Corporate weekly highlights—12 July 2018

This week’s edition of Corporate highlights includes analysis of new provisions relating to the availability of information during the UK IPO process, the amendment of the Nomad Rules by the LSE, and analysis of the Companies (Miscellaneous Reporting) Regulations 2018 following Parliamentary approval this week.

In this issue:

Equity capital markets

Reform of the main market IPO process goes live

Corporate analysis: This news analysis looks at the new Conduct of Business Sourcebook provisions relating to the availability of information during the UK IPO process. The analysis includes market commentary from Alexander Keepin, partner at Bryan Cave Leighton Paisner.

The Financial Conduct Authority (FCA) has been concerned that the prospectus, which is meant to be the main source of information on a company applying for listing, is made available too late in the IPO process. Instead investor education is generally informed by research produced by analysts at the investment banks which are advising on or underwriting the IPO.

The main changes set out in FCA policy statement PS 17/23 provide that:

  1. an FCA approved prospectus or registration document must be published before the publication of any research on the company;
  2. unconnected analysts must be given equal opportunity to produce research on the company; and
  3. there should be no contact between analysts and the company’s management while the analysts’ investment bank is pitching for work on the IPO in order to avoid conflicts of interest

This news analysis conisders the following issues:

  1. New IPO timetable: initial feedback suggests that the market favours the FCA’s second option for providing unconnected analysts with access to the company’s management (that they must be given identical information to that given to connected analysts and publication of connected analysts’ research is not permitted until seven days after the publication of the prospectus/registration document): Alexander Keepin, partner at Bryan Cave Paisner Leighton comments ‘We think that the new process will lead to increased focus on pilot fishing as the deal will effectively become public on publication of the registration document which will specify the purpose for which it has been prepared...As a consequence the ITF will either be published alongside the registration document or, if delayed to later in the process, there will be a very fulsome announcement on publication of a registration document to put forward the company’s messaging during the black-out period prior to the publication of the connected research’
  2. Changes to the public documents produced: in the consultation paper, the FCA envisaged that the new rules will lead to the use of the tripartite prospectus permitted under EU prospectus legislation consisting of a registration document, a summary document and a securities note. However, feedback from the market suggests that companies will produce a registration document and in parallel submit a draft comprehensive prospectus to the FCA, as opposed to having a separate securities note and summary document. Alexander Keepin, partner at Bryan Cave Paisner, adds ‘Pathfinder prospectuses are likely to become redundant in the new IPO process as all the relevant information about the company will now be in the registration document
  3. Updating the registration document: if there occurs ‘a material change or recent development which could affect an investor’s assessment since the date of the registration document, updated information should be included in the securities note
  4. Responsibility: whilst the FCA have confirmed that ‘prospectus liability’ under section 90 of the Financial Services and Markets Act 2000 will not attach to the registration document (only once all three constituent parts of the prospectus are published), the registration document is required to include a responsibility statement from those persons responsible for the information and accordingly liability under the general law could attach to the directors for omissions from or misstatements in the registration document
  5. Ancillary documentation: there will almost certainly need to be an increase in that needed for an IPO since responsibility letters and comfort letters will need to be signed for the registration document and either the separate documents making up the tripartite prospectus or the single prospectus. Also, accountants’ reports and expert reports will need to be prepared earlier in the process for inclusion in the single prospectus.
  6. AIM: the FCA has decided not to apply these new rules to AIM IPOs, the rationale being that the potential lengthening of the public phase of an IPO on multilateral trading facilities poses more execution risk and would discourage early-stage companies from listing on that market

In conclusion, Alexander Keepin, partner at Bryan Cave Paisner, comments that ‘The most interesting part of these changes will be to see whether they achieve their aim of encouraging unconnected analyst research and if it achieves this, what the impact will be on the value placed on the connected research’.

For further information, see News Analysis: Reform of the main market IPO process goes live.

London Stock Exchange amends AIM Rules for Nominated Advisers under AIM Notice 52

Further to its consultation launched earlier this year (in AIM Notice 51), the London Stock Exchange (LSE) has published amended AIM Rules for Nominated Advisers (Nomad Rules), which will come into force on 30 July 2018.

The main changes proposed by the LSE in AIM Notice 51 related to the eligibility and continued eligibility of Nomad firms and clarity in relation to the LSE’s supervisory powers (see LNB News 26/04/2018 76). The LSE is implementing the majority of the amendments as proposed, as follows:

  1. Amendment to Rule 2 (Eligibility criteria): introducing additional eligibility criteria for Nomads to provide evidence to the LSE about their resources and that they are able to comply with the standards of conduct the LSE expects from Nomad firms when performing their responsibilities. The LSE is not taking forward a proposed requirement in Rule 2 for Nomads to provide evidence that they have in place adequate risk management systems as this is already covered by Rule 23 (obligation to have proper procedures). Guidance on the new eligibility criteria will be set out in a revised NA1 (Nomad application form).
  2. New Rule 12 (Notification obligations): more clearly setting out the types of information that a Nomad is required to provide to the LSE regarding changes relevant to their nomad services.
  3. New Rule 27 (Supervision of nominated advisers): a range of supervisory actions that the LSE can take in respect of a Nomad’s performance, including requiring a Nomad to undertake remedial action (eg hire additional staff) or impose restrictions or limitations on the services a Nomad can provide (eg where its experience and expertise is limited).
  4. New Rule 27(c) (Supervision of Qualified Executives): power for the LSE to require remedial action and/or restrictions in relation to a Qualified Executive (QE) at a Nomad, where issues of competency or training of the QE arise. Supplements existing Rule 27 whereby the LSE may remove a QE’s status in certain circumstances.
  5. Moved Rule 31 (Moratorium on acting for further AIM companies): additional examples of when the LSE may place a Nomad under a moratorium from acting as Nomad to additional AIM companies.
  6. Jurisdiction and appeals: clarifying that the LSE has jurisdiction over Nomads that were once, but no longer are, approved in relation to breaches/suspected breaches of the Nomad Rules or AIM Rules for Companies committed while they were approved

See LNB News 05/07/2018 51 and AIM notice 52.

Views sought on amends to trading Chinese A-shares’ depositary receipts in Main Market

The LSe has issued notice N13/18 which announced its consultation on amendments to the Admission and Disclosure Standards (the Standards) for the trading of Chinese A-shares’ depositary receipts (DRs) to be admitted to the Main Market and traded through the LSE’s International Order Book trading service.

The LSE aims to launch the Shanghai-London Stock Connect Segment of the LSE’s Main Market in the last quarter of 2018 and the consultation forms part of that preparatory work in anticipation of the launch. It will enable global investors to access Chinese A-shares through a DR programme listed on the LSE and qualifying LSE-listed issuers to access Chinese investors in Shanghai by listing a Chinese DR in Shanghai.

Proposed changes to the Standards include:

  1. a new Schedule 7 setting out admission criteria for issuers seeking entry to the Shanghai-London Stock Connect Segment (issuers to be required to meet Listing Rule requirements for the listing of DRs and the associated requirements of EU directives and regulations)
  2. requiring an applicant to provide the LSE with a copy of admission documentation as soon as it has been published: the LSE may then make such document available on its website
  3. an amendment to clarify that the LSE may cancel the admission to trading of an issuer’s securities if it is satisfied that there are special circumstances that preclude normal dealings in them

The consultation closes on 7 September 2018.

See LNB News 11/07/2018 26.

Corporate governance

Parliament approves the Companies (Miscellaneous Reporting) Regulations 2018

Corporate analysis: Parliament has approved the Companies (Miscellaneous Reporting) Regulations 2018, which implement a number of the corporate governance reforms announced by the government in August 2017. The next step will be for the instrument to be signed into law by the Secretary of State, following which the 2018 Regulations will be ‘made’. The new requirements will apply to companies with accounting periods beginning on or after 1 January 2019. The analysis includes market commentary from Martin Webster, partner at Pinsent Masons and Edward Craft, partner at Wedlake Bell.

The news analysis looks at the following new reporting requirements:

  1. Section 172 statement: a separately identifiable statement in the strategic report describing how the directors have had regard to employees and other interests when performing their duty under section 172 of the Companies Act 2006 to promote the success of the company (comment from Martin Webster, partner at Pinsent Masons: ‘The government’s intention is to focus the board’s attention on the section 172 stakeholder factors and how they have influenced their decision making. Directors and company secretaries need to bear in mind as the decisions are being taken and ask themselves how they are going to explain the process in the subsequent annual report.’)
  2. Engagement with employees: a statement in the directors’ report summarising how the directors have engaged with UK employees and how the directors have had regard to UK employee interests, and the effect of that regard, including on how the principal decisions taken by the company during the financial year (comment from Martin Webster, partner at Pinsent Masons: ‘This employee engagement reporting requirement is clearly related to the expected provision in the new UK Corporate Governance Code requiring a worker on the board of a premium listed company, or a non-executive director designated to engage with the workforce, or the workforce advisory panel. But this new obligation applies to much smaller companies and many of them may find it quite burdensome’.)
  3. Engagement with suppliers and other stakeholders: a statement in the directors’ report summarising how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others
  4. Large private companies and unlisted private companies: will have to include in their directors’ report a statement of their corporate governance arrangements, specifying which corporate governance code, if any, the company applied, how the company applied any such corporate governance code and, if the company departed from any such corporate governance code, the respects in which it did so, and its reasons for so departing (comment from Martin Webster, partner at Pinsent Masons: ‘It is easy to see this provision as aimed at large private concerns such as BHS, and family companies and private equity-owned businesses. But the reporting requirement is also aimed at large subsidiaries and so will contribute to the recent focus on good subsidiary company governance’.)

Edward Craft, partner at Wedlake Bell, has some reservations about the new reporting requirements: ‘There is a lot for companies to process here, but when it comes to digestion the meal is rather sparse...Confusion reigns as to which companies are in or out of scope—surely there is a case for the UK government to apply a simgle size criterion’.

For other forthcoming developments, see Practice Note: 2017/2018 Corporate governance reforms.

See News Analysis: Parliament approves the Companies (Miscellaneous Reporting) Regulations 2018.

CEO pay ratios and other developments in directors’ remuneration reporting

Corporate analysis: This news analysis looks at the Companies (Miscellaneous Reporting) Regulations 2018 requirements for quoted companies to provide pay ratio information comparing CEO to average worker pay and to report on other aspects of directors’ remuneration. The analysis includes market commentary from Jonathan Fenn, partner at Slaughter and May and Martin Webster, partner at Pinsent Masons.

The new reporting requirements will apply to UK incorporated quoted companies (quoted on the UK Official List, NYSE, NASDAQ or recognised stock exchange in the EEA, but not including AIM companies) with more than 250 UK employees. Companies should determine the number of UK employees across the group as a whole. Where a company’s headcount varies from year to year above or below 250 UK employees, there is a ‘smoothing provision’ allowing a two-year time lag before a company drops out of, or is covered again, by the pay ratio disclosure requirement.

Qualifying companies will be required to publish, as part of their directors’ remuneration report, pay ratio information comparing the total remuneration of the CEO to median (50th), 25th and 75th percentile full-time equivalent remuneration of the company’s UK employees. Companies will have to publish supporting information alongside this, including the reasons for changes to the ratios from year to year.

The government’s Q&A document provides some guidance as to the most statistically accurate way for a company to calculate the three ratios each year. It presents an ‘Option A’ for the calculation, but also sets out two further options.

All quoted companies will be required to include in the directors’ remuneration report details of the amount of a director’s award that is attributable to share price appreciation.

The 2018 Regulations restore the requirement for small community interest companies (CICs) to report on directors’ remuneration. The government felt that CICs should be subject to a higher duty of transparency than private companies and that restoring the requirement for CICs to report on directors’ remuneration was important for ensuring that the community interest test is met. Large CICs will be unaffected by the requirement. The 2018 Regulations amend the Community Interest Company Regulations 2005 by inserting a new schedule (which is a reproduction of the revoked Schedule 3 to the Small Companies and Groups (Accounts and Reports) Regulations 2008, with minor amendments to definitions).

Martin Webster, partner at Pinsent Masons, comments that the ratios that these new regulations throw up, together with those under the new gender pay gap reporting requirements, ‘may at times give a misleading picture, but the government’s avowed purpose is to focus the attention of remuneration committees and boards on how they justify the ratios that result and what they are doing to change them’.

Jonathan Fenn, partner at Slaughter and May, notes that ‘It is questionable whether the reforms will meet the stated aim of building confidence in the way that large private and quoted companies are run and seeking to increase boardroom accountability’. Given that ‘the ratio between average CEO and employee pay is already quite widely reported in the press’, it ‘remains to be seen whether CEO versus employee pay reporting will become just another statistic in already lengthy remuneration reporting’.

These reforms will apply to companies with accounting periods beginning on or after 1 January 2019 (other than the restoration of the requirement for small community interest companies (CICs) to report on directors’ remuneration, which will apply to CIC reports for financial years ending on or after the day on which the 2018 Regulations come into force).

Seeee News Analysis: CEO pay ratios and other developments in directors’ remuneration reporting.

Guidance on effective board reporting published

ICSA: The Governance Institute (ICSA) and Board Intelligence have published guidance on effective board reporting. The guidance is intended to assist organisations with the preparation and presentation of their board reporting. A ‘cost calculator’ and self-assessment tool have also been launched to accompany the new guidance.

The guidance is organised into four sections:

  1. identifying the information the board needs
  2. commissioning board papers
  3. writing board papers
  4. collating and distributing the board pack

The self-assessment tool enables organisations to assess the style, scope and content of their board reports and identify ways in which they can be improved. The cost calculator enables users to calculate how much time and money is being spent on producing board reports.

The new resources are available to download from ICSA’s website.

See LNB News 11/07/2018 81.

Members, Company incorporation

Court did not have power to order charity’s member to vote in favour of resolution (Lehtimäki v The Children’s Investment Fund Foundation (UK))

Corporate analysis: In this case, the Court of Appeal considered whether a member of The Children’s Investment Fund Foundation (CIFF) was subject to any fiduciary duties and whether the Court’s inherent jurisdiction in relation to charities was enough to allow it to order a member to exercise a discretion in a particular way regardless of whether there was evidence of a breach of duty on the part of the member.

Lehtimäki v The Children’s Investment Fund Foundation (UK) [2018] EWCA Civ 1605

CIFF was incorporated as a company limited by guarantee without a share capital and its memorandum of association had been designed to ensure that its assets were exclusively applied for charitable purposes.

The focus of the appeal was on whether the Court had the power to direct Dr Lehtimaki, the only member of CFF entitled to vote, (the Member) to vote in favour of resolutions approving a grant of US$360m to a charity set up by one of CFF’s founders. CIFF had sought the Court’s approval of the grant after the Charity Commission had authorised them to make the grant under section 115 of the Charities Act 2011.

In particular, the case turned on three key issues:

  1. was the Member subject to any fiduciary duties? (the fiduciary duties issue)
  2. was the Court’s jurisdiction in relation to charities extensive enough to allow it to order a member to exercise a discretion in a particular way regardless of whether there is evidence of breach of duty on the part of the Member? (the inherent jurisdiction issue)
  3. in the light of the answers to the previous questions, was the Court entitled, on the facts of the present case, to direct the Member to vote for a resolution under section 217 of the Companies Act 2006 approving the payment of the grant? (the present case issue)

The Court of Appeal found that membership of a company limited by guarantee was very different from ownership of shares in a non-charitable company (where shareholders are not subject to fiduciary duties) and the members of CIFF owed fiduciary duties. However, it did not necessarily follow that members of other charities such as the National Trust also have fiduciary duties.

On the inherent jurisdiction issue, the Court of Appeal concluded that the Court had no wider jurisdiction to control the actions of fiduciaries in the context of charities than, say, private trusts: the Court could not direct a fiduciary (including a member of CIFF) how to exercise his powers unless he was acting in breach of duty. The Court was not entitled, absent a breach of duty, to substitute its view for that of the fiduciary.

Considering the Member’s witness statement, in which he described his ‘decision-making process’, and having concluded that it did not show the Member to be acting otherwise than ‘in good faith, responsibly and reasonably’ or to be failing to ‘inform [himself], before making a decision, of matters which are relevant to the decision’, the Court of Appeal did not consider that the Court was entitled to order the Member to vote in favour of the grant’s approval.

For further information, see News Analysis: Court did not have power to order charity’s member to vote in favour of resolution (Lehtimäki v The Children’s Investment Fund Foundation (UK) and Ors)

Additional Corporate updates this week

Business Contract Terms (Assignment of Receivables) Regulations 2018

The Draft Business Contract Terms (Assignment of Receivables) Regulations 2018 would make ineffective any contract term that prohibited the assignment of receivables. By doing so, it is hoped that small and medium-sized enterprises will be able to use all of their customer debts to raise finance through invoice discounting (sometimes called 'factoring' of debts) not just those customer debts arising under contracts which do not contain a prohibition or restriction on assignment of contracts or rights arising under it. The proposed regulations will not apply if the individual to whom the receivable is owed is a large enterprise or a special purpose vehicle, and various types of contracts are excluded from the scope as well.

Draft regulations were previously published in 2017 (see LNB News 18/09/2017 97), but later withdrawn (see LNB News 24/11/2017 73), following various concerns raised (see LNB News 07/11/2017 124 for details of the objections raised by the City of London Law Society.

Points to note:

  1. financial services contracts and similar contracts such as operating leases and derivative contracts, will not be covered (participants in the loan market had previously expressed concern that the 2017 draft of the regulations would invalidate certain provisions found in most well-drawn loan agreements and bonds)
  2. various types of contract are excluded from the scope of the regulations, including a contract entered into in connection with or for the purpose of the transfer of all or part of a business (including transitional services agreements), provided the contract includes a statement to that effect

For further information, see LNB News 06/07/2018 82.

Brexit

Brexit Bulletin—keeping up to date on Brexit

This Brexit Bulletin contains helpful Brexit research tips and reminders, including links to useful materials to help you keep up to date on the latest Brexit developments, updates on Brexit legislation, instructions for setting up Brexit alerts and links to further resources.

There is a wide range of Brexit content available across multiple practice areas in LexisPSL:

  1. Brexit toolkit—this toolkit collates practical guidance on the specific legal and practical implications of Brexit across a range of practice areas. Each practice area listed in the toolkit also has a separate Brexit subtopic accessible via their topic tree containing the relevant content. The Brexit toolkit brings all of the core content together for ease of reference and also provides essential background information and analysis on UK and EU constitutional law, as well as central trackers and timelines from LexisPSL Public Law
  2. Brexit—overview—the central Brexit subtopic in LexisPSL Public Law contains a broad range of materials, commentary and analysis on Brexit with links to related news, guidance and policy documents. It provides useful background reading on the Brexit process to support the practice-specific content available in other practice areas. This core content is also available to view in the ‘Brexit Essentials’ section of the Brexit toolkit
  3. Brexit legislation tracker—this Practice Note tracks the progress of UK legislation introduced as part of the legislative preparation for the UK’s withdrawal from the EU. It includes a Brexit SI databasecollating details of draft and enacted SIs specifically identified as ‘EU Exit Regulations’. This tracker is also available to view in the ‘Brexit Trackers and Timelines’ section of the Brexit toolkit
  4. Brexit timeline—this Practice Note contains broader updates on key events and developments in the Brexit process. It is also available to view in the ‘Brexit Trackers and Timelines’ section of the Brexit toolkit

As well as the details collated in the Brexit legislation tracker, LexisPSL alerts will include updates on Brexit-related legislation, including Brexit SIs, relevant to each area of practice. To keep further track of Brexit SIs, you can also create bespoke current awareness updates in LexisLibrary, tailoring the settings to your particular preferences (it includes the option to retrieve separate updates on draft and final SIs laid in Parliament from the UK SI Summaries source).

See Brexit Bulletin—keeping up to date on Brexit.

Additional news—daily and weekly news alerts

This document contains the highlights from the past week’s news. To receive all our news stories, whether on a daily or a weekly basis, amend your personal settings within your ‘News’ tab on the homepage by clicking on either ‘Email’ or ‘RSS’ (depending on how you prefer to receive them) on the right hand side of the blue banner.

Dates for your diary

Date Development
16 July 2018 Revised UK Corporate Governance Code (UKCG Code): The FRC is expected to publish a revised version of the UKCG Code to apply to premium listed companies with accounting periods beginning on or after 1 January 2019, following its December 2017 consultation. (Note: the source for this date is a calendar entry on the FRC website.)
See LNB News 05/12/2017 109.
21 July 2018 EU public reporting framework: The European Commission consultation on the effectiveness of the EU framework on public reporting by companies closes.
See LNB News 21/03/2018 142.
21 July 2018 The Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) Regulations 2018, SI 2018/786 will come into force.
See LNB News 29/06/2018 104.
23 July 2018 Limited partnerships: The government’s consultation seeking views on proposed reforms to the regulatory regime governing limited partnerships closes.
See LNB News 30/04/2018 149.
23 July 2018 Revised FCA Technical Note: FCA’s consultation on changes to its Technical Note on periodic financial information and inside information (FCA/TN/506.2) closes.
See LNB News 11/06/2018 115.
24 July 2018 Audit: The International Organization of Securities Commissions (IOSCO) consultation on good practices for audit committees in supporting audit quality closes.
See LNB News 24/04/2018 113.
30 July 2018 Revised AIM Rules for Nominated Advisers come into force.
The main changes (proposed in AIM Notice 51: see LNB News 26/04/2018 76) relate to the eligibility and continued eligibility of Nomad firms and clarifying the LSE’s supervisory powers.
See LNB News 05/07/2018.

Trackers

To track key legislative and regulatory developments, see our Trackers:

  1. Brexit legislation tracker
  2. Brexit timeline
  3. MiFID II—timeline
  4. Market Abuse—timeline
  5. Prospectus Regulation tracker
  6. Transparency Directive tracker
  7. Listing Rules tracker
  8. Disclosure Guidance and Transparency Rules Sourcebook tracker
  9. Prospectus Rules tracker
  10. Small Business, Enterprise and Employment Act 2015 tracker

Latest Q&As

New Q&As added this week:

  1. How are shares held by an offeror’s parent treated for the purposes of the squeeze-out rights on a takeover?

Useful information

To view analysis of the latest deals in the market and the underlying transaction documents, use our Market Tracker deal analysis tool.

To read about the latest corporate announcements, see our Market Tracker weekly round-up: Market Tracker weekly round-up—6 July 2018.

Relevant Articles
Area of Interest