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London corporate finance update: Summer 2014

Winston & Strawn LLP

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European Union, United Kingdom June 19 2014

In This Issue:

UK Listing Rules – enhancing the effectiveness of the UK listing regime: key changes.............................................2

Transparency Directive – extractive companies to report on payments to governments..........................................3

Early abolition of interim management statements...................................................................................................................4

New AIM and NOMAD Rules.............................................................................................................................................................4

Women on boards..................................................................................................................................................................................5

UK Listing Rules – enhancing the effectiveness

of the UK listing regime: key changes

Changes to the UK Listing Rules came into effect on 16

May, following the Financial Conduct Authority’s (FCA)

consultation on the effectiveness of the UK listing regime.

These changes impact companies with securities listed

on both the premium and standard segment of the UK

Official List (or which are seeking to have securities so

listed).

The focus of the changes is on premium listed companies

with a controlling shareholder (i.e., 30 per cent or more

of the shares). The FCA is keen to strengthen minority

shareholder rights and to enhance the governance of such

companies. Premium listed companies with significant

shareholders will need to consider if these shareholders

amount to “controlling shareholders” as defined in the

amended Listing Rules and, if they do, these issuers will

need to take steps to comply with the new requirements.

Some of the changes will impact all listed companies

and so the new rules, and the FCA’s feedback on the

new rules, will be of interest to all listed companies and

potential applicants for listing in London.

The key changes are:

΅΅ Free float – Whilst there are no changes to the free

float level required for premium or standard listed

companies, the Listing Rules now clarify when

securities will not be viewed as being held in public

hands and how the free float provisions, and the

FCA’s power to modify the required levels, operate for

premium and standard listed issuers. In particular, the

new rules clarify that:

―― shares subject to a lock-up period of more than 180

calendar days are excluded from the free float (on

the basis that they do not help to achieve liquidity);

and

―― shares held by fund managers in one organisation,

which in aggregate amount to more than five

per cent, may still be treated as being in public

hands provided investment decisions are made

independently by the individual fund manager and

the decisions are unfettered by the organisation to

which the fund manager belongs.

΅΅ Extension of Listing Principles to standard listed

companies – Two of the Listing Principles have been

extended to apply to standard listed companies.

2

London Corporate Finance Update

© 2014 Winston & Strawn London LLP

These are:

―― the requirements to establish and maintain

adequate procedures, systems, and controls to

enable compliance with obligations; and

―― to deal with the FCA in an open and co-operative

manner.

There are also two new Listing Principles for premium

listed issuers.

΅΅ Relationship agreements – Premium listed companies,

and applicants for a premium listing, with a controlling

shareholder need to put in place a relationship

agreement with the controlling shareholder, which will

need to contain certain prescribed “independence

provisions”.

΅΅ Independent directors – On the proposed election

or re-election of an independent director, premium

listed companies with a controlling shareholder will

need to obtain the approval of the majority of the

shareholders as a whole and also of the independent

shareholders of the company. The Listing Rules set

out certain information which needs to be given to

shareholders when the election or re-election of an

independent director is being considered and also

address the situation where both of these approvals

are not obtained.

΅΅ Enhanced oversight measures for independent

shareholders – If a premium listed company with a

controlling shareholder is not complying with the new

rules on controlling shareholders (for example where

the controlling shareholder refuses to enter into the

required relationship agreement) the independent

shareholders will be given the right to vote on any

related party transactions between the controlling

shareholder and the company, regardless of the

size of the transaction or the availability of any other

exemptions under Listing Rule 11.

΅΅ Cancellation of listing – A premium listed company

with a controlling shareholder will be required to

obtain the approval of the majority of its independent

shareholders, as well as the approval of 75 per cent

of the shareholders as a whole, before it can cancel

its listing or transfer to the standard segment of the

Official List. The Listing Rules address how the new

rules on cancellation of listing apply in the context of a

takeover offer by the controlling shareholder.

Transparency Directive – extractive companies

to report on payments to governments

In 2013 the European Union adopted measures to require

companies operating in extractive industries to disclose

payments made to governments. The aim of the measures

is to aid accountability and governance in resource-rich

countries.

The requirements are set out in two Directives:

΅΅ Directive 2013/34/EU (the “EU Accounting Directive”)

which applies to EU incorporated large companies and

“public-interest entities”; and

΅΅ Directive 2013/50 (the “Transparency Directive

Amendment”) which extends the requirements of

the EU Accounting Directive to all companies with

securities admitted to trading on an EU regulated

market, regardless of their country of incorporation.

These companies will be required to publish an annual

report on payments made to governments if they are:

΅΅ undertakings active in the extractive industry (e.g.,

involved in the exploration, discovery, development

and extraction of minerals, oils, natural gas); or

΅΅ undertakings active in the logging of primary forests.

As the changes are set out in EU Directives, Member

States are required to adopt measures to implement

the changes. For the EU Accounting Directive, the

implementation deadline is 20 July 2015 and for the

Transparency Directive Amendment it is 27 November

2015.

The UK has however committed itself to early

implementation and the UK Government has published

a consultation paper on the UK implementation. The

consultation primarily focuses on the implementation

of the EU Accounting Directive and, therefore, on UK

incorporated companies. However, the approach taken is

likely to be important for entities, wherever incorporated,

whose securities are admitted to trading on an EU

regulated market and which are, therefore, subject to the

Transparency Directive Amendment.

The key points to note for non-EU incorporated issuers

are summarised below.

΅΅ Non-EU companies with securities (shares, debt,

GDRs) listed in the UK will only be caught by the

UK implementation of the Transparency Directive

Amendment and will not be subject to the UK

3

London Corporate Finance Update

© 2014 Winston & Strawn London LLP

implementation of the EU Accounting Directive. That

said, any differences between the two regimes will

lie not in what information is disclosed but in how and

when the information is disclosed and the liability

regime attaching to such information.

΅΅ The UK implementation date for the Transparency

Directive Amendment is not yet clear but it will

potentially be later than that for the EU Accounting

Directive (currently proposed to be financial years

beginning on or after 1 January 2015).

΅΅ The report will need to set out payments made to

governments (whether at a national, regional, or local

level) in money or in kind, where made as a single

payment, or a series of related payments, of at least

EUR 100,000 within a financial year.

΅΅ The report will need to break down the payments:

―― into types of payment in line with the categories

set out in the EU Accounting Directive (for example

taxation, royalties, signature, and discovery

bonuses); and

―― on a country-by-country and project-by-project

basis.

΅΅ The report will need to be provided at “consolidated

level”. It remains to be seen how the UK will implement

this requirement of the Transparency Directive

Amendment.

΅΅ The report, which will be separate from the annual

report and accounts, will need to be “made public”

within six months of the end of the financial year to

which it relates and will need to remain public for

at least 10 years. It is yet to be seen how the report

will need to be “made public”. One option would be

that the report would be made public via the normal

regulatory announcement procedures which apply to

regulated information. An alternative would be that

the report would need to be placed on the company’s

website.

΅΅ The report will not need to be audited. The penalty

regime which will attach to it will be clarified in the

UK implementation of the Transparency Directive

Amendment. If the report is made public via the usual

regulatory announcement procedures, it is expected

that the usual liability regime for regulated information

would apply (which is different to the liability regime

proposed in the UK implementation of the EU

Accounting Directive).

΅΅ Non-EU issuers will be required to comply with

the requirements of the Transparency Directive

Amendment, even if their home jurisdiction requires

similar disclosures. It is possible that in due course

certain non-EU disclosure regimes will be designated

as equivalent but currently there are no regimes even

being assessed by the EU for equivalence.

It is expected that the UK will publish a separate

consultation on the implementation of the Transparency

Directive Amendment in due course. Although it is not yet

clear therefore when non-EU companies with securities

listed in the UK will need to start publishing these reports,

there is no question that they will be required to do so

in the near future. Affected companies may wish to start

thinking, therefore, about the systems and procedures

that they will need to have in place to gather, and report

on the information required.

Early abolition of interim management

statements

In the Chancellor’s Autumn Statement, it was announced

that legislation would be brought forward early in

2014 to abolish the requirement in the Disclosure and

Transparency Rules that listed companies produce interim

management statements. The legislation has not yet been

published. The abolition results from an amendment to

the Transparency Directive.

New AIM and NOMAD Rules

The AIM Regulation team at the London Stock Exchange

(LSE) has issued its feedback on AIM Notice 38 and

has confirmed the final changes to the AIM Rules for

Companies (AIM Rules), AIM Rules for Nomads (Nomad

Rules), and the AIM Disciplinary Handbook (Disciplinary

Handbook). All changes to the rules are now in force, with

the exception of the new disclosure requirements in AIM

Rule 26, with which companies must comply by 11 August

2014.

AIM Rules

΅΅ General disclosure of price sensitive information

(Rule 11) – This rule has been amended to clarify that

an obligation to announce is triggered by any price

sensitive information, even if it does not fall within one

of the categories specified in this Rule. New guidance

to Rule 11 confirms that the “reasonable investor” test,

4

London Corporate Finance Update

© 2014 Winston & Strawn London LLP

contained in FSMA, will be included in what AIM looks

at when applying Rule 11. This reflects general market

practice and will help eliminate any potential ambiguity.

΅΅ Company Website Disclosure (Rule 26) – Subject

to the transitional provisions mentioned above,

companies will need to disclose on their websites:

―― the date on which the details relating to the AIM

securities in issue and significant shareholders

were last updated;

―― whether the AIM company is subject to the UK

Takeover Code (or equivalent legislation or

regulation in its country of incorporation) or whether

it has adopted similar provisions voluntarily;

―― their annual accounts for the last three years (or

since their date of admission) whichever is the

lesser; and

―― details of the corporate governance code that the

company has decided to apply, how it does so or,

if no code has been adopted, a statement to that

effect. In circumstances where no code has been

adopted, companies are also required to clarify

their current corporate governance arrangements.

΅΅ Jurisdiction (Rules 43, 22, and Disciplinary

Handbook) – New Rule 43 states that even if an

AIM company ceases to have its shares traded on

the market, the LSE retains jurisdiction over it for the

purposes of investigating conduct and taking any

disciplinary action in relation to acts or omissions while

its shares were being traded. Consequential changes

have been made to Rule 22 to allow the LSE to secure

information from the company in question and to the

Disciplinary Handbook.

΅΅ Class tests (Schedule 3) – original proposed changes

to this rule clarified what has been the AIM Team’s

practice when assessing profits (i.e., losses should

be included and the negatives should be ignored).

Feedback suggested that this was not helpful on the

basis that the treatment of losses, in relation to the

Profits Test, is considered on a case-by-case basis

by AIM Regulation. Accordingly, the Exchange has

decided not to proceed with these changes.

Nomad Rules

΅΅ Eligibility Requirements (Rule 2) – The LSE originally

proposed changes enabling it to use its discretion to

waive the two year track record and/or three relevant

transactions requirement. In light of feedback these

changes are not included in the new rules.

΅΅ Qualified Executives (Rule 4) – The proposals for

relaxation to the continuing eligibility criteria for QEs

has been adopted. The LSE has confirmed that periods

of maternity/paternity leave will not ordinarily prejudice

a candidate’s continuous QE status and other periods

of absence will be considered on a case-by-case

basis.

΅΅ Continuing eligibility (Rules 11 and 30) – Several

amendments have been made to this section of the

Nomad Rules, including a requirement to notify the

LSE of a change of control “which is reasonably likely”

and any material adverse change in its financial or

operating position that may affect its ability to act as a

Nomad. Should the LSE deem a change of control to

have occurred, a new application for Nomad status will

be required.

Women on boards

The Davies Review Annual Report 2014 shows that

women now account for approximately 21 per cent of

overall board directorships in the FTSE 100—up from

12.5 per cent in 2011. There now remain only two all-male

boards in the FTSE 100.

Lord Davies reports a “growing recognition” of the social

and economic benefits of having more women on boards.

Gender equality in business allows companies to:

΅΅ “improve performance at Board and business

levels through input and challenge from a range of

perspectives”;

΅΅ “access and attract talent from the widest pool

available”;

΅΅ “be more responsive to the market by aligning with a

diverse customer base, many of whom are women”;

and

΅΅ “achieve better corporate governances, increase

innovation and avoid the risks of ‘group think’”.

5

London Corporate Finance Update

© 2014 Winston & Strawn London LLP

Targets

In 2011 Lord Davies recommended that FTSE 100

boards should aim for a minimum 25 per cent female

representation on their boards by 2015, which in practical

terms means that fewer than 50 women need to be

appointed to FTSE 100 boards in the next 18 months

for the UK to meet this milestone. Such an achievement

would double the percentage of women on boards since

2011 and is, according to Lord Davies, a target which "can

clearly be achieved".

Legislation?

Lord Davies points out that the UK’s voluntary, businessled

approach is under intense scrutiny from European

partners, regulators, investors, and other stakeholders,

while countries such as Germany have already chosen the

legislative route. German companies are required to allot

30 per cent of their non-executive board seats to women

from 2016 or leave the positions unfilled. Meanwhile

Norway, a non-EU member, imposed a 40 per cent quota

in 2003—a target reached in 2009. Norwegian companies

can be liquidated if they fail to reach the target.

The European Parliament voted in favour of legal quotas

last November but the European Council reached

deadlock on the matter. Failure by the UK to achieve

the voluntary targets would raise the prospect of legal

intervention by Government or from the European Union.

With the spotlight on British business, Lord Davies asks

the UK to prove that it can deliver real change in this area

without legislative measures.

To view all formatting for this article (eg, tables, footnotes), please access the original here.
Winston & Strawn LLP - Zoë J. Ashcroft and Nicholas Usher

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