Corporate Law Update: 8 - 14 July 2023

14 July 2023

In this weeks update:

Government publishes second annual report on how UK’s national security regime is working 

The Government has published its second annual report on how the UK’s new national security screening regime is operating. The report covers the period from 1 April 2022 to 31 March 2023 and is the first report to cover an entire year.

By way of reminder, under the regime, the UK Government, acting through its Investment Security Unit, has the power to call in certain kinds of investment and acquisition for review if it perceives a risk to the UK’s national security. For certain transactions in certain sectors, notification is mandatory.

Following review, the Government can clear an acquisition, impose conditions on it or block it entirely.

The key points from the report are set out below and relate to the period covered by the report.

  • The Government received 866 notifications, comprising 671 mandatory notifications, 180 voluntary notifications and 15 applications for retrospective validation. This is a similar volume (approximately 72 per month) as for the review period of the first annual report (74 per month).
  • On average, notifications were accepted within 4 working days. Only 43 notifications (5%) were rejected, on average within 7 to 10 working days.
  • The Government does not review all notifications. Of the 866 notifications made, the Government reviewed 766 (88%). Of those 766, the Government called in only 55 (7.2%) for further review.
  • The Government called in 65 transactions for review. 37 followed a mandatory notification and 17 followed a voluntary notification. It called in 10 transactions that had not been notified.
  • Every notification was called in or cleared within the time limit of 30 working days of being accepted. The Government took on average 27 or 28 working days to decide a call-in.
  • 47% of mandatory notifications related to transactions in the defence sector.
  • The sectors in which transactions were called in most frequently included military and dual use items (37%), defence (29%) and advanced materials (29%).
  • The most frequently called-in acquisitions involved acquirers associated with China (42%), the UK (32%) and the USA (20%).
  • Where the Government wishes to block or impose conditions on an acquisition, it can impose a final order. The Government issued only 15 final orders, only 5 of which result in an acquisition being blocked.
  • Of those 15 final orders, 4 related to military and dual use technology and another 4 to the communications sector. Other sectors that saw final orders included energy, defence, computing hardware and advanced materials, suggesting that some final orders related to multiple sectors.
  • 8 final orders involved acquirers associated with China, 4 involved UK acquirers and 3 involved US acquirers.

Near-final securities prospectus legislation published 

The Government has published a near-final version of the statutory instrument that will set out the UK’s securities prospectus regime when the UK Prospectus Regulation (the UKPR) (derived from the EU Prospectus Regulation) is repealed.

The Government first published an illustrative instrument in December 2022 as a means of demonstrating how the regime was likely to operate in the future.

You can read more about the new draft instrument and what it means for the UK’s securities prospectus framework in our separate in-depth piece.

ESMA publishes guidance on sustainability disclosure in securities prospectuses 

The European Securities and Markets Authority (ESMA) has published a public statement on sustainability disclosure in prospectuses for both equity and non-equity securities within the EU.

The statement is aimed at securities regulators but ESMA encourages issuers and advisers to take it into account when drawing up a securities prospectus.

In short, ESMA expects material sustainability-related disclosure to be included in a prospectus, given the requirement in the EU Prospectus Regulation for a prospectus to contain the necessary information that is material to an investor for making an informed assessment.

The statement also covers specific considerations when including sustainability disclosures, consistency with non-financial reporting, securities with a specific ESG component or objective, and consistency of disclosure in prospectuses and advertisements.

The statement does not apply to prospectuses published under the UK’s prospectus regime but may nonetheless be useful in assessing what sustainability information to include within a prospectus.

Report makes recommendations for investment research in the UK

The Government has published the report of the UK Investment Research Review (IRR) on the status of company investment research in the UK.

The IRR, which is led by Rachel Kent, was formed at the instigation of HM Treasury as one of several initiatives designed to improve the UK’s capital markets.

Investment research refers to a report compiled by experienced analysts to assist potential investors when deciding whether to acquire securities, such as shares in publicly traded companies. It is often compiled and published in the run-up to the initial public offering (IPO) of a company and forms a significant basis for investors deciding whether to take up shares in the IPO.

This investment research is often prepared by analysts who are in some way connected with the financial advisers involved in the IPO (“connected analyst research”). Connected analysts typically have better access to information required to produce an informed analysis.

Concerns that connected analyst research may not provide a sufficiently independent analysis of a company, coupled with the difficulty that unconnected analysts face in obtaining useful information, led the Financial Conduct Authority (FCA) to amend its Handbook in 2018 in an attempt to place unconnected analysts on a more even footing with connected analysts. There is, however, little evidence that this has had any significant effect.

The IRR’s report sets out recommendations for improving the current system. These include:

  • establishing a central research platform to promote, source and disseminate research on publicly traded companies;
  • requiring the FCA to examine ways in which investment research can be made more readily available to retail investors;
  • promoting the role of academic institutions in investment research;
  • establishing a code of conduct for connected analyst research so as to add structure to the market for connected analyst research and enhance its integrity; and
  • reviewing the timetable for the publication of connected analyst research to make that research available on a similar basis to a prospectus.

The FCA has publicly stated that it supports the IRR and will carefully consider its report and recommendations and engage immediately with market participants.

Interim recommendations published on digitising UK shares

The Digitisation Taskforce has published an interim report on digitising UK traded company shares with a view to abolishing paper share certificates.

The Taskforce, which is chaired by Sir Douglas Flint, was formed on the recommendation of the recent Secondary Capital Raising Review for the purpose of driving forward full digitisation of shareholdings and improving the existing intermediate share ownership structure used on the capital markets.

The interim report makes several recommendations to government, including the following.

  • Introducing legislation and amending company articles of association to stop the issuance of new paper share certificates.
  • Introducing legislation to require the dematerialisation of all existing paper share certificates at a future date to be determined. The report asks for views on an appropriate timeline.
  • Requiring intermediaries to put technology in place that enables them to respond to requests from issuers about their ultimate beneficial owners (UBOs) within a very short timeframe.
  • Requiring intermediaries to provide “efficient and reliable two-way communication” between issuers and their UBOs.
  • Following digitisation, discontinuing cheque payments and mandating direct payment to a UBO’s nominated bank account.

The report also raises a series of questions to which the Taskforce is seeking responses.

Sir Douglas intends to conduct a period of open engagement over the next six months and has asked for feedback on the interim report by 25 September 2023.

On a separate but related note, the Government is consulting on proposals for a Digital Securities Sandbox. The Sandbox would enable firms to (among other things) perform the activities of a central securities depository (including settlement and maintenance) and operate a trading venue under a framework that accommodates digital asset technology. It has asked for responses by  21 August 2023.

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