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This week’s edition of Corporate highlights includes the latest updates on Brexit; news of corporategovernance reviews carried out by the QCA, PERG and the EHRC; details of the ongoing scrutiny of the accounting and audit sectors, including the recommendations of the Kingman review and the CMA audit market study; and the findings of the FRC’s industry inquiry into compliance with MAR. We also look at two cases: Morris v Swanton Care & Community Ltd on an agreement to agree in a share purchase agreement and Re MDNX Group Holdings Ltd on the partial approval of a cross-border merger.
Accounts and reports; audit
Private M&A (share purchase)
Public company takeovers
Financial services regulation for corporate lawyers
Additional news—daily and weekly news alerts
New and updated content
Dates for your diary
On 12 December 2018, HM Treasury published the draft Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations 2019 to add to the explanatory informationpublished on the Regulations on 21 November 2018.
It is proposed that the Regulations will address certain deficiencies in retained EU law relating to the Prospectus Directive and the Transparency Directive that arise from Brexit, whether or not a deal is entered into. The FCA Handbook and related rules will be amended to reflect the changes made by the Regulations.
For further information, see: LNB News 22/11/2018 113 and Practice Note: The effect of Brexit on UK company law.
Re the UK Withdrawal from the European Union (Legal Continuity) (Scotland) Bill—Reference by the Attorney General and the Advocate General for Scotland  UKSC 64,  All ER (D) 58 (Dec)was the first-ever challenge by UK law officers to the competence of a Scottish Parliament Bill.
The European Union (Legal Continuity) (Scotland) Bill (the Continuity Bill) was passed by the Scottish Parliament principally to give the Scottish government the power to prepare the statute book for Brexit in devolved areas (ie areas of law for which the Scottish Parliament has responsibility). It was introduced in February 2018 and fast-tracked through the Parliament’s emergency legislation procedures, in anticipation of the UK and Scottish governments being unable to reach agreement on what, if any, restrictions the European Union (Withdrawal) Act 2018 (EU(W)A 2018) (then progressing through the UK Parliament) could place on the Scottish Parliament’s ability to legislate in areas of law that are not reserved to Westminster by Scotland Act 1998 (SA 1998) but are instead currently dealt with at EU level.
The UK government’s concern was that EU law in those areas ensures that UK businesses can trade in all parts of the UK subject to a single set of rules—but if different rules were introduced in different countries (ie England, Wales and Scotland) post-Brexit that could create barriers to intra-UK trade. The Scottish government’s position was that UK-wide rules should be agreed—but by consent, with no legal restrictions put in place—and that if the Scottish Parliament did not consent to EU(W)A 2018 provisions then it should have been amended so it did not apply to any areas within the Scottish Parliament’s competence.
The Continuity Bill was passed in anticipation of, and with a view to helping to achieve, that latter outcome. The plan was that the Scottish government would use the powers in the Continuity Bill rather than EU(W)A 2018 to make regulations preparing the Brexit statute book, but the Continuity Bill was referred to the Supreme Court before it could receive Royal Assent. The EU(W)A 2018 was then enacted, notwithstanding the Scottish Parliament’s objections to it.
The regulation-making powers in the Continuity Bill were not identical to those in EU(W)A 2018. The Continuity Bill contains provisions with no equivalent in EU(W)A 2018—including conferring powers on the Scottish government to make regulations that would incorporate changes in EU law into Scots law post-Brexit (known as the ‘keeping pace’ power). The Continuity Bill, s 17 also purported to restrict the ability of UK ministers to make regulations in devolved areas under EU(W)A 2018 (or any equivalent UK legislation) without the consent of the Scottish government, anticipating the EU(W)A 2018 being passed without consent and attempting to frustrate its operation.
In the Supreme Court decision, a panel of seven Supreme Court justices held unanimously that while the Continuity Bill as a whole was within the Scottish Parliament’s legislative competence, parts of it were not because they sought to modify either the SA 1998 or the EU(W)A 2018.
In particular, the decision found (among other things) that the Continuity Bill, s 17, which would make the legal effect of subordinate legislation made by UK government ministers under EU(W)A 2018 conditional upon the consent of the Scottish ministers, was outside the legal competence of the Scottish Parliament.
The effect of the court’s judgment is that the Continuity Bill cannot now receive Royal Assent in its current form. The Scottish Parliament has the option of amending it to bring it within competence, although that would mean making key provisions identical to the equivalent sections of EU(W)A 2018 that already give the Scottish government significant powers to prepare for Brexit.
Charles Livingstone, partner, and Jamie Dunne, senior solicitor, both of Brodies LLP, have examined the Supreme Court's decision, see News Analysis: Supreme Court rules parts of Scottish Brexit Bill outside legislative competence (Re the UK Withdrawal from the European Union (Legal Continuity) (Scotland) Bill).
For the views of Adam Cygan, Professor of Law at the University of Leicester; Andrew Mylne, head of the Non-Government Bills Unit at the Scottish Parliament; and Alexander Campbell, barrister at Field Court Chambers, see: LNB News 13/12/2018 170.
The government has launched a tool to assist businesses in their preparations for Brexit. The purpose of the tool is to help businesses find out what they should be doing to prepare for Brexit, what changes are occurring in their industry sector and information on specific rules and regulations.
The tool asks users seven questions about their business, such as their industry sector, the extent of any cross-border trade, whether they have any employees in other European countries and their use of personal data. Users are then directed to previously published guidance relevant to their particular circumstances.
For more information, see: LNB News 19/12/2018 117.
The Quoted Companies Alliance (QCA) has conducted a review of the websites of all 927 companies on AIM to determine which recognised corporate governance code such companies have adopted. As of September 2018, all companies on AIM are required to name on their website which corporategovernance code they follow to be in line with AIM Rule 26.
The QCA discovered that:
89% of the companies follow the QCA Corporate Governance Code (823 companies)
6% of the companies follow the Financial Reporting Council’s UK Corporate Governance Code (55 companies)
4% of the companies follow the code of another country or territory (34 companies), and
1% of the companies follow either the Association of Investment Companies Code for Investment Companies; an older (2013) version of the QCA Corporate Governance Code or are yet to state which code they follow
For further information, see LNB News 13/12/2018 108.
The QCA has conducted a review of the level of application of the QCA Corporate Governance Code (QCA Code) by the 800 plus companies on AIM that have adopted it.
Key findings of the QCA’s review include:
For further information, see: LNB News 13/12/2018 130.
The Private Equity Reporting Group (PERG) has reviewed the private equity industry’s conformity with the Guidelines for Disclosure and Transparency in Private Equity, as recommended by Sir David Walker in 2007 (the Guidelines). The Guidelines seek to increase transparency through enhanced reporting and disclosure by the largest UK portfolio companies and their private equity owners. PERG was established in March 2008 to monitor conformity with the Guidelines and make periodic recommendations to the British Private Equity and Venture Capital Association (the BVCA).
The review covers 56 portfolio companies (2017: 54) that fall within the scope of the Guidelines and the 51 firms (2017: 59) that back them (private equity firms and those operating in a private equity-like manner).
The key findings of the PERG review were that:
For further information, see: LNB News 14/12/2018 138.
The Equality and Human Rights Commission (EHRC) has published an analysis of the gender pay gap action plans of employers in an effort to understand the steps being taken to tackle the inequalities faced by women at work.
As a result of its findings, the EHRC is calling for the government to make the publication of action plans mandatory, so that such reporting can drive meaningful change in the workplace. The EHRC believes more employers should voluntarily publish their action plans to demonstrate a real commitment to reducing the pay gap.
Findings from the EHRC’s analysis reveal that:
The EHRC makes several recommendations to assist employers in the creation of good gender pay gap action plans.
For further information, see: LNB News 14/12/2018 136.
John Kingman’s independent review of the Financial Reporting Council (FRC) has been published. Broad proposals for a new organisation with a new mandate, clarity of purpose, leadership and powers are put forward in order to create a regulator that is a beacon for best practice in governance, transparency and independence in UK companies.
The government’s response to the review will be published in due course—if the recommendations are followed, primary legislation would be required to radically overhaul the FRC’s existing structure, which has no statutory base and did not start its life as a regulator.
Key recommendations include:
the FRC should be replaced as soon as possible with a new independent regulator, with clear statutory powers and objectives (with a proposed name of ‘Audit, Reporting and Governance Authority’)
the new body should be accountable to Parliament, with a remit letter to the regulator at least once each Parliament (as it does for the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA))
the regulator should have an overarching duty to promote the interests of consumers of financial information, not producers
a new board should be appointed, and should not be self-perpetuating, as it currently is
the regulator should be better equipped to ensure its work and decision-makings is informed by market analysis
the current self-regulatory model for the largest audit firms should end
the regulator’s corporate reporting work should be extended to cover the entire annual report, with stronger powers to require documents and other relevant information in order to conduct that review work
the regulator needs to engage at a more senior level in a much wider and deeper dialogue with UK investors, and
the regulator should not be funded on a voluntary basis—a statutory levy should be put in place
For further information, see: LNB News 18/12/2018 53.
At the end of October 2018, the FRC announced that it was undertaking a review into corporatereporting which would look at existing financial and non-financial practices, consider what information investors and other stakeholders require and the purpose of corporate reporting and the annual report. The Future of Corporate Reporting Advisory Group has now been formed for that purpose and the FRC has published details of its members. The members are representatives of the FRC’s major stakeholder groups—companies, investors, civil society groups, academics, auditors, audit committee chairs, lawyers and design agencies.
For further information, see: LNB News 17/12/2018 76 and LNB News 30/10/2018 67.
On 18 December 2018, the Competition and Markets Authority (CMA) published an update paper for its statutory audit market study, identifying serious competition concerns and proposing changes to legislation to improve the audit sector for the benefit of both savers and investors.
The CMA launched its market study in October 2018 and has now identified several reasons why it believes audit quality is falling short.
In the update paper, the CMA is consulting on proposed legislation to:
The deadline for responses to the update paper is 21 January 2019.
For further information, see: LNB News 18/12/2018 43.
The government has launched an independent review into standards in the UK audit market, appointing Donald Brydon, outgoing Chair of the London Stock Exchange Group, to lead the review. The Brydon Review will consider standards being delivered by UK auditors, what more can be done to make them more effective and reputable and look at what the standards and requirements should be for the UK audit profession in the future.
The Brydon Review builds on the findings of two parallel reviews:
For further information, see: LNB News 18/12/2018 51.
Commercial analysis: Kristina Lukacova, a barrister at New Square Chambers, analyses Morris v Swanton Care & Community Ltd  EWCA Civ 2763.
In that case, the Court of Appeal upheld the first instance decision that the claimant did not have an enforceable right to provide consultancy services to a company during a period to be reasonably agreed between the parties to a share purchase agreement. The relevant provision, which was in the earn out consideration clause of the share purchase agreement, was found to be an agreement to agree and there was no objective standard by reference to which the court could determine the length of the period referred to.
It provides a useful summary of the principles regarding agreements to agree and serves as a warning to parties tempted to leave matters to be agreed at a later date. Where the parties leave an essential matter to be agreed between them in the future, on the basis that either party remains free to agree or to disagree about it, there is no bargain which the courts could enforce.
For further information, see News Analysis: An unenforceable agreement to agree (Morris v Swanton Care & Community Ltd).
Re MDNX Group Holdings Ltd  EWHC 3396 (Ch) concerned two cross-border mergers aimed at reorganising subsidiaries within the same corporate group. Eleven UK companies and two Dutch companies were involved.
In the first merger (merger 1), the transferors were seven wholly owned subsidiaries of MDNX Group Holdings Ltd (MDNX). MDNX would merge with those seven companies, making MDNX the transferee company for merger 1. MDNX was an English registered company. Of the seven transferors: (i) one was a Dutch registered company; (ii) one was a Scottish company (Easynet); and (iii) the other five were English companies. Once merger 1 had taken place, merger 2 would occur, at which point an English company (Networks) would merge with: (i) MDNX, which was its sister company; (ii) three other English companies; and (iii) one Dutch company. Following the mergers, Networks would continue to conduct the business formerly carried out by the transferor companies.
It was necessary for pre-merger certificates to be obtained, pursuant to regulation 6 of the Companies (Cross-Border Mergers) Regulations 2007, SI 2007/2974 (the Cross Border Merger Regulations). Among other things, regulation 11 of the Cross Border Merger Regulations required a members' meeting to be summoned and a notice published in the Gazette.
Hearings took place to obtain the pre-merger certificates in London (for the English companies) and in Edinburgh (for Easynet). At the Edinburgh hearing, the Court of Session noted that the notice published in the Gazette had not included particulars of the date, time and place of the meetings summoned, as required under regulation 12 of the Cross Border Merger Regulations. The pre-merger certificate issued by the Court of Session stated that Easynet had properly completed the pre-merger acts and formalities, so far as applicable, with the exception of certain requirements of regulation 12 of the Cross Border Merger Regulations. The same omissions had been made from the Gazette notice for the English companies, but this had not been noticed or drawn to the attention of the judge in London who had issued a pre-merger certificate stating that the companies had properly completed the pre-merger acts and formalities for the cross-border merger.
The applicants applied to the Companies Court for the sanctioning of the two mergers.
The court held that merger 2 would be approved. There was jurisdiction under regulation 16 of the Cross Border Merger Regulations to make an order to approve the completion of merger 2. Further, there was no reason for the court not to exercise its discretion in favour of approving merger 2.
However, the court found that the jurisdictional requirement in regulation 16(1)(b) of the Cross Border Merger Regulations, which requires that an order has been made under regulation 6 (ie a pre-merger certificate has been obtained) in relation to each UK merging company, had not been satisfied in respect of the merger 1. The court could not make an order to approve the completion of merger 1, because of the pre-merger certificate made in respect of Easynet. It found that the fundamental requirement of article 127 of Directive (EU) 2017/1132 and of regulation 6 of the Cross Border Merger Regulations was that the court issuing a pre-merger certificate was satisfied, following its scrutiny, that all the pre-merger acts and formalities had been complied with. The term 'pre-merger certificate' for the purposes of regulation 6 of the Cross Border Merger Regulations was limited to an order given that stated that the court had concluded just that. An order which certified that some, but not all of the acts and formalities had been completed was not such a pre-merger certificate, in the view of the court.
The FCA has published the findings of a review into industry implementation of the Market Abuse Regulation (EU) 596/2014 (MAR) in the latest edition of its newsletter, Market Watch 58. The review involved meetings with firms, surveys sent to issuers of financial instruments and asset management firms and analysis of its own data. Market Watch 58 includes FCA advice on some of the issues raised by the review.
The findings and advice relate to market soundings; insider lists; systems and controls for identifying and disclosing inside information; and suspicious transaction and order reports (or STORs).
Overall, the FCA found that many market participants have a good understanding of their obligations under MAR and have configured their systems and controls accordingly. However, there remain areas where firms are struggling to comply, which includes surveillance of all orders and transactions. When MAR came into force, firms told the FCA that quote surveillance would require an additional technology build and they recognised that this might take time to design and implement. However, 2 years into the regime, the FCA now expects firms to be fully compliant with the obligation to undertake quote surveillance.
For further information, see: LNB News 18/12/2018 44.
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.
We have published a new Practice Note in our Corporate Governance topic: Corporate governance for private companies.
To track key legislative and regulatory developments, see our Trackers:
Brexit legislation tracker
Prospectus Regulation tracker
Transparency Directive tracker
Listing Rules tracker
Disclosure Guidance and Transparency Rules Sourcebook tracker
Prospectus Rules tracker
New Q&A added this week: What defines a financial year for a limited partnership?
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—7 December 2018.
This is our final weekly highlights for 2018. The first weekly highlights of 2019 will be published on 10 January 2019. For details on how to keep up to date with the latest news on a daily and weekly basis, see Additional news—daily and weekly news alerts above.
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