Corporate Law Update: 18 - 23 December 2021

23 December 2021

In this week’s update: guidance on notifying an acquisition under the UK’s new national security screening regime, PERG’s annual report on compliance with the Walker Guidelines, the FCA confirms the taxonomies companies can use for reporting under ESEF and extends reporting against the TCFD Recommendations to standard-listed companies, a summary of responses to the Government’s consultation on the UK’s prospectus regime and former directors of dissolved solvent companies can now face disqualification.

This is the last Corporate Law Update of 2021. We will return in the New Year. We wish all our readers a relaxing festive season and a Happy New Year.

New guidance on notifying transactions under the UK’s national security screening regime

The Government has published new guidance on how to notify an acquisition that falls within the UK’s new national security screening regime, set out in the National Security and Investment Act 2021 (the NSIA). The guidance will be of use to acquirers and their advisers who need to file a mandatory notification, as well as any party to an acquisition who wishes to make a voluntary notification and seek clearance.

The new regime come into effect formally on 4 January 2022. However, it will apply retrospectively to acquisitions that have completed since 12 November 2020. The regime allows the Government to scrutinise and potentially block or impose conditions on acquisitions that satisfy certain criteria and pose a risk to the UK’s national security.

Where the proposed acquisition of an entity will take place in one of 17 “sensitive” sectors of the UK economy (a so-called “notifiable acquisition”), the acquirer will be obliged to make a mandatory notification with the new Investment Security Unit (ISU). Failure to do so will be a criminal offence and will render the proposed acquisition automatically void as a matter of UK law.

In all other circumstances, notification is voluntary, but the Government still has the power to “call in” and assess an acquisition that gives rise to a national security risk.

The regime applies to acquisitions of entities and assets located in the UK, as well as entities and assets located outside the UK if they have a sufficiently close connection with the UK. There is no minimum transaction value under the regime and no exceptions. The regime applies both to inward investment from overseas and to purely “domestic” UK transactions.

Alongside the new guidance, the Government has published information sheets setting out the information a person will need to provide when making a mandatory notification, a voluntary notification, and an application to retrospectively validate a notifiable acquisition.

Separately, regulations have now been published to bring the regime formally into effect from 4 January 2022. The regulations also state that, if, as at that date, the Government has already intervened in a transaction on national security grounds under the Enterprise Act 2002, the existing regime under that Act will continue to apply with respect to that transaction, rather than the new regime under the NSIA.

PERG publishes annual report on Walker Guidelines compliance

The Private Equity Reporting Group (PERG) has published its 14th annual report on compliance with the Guidelines for Disclosure and Transparency in Private Equity (the “Walker Guidelines”).

The Guidelines are designed to assist private equity firms and their portfolio companies with improving transparency in financial and narrative reporting. They require portfolio companies to make certain disclosures in their annual report, publish their report and a mid-year update in a timely manner, and share certain data to gauge the contribution of UK private equity to the economy.

They also require private equity firms to make certain website disclosures.

This year’s report covers 64 portfolio companies and 56 firms that backed them. The key points arising out of the report are set out below.

  • The Covid-19 pandemic is still having an impact on many portfolio companies but PERG has seen a shift back to “normal” reporting timelines under the Guidelines. (In 2020, PERG gave a “first-year grace” in relation to the enhanced reporting requirements in their annual report.)
  • Annual reports still contain significant levels of commentary on the impact of Covid-19 on the results and liquidity of the business.
  • All portfolio companies reviewed in the sample complied with the disclosure requirements in the annual report (up from 93% in 2020). 67% prepared disclosures to at least a “good” standard (up from 60% in 2020 and 53% in 2019), but no company produced “excellent” disclosures this year.
  • There was positive progress on environmental and business model disclosures, but improvements are needed in relation to gender diversity disclosure and non-financial key performance indicators (where use of the “comply or explain” principle was more prevalent).
  • 75% of portfolio companies published their annual report in a timely manner on their website (up from 70% in 2020). The equivalent figure for mid-year updates was 87% (up from 68% in 2020). PERG expects these figures to rise as companies adjust to a “post-pandemic environment”.
  • All British Private Equity and Venture Capital Association (BVCA) member firms published certain disclosures on their website to communicate information about themselves, their portfolio companies and their investors.

PERG notes that the Guidelines will be reviewed over the course of 2022, taking into account changes in the broader narrative reporting landscape for both private and listed companies and the increased focus on climate change and societal challenges.

PERG estimates the implementation timeframe for revisions to the Guidelines to be 2023/24 but notes that this depends on the finalisation of proposed reforms to corporate reporting in the UK. In the interim, PERG has published recommendations to help improve the quality of reporting by portfolio companies, which it states should be implemented now.

FCA confirms taxonomy for ESEF reporting

The Financial Conduct Authority (FCA) has confirmed the range of taxonomies that publicly traded companies will be permitted to use when reporting under the new European Single Electronic Reporting Format (ESEF) and published the relevant implementing instrument.

Under the UK version of ESEF, for financial years beginning on or after 1 January 2021, issuers with securities admitted to trading on a UK regulated market must file their annual financial reports in XHTML format, and those preparing consolidated financial statements using IFRS must include iXBRL tagging for basic financial information.

Tagging must be applied using a recognised taxonomy. In September 2021, the FCA consulted on the taxonomies a company should be allowed to use when tagging under ESEF. For more information on that consultation, see our previous Corporate Law Update.

In summary, for financial years beginning on or after 1 January 2021 but before 1 January 2022, companies may use the original 2019 version of the ESEF taxonomy, the ESEF 2020 taxonomy, the UKSEF 2021 taxonomy or the UKSEF 2022 taxonomy to mark up their financial statements.

For financial years beginning on or after 1 January 2022, companies must use the UKSEF 2022 taxonomy to mark up their financial statements. The FCA has postponed permitting companies to use the ESEF 2021 taxonomy until this is implemented in EU legislation.

Companies that use a UKSEF taxonomy to mark up their financial statements will be permitted to use any other taxonomy published by the Financial Reporting Council to mark up other parts of their annual report.

FCA extends TCFD disclosure requirements to standard-listed companies

The Financial Conduct Authority (FCA) has confirmed (in Policy Statement PS21/23) that it is extending mandatory climate reporting to companies listed on the standard segment of the Official List.

Premium-listed commercial companies are already required, for financial years beginning on or after 1 January 2021, to comply or explain against the recommendations and recommended disclosures in the Final Report of the Task Force on Climate-related Financial Disclosures (TCFD).

In June 2021, the FCA consulted on extending this obligation to companies with a standard listing. For more information on that consultation, see our previous Corporate Law Update.

The FCA has now published the instrument making these changes. In short:

  • The requirement will apply to companies with a standard listing of shares or global depositary receipts (GDRs) for financial years beginning on or after 1 January 2022.
  • The requirement will not apply to investment entities or to shell companies (which, for these purposes, includes special purpose acquisition companies, or SPACs). It will, however, apply to shell companies once they have completed an acquisition or merger and cease to be shells.
  • The requirement will not be extended at this stage to issuers of debt or debt-like securities. Instead, the FCA intends to consider a more tailored approach that recognises the interaction of other pieces of securities regulation that apply to debt securities.

The FCA has also updated the rules for both premium- and standard-listed companies to bring the latest version of the TCFD’s “annex” on implementing its recommendations, as well as the TCFD’s recent Guidance on Metrics, Targets, and Transition Plans, within the list of documents which the FCA considers relevant when issuers make their disclosures under the regime.

Finally, the FCA has amended the rules to require listed companies that are headquartered or operate in a country with a “net zero economy” commitment to assess the extent to which they have considered that commitment in developing and disclosing their transition plan under the regime.

Treasury publishes responses to prospectus consultation

The Treasury has published a summary of responses it has received following its consultation in July on a proposed overhaul of the UK’s regime for publishing a prospectus when offering securities.

As a reminder, under UK law, to offer transferable securities to the public or to request admission of transferable securities to a UK “regulated market” (such as the London Stock Exchange’s Main Market or the AQSE Main Market), a prospectus must be published setting out information on the issuer and securities. The purpose is to ensure that investors have the information they need to make an informed choice. There are certain exemptions from this requirement.

The legal and regulatory regime is covered by a combination of the EU Prospectus Regulation (which continues to apply, in modified form, in the UK), Prospectus Regulation Rules made by the Financial Conduct Authority (FCA), and various pieces of guidance.

For more information on the July consultation, see our previous Corporate Law Update.

Broadly, respondents supported the Government’s proposed approach in most respects, including (in particular) proposals to separate prospectus requirements for offers of securities and for admission to trading, to regulate crowdfunding through FCA-authorised platforms, and to take measures to encourage more forward-looking information in prospectuses.

The Government will set out its intended next steps in due course. We will continue to monitor and report on developments.

Other items

  • Former directors of dissolved solvent companies can now face disqualification. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 has received Royal Assent. Among other things, the Act now requires the court to issue a director disqualification order to a former director of a company that has been dissolved without becoming insolvent if the individual’s conduct as a director of that company makes them unfit to be concerned in the management of a company.

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