Included in this issue: FCA consults on the implementation of the EU Market Abuse Regulation | AIM Regulation statement on disclosure obligations under the AIM Rules and MAR | AIM: consultation on changes to AIM Rules for Companies | Changes to the Listing Rules (LR) and DTRs now in force | Statement of public censure of advisers for Takeover Code breaches | Additional presumptions to the definition of acting in concert | Amendments to definition of "voting rights" | Treatment of dividends paid by the target | Proposed changes to ISS Voting Guidelines | Modern Slavery Act 2015: section 54 slavery and human trafficking statement | Britain goes to work on boardroom bias | BIS consultation on implementation of EU audit reform | FRC also consults on audit reform

Equity Capital Markets

FCA consults on the implementation of the EU Market Abuse Regulation

The Financial Conduct Authority (FCA) has published its proposals for the necessary changes to the FCA Handbook required to implement the EU Market Abuse Regulation (MAR) which will have direct effect from 3 July 2016.

In overview, it is proposed that the Handbook should provide guidance on, and "signposts" to, MAR where appropriate. However, the Handbook will not contain, and the FCA have stated that, after implementation, it should not be regarded as being a source of all relevant provisions. The Treasury will also need to amend the Financial Services and Markets Act 2000 and, in the same way, make sure that any provisions which are incompatible with MAR are removed.

The FCA consultation deals with two broad issues. First, it seeks responses on two aspects of MAR where there is national discretion on implementation, in particular:

  • the regime relating to the notification to the FCA of the decision by issuers to delay the public disclosure of inside information. The FCA's preference is for explanations of any delay in disclosure only to be provided on request as opposed to in all circumstances; and
  • the threshold above which transactions undertaken on their own account by persons discharging managerial responsibility (PDMR), and those closely associated with them, should be disclosed to the market. At present, DTR 3 has no such threshold but MAR allows a €5,000 threshold which may be increased to €20,000 if the FCA thinks it is justified and the European Securities and Markets Authority agrees. The FCA's current thinking is that the €5,000 threshold is the right one but is seeking feedback to inform its decision.

Second, the proposals address the "step-change" caused by the EU market abuse regime being governed by a Regulation as opposed to a Directive - the FCA states that this necessitates deleting provisions of the Handbook where MAR contains an equivalent provision. In effect, this means that, as from July 2016, the Disclosure Rules and Transparency Rules (DTRs) will be renamed the "Disclosure Guidance and Transparency Rules"; it will also require fundamental amendment to the current Code of Market Conduct, Chapters 2 and 3 of the DTRs and the replacement of the Model Code of Share Dealing with guidance for issuers to use when framing their own procedures.

The FCA have requested feedback by 4 February 2016.

AIM Regulation statement on disclosure obligations under the AIM Rules and MAR

As a Multi-lateral Trading Facility, MAR will apply to AIM. Whether MAR will apply in its entirety is yet to be determined.

One area in which there is some clarity is in relation to market disclosure. Thus, the AIM Regulation team at the London Stock Exchange (LSE) has published an Inside AIM update outlining how disclosure obligations under MAR will sit alongside the disclosure obligations currently in Rule 11 of the AIM Rules for Companies.

AIM Regulation considers that retaining Rule 11 (in a slightly amended format to reflect MAR) is important to the integrity of AIM and the maintenance of an orderly market. As the FCA has been announced as the competent authority under MAR, retaining Rule 11 will mean that, when MAR comes into force, AIM companies will owe obligations both to the FCA under MAR and to the LSE under the AIM Rules.

AIM Regulation has stated that it intends to work closely with the FCA to minimise potential duplication and envisages that it will continue to discuss announcement obligations with nominated advisers in the first instance and will co-ordinate with the FCA as necessary. However, AIM Regulation acknowledges that only the FCA will be able to opine on MAR compliance and will always have the right to engage directly with AIM companies.

AIM: consultation on changes to AIM Rules for Companies

The LSE has published AIM Notice 42 containing proposed changes to the AIM Rules for Companies and, in particular, investing companies and those companies on the market which undertake a fundamental change of business. Consequential changes are also proposed to the AIM Note for Investing Companies. In overview, if adopted, the changes will:

  • increase the amount that a new investing company must raise on IPO from £3m to £6m; and
  • mean that companies which undertake a fundamental disposal of their assets will be regarded as a cash shell under AIM Rule 15 (and not an investing company) and thereafter have only six months to make an acquisition or acquisitions constituting a reverse takeover. Failing to do so will mean the LSE suspends trading in the company's shares which may lead to a cancellation of its admission under Rule 41.

Responses to the consultation are requested by 12 November 2015.

Changes to the Listing Rules (LR) and DTRs now in force

The FCA has published its response statement and new rules following the quarterly consultation it launched in June 2015. The changes made which, save as stated below, are now in force are largely as originally proposed and include:

  • amending LR 9.8.6R to require each annual financial report to include not only the amended going concern statement required by provision C.1.3 of the 2014 iteration of the UK Corporate Governance Code (Governance Code) but also the directors' assessment of the longer term viability of the company required by provision C.2.2, also known as the "viability statement". In doing so, the FCA rejected arguments that it was mandating a requirement and thereby overriding the "comply or explain" principle underpinning the Governance Code;
  • deleting the electronic eligibility requirements (LR 6.1.23R) for premium listed companies so as to accord with the provisions of Article 3.2 of the EU Central Securities Depositories Regulation; and
  • updating various headline codes for use when disseminating regulated information (DTR 8, Annex 2) – note that these headline codes will come into force on 1 December 2015.

Public M&A

Statement of public censure of advisers for Takeover Code breaches

The Takeover Panel (Panel) has issued a statement of public criticism of the conduct of Credit Suisse, Freshfields Bruckhaus Deringer and Holman Fenwick Willan (HFW), and described J.P Morgan's conduct as "disappointing", in respect of their roles as advisers in the acquisition by Vallar plc (the predecessor entity of Bumi plc) of interests in two Indonesian coal mining companies, which gave rise to a number of breaches of the Introduction to the Takeover Code (Takeover Code) and, in particular:

  • failing to consult the Panel as to whether there were concert party issues in relation to the transaction (in breach of Section 6(b) of the Introduction to the Takeover Code);
  • failing, in the case of Credit Suisse, to discharge the particular responsibilities of financial advisers (in breach of Section 3(f) of the Introduction); and
  • failing to act in an open and co-operative manner with the Panel and provide it with the necessary information and assistance (in breach of Section 9(a) of the Introduction).

By way of conclusion, the Panel set out a number reminders for practitioners and other persons to whom the Takeover Code applies, including:

  • the Panel system of regulation relies on parties and their advisers consulting the Panel whenever they are in any doubt whatsoever as to the application of the Takeover Code;
  • consulting the Panel where there are doubts as to whether parties may be acting in concert is particularly important;
  • taking legal or other professional advice as to whether parties are acting in concert, or relying on warranties or representations from those parties that they are not acting in concert, can never be an alternative to consultation with the Panel;
  • whenever the Panel is consulted, all relevant information must be disclosed and no relevant facts withheld; and
  • financial advisers have a particular responsibility to ensure that their client and its directors are aware of their responsibilities under the Takeover Code and that the Panel is consulted whenever appropriate. The Panel stated that its public criticism of law firms in this case should not be taken to mean that there has been any change in the established principle of financial advisers having particular responsibility.

Additional presumptions to the definition of acting in concert

The Code Committee (Committee) of the Panel has published a response statement on its proposals to introduce three new presumptions to the definition of "acting in concert" in the Definitions of the Takeover Code such that the following persons will be presumed to be acting in concert with each other:

  • a person, the person's close relatives, and the related trusts of any of them, all with each other;
  • the close relatives of a founder of a company to which the Takeover Code applies, their close relatives, and the related trusts of any of them, all with each other; and
  • shareholders in a private company who sell their shares in that company in consideration for the issue of new shares in a company to which the Takeover Code applies, or who, following the re-registration of that company as a public company in connection with an IPO or otherwise, become shareholders in a company to which the Takeover Code applies.

In proceeding with the amendments to the Takeover Code in substantively the form consulted on, the Committee has effectively codified existing Panel practice.

Amendments to definition of "voting rights"

The Committee has also published a response statement dealing with its proposals to amend the definition of "voting rights" in the Takeover Code in relation to restrictions and suspensions of voting rights and certain related amendments. Again, the new rules have been adopted as proposed with certain minor amendments, such that:

  • the definition of "voting rights" has been amended to make it clear that shares which are subject to a restriction on the exercise of voting rights, or to a suspension of voting rights, should nonetheless be regarded for the purposes of the Takeover Code as having voting rights which are currently exercisable at a general meeting. Thus, this will impact on the assessment of whether thresholds have been reached which determine whether a Rule 9 mandatory offer must be made, or a "whitewash" obtained; and
  • minor amendments have been made to the Note on Rule 9.7, which relates to the calculation of the number of shares to which voting restrictions will be applied and the number of interests to be disposed of where the Panel has agreed to the disposal of interests in shares by a person as an alternative to making a Rule 9 mandatory offer.

Companies which have in the past issued suspended voting shares which remain in issue should consult the Panel in order to obtain a ruling regarding the application of the Takeover Code.

Treatment of dividends paid by the target

Finally, the Committee has published a further response statement following its consultation on proposed amendments to the Takeover Code in relation to the treatment of dividends paid by a target company. Again, the proposals sought to align the provisions of the Takeover Code with existing Panel practice.

The substance of the amendments proposed has been adopted but with certain modifications. The changes will require a bidder, in each statement made in a possible offer announcement, in a firm offer announcement and in an offer document, to state that it will have the right to reduce the offer consideration by the amount of any dividend or other distribution which is paid or becomes payable by the target to its shareholders, unless, and to the extent that, the bidder expressly states that the shareholders of the target will be entitled to receive all or part of a specified dividend in addition to the offer consideration.

The Executive is not proceeding with its proposal to publish a related Practice Statement.

All the above amendments will take effect and revised pages of the Takeover Code will be published on 23 November 2015.

Governance, Reporting & Compliance

Proposed changes to ISS Voting Guidelines

Institutional and Shareholder Services (ISS) has launched its 2016 benchmark voting policy consultation. It is seeking feedback on the following proposed changes to its UK & Ireland Proxy Voting Guidelines:

  • Director overboarding: ISS is proposing to introduce an "overboarding" policy which recommends the number of directorships an individual may hold due to the importance it ascribes to directors having sufficient time to devote to their roles. The proposed policy limits are:
  • executive directors are not expected to hold other executive or chairmanship positions. They may, however, hold up to two non-executive directorships;
  • a board chairman should not hold an executive position or more than one other chairmanship position. However, the chairman may hold up to three other non-executive directorships; and
  • a non-executive director who does not hold an executive or chairmanship position may hold up to four other non-executive directorships.

Only publicly listed companies will be taken into account when assessing directorships. When applying the policy, ISS will consider the nature and scope of individuals' various appointments;

  • General authorities to issue shares without pre-emptive rights: ISS is proposing to update its policy to reflect the Pre-Emption Group’s revised guidelines which were published in March 2015. By way of reminder, the guidelines state that a company may seek a general authority to issue shares with a disapplication of pre-emption rights of up to 10% of issued share capital, provided that the extra 5% is to be used only for the purposes of an acquisition or a specified capital investment. However, ISS may issue a negative recommendation on the authority at the following AGM if a company subsequently abuses the authority during the year; and
  • Auditors' fees, smaller companies: ISS is proposing to extend its policy on non-audit service fees (such that it may recommend a vote against the remuneration of the auditors where the ratio of non-audit fees to audit fees has been in excess of 100% for over one year) to smaller companies.

Any comments should be submitted by 9 November 2015. The final policies will be published by ISS on 18 November 2015. The revised policies will be applied to shareholder meetings taking place on or after 1 February 2016.

Modern Slavery Act 2015: section 54 slavery and human trafficking statement

Each business with a turnover of more than £36m must publish an annual statement stating the steps it has taken to ensure that slavery and human trafficking are not taking place in its business or its supply chain. This "section 54" requirement is now in force and the government has published its guidance which deals with implementation, detailed application, transitional provisions and the content of the statement itself, all of which is covered in our update.

Britain goes to work on boardroom bias

In Lord Davies final report on gender bias in the boardrooms of the UK's largest listed companies, he reports that the target of 25% of FTSE 100 board positions being filled by women has been met, that there are now no all male FTSE 100 boards and only 15 all male boards in the FTSE 250. Lord Davies goes on to make various further recommendations, including setting a target for women's representation to be at 33% in the FTSE 350 by 2020. He also emphasises the pressing need to focus on executive positions and the longer term pipeline of female talent.

BIS consultation on implementation of EU audit reform

The Department of Business, Innovation and Skills has published a consultation paper setting out proposals for the implementation of the Directive amending the EU Statutory Audit Directive and the EU Audit Regulation on the statutory audit of public interest entities (PIEs). The Regulation will apply from 17 June 2016, by which time the Directive must also have been implemented.

The consultation seeks views on various issues, including:

  • for the purposes of the Regulation and those provisions of the Amending Directive that relate to PIEs, the decision not to extend the definition of a PIE to companies traded on AIM. Thus, PIEs will only be those entities with securities admitted to trading on a regulated market, banks, building societies, and insurers;
  • the requirement that PIEs retender their audit engagement at least every ten years and change their auditor every 20 years. The consultation also sets out transitional arrangements for PIEs which first appointed their current auditor in the 13 years leading up to the application date of the Regulation;
  • measures to make ineffective any agreement with a third party that restricts an audit client's choice of auditor;
  • proposed amendments to the Companies Act 2006 to reflect the wider range of entities that must now be audited under EU law; and
  • formal designation of the FRC as the UK's competent authority with ultimate responsibility for regulatory tasks under the Statutory Audit Directive.

Responses to the consultation are required by 9 December 2015.

FRC also consults on audit reform

The Financial Reporting Council (FRC) has also published a consultation to revise the Ethical and Auditing Standards, the UK Corporate Governance Code and related Guidance on Audit Committees, as part of its ongoing work to enhance confidence in audit. The proposals are designed primarily to implement the EU Audit Directive and Regulation, but also to reflect other recent changes, including revisions to the International Audit and Assurance Standards Board's auditor reporting standards and the new audit-related obligations of FTSE 350 companies under the Competition and Markets Authority's Statutory Audit Services Order. For our CQC update containing more detail, please click here. The consultation runs until 11 December 2015.