Corporate Law Update

This week we look at various developments in the equity capital markets, changes to exemptions from producing a prospectus, proposals by ESMA for changes to the format and content of prospectuses, and proposed changes to the admission process for AIM, as well as a few other small updates.

Quick links:

“Great Repeal Bill” published

The Government has published a draft of the European Union (Withdrawal) Bill (referred to until now as the “Great Repeal Bill”). As drafted, the Bill would repeal the European Communities Act 1972 – the legislation that took the UK into the EU – and transpose the large body of EU law directly into UK domestic law with effect from “exit day”.

As drafted, the Bill would give the Government wide-ranging powers to make changes to both primary and secondary legislation using statutory regulations, in some cases without formally presenting them to Parliament. In part this is so that the Government can shift competence in areas currently handled by EU authorities to equivalent bodies in the UK, or possibly remove approval procedures entirely.

We have produced a separate article on the Bill, which can be found here.

FCA amends prospectus exemptions

The Financial Conduct Authority (FCA) has published an instrument amending certain exemptions from the requirement to produce a prospectus. The FCA had consulted on these amendments in its Quarterly Consultation Paper 16 in March.

The effect is that a company will not be obliged to produce a prospectus in order to admit securities to trading on a regulated market in the following situations:

  • Where it wishes to admit securities that represent (over a period of 12 months) less than 20% of a class of securities already admitted to trading. This essentially increases the current threshold of 10% to 20% and broadens the exemption from shares to the wider category of “securities”.
  • Where it wishes to admit shares resulting from the conversion, exchange or exercise of other securities, and those shares represent (over a period of 12 months) less than 20% of a class of shares already admitted to trading. This essentially imposes a new 20% limit on the number of shares that can be issued under this exemption (whereas previously there was no limit).
  • Where it wishes to admit securities as a result of the conversion or exchange of other securities under the EU Bank Recovery and Resolution Directive.

These changes are necessary to implement the early provisions of the new EU Prospectus Regulation. They come into force on 20 July 2017.

Other provisions of the Prospectus Regulation come into force on 21 July 2018 and 21 July 2019. Under the draft European Union (Withdrawal) Bill currently before Parliament, those provisions of the Regulation coming into force on 21 July 2019 would not be continued into UK law. However, whether this is the case will depend on the final wording of the Act and the day appointed for the UK to leave the EU. We will provide an update on these provisions in due course.

ESMA consults on the format and approval of prospectuses

ESMA has issued three consultation papers regarding the format and approval of prospectuses under the new Prospectus Regulation (Regulation (EU) 2017/1129). The three consultations cover:

The consultation papers are lengthy. In addition, although (strictly speaking) the Prospectus Regulation is now in force in the UK, most of its operative provisions do not come into effect until after the date on which the UK is currently scheduled to leave the EU, and it is currently not clear to what extent the Prospectus Regulation will apply in the UK after that date. However, for the time being, it is worth noting some of the key points made in the consultations.

Perhaps the most significant proposal is that profit forecasts and profit estimates would no longer need to be accompanied by an auditor’s or independent accountant’s report. This would be a significant change to the current regime, but ESMA believes the need for reports deters issuers from including useful information.

Other proposed changes include the following:

  • The current approach to building a prospectus should continue, but there is scope for reducing the number of annexes given the new secondary issuance and EU Growth prospectus regimes.
  • Prospectuses should include a mandatory cover note written in plain language, limited to three pages, avoiding legal disclaimers and stating what actions the relevant national competent authority (or authorities) has (or have) taken in relation to scrutinising the prospectus.
  • The prospectus should contain a dedicated section (which should be given increased prominence) setting out the purpose for which the proceeds of the issue will be used.
  • The prospectus should include a new section on the issuer’s strategy and objectives (which goes beyond the current requirement to disclose only exceptional factors relating to the issuer’s operations and principal activities).
  • The statement of capitalisation and indebtedness should be prepared as at no more than 90 days before publication of the prospectus, and any material changes during that 90-day period specifically disclosed in the prospectus.
  • Prospectuses should disclose the dilution arising from the offer by reference to both voting rights and net asset value per share.
  • The simplified prospectus for secondary issuances (which would be available to issuers on either a regulated market or an SME Growth market) would not need to include certain building blocks, including (among others) organisational structure, operational and financial review, capital resources, remuneration and benefits, and employees. It would also need to include only reduced information from certain other building blocks, including (among others) information about the issuer, business overview, annual financial statements and material contracts.
  • ESMA has suggested a prescribed order and content for the EU Growth prospectus (available to issuers on SME Growth markets), both where the registration document and securities note are separate and where they are combined into a single document.

ESMA has requested responses by 28 September 2017.

LSE consults on changes to AIM Rules

The London Stock Exchange (LSE) has issued a discussion paper seeking views on certain potential changes to the AIM Rules for Companies and the AIM Rules for Nominated Advisers:

  • Should the requirement for nominated advisers (“nomads”) to enter into confidential discussions with the LSE at an early stage in the admission process be extended to all applications for admission, and not merely applications where there are atypical features or potential issues? The LSE believes this would reduce the number of applications that are delayed, postponed or withdrawn due to the late discovery of problems.
  • Should there be a non-exhaustive list of factors that nomads must consider when assessing an applicant’s appropriateness for AIM? The LSE believes this would provide consistency of approach by nomads and certainty of the LSE’s expectations.
  • Should admission be conditional on there being a minimum “free float”, as is the case for admission to the Main Market? The LSE does not favour a free float requirement but would like views on whether there should be a requirement and, if so, at what level.
  • Should admission be conditional on a minimum fundraising threshold? Currently this applies only to “investing companies”. The LSE believes extending this requirement could translate into a better quality of trading in the secondary market and asks whether this should be extended to non-revenue generating companies generally or to all kinds of applicant.
  • Should AIM companies be required to report against a corporate governance code on a “comply or explain basis”, like listed companies? The LSE does not favour a comply-or-explain obligation but is seeking views on this.
  • Should there be automatic fines for explicit breaches of the AIM Rules?

The LSE has asked for responses by 8 September 2017.

Other items

  • The Takeover Panel has published Practice Statement 31 (“PS31”). PS31 sets out the Panel’s position where a company initiates a strategic review that may result in a public offer for the company, conducts a “formal sale process” (i.e. an auction sale) or is otherwise seeking offerors. It replaces Practice Statement 3 (Controlled auctions) and Practice Statement 6 (Strategic review announcements).
  • The Wolfsberg Group has updated its guidance on anti-bribery and corruption (ABC) compliance policies. The Wolfsberg Group is an association of thirteen global banks founded to develop financial industry standards for anti-money laundering, customer due diligence and counter-terrorism. The guidance is designed to assist organisations in the financial services industry with developing, implementing and maintaining effective ABC compliance programmes. The updated guidance sits alongside the Group’s other guidance notes, including its recent guidance on politically exposed persons (PEPs) issued in May 2017.
  • The European Securities and Markets Authority (ESMA) has updated its Q&A on the Market Abuse Regulation (“MAR”). The updated Q&A clarifies when a body corporate, trust or partnership can be a person closely associated with a person discharging managerial responsibilities (a “PDMR”) and (in particular) when a PDMR will be regarded as discharging managerial responsibilities in relation to such a body corporate, trust or partnership.