority of key messages for audit firms following the 2013 report have been addressed by firms. There has been a notable increase in the emphasis within the firms’ methodologies on the application of judgment when determining overall materiality and performance materiality; providing industry-specific guidance for many sectors and demonstrating the consideration of risk in setting performance materiality.

The report recommends that audit firms should:

  • ensure that if adjusted profit is used as a benchmark, it is still useful to users of financial statements. An explanation should be provided as to why the adjustments have been made; and how the benchmark being used responds better to the needs of those using the financial statements;
  • provide audit teams with guidance on setting component materiality; and
  • consider how they can improve the explanation of the concept of performance materiality in their reports.

Audit committees

The report includes a number of key messages for audit committees in Appendix 1, including matters to be considered when discussing materiality with their auditors. Among other things, audit committees should:

  • understand and challenge the judgments underlying the setting of materiality and how it affects the audit work performed;
  • ensure that component materiality is properly explained and justified to them by the auditor; and
  • consider how best to engage with investors on materiality and adjusted and unadjusted differences.

Investors

The report encourages audit firms to engage better with investors to reduce the confusion relating to audit materiality. Firms should ensure audit reports are clear and provide sufficient explanations of materiality for investors. The FRC, in turn, encourages investors to:

  • improve their understanding of the audit process and its impact on the functioning of capital markets; and
  • be comfortable with challenging company directors on the approach taken by their auditors.

Standard setters

Standard setters should be aware of recent developments in the practice of setting materiality, for example the use of forecasts as benchmarks. Standard setters should also consider whether auditors would benefit from guidance regarding setting component materiality and how it relates to overall materiality and the impact that it has on the audit work performed.

(FRC, Audit quality thematic review, 12.12.17)

FRC: Triennial review of FRS 102 completed

On December 14, 2017 the FRC published its Impact Assessment and Feedback Statement from its 2017 triennial review of FRS 102. This follows on from FRED 67 Draft amendments to FRS 102 – Triennial Review 2017 – Incremental improvements and clarifications and FRED 68 FRS 102 – Payments by subsidiaries to their charitable parents that qualify for gift aid, issued in March 2017 and September 2017 respectively.

The Feedback Statement summarises the responses the FRC received in relation to both FRED 67 and FRED 68 and sets out its response to them.

The FRC has confirmed a number of amendments to FRS 102 which do the following:

  • simplify the measurement of directors’ loans to small entities;
  • require fewer intangible assets to be separated from goodwill in a business combination;
  • permit investment property rented to another group entity to be measured by reference to cost, rather than fair value;
  • expand the circumstances in which a financial instrument may be measured at amortised cost, rather than fair value; and
  • simplify the definition of a financial institution.

In FRED 68 respondents supported the proposal to allow the tax effects of an expected gift aid payment to be taken into account in measuring current tax, and to incorporate the new small entities and micro-entities regimes in the Republic of Ireland (the latter by amendments to FRS 105). 

Next steps

The amendments are generally effective for accounting periods beginning on or after January 1, 2019, with early application available. The amendments to incorporate the small entities and micro-entities regimes in the Republic of Ireland are effective for accounting periods beginning on or after January 1, 2017.

(FRC, Impact Assessment and Feedback Statement, 14.12.17)

FRC: Digital future of corporate reporting – XBRL Deep-dive

The introduction of the European Single Electronic Format (ESEF), which is expected to be finalised in early 2018 and come into force in 2020, will, according to the Financial Reporting Lab (the Lab), drive a step change in the use of XBRL (eXtensible Business Reporting Language) for the production and consumption of the annual reports of European listed companies. As  result, the Lab published a report on the benefits of XBRL on December 13, 2017. This summarises the potential impacts and issues of the use of XBRL and the report argues that if the new technology is implemented effectively, and regulators, companies, investors and technology provides work together, it will facilitate the digitisation of company reporting.

While there is no current requirement in the UK for companies to file accounts in XBRL, it is used in more than 60 countries around the world. With the introduction of the ESEF, European listed companies will be required to file their annual reports in digital format for 2020 year ends and so the Lab has considered how XBRL could be used in the production, distribution and consumption of listed company annual reports.

The Lab sets out a number of key messages and recommendations:

Regulators/standard setters

A single committee should be formed in the UK made up of representatives from each of the regulators and government to:

  • explore the potential benefits of driving digital reporting in the UK and, where needed, align reporting requirements;
  • ensure cross-regulator cooperation to ensure adoption of ESEF (or a UK alternative) to provide better quality corporate reporting; and
  • engage with the wider community, including companies and investors about this work,

Technology community

The Lab recommends that technology companies:

  • focus on producing tools and packages for non-technical users who create, distribute and consume XBRL data; and
  • educate the business community (including boards) and continue to innovate in the product space.

Companies and preparers

Companies should take all opportunities to understand and help shape the requirements by:

  • developing a strategy at board and audit committee level to consider how to implement XBRL;.
  • using all opportunities to get involved with the development of the technology and supporting regulation;
  • engage with the European Securities and Markets Authority , the Financial Conduct Authority and others where opportunities for consultation or field-testing exist; and
  • discussing their strategy with their design agency, audit firm, peers and other relevant advisers.

Investment community

Investors are recommended to:

  • engage with regulators, auditors and companies so that XBRL data is of value to the investor community; and.
  • consider how to use the available data and services as a result of XBRL and encourage others to innovate in the services they provide.

Next steps

This report on XBRL is the first in a series of technology deep-dive reports from the Lab which form part of its Digital Future project. The next report will focus on Blockchain and the digital future of corporate reporting. The Lab plans to complete the entire project in 2018.

(FRC, Digital future of corporate reporting: XBRL, 13.12.17)

Home Office: United Kingdom Anti-Corruption Strategy 2017-2022

On December 11, 2017 the UK Government published  a strategy which provides a framework to guide its anti-corruption policies and actions. Its vision is to reduce the threat to national security , including instability caused by corruption overseas, increased prosperity at home and abroad, including for UK businesses, and enhanced public confidence in the UK’s domestic and international institutions.

The strategy identifies six priorities that will be the focus of efforts to 2022 and these include strengthening the integrity of the UK as an international financial centre. Steps to progress this include:

  • the Government’s commitment to create a public register showing the beneficial owners of overseas legal entities which own or buy property in the UK - responses to the call for evidence published in April 2017 are being analysed and a response is to be published in due course, as well as a draft bill in this parliamentary session;
  • strengthening channels for regular dialogue and feedback between law enforcement agencies and Companies House in relation to the information on the public People with Significant Control (PSC) register;
  • working with the UK’s Overseas Territories and Crown Dependencies to establish central registers or similar systems for collection of company beneficial ownership information and providing UK law enforcement with timely access to that information; and
  • implementing all key elements of the Criminal Finances Act 2017 , including Unexplained Wealth Orders, by the end of April 20218 (subject to parliamentary time).

(Home Office, United Kingdom Anti-Corruption Strategy 2017-2022, 11.12.17)

FCA: Handbook Notice No 50

On December 8, 2017 the Financial Conduct Authority (FCA) published Handbook Notice No 50. The FCA sets out their response to the feedback they received from its consultation paper on the UK implementation of MiFID II and the MiFID 2 (deferred matters) Instrument 2017.
There have been some changes made to the Prospectus Rules subsequent to the amendments of section 86(7) of FSMA to implement MiFID II. These changes are as follows:

  • Amendments to the definition of qualified investor in the Prospectus Rules, and the FCA glossary term, to align with the amendment to the definition of qualified investor in relation to an offer of transferable securities in section 86(7)(d) of FSMA.
  • Amendments to the Prospectus Rules 1.2.1UK, which reproduces section 86(7), to reflect the amendments to the section.

This Instrument comes into force, for the most part, on 3 January 2018.

(FCA, Handbook Notice No 50, 08.12.17)

PERG: Tenth annual report

On December 7, 2017 the Private Equity Reporting Group (PERG) published their tenth annual report. The report provides a summary of the private equity industry’s conformity with the Guidelines for Disclosure and Transparency in Private Equity (formerly known as the Walker Guidelines (the Guidelines)) following their introduction in November 2007. The report highlights greater transparency of the UK private equity industry.

The report states that 54 portfolio companies were covered by the Guidelines during 2017. The 2017 PERG report found that:

  • Compliance has fallen to 79 per cent from 86 per cent in 2016. PERG attributes part of that fall to the failure of some portfolio companies to embed the 2014 revisions of the Guidelines. PERG also acknowledges that non-compliance is driven by some non-BVCA members.
  • All BVCA members and their portfolio companies are compliant with the Guidelines or have provided appropriate explanations.
  • Only 53 per cent of companies included a specific statement of compliance with the Guidelines in their annual report and financial statements. PERG states that it expects companies to address this in future.
  • 63 per cent of the sample reviewed achieved a rating of good or excellent, up from 57 per cent in 2016; rising to 80 per cent for compliant companies, up from 67 per cent in 2016.
  • Areas where the standards of disclosure require improvement include human rights, gender diversity, employee matters, identity of the private equity firm, and trends and factors affecting future developments, performance or position.
  • Six portfolio companies included in the sample have not complied with the Guidelines in full.
  • 78 per cent of companies have published an annual report in a timely manner on their website and 72 per cent have published a mid-year update on their website in a timely manner.

Next steps

PERG plans to consult on whether and how to amend the Guidelines following the implementation of the EU Non-Financial Reporting Directive in 2017. In addition to that, PERG plans to publish its guidance on good practice reporting by portfolio companies under the Guidelines again, but with further examples of good practice.

(PERG, Tenth annual report, 07.12.17)


Recent publications

Subscribe and stay up to date with the latest legal news, information and events...