This week we look at new guidance on audit tenders, an analysis of public PSC data by Global Witness, and a new facility to ask ESMA questions on topics within its remit. But we begin with a small update on our main topic last week the recent scheme of arrangement takeover of Dee Valley Group.

No appeal in scheme of arrangement case

Last week we highlighted the judgment in relation to Severn Trent plc's takeover of Dee Valley Group plc by way of scheme of arrangement. The case was a landmark decision on whether share-splitting is possible to defeat a scheme of arrangement. The court held that it was not.

Dee Valley announced this week that there will be no appeal against the decision. For now, this lays to rest potential concerns about share-splitting on a scheme of arrangement takeover.

FRC to review UK Corporate Governance Code

The Financial Reporting Council (FRC) has announced that it intends to undertake a "fundamental review" of the UK Corporate Governance Code, which will take account of the issues raised in the Government's recent Green Paper on corporate governance and the preceding BEIS Select Committee Inquiry. The FRC will be seeking input from a wide range of stakeholders.

The announcement can be found here.

New ESMA Q&A webpage

The European Securities and Markets Authority (ESMA) has created a new webpage allowing members of the public to ask it questions directly.

Any person may ask questions, including consumer associations, financial market participants and supervised entities, and other stakeholders. However, questions from "other stakeholders" will generally be given lower priority.

Questions must relate to legislation within ESMA's remit or guidelines or opinions published by ESMA. This encompasses a host of regimes, including market abuse, markets in financial instruments, prospectuses, alternative investment funds (AIFs), UCITS, and European social entrepreneurship funds and venture capital funds (EuSEFS and EuVECAs).

ESMA will publish answers to questions it receives in English on its website.

ICSA publishes analysis of PSC register data

ICSA: The Governance Institute has published an analysis of public data published under the PSC regime. The analysis was carried out by not-for-profit organisation Global Witness, in collaboration with other expert organisations.

The analysis can be found here. It makes for interesting reading but raises some concerning points:

  • 9,800 companies sampled listed their PSC as an overseas company, and almost 3,000 listed their PSC as a company in a tax haven. This is striking. It is not possible to record an overseas company as a PSC unless it is listed on one of certain securities exchanges, which is unusual for offshore companies. This finding suggests at best a profound misinterpretation of the regime or at worst a deliberate attempt to circumvent it.
  • Problems arose with the way in which data can be submitted to Companies House. Ten PSCs identified their nationality as Cornish, and 2,160 stated they were born in 2016. ICSA suggests that input methods for the Companies House forms could be improved to address this.
  • Despite concerns that companies may find it hard to identify their PSCs, only 2% of companies sampled said they had been unable to do so. This suggests the regime may be working well where it is applied properly.
  • Just less than 10% of companies sampled said they had no beneficial owner. Our experience is that this is more common than one might suspect. Fragmented shareholdings in family- or management-owned companies often mean that no one individual has control.

Audit tenders new guidance

Both the Financial Reporting Council (FRC) and the Investment Association (IA) have published new guidelines setting out their expectations of traded companies when tendering their audit.


Publicly traded companies often put the external audit out to a public tender process.

Indeed, for financial years beginning on or after 17 June 2016, companies admitted to a regulated market (such as the LSE Main Market) and certain financial institutions are required by law to select their external auditor in accordance with a prescribed selection procedure. The audit must be re-tendered after ten years, and the company must usually rotate its auditor after a maximum of 20 years.

FRC guidelines

The FRC has updated its notes on best practice for conducting audit tenders. Although all listed companies must now re-tender their audit after ten years, the UK Corporate Governance Code (which is not mandatory) has required premium-listed companies to do this since 2012.

The notes can be found here. Helpful new suggestions from the FRC include:

  • asking the audit firm to outline its succession planning for the audit team;
  • asking for the audit partner to serve a minimum five-year term;
  • limiting the length of the tender proposal document to a set number of pages;
  • seeking views from investors on the level of audit fees; and
  • asking candidate firms for their most recent FRC Audit Quality Review.

Usefully, if a company is not sure when its audit engagement began (and so from what date its timescales run) the FRC can assist by giving the company an opinion.

IA guidelines

The IA has also published guidelines on audit tenders. These are aimed at all publicly traded companies, both on the Main Market, but also on AIM or the High Growth Segment. They set out investors' expectations of companies when conducting an audit tender.

The guidelines can be found here. Again, they provide useful recommendations, including:

  • engaging with investors on the tender process, including by issuing an RNS announcement and contacting major shareholders;
  • giving investors advance notice of a tender and its timetable;
  • prioritising auditor selection over other services, such as taxation and consultancy;
  • where practical, including firms outside the "Big Four" in the tender process;
  • ensuring the process addresses any advantage the incumbent auditor may have; and
  • disclosing to investors the selection criteria used in the tender (quality being the main criterion).

Practical implications

Audit tendering may be a new concept for many publicly traded companies. The FRC and IA guidelines together provide a useful navigation tool for companies across the various UK markets.