New Financial Services Authority (FSA) rules implementing the EU Transparency Obligations Directive (TD) will take effect from 20 January 2007. The FSA is adding transparency rules to the Disclosure Rules (DR), with the DR being renamed the Disclosure and Transparency Rules (DTR). Consequential changes are also being made to the Listing Rules (LR).

This briefing identifies some key TD issues for UKincorporated listed companies, relating to:

  • periodic financial reporting, including new requirements for quarterly reports or management statements and for responsibility statements;
  • the new regime for disclosure of major shareholdings;
  • and requirements on electronic communications with shareholders and others and a proposed further review of disclosure of contracts for difference.

The new financial reporting rules applying to issuers with shares admitted to trading on a regulated market (such as the London Stock Exchange (LSE) main market) take effect for financial reporting periods starting on or after 20 January 2007. The FSA has included a table in issue 14 of List! (page 5) illustrating when companies have to make their first TD-compliant reports. Companies with a 31 December year-end will not be covered by the new rules until 2008, but a company with a financial year that begins, say, on 1 April 2007 must produce a TDcompliant interim management statement during the period starting no later than 10 weeks after that date and ending no later than six weeks before 30 September 2007. Companies must continue to comply with the existing reporting regime until the TD reporting regime applies to them. Note that the new regime covering notifications of major interests in shares (see ‘Major shareholdings – disclosure and investigation – dual regime’ below) applies from 20 January 2007 regardless of financial years.

Companies will have to publish their annual financial report within four months of the end of their financial year and their half-yearly report within two months of the half-year end. Companies will no longer have to send half-yearly reports to shareholders or publish them in a newspaper (though the FSA suggests companies may want to continue to send hard copies to those shareholders who still want them). Issuers who fall outside the scope of International Accounting Standard (IAS) 34 will have to reflect any accounting policy changes that will apply in the subsequent annual report in their half-yearly report. This is not intended to stop companies changing their accounting policies in the second half of the year.

The FSA says that the requirement to provide a ‘true and fair view’ in half-yearly reports is satisfied by a statement that the condensed accounts have been prepared in accordance with IAS34, provided the person making the statement has reasonable grounds to be satisfied that the condensed set of statements is not misleading. The FSA’s view is that this does not affect the interpretation of true and fair view for annual accounts.

Issuers who use UK Generally Accepted Accounting Principles rather than IAS are guided to use the Accounting Standards Board statement on interims. If the half-yearly statement has been audited or reviewed the report or review must be reproduced in full. The FSA has clarified that only audit review reports compiled in line with Auditing Practices Board pronouncements on interim reports must be reproduced in full.

The TD aims to ensure that the financial information provided by listed companies is standardised and provided frequently and quickly. A key part of this strategy is the requirement that an issuer of shares must issue either quarterly reports or an interim management statement (IMS) that, broadly:

  • gives a general description of its financial position and performance during the relevant period;
  • and explains material events and transactions and their impact on the financial position.

To help companies interpret the new requirements, the FSA has given informal views on IMS content in issue 14 of List!. The FSA stresses that IMS content will depend greatly on the circumstances of the issuer and the markets in which it operates and that the ‘guidance [in List!] is not mandatory, exhaustive or appropriate… in all circumstances’. The FSA suggests that issuers may be able to use trading statements to satisfy the obligation to publish an IMS provided the requisite information is included. The FSA also takes the view that, in some situations, financial information may not need to be included in an IMS. The FSA hopes that the market will drive best practice for IMS content and intends to review market practice in 18-24 months.

Listed companies will no longer have to produce preliminary statements of annual results but, if they choose to do so, they must meet existing content requirements. This will not allow issuers to withhold inside information, as they are still required to publish this as soon as possible under the DTR.

The persons responsible within the listed company will be required to state publicly that:

  • to the best of their knowledge, the annual financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the company’s consolidated assets, liabilities, financial position and profit or loss;
  • the annual management report includes a fair review of the development and performance of the business and the company’s position, with a description of the principal risks and uncertainties that it faces; and
  • the half-yearly management report includes a fair review of the important events that have occurred in the first six months of the financial year and their effect on the financial statements, with a description of the principal risks and uncertainties for the remaining six months (there are additional requirements regarding related parties’ transactions).

It is up to the company to decide who will take responsibility for the statements or report. The responsibility statement should give the names and functions of the relevant people. The FSA indicates that where one director acts on behalf of the people responsible, only that director needs to sign the responsibility statement and it is not necessary to name all the other people responsible.

The DTR make it clear that the company itself (rather than the directors) has sole regulatory responsibility for compiling annual and half-yearly reports.

There has been a concern that the new TD requirements may increase the liability of a listed company and its directors and auditors for the accuracy of financial reports. It is arguable that liability might extend beyond existing shareholders to all potential investors, and might also arise under the laws of each of the 27 member states.

The Companies Act 2006 has set up a statutory liability regime to help protect companies against this possible extended liability (at least in the UK). Under the new law, a listed company is liable to compensate an investor who has acquired securities and suffered loss as a result of an untrue or misleading statement in, or omission from, an annual, half-yearly or interim management report, or a preliminary statement of annual results. But to establish liability a director must have known or been reckless as to whether the statement was wrong or misleading, or have known that any omission was a dishonest concealment. Only the company is liable to the investor, although the director concerned may be liable to the company.

The government consulted on whether this new liability regime should be extended to cover other disclosures required by FSA rules, but decided that it could not consider such a complex issue in time to make relevant changes to the Companies Act 2006 and that there should be a formal review. This review is now being conducted by Professor Paul Davies. There is a statutory power to make changes to the liability regime if the review concludes that this is appropriate.

Companies will still have to meet the existing LR requirements on the timeliness and content of dividend statements. They will also have to continue to meet other LR requirements related to periodic reporting, including:

  • directors’ remuneration disclosures;
  •  the statement that the business is a going concern; and
  • stating whether the company complies with the Combined Code or explaining where it does not do so.

 The FSA intends to delete its requirements on directors’ remuneration when the new Companies Act provisions on directors’ remuneration come into force. The FSA had proposed to delete a number of other requirements, including details of arrangements under which a director has waived emoluments, a statement of the beneficial and non-beneficial interests of directors and items in relation to the issuer’s purchases of its own shares, but opposition to these deletions has led the FSA to retain all of these requirements. Amendments are being made to the Model Code’s close periods to align them with the new reporting deadlines. As the FSA did not consult on introducing close periods before the publication of IMSs, it is unable to introduce this change but urges issuers to use their discretion.

The FSA is assuming responsibility for the regime governing notifications of major interests in shares, with the new rules set out in DTR 5.Member states are permitted to implement more stringent rules than the minimum level set by the TD and the DTR retain some of the stricter aspects of the Companies Act 1985 regime for UK-incorporated companies (such as the thresholds for notification and deadlines). The new regime also applies (with different thresholds and deadlines) to issuers incorporated outside the UK with shares admitted to trading on a regulated market and who are obliged by the Prospectus Rules to file annual information updates with the FSA.

The notification obligation applies in relation to all shares that:

  •  are issued;
  • carry rights to vote in all circumstances at general meetings (including shares that have become fully enfranchised for voting purposes, such as preference shares that become enfranchised if the dividend is in arrears);
  • and are admitted to trading on a regulated market (such as the LSE main market) or prescribed market (such as the Alternative Investment Market (AIM) and Plus Markets).

There is a standard form notification.

The LSE has published a notice outlining changes to the way most AIM companies will need to disclose significant shareholdings as a result of implementation of the TD. 

 The determination of which interests are notifiable is one of the more complicated areas of the TD and there will be some cases where interests not caught under the previous regime will be caught and vice versa. The effect of these changes will vary.

 Stock lenders are permitted to net off their loan with their right of recall so they do not need to make a disclosure. Borrowers who on-lend stock by close of business the next day will not have a disclosure obligation but other borrowers will. See ‘Contracts for difference’ below for an overview of the FSA’s ongoing consideration as to whether to bring pure economic interests within the scope of the notification regime.

Where shareholders give a proxy holder (usually the chairman) the discretion to exercise their voting rights, the proxy holder will be treated as an indirect holder of those shares under the new rules and, therefore, becomes subject to a notification obligation if a relevant threshold is reached. The interests conferred by the granting of discretionary proxies need to be aggregated with the proxy holder’s existing interests. One notification on behalf of the proxy holder and donor shareholder(s) is sufficient, to be made on or as soon as reasonably practicable after the deadline for receipt of proxy appointments – usually 48 hours before the start of the meeting – provided the notification makes it clear what the resulting situation in terms of voting rights will be when the proxy no longer has discretion to exercise the voting rights. A proxy conferring only minor and residual discretions (such as to vote on an adjournment) will not result in the proxy holder (or the donor shareholder) having a notification obligation.

Under the new rules, issuers must disclose the total number of voting rights and capital in respect of each class of share admitted to trading on a relevant market, and the total number of voting rights attached to shares held in treasury, at the end of every calendar month in which the amounts change.

As transitional measures, companies were required to publish their total voting rights no later than 31 December 2006 and to publish, as soon as possible, any change that occurs after first notification and before 20 January 2007. Those with interests will use this information to provide the denominator for their calculations.

As a transitional provision, where a major shareholder has not been required to make a notification under the new DTR regime before 20 March 2007 (eg because he has not made any acquisition or disposal, there has been no change in the issuer’s total voting rights and his percentage interest remains the same under the old and new regimes) he must do so by that date even if there has been no change in his interest. The issuer must then publish this information by no later than 20 April 2007. A major shareholder will not have to make such a notification where he had a notifiable interest under the old regime but does not under the new regime.

The rules giving UK-incorporated public companies powers to ask about interests in their shares by using a notice have not been brought into the FSA’s ambit.With effect from 20 January 2007, these investigation provisions are repealed and restated, with no significant amendments, by Part 22 of the Companies Act 2006. The obligation on shareholders to disclose information in response to a section 793 (previously section 212) notice will differ significantly from the new notification obligations on those with interests in voting rights under the DTR and there are no plans to align these regimes.

There are no proposed changes for issuers using a Regulatory Information Service to disseminate regulated information. There are, however, new rules for issuers using electronic communications to provide information to shareholders, debt security holders or anyone with an indirect interest in shares. The rules provide that a decision to use electronic means to convey information must be taken in a general meeting. The FSA has said in issue 14 of List! that where a company has secured express agreement from security holders, in reliance on the provisions of the Companies Act 1985, to their being communicated with via a website it should be able to continue to rely on that agreement. There is a transitional provision dealing with this. Use of electronic means must not depend on the location of the seat or residence of the relevant person. If a company needs to restrict the sending of a particular document (eg so as not to infringe US or other securities laws) it will not be able to use electronic means to send that document.

The FSA has clarified, in issue 14 of List!, that issuers can use electronic communications for shareholders (provided the relevant requirements are met) without having also to obtain the consent of those with indirect interests in shares. It has also clarified that the ‘identification arrangements’ that the company must put in place to use electronic communications are ‘arrangements to identify holders (or others) so they can be effectively informed… of the matters they are entitled to be informed of under the TD’. UK-incorporated companies will be able to use their registers of members to identify shareholders.

The FSA consulted on whether there was a need for the regime covering disclosure of major interests in shares to include pure economic interests such as contracts for difference (CFD). As there was no consensus, the FSA announced in Policy Statement (PS) 06/11 (link below) that it is planning to undertake further analysis and to publish its findings in the summer of 2007. The three options being considered are:

 to do nothing;

 to extend the major shareholding regime to include the disclosure of economic interests; and

 to strengthen the regime to prevent or make it more difficult for CFD holders effectively to hold constructive options over shares held in hedge by CFD writers and for CFD writers to influence corporate governance matters at the request of CFD holders. `

 The changes for UK listed companies arising from the implementation of the TD will not be as dramatic as the changes for other EU companies. However, there are a significant number of changes of detail for companies and their investors to get to grips with.