Corporate weekly highlights—21 June 2018

This week’s edition of Corporate highlights includes the NEX Exchange consultation on proposed changes to the Fast Track admission process, the Law Society’s response to the consultation on insolvency and corporate governance and the publication of the Fifth Money Laundering Directive in the Official Journal.

In this issue:

NEX Exchange consultation on proposed changes to Fast Track admission process

The NEX Exchange has launched a market consultation in relation to proposed amendments to the NEX Exchange Growth Market Rules for Issuers in relation to the fast track admission process. The deadline for submitting responses is 29 June 2018 and the NEX Exchange will confirm the outcome of the consultation by 13 July 2018.

At present, companies that are admitted to certain qualifying markets can apply to join the NEX Exchange Growth Market without publishing a NEX Exchange Admission Document. The alignment of disclosure rules and transparency is easily achieved where companies applying for fast track admission to the NEX Exchange Growth Market are already on the AIM, however, that is not true of all qualifying markets.

To ensure parity between fast track and non-fast track issuers regarding information available to investors, NEX Exchange proposes making certain changes to the fast track admission process. NEX Exchange has published a mark-up of the proposed amendments to the NEX Exchange Growth Market Rules for Issuers, which can be accessed here.

Proposed amendments include requiring an applicant using the fast track procedure to review and confirm that all information required by Appendix 1 of the NEX Exchange Growth Market Rules for Issuers is publicly available in English, whether in an admission or prospectus document or other regulatory filing in the issuer’s home market (and where there are gaps in publicly available information the information will need to be included in the NEX Exchange admission application announcement). Corporate advisers will be required to submit a checklist evidencing that the information requirements of Appendix 1 have been satisfied.

The consultation closes on 29 June 2018 and the NEX Exchange will confirm the outcome by 13 July 2018.

For further information, see LNB News 18/06/2018 71.

Corporate governance

Law Society responds to consultation on insolvency and corporate governance

The Law Society has published its response to the Department of Business, Energy & Industrial Strategy’s consultation on insolvency and corporate governance, which sought views on sales of businesses in distress, reversal of value extraction schemes, investigation into the actions of directors of dissolved companies and strengthening corporate governance in pre-insolvency situations.

The Law Society, in its response, stated that:

  1. its members' experience supports the statement in the consultation paper that some company directors avoid accountability for misconduct by allowing, or actively causing, their companies to dissolve instead of placing the company into a formal insolvency process. It considers that this practice is widespread
  2. with regard to the sale of insolvent subsidiaries, creditors of companies in distress which are sold are adequately protected under the existing law and further measures are not required. However, the Law Society states that, if (contrary to its view) measures were to be contemplated to address specific public interest concerns, this would more appropriately be dealt with by specific legislation or regulation targeted at those public interest concerns
  3. the existing antecedent transaction provisions are adequate (in their current form) to respond to value extraction schemes appropriately and it does not consider that there is a need for either new tools or the expansion of the existing powers of insolvency office-holders
  4. existing requirements of the Companies Act 2006 and the UK Corporate Governance Code are adequate to deal with the specific problems referred to in the consultation paper
  5. the legal framework governing the payment of dividends and making distributions should be reviewed

For further details, see LNB News 19/06/2018 131.

Company incorporation

Moving to Luxembourg before Brexit hits (Liberty Mutual Insurance Europe PLC and LSM Luxembourg PLC SA)

Corporate analysis: This judgment approved the merger of Liberty Mutual Insurance Europe PLC, an unlisted public limited company, with a newly formed Luxembourg company to form a Societas Europaea (SE). This forms part of plans to redomicile to Luxembourg to prepare for the consequences of the UK leaving the EU on 29 March 2019.

Liberty Mutual Insurance Europe PLC and LSM Luxembourg PLC SA [2018] EWHC 1445 (Ch)[2018] All ER (D) 77 (Jun).

This case involves a non-listed UK company, Liberty Mutual Insurance Europe PLC (Liberty), a subsidiary of a Boston-based US Fortune 100 company, applying to the Companies Court of England and Wales to approve the terms of a merger with a Luxembourg company in order to form an SE. The formation of the SE forms part of Liberty’s intentions, announced last year, to redomicile to Luxembourg due to the UK’s exit from the EU. Reasons given for the redomicile are to prepare for the consequences of Brexit, to minimise disruption to customers and pursue growth plans in Europe.

The court confirmed that the requirements of Article 26 of the Council Regulation (EC) No 2157/2001 of 8 October 2001 (the SE Regulation) have been satisfied. The court determined that the fact that LSM Lux was incorporated in December 2017 purely for the purpose of facilitation the merger with Liberty to form an SE and had never traded did not affect the legality of the merger. Mr Justice Morgan stated that ‘following the reasoning of the Court of Appeal in Easynet Global Service Ltd v Secretary of State of Business, Energy and Industrial Services [2018] EWCA Civ 10, I considered that even if the involvement of LSM Lux was merely a means to enable the Company to produce the intended result under the Regulation, the steps which had been taken and which would be taken came within the ambit and terms of the Regulation and did not infringe the principle of abuse of rights in accordance with the European jurisprudence’.

Many UK companies with European interests will still be weighing up potential business risks and considering their options following the UK’s departure from Europe next year and will no doubt pay attention to cases such as this. However, this particular example may have limited use as a case study for other companies because, given the time required to give required notice periods and proceed through the courts, it may well be one of the last SEs formed in England and Wales. The SE Regulation will no longer apply following Brexit, and the UK will be deemed a ‘third country’, incapable of registering an SE. See further information in the European Commission’s Notice to Stakeholders: withdrawal of the United Kingdom and EU rules on company law, which sets out the consequences for UK companies following Brexit.

See News Analysis: Moving to Luxembourg before Brexit hits (Liberty Mutual Insurance Europe PLC and LSM Luxembourg PLC SA).

Corporate crime for corporate lawyers

MLD5 published in the Official Journal

Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 (the Fifth Money Laundering Directive, MLD5) has been published in the Official Journal. It amends Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the Fourth Money Laundering Directive), and Directives 2009/138/EC and 2013/36/EU.

The aims of MLD5 include increasing transparency and responding to the latest technological developments. Among other things, the scope of the Fourth Money Laundering Directive is extended to include providers engaged in exchange services between virtual currencies and fiat currencies as well as custodian wallet providers. In addition, MLD5 enables EU citizens to access beneficial ownership information of trust and similar legal arrangements where they demonstrate a ‘legitimate interest’ in the information. Access should also be granted to any person that files a written request in relation to a trust or similar legal arrangement which holds or owns a controlling interest in any corporate or other legal entity incorporated outside the EU, through direct or indirect ownership, including through bearer shareholdings, or through control via other means.

MLD5 shall enter into force on the twentieth day that of its publication in the Official Journal. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with MLD5 by 10 January 2020.

For full text, click here.

For further information, see LNB News 19/06/2018 48.

Audit

Decline in quality of Big Four’s auditing

The Financial Reporting Council (FRC) has seen a decline in the audit quality of the Big Four audit practices during this year’s audit inspections. The FRC notes that the Big Four audit practices must ‘act swiftly’ to reverse this decline and reach the targets set by the FRC. The FRC's audit inspection findings show that there has been an 'unacceptable deterioration' in audit quality at KPMG, with 50% of its FTSE 350 audits requiring more than just limited improvements, compared to 35% in the previous year.

The FRC has also highlighted a number of factors behind the fall in quality. These include, among others:

  1. a failure to challenge management
  2. failures to show appropriate scepticism across audits
  3. poorer results for audits of banks

As a result of KPMG’s deterioration in audit quality, it will be subject to increased scrutiny by the FRC, including 25% more audits over its 2018/19 cycle of work.

FRC has taken further actions, including reviewing the effectiveness of root cause analysis by the firms to identify the real causes of audit shortcomings and whether their action plans will effectively address the FRC’s concerns, and agreeing actions with firms on all audits where shortcomings were identified.

For further information, see LNB News 19/06/2018 40.

Accounts and reports

Blockchain has potential disruptive impact on corporate reporting

The Financial Reporting Council’s Financial Reporting Lab (the Lab) has published a report looking at how current developments and use-cases of blockchain technology might impact corporate reporting processes in the future. The Lab concludes that, while cost, complexity and lack of standardisation of blockchains might be inhibiting factors, the growing use of blockchain means those involved in corporate reporting processes need to consider its potential disruptive impact.

The Lab has considered the following potential use-cases for blockchain:

  1. in the production of corporate reporting—how transactions processed on a blockchain may help to improve accounting records
  2. in the distribution of corporate reporting—how a blockchain based European corporate reporting platform (European Financial Transparency Gateway) may help to open up access to corporate reporting
  3. in the consumption of corporate reporting—how blockchain might help to rethink the way that reporting content is defined

The Lab recommends that regulators, standard-setters and professional bodies monitor blockchain developments and consider how they may impact corporate reporting and potentially create a forum where all those involved in corporate reporting can share and learn.

For further information, see LNB News 19/06/2018 123.

Partnerships (Scotland)

Inner House confirms continuing liability of law firms to meet pensions payments for former employees (Scottish Pension Fund Trustees Ltd v Marshall Ross & Munro)

Pensions analysis: The Court of Session in Scotland has confirmed that where a business is transferred from one partnership to another, but continues to trade to the outside world as the same entity, there is a legal presumption under Scottish law that the liabilities of the old partnership transfer with the business to the new one. What is, on the face of it, a ‘pensions’ case, has much broader implications for the commercial world. The decision has taken a step towards reconciling the tension between a very technical interpretation of partnership law in Scotland and the reality of day-to-day operation of a business. This case has reaffirmed the position that, where a business has traded as a single entity over a period of time, there is a presumption under Scottish law (which does not exist under English law) that liability flows between successor partnerships. Frances Ennis, senior associate at Pinsent Masons, who acted for the Trustees, sheds further light on the decision.

Scottish Pension Fund Trustees Ltd v Marshall Ross & Munro [2018] CSIH 39.

For further information, see News Analysis: Inner House confirms continuing liability of law firms to meet pensions payments for former employees (Scottish Pension Fund Trustees Ltd v Marshall Ross & Munro and others).

Additional news—daily and weekly news alerts

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Dates for your diary

Date Development
21 June 2018 Capital Markets Union: Consultation on amendments to the Markets in Financial Instruments Directive (MiFID II) delegated act on SME growth markets (Commission Delegated Regulation (EU) 2017/565 on SME Growth Markets) closes.
The proposed amendments as set out in the consultation will now be sent to the European Parliament and the Council for their scrutiny. They are part of the European Commission’s plans to adapt existing EU rules on access to public markets (as announced in the Mid-Term Review of the CMU Action Plan in June 2017), which will also include amendments to the Market Abuse Regulation and the Prospectus Regulation in due course.
See LNB News 13/06/2018 29.
29 June 2018 Late Payment of Commercial Debts (Scotland) Amendment Regulations 2018 come into force.
This statutory instrument amends The Late Payment of Commercial Debts (Scotland) Regulations 2002, SI 2002/335, by replacing an existing provision which allows representative bodies to challenge certain ‘grossly unfair’ contractual terms or practices on behalf of small and medium sized enterprises (SMEs). The new provision clarifies that certain representative bodies are able to decide whether to take action to bring proceedings to challenge the use of certain grossly unfair terms or practices in, or in relation to, contracts on behalf of any size business undertaking (ie not just SMEs), provided that the contract is one to which the Late Payment of Commercial Debts (Interest) Act 1998 applies.
See LNB News 21/05/2018 75.
1 July 2018 Changes to the Conduct of Business Sourcebook (COBS) set out in the FCA’s Policy Statement: Reforming the availability of the information in the UK equity IPO process, PS 17/23, (published 26 October 2017) come into effect.
The changes follow on from the FCA consultation paper CP17/5: Reforming the availability of information in the UK equity IPO process (published on 1 March 2017). The FCA is aiming to restore the centrality of the prospectus or registration document in the IPO process and to create the necessary conditions for unconnected IPO research to be produced.
See LNB News 26/10/2017 108.
1 July 2018 FCA: Rules for a new category within the premium listing regime to cater for companies controlled by a shareholder that is a sovereign country come into force.
The consultation paper (CP17/21) followed on from discussion paper 17/2, ‘Review of the effectiveness of primary markets’, which discussed the role of listed primary markets and the structure of the UK listing regime in supporting that role.
The new premium listing category includes the same investor protections applicable to companies in the existing premium listing category with two modifications, which the FCA considers appropriate for companies of this type: modified related party rules: the sovereign controlling shareholder would not be considered a related party for the purposes of the UK listing rules; and the controlling shareholder rules would not apply to companies in the new category in respect of the sovereign controlling shareholder.
See LNB News 13/07/2017 135.
16 July 2018 Revised UK Corporate Governance Code: Following its December 2017 consultation, 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. Note: source for this specific date is a calendar entry on the FRC website.

Trackers

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

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

Latest Q&As

New Q&As added this week:

  1. Is a limited partnership established in England required to make trading disclosures of the details of all its partners?

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—15 June 2018.

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