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Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.
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.
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.
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:
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:
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.
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.
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:
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.
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
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:
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:
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:
The Consultation also proposed amendments in a number of other areas including:
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.
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.
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:
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:
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:
The report sets out key findings for each of the following:
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:
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:
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:
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.
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:
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).
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.
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:
A single committee should be formed in the UK made up of representatives from each of the regulators and government to:
The Lab recommends that technology companies:
Companies and preparers
Companies should take all opportunities to understand and help shape the requirements by:
Investors are recommended to:
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.
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:
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:
This Instrument comes into force, for the most part, on 3 January 2018.
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:
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.
The COVID-19 global health emergency has significantly impacted the ability of Australian businesses to supply services to consumers.
The recent decision of the Western Australian Court of Appeal in Hancock Prospecting Pty Ltd v DFD Rhodes Pty Ltd highlights the complex issues that arise where court proceedings commenced by “strangers” to an arbitration agreement involve disputes covered by the arbitration agreement.