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This week’s edition of Corporate highlights includes various Brexit-related updates, including the Financial Conduct Authority’s further consultation (CP18/36) on its approach to Brexit which includes a review of the Prospectus Rules, Listing Rules and parts of the Disclosure Guidance and Transparency Rules sourcebook, while in other developments the FRC has published FAQs on the 2018 UK Corporate Governance Code.
Equity capital markets (Main Market)
Additional Corporate updates this week
Additional news—daily and weekly news alerts
Dates for your diary
The Financial Conduct Authority (FCA) has launched a further consultation on its approach to the UK's exit from the EU. The consultation paper (CP18/36) includes a review of the Prospectus Rules (PR), the Listing Rules (LR) and parts of the Disclosure Guidance and Transparency Rules (DTR) sourcebook.
The FCA notes that most of the changes it proposes to make to the LR, PR and DTR will be to ensure consistency with the Treasury's proposed approach, that in practice, this means that certain issuers will need to have a prospectus approved by the FCA where they now rely on a passported document, and that similarly, some issuers will have to make disclosures according to the FCA's rules where they now do so following the rules of their home competent authority.
The FCA notes that currently under the LR, when an issuer applies for admission of shares or depositary receipts over shares to the Official List, it must demonstrate that enough securities of that class are distributed to the public in one or more EEA states, ie the 'free float'. In light of the above, the FCA is proposing to remove the reference to EEA holders in the LR, meaning that holders from any jurisdiction can be counted towards the 'free float'.
Disclosure guidance and transparency Rules—transparency requirements
The FCA is proposing the following changes to the DTR transparency requirements:
DTR 1A and 4—these rules currently only apply to issuers with securities admitted to trading on a regulated market in the EU and for which the FCA is the home competent authority. The FCA proposes that, after exit, the transparency rules will only apply to issuers with securities admitted to trading on a UK regulated market
DTR 4.1.6R—this rule requires issuers with securities admitted to trading on an EU regulated market to make use of International Financial Reporting Standards (IFRS), as adopted by the EU: the FCA is proposing to change this requirement so that issuers will be required to use IFRS as adopted by the UK instead
DTR 4.1.7R—this rule permits UK traded non-EEA issuers to use an EEA auditor to provide the audit report in respect of their annual financial statements. After exit, the FCA notes that auditors based in the EEA will become subject to the requirements currently applicable to third country auditors, including registration with the FRC and that this will also apply when they audit UK traded EEA issuers
DTR 5—this rule imposes notification requirements that do not apply in respect of voting rights provided to or by members of the European System of Central Banks in the context of carrying out their functions as monetary authorities: the FCA proposes to amend this reference so the notification exemption is available to the Bank of England only
DTR 6—this rule sets out the requirements that issuers must comply with when disseminating regulated information. Currently issuers can choose between using a Primary Information Provider (PIP) or an incoming information society service. After exit, issuers will only be able to use a PIP to disseminate such information
Disclosure Guidance and Transparency rules—corporate governance requirements
DTR 1B and 7.1 set out requirements in relation to audit committees. DTR 1B.1.3R provides an exemption from DTR 7.1 for an issuer which is a subsidiary undertaking of a parent undertaking, where the parent undertaking is subject to DTR 7.1 or to requirements implementing article 39 of the Audit Directive in any other EEA State.
The FCA proposes to amend this exemption so that such an issuer will only be exempt from DTR 7.1 where the parent undertaking is subject to DTR 7.1. However, the FCA is also proposing that the existing exemption will continue to apply in respect of a financial year beginning before exit day.
For further information, see LNB News 23/11/2018 119.
The government has published two approach papers relating to the proposed amendments to be made to retained EU law relating to market abuse and the Prospectus, Transparency and Consolidated Admissions and Reporting Directives to ensure that they continue to operate effectively after the UK leaves the EU. Draft statutory instruments (SIs) have not yet been published but the approach papers set out the policy background and purpose of the proposed SIs.
Draft Market Abuse (Amendment) (EU Exit) Regulations 2018: explanatory information
This SI will address deficiencies in retained EU law relating to the market abuse regime. The proposals include:
maintaining the scope of the Market Abuse Regulation—the UK market abuse regime will cover conduct related to instruments admitted to trading or traded on both UK and EU venues
transaction reporting—the transaction reporting regime in the Markets in Financial Instruments Directive (MiFID II) provides for the collection of data used to identify possible instances of market abuse and the Market Abuse Regulation provides for its investigation and enforcement. The government intends that the existing scope of the FCA’s monitoring of markets will be maintained
notification requirements will be retained—the UK market abuse regime will keep the Market Abuse Regulation’s notification requirement for issuers to report certain information (PDMRs, insider lists etc.) to the relevant national competent authorities
transfer of ESMA’s functions to the FCA for enforcement actions
supervisory co-operation—it will not be appropriate for UK supervisors to be obliged to share information or co-operate unilaterally with EU authorities without reciprocity
Draft Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations 2019—explanatory information
This SI will address deficiencies in the Prospectus Directive and the Transparency Directive that arise from the UK leaving the EU. The FCA Handbook will be amended to reflect the changes and the FCA will consult on the changes.
Some of the changes proposed in the SI include:
approval of prospectuses—in a no-deal scenario, the UK will treat EEA states and EEA issuers in the same way as other third countries and their issuers, including with regard to approving prospectuses. Issuers with a prospectus already approved by another EEA national competent authority will need to have their prospectus approved by the FCA if they wish to make an offer to the public in the UK or gain admission to a UK regulated market
prospectuses approved pre-Exit—prospectuses ‘passported’ into the UK before Exit day will be grandfathered for use in the UK until their validity expires—however, those prospectuses that have expired already will not be eligible for use in the UK
exemptions from the obligation to produce a prospectus and make disclosures under the Transparency Directive for public bodies: under the current regimes certain public bodies—at present the exemptions only apply to issuers from EEA member states but the government intends to extend this to certain third country public sector bodies
equivalence determinations—in order to ensure that the UK can still make equivalence determinations when it leaves the EU, the functions of the European Commission in this respect will be transferred to UK authorities
International Financial Reporting Standards (IFRS)—at present, issuers with securities admitted to trading on a regulated market in the EU are required to use IFRS for their consolidated accounts. In a no-deal scenario, in order to provide continuity the Treasury intends to issue an equivalence decision determining that EU-adopted IFRS can continue to be used to prepare financial statements for Transparency Directive requirements and for the purposes of preparing a prospectus under the Prospectus Directive
supervisory co-operation—as with the proposed draft Market Abuse SI (see above), provisions relating to co-operation and information sharing will be removed
The explanatory information notes that the government intends to domesticate the remaining provisions of the Prospectus Regulation (which are due to apply in July 2019).
The government notes that the drafting approach and other technical aspects of the proposals may change before the statutory instruments are laid before Parliament.
For further information, see: LNB News 22/11/2018 113.
The Commons European Statutory Instruments Committee (ESIC) and the Lords Secondary Legislation Scrutiny Committee (SLSC) are responsible for the sifting process under the European Union (Withdrawal) Act 2018 ( EU(W)A 2018). These committees scrutinise proposed negative Brexit SIs and make recommendations on the appropriate parliamentary procedure before the instruments are laid in Parliament. This bulletin outlines the latest updates and recommendations, collated on 23 November 2018.
One of the three proposed negative Brexit SIs considered by the SLSC and recommended for upgrade was The Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2018.
For further information, see News Analysis: Brexit SI Bulletin—latest drafts and sifting committee recommendations, 23 November 2018.
The Financial Services (Implementation of Legislation) Bill (the Bill) was introduced in the House of Lords on 22 November 2018. It is intended to provide the Government with the power to implement and make changes to ‘in flight’ files of financial services legislation for two years after the UK's withdrawal from the European Union in the absence of a withdrawal agreement being reached (ie in a no-deal scenario).
‘In flight’ files are pieces of EU legislation that:
The majority of the UK's financial services legislation is currently negotiated at EU level. HM Treasury (HMT) is in the process of completing an ‘onshoring’ project, which will see around 60 statutory instruments brought onto the UK statute book under EU(W)A 2018, to ensure a functioning financial services regime post-EU exit. Although EU(W)A 2018 will transfer the existing body of EU law as it is in effect on exit day into UK law, it does not catch any provisions of EU law that have been adopted but have not yet taken effect, and it does not include any provisions to update EU law once it has become UK law (other than through primary legislation).
In a no-deal scenario, this Bill provides for a delegated power to deal specifically with the expected changes to the body of financial services law that are currently in the EU pipeline. It also provides for the UK to update its financial services regulatory regime. In doing so, it will minimise disruption to financial services for up to two years after the point of the UK's exit from the EU.
The Bill permits HMT to make provision in UK law that corresponds, or is similar, to specified EU financial services legislation in a no-deal scenario. It also gives it the power to make adjustments HMT considers appropriate including, in particular, adjustments in connection with the UK's withdrawal from the EU. These powers will allow the Government to:
The power to make provision in UK law that corresponds, or is similar, to specified EU financial services legislation in a no-deal scenario is sun-setted to two years, consistent with the EU(W)A 2018. This recognises the importance of putting in place a longer-term solution for updating financial services regulation. The affirmative resolution procedure is required for every instance of the use of the power and HMT is mandated to produce and publish annual reports on the exercise of the power.
The Bill now makes its way through the Parliamentary process, with the second reading in the House of Lords expected on 4 December 2018.
For further information, see: LNB News 26/11/2018 83.
HM Treasury has now also published a policy note in relation to The Financial Services (Implementation of Legislation) Bill outlining the Bill's purpose and further detail on the 'in-flight files' specified in the Bill itself.
For further information, see: LNB News 28/11/2018 113.
Financial Services analysis—22 November 2018: HM Treasury published the draft Packaged Retail Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019 statutory instrument (SI) together with explanatory information. HM Treasury also published explanatory information on prospective SIs in relation to investment exchanges, clearing houses and central securities depositories, mortgage credit and amendments to the Financial Services and Markets Act 2000.
For further information, see News Analysis: Brexit Financial Services draft SIs and explanatory information published—22 November 2018.
On 25 November 2018, EU27 leaders endorsed the draft Withdrawal Agreement and political declaration on the framework for the future relationship. EU27 leaders restated the EU’s determination to have ‘as close as possible a partnership’ with the UK, in line with the political declaration. The conclusions are available here.
Following the summit, the Prime Minister’s office published:
Policy paper: Withdrawal Agreement and Political Declaration laid before Parliament following political agreement
40 reasons to back the Brexit deal
PM letter to the nation: 24 November 2018
For further information, see: LNB News 26/11/2018 94.
Public Law analysis: The UK government and the European Commission have reached agreement in principle on the wording of a political declaration on the framework for the future EU-UK relationship. The political declaration sets out the broad understanding between the UK and EU on the framework for the future UK-EU relationship to be finalised after exit day and as such is a set of objectives and underlying principles which will provide an outline blueprint for negotiators, describing the envisaged structure, scope, objectives and process for reaching agreement on future UK-EU co-operation, ideally by the end of 2020.
While the parties recognise that the relationship may ‘evolve over time’, in the first instance, many provisions in areas of particular interest for the UK appear to be linked either to the conditions set out in the Withdrawal Agreement, or subject to future conditions to be agreed including: financial contributions, compliance with relevant EU laws and instruments, ‘compatible’ regulatory approaches and/or regulatory alignment. Examples include continued participation in EU programmes, co-operation and involvement with EU agencies and regulators, sectoral co-operation and trade arrangements and customs checks and controls.
The document is open-ended and leaves room for a range of outcomes, but the clear implication is that the vision for the future relationship is founded on the core principles and approaches outlined in the Withdrawal Agreement. Examples include the single customs territory, competitive level playing field, protection of IP rights, governance, dispute resolution and enforcement. While in many cases the declaration seeks to ‘preserve regulatory autonomy’ on both sides, implying a choice as to the extent of future co-operation, it also aims for co-operation that goes beyond existing external arrangements (eg WTO, GPA, FTAs) on the basis of ‘compatible’ regulatory approaches and ‘voluntary’ regulatory co-operation in areas of mutual interest—ie the level of ambition is linked to the level of regulatory alignment.
For an outline of the key announcements, documents and next steps, see News Analysis: Brexit Bulletin—examining the political declaration on the future UK-EU relationship.
On 27 November 2018, the Court of Justice began hearing the preliminary reference in Wightman and Others, concerning whether the UK’s notification to withdraw from the EU under Article 50 TEU could be revoked unilaterally. The government challenged the preliminary reference as inadmissible and sought permission to appeal the decision of the Inner House of the Court of Session to the UK Supreme Court. The Supreme Court refused permission.
The questions submitted for preliminary ruling by the Court of Justice in Wightman are as follows:
‘Where, in accordance with Article 50 of the TEU, a Member State has notified the European Council of its intention to withdraw from the European Union, does EU law permit that notice to be revoked unilaterally by the notifying Member State—and, if so, subject to what conditions and with what effect relative to the Member State remaining within the EU.’
For further information, see: LNB News 26/11/2018 95.
Public Law analysis: The General Court rejected a challenge to the validity of the decision of the Council of the EU in May 2017 to authorise the European Commission to open negotiations with the UK for the Brexit withdrawal agreement. This case, brought by thirteen British citizens residing in EU Member States outside the UK, is one of a number of Brexit-related challenges in the UK and EU courts. The General Court rejected it as inadmissible because the Council decision under challenge does not have binding legal effect on Mr Shindler and the other applicants. The judgment is of limited practical effect, but it is interesting to consider the approach taken by the European Court, because this is one of a number of Brexit-related cases coming before the EU courts. Written by Maya Lester QC, Brick Court Chambers.
For further information, see News Analysis: General Court rejects challenge to EU decision opening Brexit negotiations as inadmissible (Shindler v Council of the European Union).
The Financial Reporting Council (FRC) has published a list of frequently asked questions (FAQs) on the 2018 UK Corporate Governance Code (UKCG Code), which will apply to premium listed companies with accounting periods beginning on or after 1 January 2019. The FAQs cover issues such as how the Principles should be reported on, the status of the revised Guidance on Board Effectiveness and how the ‘comply or explain’ regime operates in practice.
Although the UKCG Code only applies to companies with accounting periods beginning on or after 1 January 2019, the FRC believes it will be appropriate for companies to report on Provision 4 (significant dissent on shareholder resolutions) during 2019. Similarly, future remuneration policies and changes to existing ones should be developed with reference to the 2018 UKCG Code and the updated Guidance on Board Effectiveness. This is a reflection of the fact that remuneration policies are forward-looking applying to future accounting periods.
The FAQs also clarify that:
For further information, see: LNB News 27/11/2018 124.
The Investment Association (IA) has published the 2018 update of its ‘principles of remuneration’ document (remuneration principles) and, in advance of the 2019 AGM season, highlighted certain items of focus. The review took place against the backdrop of the introduction of the 2018 UK CorporateGovernance Code and an increasing level of dissent on remuneration resolutions at FTSE 100 AGMs (IA members expressing frustration that many companies are not listening to investor views).
Under the updated remuneration principles, the IA expects companies to:
For further information, see: LNB News 22/11/2018 110.
The UK chapter of Transparency International has launched the 2018 Corporate Political Engagement Index, which assesses businesses on how transparent they are in their political dealings. It found that nearly three quarters of the 104 companies assessed are failing to make adequate disclosures.
The 2018 Corporate Political Engagement Index looks at key areas of political engagement by companies such as donations to political parties, lobbying of those in power, the revolving door, public commitment to ethical behaviour and the overall transparency of this information.
Of the companies assessed, many of whom regularly meet with government, nearly three quarters are failing to adequately disclose how they engage with politicians. Just one company received the highest grade (GlaxoSmithKline) while on average companies were ranked 'E'—representing poor standards in transparency.
Transparency International view the findings of the 2018 Corporate Political Engagement Index as a cause for concern. In their view, 'businesses must be far more transparent in how they engage with politicians or they risk damaging their reputations with the public and in the long-run will themselves lose out'.
For further information, see: LNB News 26/11/2018 86.
The European Commission has published the draft delegated regulation ahead of finalising its initiative for a simplified prospectus for companies and investors in Europe, which is to complement the 'single prospectus rulebook'. The draft delegated regulation is to supplement the Prospectus Regulation (EU) 2017/1129 as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and to repeal Commission Regulation (EC) No 809/2004. The European Commission is now seeking views on its draft delegated regulation (the feedback period ends on 26 December 2018).
The draft delegated regulation covers:
It additionally covers issues such as prospectus format and the categories of information to be included in the prospectus.
For further information, see: LNB News 28/11/2018 112.
The Financial and Company Law Committees of the City of London Law Society (CLLS) have published a response to the Law Commission consultation paper on electronic execution of documents (which sought to address any uncertainty surrounding the formalities around the electronic execution of documents).
The CLLS agrees with the majority of the recommendations in the consultation paper, which it notes are consistent with recommendations previously made by the CLLS. Other observations include:
the CLLS agrees that an electronic signature can satisfy statutory requirements for a signature and that it is not necessary to enact new law to enable the use of electronic signatures on documents held in electronic form for either business or personal purposes
the CLLS believes that the courts would adopt a flexible approach in interpreting the current legal requirement around execution of deeds and would be willing to interpret the requirement for a deed be signed ‘in the presence of a witness’ to include a person witnessing a signature by remote technology such as a video link, Skype call or FaceTime. However, in the absence of clear caselaw on this issue, best practice is to ensure the physical presence of a witness. In view of this, it would be helpful for the law to clarify the position in this area
For further information, see: LNB News 28/11/2018 15.
The Law Society has also published evidence and opinions in response to the consultation, recommending that legislation be introduced to remove doubts about the validity of electronic execution. For further informtion, see: LNB News 27/11/2018 74.
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We have published the following new Scottish execution clause Precedents in our Clause bank for corporate lawyers topic:
Execution clause (Scotland)—ordinary execution by a company by a director
Execution clause (Scotland)—ordinary execution by a company by an authorised official
Execution clause (Scotland)—ordinary execution by a company by the company secretary
Execution clause (Scotland)—ordinary execution by a partner for a partnership or a limited liability partnership, signing firm name on behalf of the firm
Execution clause (Scotland)—ordinary execution by a partner, for a partnership or a limited liability partnership, signing own name
Execution clause (Scotland)—ordinary execution by an attorney acting under a power of attorney
Execution clause (Scotland)—ordinary execution by an individual
Execution clause (Scotland)—ordinary execution by two partners, for a limited liability partnership signing own names
Execution clause (Scotland)—ordinary execution on behalf of a body corporate, by an authorised signatory, board member or the entity's secretary
Execution clause (Scotland)—ordinary execution on behalf of a limited company, by an authorised signatory, director or company secretary
Execution clause (Scotland)—self-proving execution by a company by two authorised officials
Execution clause (Scotland)—self-proving execution by a company by two directors or a director and the company secretary
Execution clause (Scotland)—self-proving execution by a partner for a partnership or a limited liability partnership, signing firm name on behalf of the firm
Execution clause (Scotland)—self-proving execution by a partner, for a partnership or a limited liability partnership, signing own name
Execution clause (Scotland)—self-proving execution by an attorney acting under a power of attorney
Execution clause (Scotland)—self-proving execution by an individual
Execution clause (Scotland)—self-proving execution by two partners, for a limited liability partnership signing own names
Execution clause (Scotland)—self-proving execution on behalf of a body corporate, by an authorised signatory, board member or the entity's secretary
Execution clause (Scotland)—self-proving execution on behalf of a body corporate, by an authorised signatory, director or company secretary and affixing the common seal
Execution clause (Scotland)—self-proving execution on behalf of a limited company, by an authorised signatory, director or company secretary
To track key legislative and regulatory developments, see our Trackers:
Brexit legislation tracker
Listing Rules tracker
Disclosure Guidance and Transparency Rules Sourcebook tracker
Prospectus Rules tracker
Prospectus Regulation tracker
Transparency Directive tracker
New Q&As added this week:
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—23 November 2018.
To read about the latest issues and developments which we are following in Market Tracker, see our latest blog post: Market Tracker weekly bulletin—29th November 2018
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