One of the challenges of interpreting the public company regulatory framework is the array of sources from which guidance may be available. Searching for guidance on a particular point can seem like searching for a needle in a haystack. The withdrawal of the facility to make no names calls to the UK Listing Authority ("UKLA") is likely to compound the problem (see our separate article here).
The UKLA had already decided to address this panoply of guidance sources by consolidating its previous guidance into the very useful set of technical and procedural notes that were published on 15 October 2010. In Primary Market Bulletin No.2, the UKLA has further developed this approach by setting out the proposed launch of what it calls the “UKLA Knowledge Base”.
Structure of the UKLA Knowledge Base
The UKLA Knowledge Base will serve as a single repository of the guidance available from the UKLA with regard to the Listing Rules and other rules under Part 6 of the Financial Services and Markets Act 2000. The UKLA Knowledge Base will also include explanations of how certain issues are expected to be addressed, as well as any information deemed as useful to market practitioners.
As part of the development of the UKLA Knowledge Base, all previous notes issued by the UKLA have been reviewed. The notes which are still considered to be valid have been reproduced in the new format; and those considered to be outdated have been withdrawn or revised. 72 notes have been reformatted. Unfortunately, there is a lot of information missing form the new reformatted notes that is presumably still valid guidance.
Within the new format, the notes are all given a unique reference number. This reference number is split into four parts. All the unique reference numbers begin with UKLA, and this is followed by either PN (Procedural Note) or TN (Technical Note). The third element of the unique reference number refers to the topic of the note, and the final number determines the version of the note.
A full list of the notes which have been amended into the new format can be found at:www.fsa.gov.uk/library/policy/guidance_consultations/2012/ukla-bulletin.
Given the very large number of notes that were being issued for consultation simultaneously, the UKLA provided little time to submit a response. Comments were requested by 14 August 2012, although this was subsequently extended to 24 August 2012.
Overview of Newly Proposed Notes
Along with the reformatting of previous notes, the UKLA also introduced 11 new notes, of which 3 are Procedural Notes and 8 are Technical Notes.
Block listing, UKLA/PN/907.1
A block listing is a facility which allows an issuer to admit to listing unallotted securities, which are to be issued over an extended period of time. The note explains the rationale for the block listing regime. It states that in order to ensure the block listing regime is consistent with the Financial Services Authority's ("FSA") statutory duty to admit securities only when it is satisfied that relevant regulatory requirements are satisfied, its availability is limited. It is most commonly implemented in connection with the issue of shares under employee share option schemes and as a result of conversion of convertible instruments and the exercise of warrants. Within the note, the UKLA highlights practical requirements for applications under the block listing regime, including the importance of full disclosure in the application for a block listing.
The UKLA is not prescriptive about the circumstances in which a block listing regime will be available. However, the regime would not be available for issuances that are likely to have very few allotments, for the avoidance of fees or for the purpose of carrying out placings of shares.
UKLA decision making and review process, UKLA/PN/908.1
This note covers the decision making procedure of the UKLA, including its internal escalation process. Escalation can be triggered either by the UKLA personnel dealing with a matter themselves or the individual seeking guidance under SUP 9.5.1G. The note sets out a seven step general description of the decision making process. The possibility of an appeal is also covered by the note, including information about the structure of the Listing Advisory Review Committee and the appeal process. However, the note does not cover referrals of UKLA decisions to the Upper Tribunal.
Sponsor firms - ongoing requirements during reorganisations, UKLA/PN/909.1
Understandably, given the current economic climate, there has recently been an increase in the number of sponsor firms that have been the subject of some form of reorganisation, including a change of control. It is noted that during any transitional period caused by a reorganisation, a sponsor has an ongoing requirement to meet the criteria for the role, as set out in LR8.6.6R.
The note also reminds readers that the sponsor firm should be in contact with the Sponsor Supervision Team from the early stages of a proposed reorganisation, even though other parts of the FSA may also be notified as a result of a potential change of control. The note sets out a list of information that the UKLA will require at the time of such a reorganisation in order to assess ongoing competence to perform sponsor services.
Approval of circulars, UKLA/TN/206.1
This note seeks to remind issuers with a Premium Listing that, unless an exemption applies, a circular must not be published without the prior approval of the FSA. Exemptions apply, amongst other things, where resolutions are being circulated that are not unusual. It is for an issuer and its advisers to ascertain whether or not a resolution is unusual. However, just because a resolution is an ordinary resolution does not mean that it is not unusual. Circulars that relate to meetings requisitioned by shareholders should normally be considered to be unusual. The UKLA should be consulted quickly in such situations because the company has a finite time to convene the meeting under company law.
Long term incentive schemes, UKLA/TN/208.1
This note relates to a long term incentive scheme set up to facilitate the retention or recruitment of an individual director under LR 9.4.2R(2). The rule states that this facility is available only in “unusual circumstances”, since it circumvents the normal requirement for a shareholder vote in respect of such matters. The note states that the UKLA would expect the rule to be rarely used in practice. The note is unhelpfully short on specific guidance on the meaning of "unusual circumstances".
Related party transactions - Modified requirements for smaller related party transactions, UKLA/TN/308.1
Related party transactions normally require a financial adviser's fairness opinion to be published in connection with the transaction, as well as a shareholder vote. However, there is an exemption for smaller related party transactions. In such circumstances, LR.11.1.10R(2)(b) requires, amongst other things, that a written confirmation from an independent adviser be provided to the FSA stating that the proposal is fair and reasonable so far as all shareholders of the issuer are concerned. This note addresses the recent use of language in such letters which limits the use of the letter by the FSA as well as the inclusion of third party disclaimers. The FSA considers it "unnecessary" to include such provisions in the letters. The note also states that explanations for the opinion are unacceptable since they could qualify the validity of the opinion. A clean confirmation tracking the wording of the rule itself should be given.
Related party transactions - Issuer's undertaking, UKLA/TN/309.1
Also in the context of a smaller related party transaction, the issuer is obliged to include certain details in respect of the transaction in its next published annual accounts. This note provides guidelines from the UKLA in relation to the preparation and content of such disclosure. This note is produced in response to numerous accounts of a lack of clarity found in previous cases. These guidelines are provided as a method to improve standards, and so are advised to be followed. If the standards do not improve, the FSA has stated that it may choose to take disciplinary action.
Prospectus disclosures on credit rating agencies, UKLA/TN/631.1
This note is produced as a result of the introduction of The Credit Rating Agency Regulation 1060/2009. This Regulation requires that any reference to a credit rating in a prospectus must come with a statement determining whether it is from a credit rating agency that is established in the EU and registered under the Regulation. The note goes on to provide examples of what will be required by the disclosure. A key point to pick up on in the note is the requirement to disclose the name of the specific legal entity that has been registered or certified, as opposed to the global trading name of the organisation concerned.
Sponsor's obligations on financial position and prospects procedures, UKLA/TN/708.1
In connection with a main market IPO, under LR 8.4.2R(4) a sponsor declaration is required to the effect that "the directors of the applicant have established procedures which provide a reasonable basis for them to make proper judgments on an ongoing basis as to the financial position and prospects of the applicant and its group". The note goes on to state that "established" means that all necessary procedures have been put in place at the point of admission, even though they may not have been operated at that point.
The note also states that the sponsor should make due and careful enquiry; the UKLA would expect to see evidence of the sponsor's own enquiries, challenges and actions at all stages of its engagement, notwithstanding the possible role of the reporting accountants.
Reliance by a sponsor on a comfort letter from a reporting accountant, without evidence of an appropriate level of sponsor enquiry and challenge, will mean the sponsor has not met its obligations under LR 8.4.2R(4).
Equality of treatment - Listing Principle 5, UKLA/TN/207.1
Listing Principle 5 states that all shareholders of the same class should be treated equally in terms of the rights attached to the shares unless holders are considered to be in a different position. The note identifies that there are few circumstances in which the UKLA will accept that a certain group of shareholders can be treated differently. The note states that the UKLA is of the view that a capital reorganisation by means of a share consolidation and subsequent share split, with the aim of removing small shareholders, would be a breach of this principle.
Sponsor transactions - Adequacy of resourcing, UKLA/TN/709.1
Under LR8.6.6R, a sponsor will be required at all times to demonstrate that it is competent to carry out all sponsor services in connection with a particular transaction. The note sets out some of the factors that should be considered when a sponsor determines whether or not it is competent to provide sponsor services in connection with a transaction. The onus is on sponsor firms to assess their ability to act each time they are considering an appointment. However, it goes on to note that the Sponsor Supervision Team monitors the transactions to which sponsors are appointed and will be prepared to take action to require firms to review their ability to act on transactions where the risks to the integrity of the sponsor regime are high. Sponsors should be aware of a potentially "intrusive approach by the UKLA".