Unusual Case of Cold-Shouldering

iStock_000049398330_SmallIn only the third case of its kind in the history of the Takeover Panel, the Panel has used its disciplinary power to declare a person to be someone who, in its opinion, is not likely to comply with the Code.  This has the consequence of triggering “cold-shouldering” i.e. professional members are obliged in certain circumstances not to act for the person in a transaction subject to the Code while the sanction remains effective.`

In this case, the Hearings Committee ruled that Mr Morton and Mr Garner be cold-shouldered for six and two years respectively. The facts of the case are quite unusual, but essentially there were flagrant and sustained breaches of section 9(a) of the Introduction to The City Code on Takeovers and Mergers – i.e. to deal with the Panel in an open and co-operative way and not to provide incorrect, incomplete or misleading information to the Panel.

On the facts, Mr Morton thought that, on an acquisition of shares, he had breached Rule 9 in that he should have made a mandatory offer for the remaining shares. He and Mr Garner then concocted a series of lies trying to establish that Mr Morton’s purchase had actually been for Mr Garner so no Rule 9 obligation arose. They went so far as to create a dishonestly back-dated promissory note which was proffered to the Executive of the Takeover Panel in an attempt to mislead it into thinking the purchase was for Mr Garner. The bitter  irony of the case is that, on a proper construction of Mr Morton’s various concert holdings, the initial purchase could have been made without triggering a Rule 9 obligation!

The moral of the story is to be open and honest with statutory regulators.



ESMA updates its Market Abuse Q&A

ESMA has published an updated version of its Q&A on the Market Abuse Regulation. Clarification has now been provided on the following matters:

  • For the purpose of calculating whether the threshold triggering the notification obligation under Article 19(1) of the MAR has been reached, the transactions carried out by a person discharging managerial responsibilities (PDMR) and by closely associated persons to that PDMR are not to be aggregated.
  • How the value of gifts, donations and inheritances is to be calculated for the purpose of the notification and disclosure of managers’ transactions under Article 19 of the MAR.
  • Where PDMRs are granted share awards that are conditional under a contractual remuneration package, notification will only be necessary when the conditions are satisfied and the transaction is actually executed, and not when the contractual remuneration package is entered into.
  • A communication which contains purely factual information on one or more financial instruments or issuers does not European Parliament in Brusselsconstitute an “investment recommendation” for the purposes of the MAR, provided it does not explicitly or implicitly recommend or suggest an investment strategy.
  • A communication which only reports or refers to previously disseminated investment recommendations, and does not include any new elements of opinion or valuation, or confirmation of a previous opinion or valuation, does not constitute an “investment recommendation” under the MAR.
  • If the price or value of a derivative traded outside a trading venue does not depend on or have an effect on the price or value of a financial instrument referred to in Article 2(1)(a), (b) or (c) of the MAR, the derivative is not in scope of the MAR and any recommendation relating to the financial instrument is not in scope of Article 20 of the MAR.
  • Where an investment recommendation relates to a derivative, how to determine whether a recommendation has been given on the same financial instrument, for the purposes of complying with Article 4(1)(h) of Commission Delegated Regulation (EU) 2016/958.

AIM Disciplinary Notice: Breach of Rule 31

The London Stock Exchange has published AIM Disciplinary Notice 15. The AIM company involved has been privately censured and fined £75,000 for a breach of AIM Rule 31 (AIM company and directors’ responsibility for compliance).

The AIM Disciplinary Committee (“ADC”) determined that the AIM company had failed to:

  • Provide its nomad with information reasonably required to carry out the nomad’s responsibilities owed to the Exchange.
  • Seek its nomad’s advice regarding compliance with the AIM Rules when it was appropriate to do so.
  • Inform its nomad and seek advice regarding a series of business developments. The ADC held that it was not appropriate for the company to decide whether or not the business developments were disclosable based solely on its own assessment of its obligations under the AIM Rules, without reference to its nomad.

iStock_000048287250_SmallThe ADC further noted that:

  • The company’s obligation to inform its nomad and seek advice regarding business developments covers a wider range of developments than would be required to be announced under AIM Rule 11 (General disclosure of price sensitive information).
  • It is not sufficient for an AIM company simply to send agendas and minutes of board meetings to its nomad, without any context or conversation, and assume that such actions discharge the company’s responsibilities under AIM Rule 31.
  • Contractual obligations between an AIM company and its nomad do not override the company’s responsibilities under the AIM Rules.

The case is a salutary reminder to AIM companies of the importance to comply with AIM Rule 31 obligations to liaise with its nomad. In particular, AIM Rule 31 should not be narrowly interpreted and requires an AIM company to provide full, timely and regular information to its nomad. The ADC has said that it will continue to pursue formal disciplinary actions for such breaches.

AIM Rules Social Media

AIM Regulation has published an Inside AIM update on how social media (such as “twitter”, Facebook and the company’s website) interacts with the disclosure obligations under the AIM Rules. It has also clarified that these forms of communication are subject to the same rules regarding disclosure of regulatory information.

In addition, if disclosure by social media leads to a breach of AIM Rules 10 or 11, AIM Regulation will investigate and take appropriate disciplinary action. AIM companies also need to be mindful of their obligations under the Market Abuse Regulation (MAR) and note that any premature or selective disclosure by social media may give rise to breaches of MAR.

London_SkylineAIM companies are required to have in place sufficient procedures, resources and controls to enable them to comply with the AIM rules. Such systems, procedures and resources need to take into account (amongst other things) the use of social media. Companies should have clear communication policies which address the following questions (by way of example):

  • Does the AIM company have a clear policy on the use of social media as part of its existing communications policy?
  • How effective is that policy? Is it read and understood by all relevant persons?
  • How regularly is the policy reviewed?  How does the AIM company identify and ensure the policy is kept up to date?
  • If the AIM company engages a third party to disseminate regulatory information via social media, how does it ensure the third party will not compromise compliance with the AIM Rules and MAR?
  • What are the AIM company’s protocols in talking to its nominated adviser in advance of information being released via social media?

It may feel like a lighter-touch environment, but social media is subject to the same regulatory scrutiny as more formal announcements and AIM companies would do well to keep that in mind.

Ethnic Diversity of UK Boards

The Parker Review Committee has published a consultation version of a report into the ethnic diversity of UK boards. The report finds that ethnic minority representation on the boards of FTSE 100 companies is disproportionately low, representing only 8% of the total director population compared to constituting 14% of the UK population.

Business people discussing strategy in boardroomThe report includes several recommendations which are intended to:

  • Increase the ethnic diversity of FTSE 100 and FTSE 250 boards.
  • Ensure that FTSE 100 and FTSE 250 companies develop mechanisms to identify, develop and promote people of colour so that they have a pipeline of board capable candidates.
  • Enhance transparency by way of the disclosure in annual reports of companies’ diversity policies and compliance with board composition recommendations.

A specific recommendation is that each FTSE 100 board should have at least one director of colour by 2021, and each FTSE 250 board should have at least one director of colour by 2024.

Comments on the consultation version of the report are requested by 28 February 2017 and a report containing the final recommendations and findings of the review will be published thereafter.

ESMA Guidance on Market Soundings

The European Securities and Market Authority has published its final guidelines on the steps and the records that a person receiving a market sounding will have to consider and implement according to Article 11(11) of the Market Abuse Regulation (EU) No 596/2014 (MAR).

A market sounding is the disclosure of information to one or more potential investors, prior to an announcement, in order to gauge their interest in a possible transaction.

The guidelines detail:

  • the factors that recipients of market soundings are to take into account when information is disclosed to them in order for them to assess whether the information amounts to inside information;
  • the steps that such persons are to take if inside information has been disclosed to them; and
  • the records that such persons are to maintain in order to demonstrate that they have complied with MAR.

SONY DSCThe guidelines are strong on the need for training and compliance with pre-established reporting procedures yet also emphasise the need for these to be appropriate and proportionate to the recipients’ scale, size and nature of their business activity.

Records will need to be kept in a durable medium for at least 5 years.

The guidelines apply from 20 December 2016.

“A change has got to come!”

A number of themes trailed in Theresa May’s first speech after securing the Conservative nomination,  were repeated at last week’s Conservative Party conference in Birmingham. The new Government reiterated its intention to occupy the centre ground of British politics and the delivery of this political objective will undoubtedly have implications for corporate Britain – in the words of the Prime Minister “ a change has got to come.”

GB_FlagAt the moment we are short on detail, but the Government has promised to publish plans later this year to have consumers and workers represented on company boards of directors. Speech soundbites also focussed on executive pay, the taxation of international business and the payment of excessive dividends, together with a more general promise to protect and enhance workers’ rights.

How all this will play out remains to be seen, but it is clear that worker representation on company boards will be at the forefront of the changes with specific proposals scheduled to appear in the next few months. Whilst we don’t know what these will look like, given that 19 out of 28 EU member states have some form of worker representation  there are plenty of examples that could be followed. Obviously there are many issues that will need to be worked through (such as, how to reconcile worker representation with the existing statutory duties of directors and requirements of the UK Corporate Governance Code), however, the momentum that has developed makes it hard to see how anything other than significant change will result.

At the moment commentary appears to be focussing on what this will mean for our larger listed companies, which are already subject to extensive governance requirements (although not worker representation). However, nothing in Theresa May’s speech drew any distinction between companies that are publicly listed and those that are owner managed or private equity backed. Indeed, her speech contained a number of thinly veiled references to BHS in relation to some of the behaviours she is seeking to regulate, so she may not be as adverse as some may think to the TUC’s recently stated position that companies with 250 or more employees should be covered.

A Conservative Government promising to protect and enhance workers’ rights and adopt continental models of corporate governance – strange times indeed!


Corporate Governance Inquiry: Are Employee Representatives Coming to the Boardroom?

Business people discussing strategy in boardroomThe Business, Innovation and Skills House of Commons Select Committee has launched an inquiry on corporate governance, focusing on directors’ duties, executive pay and the composition of boards. Interestingly, the inquiry raises the question, “Should there be worker representation on boards and/or remuneration committees?”. This echoes Theresa May’s speech on 11 July when she said “…and we’re going to have not just consumers represented on company boards, but employees as well.”. Is this a sign of things to come?

Submissions are requested by 26 October 2016.

Corporate Director Ban – Update

The Companies Act 2006 currently allows companies to appoint a corporate director as long as at least one of the directors is an individual. However, the Small Business, Enterprise and Employment Act 2015 will change that, such that only a natural person may be appointed as a director of a company unless the appointment falls within one of the exceptions provided for by regulations.

iStock_000014463224_MediumThe rationale for the ban on the use of corporate directors is found in the Government’s campaign to increase corporate transparency. The new regime was expected to come into force in October.

However, and without publicising the fact, the Companies House website now says: “You won’t be able to appoint corporate directors, although there are some limited exceptions. The detail of these exceptions are still under development. Any further information including a date for implementation will be provided on GOV.UK as soon as it’s available.”

It is hoped that this delay will afford an opportunity for the Department for Business, Energy and Industrial Strategy to review the scope of the ban and the proposals for possible exceptions to it.