Corporate Law Update

This week we look at the FCA’s proposal for a new listing category, proposed changes to the Takeover Code and updated guidance from ESMA on alternative performance measures in prospectus and other public announcements.

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FCA proposes new category for sovereign-controlled companies

The Financial Conduct Authority (FCA) has published a consultation seeking views on a new category within the premium listing regime for sovereign-controlled companies (the “new category”). This consultation forms part of the FCA’s broader review of the effectiveness of the UK’s primary markets.

Premium listings are currently divided into three separate categories, of which the most popular (and the most stringent) is the “commercial companies” category. Issuers with a premium listing in this category must comply with all of the FCA’s “gold-plated” requirements over and above EU law.

The FCA is concerned certain rules of the commercial companies category are not appropriate for companies with a sovereign controlling shareholder and are deterring this type of company from listing. It is proposing to create the new category to address this.

For a company to qualify for the new category, one of its shareholders would need to be a sovereign state holding at least 30% of the company’s voting shares.

The new category would be based predominantly on the existing “commercial companies” category, with the following requirements (among others) continuing to apply:

  • Audited three-year revenue-earning track record and unqualified working capital statement
  • Ability to carry on an independent business and to hold strategic control over its assets
  • Requirement to obtain shareholder approval for significant transactions
  • Requirement to report against a corporate governance code
  • Compliance with DTRs 4, 5 and 6

However, two key planks of the premium listing regime – the “related party rules” and the “controlling shareholder” rules – would not apply to the sovereign controlling shareholder. In essence, this means:

  • Transactions between the issuer and its sovereign shareholder would not be subject to a separate vote of the issuer’s independent shareholders, and the board would not need to give a “fair and reasonable” opinion. (A transaction would still require approval from the shareholders generally, however, if it were a class 1 transaction.)
  • The sovereign controlling shareholder would not need to enter into a relationship agreement with the company.

However, the “related party rules” and the “controlling shareholder” rules would still apply to any shareholder holding more than 30% of the issuer’s shares that is not a sovereign state.

The FCA recognises that, whilst these rules are key protections for shareholders of premium-listed companies, they are not appropriate for a sovereign shareholder and investors should be able to assess how the relationship with a sovereign shareholder will influence an issuer’s prospects.

The FCA is seeking responses by 13 October 2017.

Takeover Panel proposes changes to Code

The Takeover Panel has published a consultation proposing various changes to the Takeover Code (the “Code”). The consultation focusses on situations where the target of a takeover offer agrees to sell its assets to a potential bidder, rather than proceed with the takeover. The Panel is concerned that this structure can be used to circumvent various key provisions of the Code.

To address this, the Panel is proposing various changes that, broadly, would apply the same restrictions to asset sales as currently apply to takeover offers:

  • If a person states that it does not intend to make an offer for a company (a so-called “Rule 2.8 statement”), it would not be allowed to buy any “significant assets” of the company (“assets”) for a period of six months unless it specifically reserved the right to do so in the Rule 2.8 statement.
  • Likewise, a person who announces a price at which it might make an offer, but who later makes a Rule 2.8 statement, would not be allowed to buy any assets on better terms for a period of three months unless it specifically reserved the right to do so in that announcement.
  • If an offer does not become unconditional and the offeror withdraws the offer or it lapses, the offeror would generally not be allowed to buy any assets for a period of 12 months.
  • If an offeror states it does not intend to increase or extend its offer, and the offer is then withdrawn or lapses, it would not normally be allowed to buy any assets for a period of three months.

The restrictions would not only apply to buying or agreeing to buy assets, but would also restrict a person from announcing the possibility of it buying assets. Whether assets are “significant” would be gauged by the proposed price for the assets, their value and the operating profit attributable to them.

The Panel is also proposing to make a number of other changes, including:

  • If a target company is proposing to obtain shareholder approval for any action that might frustrate an offer, requiring it to publish a circular containing certain information and to obtain independent advice on the financial terms of that action.
  • If a target company proposes an asset sale in competition with a takeover offer, requiring it to provide the same information to potential asset purchasers as it provides to potential offerors.
  • Relaxing the restriction on certain types of information being distributed via social media.

The Panel is seeking responses by 22 September 2017.

ESMA issues updated Q&A on alternative performance measures

The European Securities and Markets Authority (ESMA) has published an updated Q&A document relating to alternative performance measures (APMs). Broadly, APMs are measures of financial performance or position that are not defined by a financial reporting framework. The Q&A accompany ESMA’s final guidelines on APMs (the “Guidelines”) published in October 2015.

The updated Q&A clarify the following:

  • The requirement to reconcile APMs to the most directly reconcilable line item of financial statements applies to ad hoc quarterly financials published under the Market Abuse Regulation.
  • Issuers must use their judgment when ensuring that APMs are not given more prominence than measures stemming directly from financial statements. This involves assessing how and where the APMs appear, rather than simply how frequently. The Q&A gives specific examples.
  • Cases in which issuers may not comply with the Guidelines by referring to other documents.
  • For entities reporting under IFRS, “results of operating activities” constitute an APM.

Court clarifies role of TUPE on a share sale

In IMSL v Berry, the High Court clarified the extent to which the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) can apply on a share sale. The principal purpose of TUPE is to ensure that, when an entity sells its business, its employees will transfer with that business.

In this case, Mr Berry had resigned his employment with a subsidiary in the IMSL Group (“ICAP”) to join a competitor. He was put on gardening leave. During that gardening leave, Tullett Prebon acquired one of IMSL’s business divisions by buying the shares in ICAP’s holding company. Mr Berry claimed that this in itself gave rise to a TUPE transfer. Alternatively, he argued, he had been employed non-contractually by IMSL or the business being acquired, and so TUPE was activated on that basis.

The Court rejected Mr Berry’s arguments and found no TUPE transfer had occurred. Although not wholly surprising, the judgment provides colour on when TUPE might be relevant in the context of a share sale. Our Litigation colleagues have produced a more detailed note on the case here.