Reporting by extractive companies on government payments – early UK implementation of the EU requirements

10/46000117_6 1 REPORTING BY EXTRACTIVE COMPANIES ON GOVERNMENT PAYMENTS EARLY UK IMPLEMENTATION OF EU REQUIREMENTS – BIS RESPONSE AND FCA CONSULTATION Two EU Directives were passed in 2013 which mandate annual reports on payments to governments by companies in the extractive industries. In the UK, the government has confirmed that these provisions will be implemented early and will apply to listed and other large companies for financial years beginning on or after 1 January 2015. The UK government has issued its response paper following its consultation on implementing the relevant provisions in the Accounting Directive. It sets out how those aspects of the law over which EU Member States have some control, including timing of implementation of the requirements, format and timing of publication of reports, and the penalty regime, will be addressed in the UK. The Financial Conduct Authority has also issued its corresponding consultation paper on amendments to the Transparency Rules to implement the equivalent provisions in the Transparency Directive. 1. Background – the EU Directives The EU requirements follow a lobbying campaign by civil society groups and others over recent years focusing on reporting by companies in the extractive and logging industries of their payments to governments in countries in which they operate. The objective is to aid accountability and governance in resource-rich countries. Several other non-EU jurisdictions have said that they will introduce mandatory requirements of this type. The US introduced its own rules under the Dodd-Frank Act but their implementation has been delayed as a result of a legal challenge and, as a result, it is the EU rules that will come into force first. As set out in our July 2013 briefing on the EU Directives, the main features of the new EU requirements are as follows: SEPTEMBER 2014 London Table of Contents 1. Background – the EU Directives 1 2. Timing and method of UK implementation 2 3. To whom will the new UK regime apply? 3 4. Consolidated reports 4 5. Exemption through compliance with regime in another EU Member State 4 6. Exemption through compliance with an equivalent regime outside the EU 5 7. Timeline for compliance with the new reporting rules 5 8. Content and form of reporting 5 9. Assurance and penalty regime 6 Contacts 7 RELATED LINKS > Herbert Smith Freehills > EU Accounting Directive > EU Transparency Directive Amending Directive > BIS (UK government) response paper > Draft AD Regulations > FCA consultation paper (CP14/17) > July 2013 briefing on the EU Directives 10/46000117_6 2 • The overall regime is derived from two sources: – the new EU Accounting Directive (2013/34/EU) (published in June 2013), applying to large companies and any ‘public interest entities’ incorporated in an EU Member State; and – Article 6 of the amended EU Transparency Directive (2004/109/EC, as amended by 2013/50/EU) (published in November 2013), which extends the regime to all companies with securities traded on an EU regulated market (both debt and equity), therefore including non-EU incorporated companies with an EU listing. • Large companies are those that meet two out of three of the relevant minimum criteria: balance sheet total €20m, turnover €40m, employees 250. • 'Public-interest entities' are undertakings which are incorporated in an EU Member State with transferable securities (debt or equity) traded on a regulated market, and any other undertaking designated by the relevant Member State as public-interest entities (it also includes credit institutions and insurance undertakings but of course these are not in the extractive industries). • The disclosure regime applies to companies falling into the above categories that carry out extractive (including oil, gas and mining) and primary logging activities, as defined by the Accounting Directive (derived from the International Standard Industrial Classification). • Payments to governments (national, regional or local) in money or in kind, whether made as a single payment or a series of related payments, totalling €100,000 or over within a financial year, and categorised according to type (royalties, taxes, etc) must be disclosed, both by country and by ‘project’, on an annual basis. • There is no requirement for audit of the reports, but Member States must introduce an appropriate sanctions regime. • There are no exemptions from disclosure for information that is subject to confidentiality agreements, that is illegal to disclose in other jurisdictions, or that is otherwise commercially sensitive. 2. Timing and method of UK implementation As noted above, the regime derives from two EU Directives, the Accounting Directive and the Transparency Directive, each of which has a different scope and so must be implemented in the UK through two separate mechanisms: Key definitions in the Accounting Directive in relation to government payments 'government' means any national, regional or local authority of a Member State or of a third country. It includes a department, agency or undertaking controlled by that authority; 'project' means the operational activities that are governed by a single contract, license, lease, concession or similar legal agreements and form the basis for payment liabilities with a government. Nonetheless, if multiple such agreements are substantially interconnected, this shall be considered a project; 'Substantially interconnected' legal agreements should be understood as a set of operationally and geographically integrated contracts, licenses, leases or concessions or related agreements with substantially similar terms that are signed with a government, giving rise to payment liabilities. Such agreements can be governed by a single contract, joint venture, production sharing agreement, or other overarching legal agreement; 'payment' means an amount paid, whether in money or in kind, for activities in the extractive and primary logging industries, of the following types: • production entitlements; • taxes levied on the income, production or profits of companies, excluding taxes levied on consumption such as value added taxes, personal income taxes or sales taxes; • royalties; • dividends (except dividends paid on the same terms as other shareholders); • signature, discovery and production bonuses; • licence fees, rental fees, entry fees and other considerations for licences and/or concessions; and • payments for infrastructure improvements. Extracted from Article 41 and Recitals 45 and 48 of the Accounting Directive 10/46000117_6 3 ACCOUNTING DIRECTIVE TRANSPARENCY DIRECTIVE • The Accounting Directive (AD) does not need to be transposed into EU Member State law until July 2015, but the UK government has committed to introducing the requirements in Chapter 10 of the AD, on the disclosure of payments to governments, early, with effect from financial years beginning on or after 1 January 2015. • The amendments to the Transparency Directive (TD) do not need to be transposed into EU Member State law until November 2015. However, the UK government has asked the FCA to align implementation of the disclosure of payments to governments' provisions under the TD with the implementation of Chapter 10 of the AD so that it will also apply to financial years beginning on or after 1 January 2015. • The Department of Business, Innovation and Skills (BIS) published a consultation in March 2014 on the transposition into UK law of Chapter 10 of the AD (see our April 2014 briefing for details of the consultation) and published its response to that consultation in August 2014. • In August 2014 the FCA issued its consultation paper (CP14/17) on amendments to the Transparency Rules (DTRs) to transpose the TD provisions into UK law. The consultation is open until 7 October 2014. • These AD requirements will be introduced by regulations under the Companies Act 2006, the Report on Payments to Governments Regulations 2014 (the AD Regulations) and near-final draft regulations are included in the government response document. The AD Regulations are expected to be laid in Parliament for approval shortly. • The FCA – through a proposed new DTR 4.3A – intends to cross-refer to the requirements of the AD and the AD Regulations. New DTR 4.3A is set out in full the FCA consultation paper. The final rules are expected to be made before the end of the year. • The AD Regulations apply to companies incorporated in the UK which are large or which (whatever their size) have securities traded on a regulated market in the EU (see further below). • New DTR 4.3A will apply to companies with securities traded in the EU whose home Member State is the UK (see further below). • Much of the text of the AD Regulations is derived directly from the AD (Chapter 10, comprising Articles 41 to 48, and Recitals 44 to 53). In particular, Recital 45 of the AD contains text that underpins the definition of a 'project', the interpretation of which will be crucial to how companies apply the requirements (see key definitions box above). • New DTR 4.3A does not set out the contents requirements itself, but instead states that a "report on payments to governments must be prepared in accordance with Chapter 10 of the Accounting Directive". 3. To whom will the new UK regime apply? AD Regulations The AD Regulations require all large UK incorporated companies and all UK incorporated companies (whatever their size) with securities traded on any EU regulated market (so including the Main Market of the London Stock Exchange) to report annually on their payments to governments if they carry out extractive or logging activities. In a change from the March 2014 draft of the AD Regulations (which cross-referred to the Companies Act 2006 definition of "undertaking"), the definition of "undertaking" is now set out in the AD Regulations and lifted directly from the AD. This therefore clarifies that only UK incorporated companies are caught by the AD Regulations (although UK incorporated parent companies must report on a consolidated basis, see paragraph 4 below, and the consolidated reports must include their non-UK incorporated subsidiaries). DTR 4 New DTR 4.3A applies to companies with securities traded on any EU regulated market whose home Member State is the UK (see box below for further details). Therefore: • UK incorporated companies that have securities traded on a regulated market anywhere in the EU will be required to comply with both the AD Regulations and new DTR 4.3A. However, the requirement in new DTR 4.3A is to report on payments in accordance with Chapter 10 of the AD and, in guidance to accompany new DTR 4.3A, the FCA states that it will consider a report prepared in accordance with the AD Regulations to be in compliance with new DTR 4.3A. This means that companies will be able to prepare just one report and then file it and make it public in accordance with the separate requirements of the AD Regulations and new DTR 4.3A (see paragraph 8 below). 10/46000117_6 4 • Unlisted large UK incorporated companies, including subsidiaries of a non-UK incorporated company, will be covered by the AD Regulations only. • Non-UK incorporated companies that have securities traded on a regulated market in the UK will be covered by new DTR 4.3A only. 4. Consolidated reports AD Regulations Where the parent company of a group is a large UK incorporated company or is a UK incorporated company (whatever its size) with securities traded on any EU regulated market, it must (under the AD Regulations, subject to the exemption for smaller groups described below) prepare a consolidated report on payments to governments for its group if it or any of its subsidiaries carry out relevant extractive or logging activities. The drafting of the AD Regulations has been clarified since the March 2014 draft to make it clear that the consolidated report must include details of any payments made in relation to the activities of the parent company and all of its subsidiary undertakings (whether or not UK incorporated) which are "included in [its] consolidated group accounts". This would therefore not include joint ventures and other companies in which a parent company has less than a 50% shareholding. However, the BIS response notes that queries were raised about reporting on joint ventures during the consultation process on the regulations. It has therefore raised the issue with the European Commission and hopes that the industry guidance (see paragraph 8 below) will cover this when finalised. The parent companies of small and medium-sized unlisted groups are excluded from the AD Regulations regime for consolidated reporting (but any large undertakings within the group will still need to report on an individual company basis). To be small or medium-sized, a group must meet two out of three of these maximum criteria: CATEGORY BALANCE SHEET TOTAL TURNOVER NUMBER OF EMPLOYEES SMALL GROUP £6.1M £12.2M 50 MEDIUM-SIZED GROUP £21.6M £43.2M 250 DTR 4 New DTR 4.3A states that "payments must be reported at consolidated level", which is a copy-out of the wording in the TD. 5. Exemption through compliance with regime in another EU Member State AD Regulations A UK incorporated company that would otherwise be required to comply with the AD Regulations, but that is a subsidiary of a parent which is itself subject to the provisions implementing Chapter 10 of the AD in another EU Member State, will be exempt if its parent submits a payment report on a consolidated basis in that other Member State. Issuers to whom DTR 4 applies DTR 4 applies to the following (DTR 4.2.1): • legal entities with shares or debt securities admitted to trading on any EEA regulated market; • for whom the UK is the home Member State. Home Member State Home Member State is defined in Article 2(1)(i) of the amended Transparency Directive which broadly provides that for an issuer of shares or debt securities: • if it is incorporated in the EEA, its Home Member State is the Member State in which it has its registered office; or • if it is incorporated outside the EEA, its Home Member State is the home Member State chosen by the issuer out of the Member States where it has its securities are admitted to trading on a regulated market. Indirect application DTR 4 can also apply to other issuers with a premium listing (LR 9.2.6B) or standard listing (LR 14.3.23) on the Official List and issuers of depository receipts (LR 18.4.3) and securitised derivatives (LR 19.4.11) if they are not required to comply with corresponding requirements imposed by another EEA Member State. 10/46000117_6 5 A consequence of the early implementation in the UK identified during the BIS consultation is that, assuming other EU Member States do not require application of the AD requirements until 2016 financial years, a UK incorporated large company with a parent incorporated in another Member State would have been required to produce its own UK payment report in relation to 2015 only. For example, if a UK large company has a German parent that will have to apply the requirements only from 2016, the UK company would have needed to produce a payment report for its 2015 financial year. Therefore BIS has provided a one year exemption for such UK subsidiaries if their parent "is required to prepare consolidated group accounts in another Member State". DTR 4 New DTR 4.3A permits compliance with another EU regime, where applicable, because it simply refers to a payment report produced in accordance with Chapter 10 of the AD. However, there is no transitional period for subsidiary companies required to comply with new DTR 4.3A whose parent company will be complying with provisions implementing the AD or the TD in another Member State from 2016 (and therefore such companies will need to produce their own payment reports for 2015). 6. Exemption through compliance with an equivalent regime outside the EU Producing a payment report in accordance with a regime established in a jurisdiction outside the EU will not automatically exempt affected companies from compliance with AD Regulations, or from compliance with new DTR 4.3A. Any such exemption will only be available if the non-EU regime has been formally designated as "equivalent" to the EU regime by the European Commission. There is a mechanism for deeming non-EU payment reporting regimes equivalent for the purpose of the AD, but no jurisdiction has yet even been considered for equivalent status by the European Commission. For example, once (and if) rules are implemented under the Dodd-Frank Act in the USA, the European Commission has the capacity to designate it as an equivalent regime (although it is not clear whether this recognition would be reciprocated, i.e. whether compliance with the EU requirements would be deemed to be compliance with the US requirements). The European Commission is currently consulting on the criteria it will use to assess the equivalence of third country reporting requirements to the AD requirements. Any such equivalence recognition would not be forthcoming before the AD Regulations and new DTR 4.3A are implemented in the UK and so all relevant companies will need to comply with the UK regime from the outset, but may later benefit from any equivalence ruling. 7. Timeline for compliance with the new reporting rules Payment reports will first be required in relation to financial years beginning on or after 1 January 2015. This means that companies will need to have their systems and procedures in place to collect the relevant information at the start of that financial year, so by 1 January 2015 for 31 December year-end companies. AD Regulations The AD Regulations give UK incorporated large unlisted companies (whether public or private) until 11 months after their year-end to report. UK incorporated large companies which are exempt from compliance with the AD Regulations because they, or their parent undertaking, prepare an equivalent payment report (equivalence as determined by the European Commission, see paragraph 6 above) must deliver a copy of the equivalent report to Companies House (see paragraph 8 below) within 28 days of that report being made publicly available under the equivalent reporting requirements. DTR 4 New DTR 4.3A requires listed companies to produce their payment reports within six months. Companies affected by both the AD Regulations and new DTR 4.3A regimes will be required to comply with the shorter deadline for filing and publication. 8. Content and form of reporting Content As explained above, the AD requires that payments to governments (national, regional or local) in money or in kind, whether made as a single payment or a series of related payments, totaling £86,000 or over within a financial year, and categorised 10/46000117_6 6 according to type (royalties, taxes, etc), must be disclosed, both by country and by ‘project’, on an annual basis. Only payments that are made at an entity level to a government need not be reported by project. The requirements are identical under the TD, which simply cross-refers to the AD regime. Neither the AD Regulations, nor new DTR 4.3A, expand on the requirements of what is to be included in the payment reports. Further details of what should be covered in the payment reports will be addressed through industry guidance (not yet available), in particular on the definition of "project". Form Under both the AD Regulations and new DTR 4.3A, disclosure is not within the annual report and accounts, but rather by way of a separate report. Under the AD Regulations, large UK companies must file their payment report electronically with the registrar of companies in the UK, Companies House. In addition, the FCA consultation proposes that both UK and non-UK companies to whom new DTR 4.3A applies will need to make their payment reports "public" in the same manner as any other regulated information, i.e. via an RIS in unedited full text (under DTR 6.3.5), and the report must also be available on the listed company's website for 10 years. The BIS response states that a standard, machine readable template for payment reports is being developed by a group of industry and NGO participants in conjunction with Companies House. An example of such a template was included in the BIS consultation (in Annex 4), with two tables showing the same information between governments at a national, state and local level and also between projects within countries, giving the same totals in each. Work is ongoing on the final template. It is not yet clear how this will fit with the requirement to publish payment reports via an RIS and on the website for those subject to the new DTR 4.3A requirements as well. 9. Assurance and penalty regime There is no requirement for audit or any other form of assurance over the payment reports. In addition, the Financial Reporting Council's Corporate Reporting Review function has not been given any powers of examination of the content of the reports. AD Regulations There have been some changes to the penalty regime for AD implementation from that originally proposed in the March 2014 draft of the regulations. The AD Regulations now contain the following penalty regime in respect of the payment reports: • any person who knowingly or recklessly delivers, or causes to be delivered, to the registrar a payment report that is misleading, false or deceptive in a material particular commits a criminal offence (under section 1112 of the Companies Act 2006); and • if a company does not deliver to the registrar a payment report that complies with the content requirements of the AD Regulations within 11 months of its financial year end, the registrar may service a notice on the company requiring it to comply. Failure to comply with the notice within 28 days is a criminal offence for the company and its directors, and any shareholder in the company or the registrar may apply to court for an order directing a company to company with the AD Regulations. DTR 4 The usual liability regime for regulated information will apply to companies that are required to report under new DTR 4.3A. This requires reasonable care to be taken to ensure that the information in the payment report is accurate and not misleading, with the FCA having the ability to censure or fine listed companies (and any director "knowingly concerned") for breach of the requirements (DTR 1A.3.2). The limited civil liability regime for listed companies (under section 90A of the Financial Services and Markets Act 2000) in relation to published regulatory information will also apply. This provides that the company (but not its directors) is liable in the event of a misleading statement or announcement where there is a deliberate or reckless action by any of its directors. 10/46000117_6 7 Contacts Jennifer Bell, Partner T +44 20 7466 2994 M +44 780 9200047 jennifer.bell@hsf.com Sarah Hawes, Professional Support Consultant T +44 20 7466 2958 M +44 7809 200285 sarah.hawes@hsf.com Daniel Hudson, Partner T +44 20 7466 2470 M +44 7809 200312 daniel.hudson@hsf.com Greg Mulley, Partner T +44 20 7466 2771 M +44 7711 704327 greg.mulley@hsf.com Stephen Murray, Partner T +44 20 7466 2270 M +44 7789 998987 stephen.murray@hsf.com 10/46000117_6 8 Carol Shutkever, Partner T +44 20 7466 2013 M +44 7825 363634 carol.shutkever@hsf.com If you would like to receive more copies of this briefing, or would like to receive Herbert Smith Freehills briefings from other practice areas, or would like to be taken off the distribution lists for such briefings, please email subscribe@hsf.com. © Herbert Smith Freehills LLP 2014 The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein. 10/46000117_6 9