On 25 February 2013, the UKLA published its fifth Primary Market Bulletin (PMB No.5) which launched a consultation on its proposed new and revised technical and procedural notes. The UKLA invites comments on the proposed notes by 8 April 2013. Following the consultation, the UKLA will consider feedback and publish the final notes in the UKLA Knowledge Base, where they will constitute formal FSA guidance. See our December newsflash for information on the launch of the new UKLA Knowledge Base.
The UKLA has proposed five new technical notes which relate to the matters set out below.
Indemnities, guarantees and similar arrangements (UKLA/TN/310.1)
Since 1 October 2012, a subsidiary company has been able to benefit from a new exemption in the Companies Act 2006 (Companies Act) which exempts it from auditing its accounts in a financial year if specific conditions are met. See the article in our October newsletter for a summary of the relevant changes to the auditing requirements in the Companies Act.
One of the conditions to the exemption provides that the parent must guarantee the subsidiary's liabilities during the relevant financial year. The technical note states that the Companies Act is not clear on the extent of the guarantee and, therefore, it will assume that the guarantee is unlimited, until the relevant provision is tested in court. Consequently, the technical note states that an unlimited guarantee would fall within the scope of Listing Rule (LR) 10.2.4R and is deemed a class 1 transaction requiring shareholder approval. The technical note also clarifies that, as provided for in LR 10.2.4R(1), an arrangement with a wholly owned subsidiary will not be deemed a class 1 transaction. So, a parent guarantee that is granted pursuant to the Companies Act provisions to a subsidiary which is less than 100% owned will be deemed a class 1 transaction.
The note also clarifies that the Companies Act will not absolve a debt issuer from the requirement to include audited accounts in its prospectus – even where the issuer has its accounts consolidated into that of a parent entity – as there is no exemption from the requirement under the Prospectus Directive.
Periodic financial information and inside information (UKLA/TN/506.1)
The UKLA has noticed that some issuers experience a significant price movement following an announcement of a periodic financial report which has caused it to query whether issuers may have possessed inside information for a "considerable amount of time" before the announcement. Consequently, the UKLA is proposing guidance in a new technical note which clarifies that the disclosure of inside information, including information about financial performance, cannot be delayed so as to coincide with a scheduled announcement of a periodic financial report. In the new note, the UKLA reminds issuers that the Listing Principles require premium listed issuers to have adequate procedures, systems and controls in place to enable them to comply with their LR obligations, which includes being able to identify and disclose inside information in a timely manner.
Sponsor services: principles for sponsors (UKLA/TN/710.1)
The new technical note provides guidance on the application of the definition of "sponsor services" in the LRs. This new definition was amended in December 2012, following the UKLA's proposal in CP 12/2. The guidance includes the following clarifications:
- a sponsor is still required to adhere to the Principles for Sponsors set out in LR 8.3 even if it has not been formally appointed
- if a sponsor voluntarily provides guidance on the Listing Rules or Disclosure and Transparency Rules (DTRs) or communicates with the FSA in relation to an event which requires a listed company to appoint or obtain guidance from a sponsor, then such services would fall within the definition of sponsor services and the Principles for Sponsors would apply. The technical note distinguishes this from where the sponsor provides guidance to the company in relation to a matter for which it is not required to be appointed under the Listing Rules. In that case, the sponsor's guidance would fall outside the definition of sponsor services but will be treated as other 'ad hoc' advice on the Listing Rules and DTRs and may be relevant to the FSA's assessment of the sponsor's competency, and
- the UKLA also provides guidance on the role of the sponsor following the approval of a prospectus (or equivalent listing document) or a circular relating to a transfer to premium listing; on aborted transactions; and following the making of an FSA submission (for example, the submission of an eligibility letter).
Sponsors notifications (UKLA/TN/711.1)
In CP 12/25, the FSA amended the general notifications that sponsors are required to submit under the LRs. The new technical note proposes practical guidance for sponsors with regard to complying with these requirements. The FSA has also deleted one technical note - "Sponsor: Regular review and annual confirmation for Sponsors" as it is no longer relevant pursuant to the changes set out in CP 12/25. Click here for our client note on the new rules set out in CP 12/25.
Prospectus Directive disclosure issues relating to non-equity securities (UKLA/TN/631.1)
In this technical note, the UKLA clarifies that zero-coupon notes, on which no interest is paid, are not securities that fall within the disclosure requirements set out in Annex XII (securities notes for derivatives transactions) or Annex XX(12) (base prospectuses) of the Prospectus Directive.
Proposed changes to existing notes
The UKLA has also launched a consultation on proposed amendments to the following existing procedural and technical notes.
Eligibility process (UKLA/PN/901.2)
The UKLA proposes to revise the eligibility process for new applicants seeking to admit their securities to the Official List or in the context of reverse takeovers. The procedural note provides that the eligibility review will happen simultaneously with the UKLA's review of the prospectus (or other equivalent document) – rather than reviewing eligibility prior to the prospectus, which is the current process. The UKLA also proposes to allocate the same staff to the eligibility review and prospectus review so that there is a more "joined-up" approach which will help to make the application process more efficient. The proposals respond to market feedback that the sequential process of eligibility review before prospectus review was time consuming and involved unnecessary duplication. Queries raised at the eligibility process tended to be resolved by disclosure of relevant information in the prospectus and so the proposed changes seek to address these issues.
Whilst it recommends that the eligibility letter should be submitted at the same time as the draft prospectus, the UKLA does acknowledge that, in a minority of cases, the applicant's advisers may wish to submit the eligibility letter before the draft prospectus, for example where the applicant has significant concerns that it may be ineligible and wishes to seek guidance on its position before incurring substantial costs. The UKLA does state, however, that the initial discussions on eligibility are not a substitute for the actual review once the prospectus is submitted and will make the process lengthier for applicants.
In addition, the amended note clarifies that, where an issuer with listed shares issues a new line of listed shares, or a new topco is placed above a listed issuer, as the applicant already has shares listed (in the case of a new issue) or is a parent of substantively the same group as the one of which the existing issuer is the parent (in the case of a new topco), there is no need to submit an eligibility letter. Instead, the UKLA has confirmed that completed eligibility checklists and drafts of the prospectus will suffice.
The changes to the eligibility review process also require consequential changes to the procedural note on Document Review and Approval (UKLA/PN/903.2) which applies to all prospectuses.
Supplementary prospectus (UKLA/TN/605.2)
The amended note seeks to provide guidance on when a supplementary prospectus is required to be produced in accordance with Financial Services Markets Act 2001 (FSMA), which implements the requirements set out in the Prospectus Directive. The UKLA notes that advisers appear to interpret the provisions differently and, consequently, it intends to propose guidance to provide transparency on its approach to interpreting the relevant provisions. The guidance includes the following clarifications:
- it is not appropriate to publish a supplementary prospectus solely to clarify or revise drafting. New matters in the supplement must be relevant for investors - the UKLA states that it will not approve a supplement where it cannot establish relevance or materiality to an investor
- terms and conditions should not be changed through a supplementary prospectus, except in very limited circumstances where, following the amendment or change to the terms, the securities are manifestly the same securities
- a supplement may be produced to describe material external events (such as a factory burning down), and
- a supplement may be produced to inform investors of a material new factor but this new factor should not have the effect of amending the terms of the original offer or admission without a new prospectus being produced. However, an issuer may be able to make certain changes to a transaction (including its terms in certain circumstances), provided the new proposals clearly relate to the transaction described in the original prospectus.
In general, when assessing whether an offer or admission can be amended through a supplementary prospectus, the UKLA will consider whether the "fundamental premise of the original document still stands". For example, the UKLA states that, if the use of proceeds changes as a result of a proposed amendment, then a new prospectus, rather than a supplement, is likely to be required.
In PMB No. 5, the UKLA also states that the technical note has been amended to reflect changes to withdrawal rights in accordance with the amendments to the Prospectus Directive. However, the existing provisions relating to withdrawal rights have in fact been deleted and it is not clear whether this was intended or whether this is an error.
The UKLA also notes that it may update or amend its guidance in the technical note following the pending review on supplementary prospectuses by the European Securities Market Authority.
Risk factors (UKLA/TN/621.2)
The amendments to the Prospectus Directive, the majority of which came into force on 1 July 2012, introduced a requirement for prospectus summaries to disclose only key information on risks, its industry and its securities so as to provide the investor with the key information on the offer. In its technical note, the UKLA acknowledges that a different materiality test applies for risks noted in the summary compared to those in the risk factor section of the prospectus. Whilst the UKLA recognises the concern that those risk factors not included in the summary may be "de-emphasised" and, consequently, have an impact on the issuer's liability, it does not believe that this is justification for including non-key risks in the summary. In order to address the concerns, however, it proposes that a statement is included in the preamble to the risk factors section of a prospectus which provides that the risks set out in the summary are the essential risks to be considered - but also notes that the non-key risks noted in the risk factor section should also be considered by prospective investors.
The Technical Note has also been revised to clarify the UKLA's view on the inclusion of mitigating information within risk factors. The UKLA notes that its policy is not to routinely request that risk factors are substantially redrafted or deleted. However, it will challenge mitigating language where the effect is to make the disclosure conflict or undermine other Listing Rule or Listing Principle requirements (for example, requirements as to working capital or requirements to maintain adequate systems, procedures and controls). The UKLA also states that risk mitigation information can be disclosed elsewhere in the prospectus where it cannot be disclosed in the risk factor section due to, for example, US disclosure requirements.
Final terms (UKLA/TN/629.2)
Following the amendments to the Prospectus Directive which introduced the concept of categorising information to be included in the base prospectus or the final terms, the UKLA is responding to market confusion regarding these new requirements by proposing new guidance on determining where information should be disclosed. The proposed guidance also highlights drafting considerations for retail and wholesale prospectuses; in particular, by clarifying how information may be presented for retail denominated securities and complex derivative securities.
The UKLA's "spring-clean" of its new Knowledge Base has a particular focus on addressing the after-effects of the Prospectus Directive following its coming into force in the UK last summer. The new and revised material appears to be useful guidance in response to issues which have raised concern amongst stakeholders. Furthermore, the UKLA's proposals for a simultaneous review of an applicant's eligibility and its prospectus or equivalent document are consistent with its recent approach to provide a more streamlined and efficient service to market participants. The new review process should be viewed as a welcome change to the UK listing process amongst new applicants.