The Financial Services Authority ("FSA") recently published a censure of BDO LLP ("BDO") in relation to BDO's failure to fulfil its responsibilities as a sponsor under the FSA's Listing Rules.

This case is notable as the first time that the FSA has exercised its powers under the Financial Services and Markets Act 2000 to issue a public censure of a sponsor.  Whilst the FSA noted that BDO has significantly improved its processes since the breach, this case serves as a timely reminder of a sponsor's obligations in the context of an increasing focus on improving market integrity and good governance, and provides further evidence of a more aggressive enforcement policy that is now being pursued by the FSA.

Significant transactions

The breach by BDO in this case was in respect of Listing Rules governing a "significant transaction" undertaken by a company with a premium listing on the FSA's Official List and shares traded on the London Stock Exchange's main market (the "Company").

When entering into a significant transaction (typically an acquisition or disposal), a listed company must observe the rules set out in Chapter 10 of the Listing Rules.

In order to determine whether the deal is a "significant transaction", various percentage ratios will need to be calculated by reference to certain "class tests" set out in Annex 1 to Chapter 10, comparing key financial measures for the target company (for example, a proposed consideration amount) against measures for the listed company (for example, its market capitalisation).

A transaction will be classified as "class 1" where any percentage ratio is equal to 25% or more, and as a "reverse takeover" where any ratio is equal to 100% or more (or where it would result in a fundamental change in the business, or in a change in board or voting control).

A listed company must obtain a sponsor's guidance if it is proposing to enter into a transaction which, due it its size or nature, could amount to a class 1 transaction or a reverse takeover.  The FSA expects the sponsor to work closely with the regulator and to do so in an "open and co‑operative" way.

If a transaction is classified as a reverse takeover, a suspension of the acquirer's shares may be appropriate, because there may be insufficient information in the market, given the significant size of the deal, for investors to make an informed assessment of the resulting value of the company's listed securities following the transaction (see Listing Rule 10.6.3G).  This would be central to discussions between the sponsor and FSA.  In various commentaries, the FSA has stated clearly that it expects shares to be suspended on a reverse takeover, unless it can be persuaded that it is not appropriate based on the particular facts of the case.

The facts in this case

11 May 2009

  • BDO was approached to act as sponsor for the Company's acquisition of an unidentified target (although correspondence later showed that even at this early stage, information available indicated to BDO that this deal would be a reverse takeover rather than a class 1 transaction).

18 May 2009

  • BDO was appointed and advised the Company early on that consultation with the FSA should be undertaken; however, it was later found that BDO agreed to follow the Company's preference not to contact the FSA until after the deal was announced to the market.

22 May 2009

  • BDO submitted two fee structures: one applicable if the deal was deemed a class 1 transaction and another if it was a reverse takeover. BDO now knew the actual identity of the proposed target, and its further calculations again showed that this was likely to be a reverse takeover.

11 June 2009

On the same date that the deal was announced to the market, BDO sent a letter to the FSA, indicating that the acquisition was a class 1 transaction (although later it was discovered that a second letter was prepared, indicating that it was a reverse takeover, but was never used). The FSA responded to BDO that this acquisition was a reverse takeover and, although the FSA ultimately later concluded that a suspension of shares would not have been necessary in this case, it instigated sanction proceedings against BDO on the basis that the regulator had been deprived of the opportunity to assess whether a suspension was required before a market announcement was made.

The FSA's decision

The FSA concluded that the actions taken by BDO constituted a breach of both Listing Rule 8.3.3R (a failure to act with due care and skill in relation to a sponsor service) and Listing Rule 8.3.5R (not co-operating with the FSA in an open and co-operative manner). The FSA censured BDO for:

  • a failure to liaise with the FSA before a market announcement was made
  • not observing clear indications at various stages (including in BDO's own calculations) that this deal was a reverse takeover, a conclusion that should have been discussed in detail with the FSA
  • a lack of objective oversight in submitting the class 1 transaction assessment, and focusing too strongly on the Company's desire to expedite the process and avoid a share suspension.

Lessons

This case provides a reminder of how internal transaction emails and draft documents can look in the harsh light of public scrutiny and hindsight. If documents or emails have been created suggesting that one course of action is appropriate and views subsequently change, it is helpful to reflect that in relevant files or email chains.

Sponsors need to ensure that their teams are well briefed on the obligations which the sponsor role entails and listed companies must appreciate that sponsors owe duties to the FSA, and not just to their client.

The censure also highlights the FSA's current enforcement strategy. The FSA stated in a press announcement accompanying its final decision that through this enforcement it is "sending a clear message with public censure". Prior to 2007, the FSA stated that it was "not an enforcement led regulator". Since 2007, in tune with the changed perception of a regulator's role following the economic downturn, the FSA has adopted a new approach of "credible deterrence", which has been pursued aggressively.  Until now, the focus of that policy has appeared to be mainly on market abuse and inadequate management responsibility.  Now the FSA has issued its first public censure against a sponsor for failure to fulfil its responsibilities under the Listing Rules and we suspect, in keeping with its new stance on enforcement, that where the FSA finds evidence of other breaches in the future it will not shy away from taking enforcement action.