Resolution for Disapplying Pre-Emption Rights

The Pre-Emption Group has published a monitoring report on the implementation of its 2015 Statement of Principles for disapplying pre-emption rights and a template resolution for disapplying pre-emption rights.

Ballot_Box-l-s[1]The monitoring report reveals that the 2015 Statement of Principles was generally adhered to but, having considered the views of investor representatives on best practice, the Pre-Emption Group decided to publish a template resolution for disapplying pre-emption rights to assist companies.

The template recommends issuers propose two separate resolutions:

  • The first resolution is to seek a five per cent disapplication to be used on an unrestricted basis.
  • The second resolution, which should only be put forward when appropriate, is to request authority to disapply pre-emption rights when the board considers the use to be for an acquisition or specified capital investment in accordance with the 2015 Statement of Principles.

Where the second resolution is proposed, companies should disclose the circumstances that led to its proposal and the consultation process undertaken.

The Pre-Emption Group encourages companies to use the template resolutions at their next general meeting but will be expected to use them for meetings held after 1 August 2016.

Revised CG Code and Guidance on Audit Committees

The Financial Reporting Council has published its final draft of the UK Corporate Governance Code which is expected to apply (subject to Parliamentary approval) to accounting periods beginning on or after 17 June 2016 and to all companies with a premium listing of equity shares regardless of whether they are incorporated in the UK or elsewhere. The draft follows on from the consultation “Enhancing Confidence in Audit: Proposed Revisions to the Ethical Standard, Auditing Standards, UK Corporate Governance Code and Guidance on Audit Committees” and resulting feedback.

Minor amendments are envisaged to the Code, such as:

  • a new requirement that the audit committee as a whole shall have competence relevant to the sector in which the company operates (C.3.1).
  • the existing requirement that FTSE 350 companies should put the external audit contract out to tender at least every ten years has been deleted (C.3.7).

  • a new requirement that the annual report sets out advance notice of any external auditor retendering plans (C.3.8).

iStock_000046212782_SmallThe FRC has committed not to amend the Code further until at least 2019.

The FRC has also published a final draft of its Guidance on Audit Committees. While boards are not required to follow this guidance, it is intended to assist them when implementing the relevant provisions of the Code.

The FRC has stated that it will, from 2017, publish the names of those companies or company audits which have been the subject of the FRC’s Corporate Reporting Review (CRR) and Audit Quality Review (AQR). It notes that, as a result of the identification of those companies subject to CRR and AQR reviews, audit committees are encouraged to report even if there were no significant issues, in order to avoid speculation. Disclosure of AQR and CRR reviews should be factually accurate, fair and balanced in order for the market to understand and avoid the need for further public clarification. A focus of the FRC’s ongoing monitoring will be how audit committees report the outcomes of AQR and CRR reviews in their annual reports.


Executive Remuneration: IA’s Interim Report

The Squire Patton Boggs’s Compensation and Benefits Global Insights blog is hosting a new post entitled “Shareholder Spring 2: Rabbit Emerges From The Hat”.

iStock_000005855098_SmallThe post looks at the Investment Association’s Interim Report which will be used to inform a revision of the IA’s “Principles of Remuneration”. Essentially, they are looking to fix an executive remuneration system that they feel is no longer “fit for purpose” and outline some innovative proposals.

FCA Paper on Reform of the IPO Process

The Financial Conduct Authority has published a discussion paper on the availability of information during the UK equity IPO process.  The FCA focuses on 2 key issues:

  1. the fact that in the vast majority of London IPOs (in the absence of a retail or other public offer) an approved prospectus is not published until immediately prior to admission to trading, rendering the document ineffective as a basis for an investment decision by investors;
  2. the use of analyst research in the IPO process, in particular the potential bias of connected research, the lack of availability of unconnected/independent research, the timing of the publication of research (and the perception that there is a lack of other information available for investors upon which to base their investment decision) and the related market practice and rationale of blackout periods.

The FCA is seeking views on the need for reform in the UK IPO process to address these issues and has developed 3 different models for possible reform (although it is at pains to point out that these are not definitive proposals for reform at this stage).  All 3 models propose the use of a tri-partite prospectus with the publication of a FCA approved registration document at the same time as an Intention to Float announcement and prior to the publication of research.  Both connected and unconnected research could then be published after an appropriate blackout period.  Following the marketing and pricing of the transaction, the securities note and summary parts of the prospectus would be approved and published immediately prior to admission in the usual way.

iStock_000064569703_SmallThe FCA’s suggested “re-sequencing” of the IPO process is designed to give unconnected analysts and potential investors formal disclosure from the issuer at an early stage thus affording them more time to conduct due diligence and to consider the investment case.  The FCA believes it would give independent research analysts a more level playing field from which to author unconnected research and to publish that ahead of any marketing process.  One of the FCA’s additional ideas is to allow unconnected analysts equal access to the issuer’s management to assist them further in producing research.

This paper is likely to generate significant market interest and feedback.  The FCA’s starting position seems to be that the UK IPO process is inefficient; and yet London’s success as an IPO venue over the last few years suggests otherwise.  There are some obvious points that seem to have been overlooked in the analysis, for example, certain issuers may be concerned to preserve confidentiality (or at least to limit the amount of disclosure that is put into the public domain) for as long as possible during an IPO process (particularly if a twin track exit strategy is being pursued); the assumption that a registration document would be more effective disclosure than a pathfinder prospectus (which would contain the same information); the assumption that independent research would be commercially viable and readily produced; concerns around the control of information to a wider analyst community and the potential commercial and legal risks for an issuer if a wide range of potentially inconsistent disclosures and valuations are available to potential investors.

Brokers should also note the FCA’s words of warning to those who deploy research analysts formally or informally in the pitch process for IPO mandates.

Stakeholder responses are due by 13 July 2016.

Proposed Changes to AIM Rules

The London Stock Exchange has issued AIM Notice 44 in which it is consulting on proposed changes to the AIM Rules for Companies in advance of the Market Abuse Regulation coming into effect on 3 July 2016.

MAR establishes a new EU-wide regulatory framework on market abuse which expands on the previous regime and includes insider dealing, unlawful disclosure of inside information and market manipulation.  MAR will introduce new and more detailed regulations relating to market soundings (eg the confidential marketing of a placing of securities), the public disclosure of inside information, the contents and procedures relating to the maintenance of insider lists, transactions by an issuer’s managers and those closely associated with them (including during closed periods), and the sanctions for any related breaches.

The proposed changes to the AIM Rules for Companies include:

  • Amending the guidance note to AIM Rule 11 (General disclosure of price sensitive information) to reiterate the purpose of the rule and to signpost an AIM company’s new and separate disclosure obligation under Article 17 of MAR. Compliance with one rule will not automatically mean compliance with the other. In this regard, AIM companies will be accountable to two regulators: the Exchange regarding AIM Rule 11 and the Financial Conduct Authority  regarding Article 17.
  • iStock_000046478238_SmallDeleting from AIM Rule 17 (Disclosure of miscellaneous information) the obligation on AIM companies to notify information relating to directors’ dealings. The Exchange is satisfied that Article 19 of MAR provides an appropriate level of transparency. New guidance to Rule 17 is also proposed, signposting an AIM company’s obligations under Article 19.
  • Deleting existing AIM Rule 21 (Restrictions on Deals) and replacing it with a new Rule requiring AIM companies to have a reasonable and effective dealing policy. Existing AIM companies are expected to update their policies to ensure compliance with the new rule by 3 July 2016. Under the AIM Rules for Nominated Advisers, Nomads have a responsibility to ensure that their AIM clients continue to understand their obligations, including being satisfied that each client’s dealing policy is effective.  Many AIM companies will have a share dealing code in place already but the code will need to be reviewed and updated in order to comply with MAR and to ensure full compliance with the new requirements of AIM Rule 21.

The Exchange anticipates making consequential amendments to the AIM Rules for Companies, the AIM Rules for Nominated Advisers and the AIM Note for Investing Companies.

The Exchange will also consider further amending the AIM Rules once ESMA clarifies whether an issuer can end its close period by publishing a preliminary statement of annual accounts under MAR.

Responses on the consultation should be emailed to AIM on or before 12 May 2016.

PIRC Shareholder Voting Guidelines

iStock_000046478238_SmallPIRC has published a new edition of its UK Shareholder Voting Guidelines which replace the version published in April 2015.

Changes include the following:

  • PIRC will not support authorities for the disapplication of pre-emption rights up to an amount equal to 10% of the company’s issued ordinary share capital unless the board has made a clear, cogent and compelling case why the 10% level is appropriate for the company.
  • PIRC recommends voting against future share buyback authorities unless the board has made a clear, cogent and compelling case demonstrating how the authority benefits long-term shareholders and that the directors are not conflicted in recommending the authority.
  • PIRC recommends abstaining where non-audit fees paid to auditors are between 25% and 50% of audit fees and opposing if non-audit fees exceed 50% of audit fees for either the year under review or the previous three years.
  • PIRC supports the Davies Review recommendation that 33% of board positions in FTSE 350 companies be held by women by 2020 and expects companies to report on targets and attempts to address gender inequality if PIRC deems there to be evidence of gender disparity in the workforce and the gender balance on the board.
  • Whilst noting that remuneration committee members should not be executive directors of other UK listed companies, in 2016 PIRC will abstain on the election of such directors who sit on the remuneration committee.
  • PIRC considers the provision of remuneration consultancy by audit firms to be wholly unacceptable.

The full content of the revised guidelines is only available by purchase from PIRC.

FCA Quarterly Consultation Paper

The FCA has published its 12th quarterly consultation paper.

The FCA is proposing the following changes to the Listing Rules, the Disclosure Rules and Transparency Rules and the Prospectus Rules:

  • to modify the LR to make the link between the definition of a reverse takeover in LR 5 and the aggregation provisions in LR 10 clearer. The aim is to ensure that transactions cannot be artificially broken up to avoid being classified as a reverse takeover. This is in line with the FCA’s policy that it will consider the substance of a transaction over its legal form. Therefore, it is proposing to amend LR 5.6.4R to state that issuers must apply the aggregation provisions in LR 10.2.10R, in addition to the class tests, when calculating the percentage ratio of a transaction.
  • to amend the DTR to implement a prescribed reporting format for the annual reports on payments to governments prepared under the Transparency Directive (2004/109/EC) (TD) in accordance with DTR 4.3A. (This relates to issuers who are active in the extractive or logging of primary forest industries who are required to prepare an annual report on payments made to governments in the countries in which they operate.)

iStock_000049398330_SmallThe FCA considers that there is a clear benefit to requiring a report under the TD to be prepared in XML format which uses the same data schema as is required under the Accounting Directive. This will ensure that issuers who fall within scope of both the AD and TD reporting requirements can prepare a report which meets the requirements of both Directives in one format. For those issuers who are not required to use the reporting format prescribed in the UK for the AD reports on payments to governments, the introduction of a prescribed reporting format for the TD reports on payments to governments will impose an additional administrative burden. However, to achieve a level playing field and comparability of reporting the FCA proposes prescribing the reporting format for all TD issuers who are required to prepare a report on payments to governments.

  • to amend the PR to reflect further European Securities and Markets Authority (ESMA) publications. In particular, the FCA is proposing to update the list of documents in PR 1.1.6G that need to be considered together when determining the effect of the Prospectus Directive.  This will reflect that there are now four ESMA opinions regarding the PR.

The consultation closes on 18 May 2016.

LSE Admission and Disclosure Standards

The London Stock Exchange has published Notice N02/16, which sets out the revised Admission and Disclosure Standards and High Growth Segment Rulebook. The revised Standards have been adopted in the same form as that proposed by the LSE in its consultation published on 4 December 2015 with the exception of the proposed amendments relating to depositary receipts. The LSE has proposed further amendments to the rule on depositary receipts and invites comments on these proposals by 11 April 2016.

The majority of the proposed changes to the Standards relate to the structure of the Standards and are of an administrative or clarificatory nature. The Standards have been restructured so that they may serve as a consolidated resource for issuers and advisers.

London_SkylineThe definition of Main Market has been clarified to make clear that it encompasses all securities where application is made for admission to trading on London Stock Exchange’s EU Regulated Market, whether listed or unlisted. Further, the Specialist Fund Market has been renamed the Specialist Fund Segment (“SFS”), to clarify that it is a segment of London Stock Exchange’s Regulated Market, and that issuers must meet the associated requirements contained within the relevant EU directives and regulations for Regulated Markets. Securities admitted to the SFS (and High Growth Segment) are not admitted to the Official List.

The Executive Panel’s ability to impose a fine on issuers for breaches of the Standards has been increased from a maximum of £50,000 to £100,000 per breach. Public censures and fines over £100,000 per breach will continue to be heard by the Disciplinary Committee.