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24 November 2017

Corporate Law Update

This week we look at various items, including updates on the market abuse regime, new guidance from ISS on proxy voting in the UK, updates to the Government’s Standard Voluntary Code for recruiting senior executives, and the FRC’s intention to conduct thematic reviews on corporate reports in 2018.

We also take a look at a notice from the European Commission about the effects of the UK leaving the EU on UK companies doing business in the EU.

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Regulations banning restrictions on receivables assignments pulled

According to votes and proceedings papers published by Parliament, the draft Business Contract Terms (Assignment of Receivables) Regulations 2017 (the "Regulations") have been withdrawn.

The draft Regulations would have prevented businesses from inserting clauses in their contracts preventing counterparties from assigning their right to payment. The primary purpose of the Regulations was to open up invoice-financing facilities to smaller businesses. See our recent Corporate Law Update for more information.

The Regulations have been dogged by technical issues since they were initially produced. However, this remains an area of focus for the Government, and we anticipate that the Department for Business, Energy and Industrial Strategy will produce a revised draft in the near future. 

ESMA updates Q&A on Market Abuse Regulation

The European Securities and Markets Authority (ESMA) has updated its questions and answers on the Market Abuse Regulation ("MAR"). The updated Q&A include two new questions relating to transactions by persons discharging managerial responsibilities ("PDMRs") during a closed period.

Under article 19(11) of MAR, PDMRs must not deal in their issuer’s financial instruments during a period of 30 days before the announcement of interim or year-end financials required by law or securities-exchange rules (a "closed period"). However, issuers can grant permission to trade during a closed period in exceptional circumstances.

The updated Q&A remind issuers and PDMRs of the following:

  • Even if an issuer permits a PDMR to deal during a closed period, the PDMR is still prohibited from dealing on the basis of inside information. In other words, merely obtaining permission to deal during a closed period will not exempt a PDMR from insider dealing restrictions.
  • The kinds of transaction to which article 19(11) applies are the same as those that need to be notified to an issuer and the FCA under article 19(1). The only difference is that article 19(1) also requires persons closely associated with a PDMR to notify dealings, whereas the prohibition in article 19(11) applies only to PDMRs (whether dealing on their own account or someone else’s).

FCA Director of Market Oversight delivers speech on market abuse

On 14 November 2017, Julia Hoggett, Director of Market Oversight at the Financial Conduct Authority (FCA), delivered a speech on recent developments in the market abuse regime. The speech focussed on the FCA’s priorities and approach to monitoring market abuse and bringing enforcement action.

Perhaps the most prominent comment by Ms Hoggett is that compliance with MAR is a “state of mind”. In particular, she notes that the definition of “inside information” is both “fluid and situational”, requirement judgements to be made by relevant parties across the industry.

Defining inside information, therefore, cannot be just a “set of rules”, but rather must be a “state of mind” involving vigilance to identify the potential for inside information, the skill to assess whether the conditions are met, and the awareness of what to do next.

The speech places critical thinking as a vital component of firms’ systems and controls and notes that the FCA is now focussed on how this “state of mind” is developing.

Other highlights from the speech include the following:

  • The FCA recognises that obligations on issuers have increased. It wishes to understand in which areas issuers are finding the regime complex and welcomes more engagement with issuers.
  • A reminder that, when MiFID II comes into effect on 3 January 2018, the regime under MAR will extend to entities with financial instruments admitted to an organised trading facility (OTF).
  • Whilst equities insider dealing has historically been the FCA’s focus (and well over 70% of suspicious transactions and orders reports (STORs) relate to this), the FCA is developing its capacity to tackle market manipulation.

ISS updates UK proxy voting guidelines

Institutional Shareholder Services (ISS) has announced that it has updated its 2018 Proxy Voting Guidelines for the UK, Ireland and Europe. The changes generally match the proposals in the original consultation in October (which we reported on here).

The key change to the UK guidelines is the addition of a section on virtual meetings. In short, ISS will generally recommend voting in favour of proposals to convene hybrid shareholder meetings that allow shareholders to attend either in person or virtually. However, ISS will generally recommend voting against convening virtual-only shareholder meetings.

The other changes relate to (among other things) overboarding, vesting levels for LTIPs and a new policy that using a cash-box structure will be considered an abuse of the directors’ authority to allot shares and will garner a negative vote at the next AGM.

Government updates Standard Voluntary Code of Conduct

The Government has published an updated version of its Standard Voluntary Code of Conduct. The Code, to which around 40 search firms have signed up, was published in 2014 following the Davies Review into women’s representation at FTSE companies. It set out a series of steps that search firms can follow across the search process to increase the proportion of women in senior positions.

The new changes to the Code include the following:

  • The Code has been expanded beyond women’s representation to encompass ethnic diversity. This follows on from a recommendation in the recent Parker Review report on ethnic diversity in FTSE 350 companies, which we reported on last month.
  • The Code has kept its target that 30% of long-listed candidates be women. The updated Code does not set a numerical target for ethnic diversity, but rather encourages firms to discuss and agree specific targets with their clients.
  • The Code has also been extended beyond board positions to other senior executive roles. For example, a new paragraph encourages firms to support nomination committees, CEOs and CHROs with succession planning by developing targets for enhancing diversity in senior executive positions. This supplements the existing recommendation on director succession planning.

FRC to undertake thematic reviews of reports and audits

The Financial Reporting Council (FRC) has announced that it intends to undertake a series of thematic reviews of corporate reports and audits in 2018/2019 in order to stimulate improvements in corporate reporting and auditing.

The reviews will focus on, in particular the financial services, retail, oil and gas and business support services sectors and will cover (among other things) the following items:

  • Targeted aspects of smaller listed and AIM company reports and accounts. The FRC will write to 40 companies before their financial year-end, informing them that it will be reviewing two specific aspects from a list of five pre-defined areas.
  • The effect of new IFRSs on revenue and financial instruments and lease accounting.
  • The effects of Brexit on companies’ disclosure of principal risks and uncertainties.
     
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