Corporate Law Update

This week:

• The London Stock Exchange publishes guidance for AIM companies on the new corporate governance “comply-or-explain” regime that applies to them
• The Government publishes its longer-term proposals for intervening in transactions that create a national security risk
• The Financial Reporting Council has published revised guidance for directors on preparing a company’s strategic report
• The Financial Conduct Authority has amended Listing Principle 6 and clarified where a regulated market company’s diversity policy should appear
• The London Stock Exchange is consulting on changes to its AIM Disciplinary Procedures
• The court sanctions the formation of a European company (SE) by merger, even though one of the parties was merely a device to achieve the merger

LSE provides guidance on new AIM comply-or-explain regime

The London Stock Exchange (the “LSE”) has published an edition of Inside AIM to assist AIM companies with preparing for the new requirement to comply with or explain against a recognised corporate governance code.

The new requirement, contained in Rule 26 of the AIM Rules for Companies, came into force on 8 March 2018. From 28 September 2018, AIM companies will need to disclose against a “recognised corporate governance code” in the same way that premium-listed companies currently disclose against the UK Corporate Governance Code.

The key points from the new guidance are:

• AIM companies will need to review their corporate governance procedures annually. The LSE expects this to happen when the company prepares its annual report and accounts.
• The comply-or-explain statement should be clearly presented and easily accessible on the “AIM Rule 26” section of the company’s website.
• The statement can incorporate content by reference to (for example) the company’s corporate governance statement in its annual report, provided that that information is freely available.
• There is no list of acceptable corporate governance codes, but the LSE has cited the UK Corporate Governance Code and QCA Corporate Governance Code as established benchmarks.
• It has also said that dual-listed AIM companies could also comply with and explain against appropriate standards in their “home jurisdiction”. (It gives the example of a company listed on the Australian Securities Exchange complying with the ASX Listing Rules.)

Government consults on long-term national security measures

The Department for Business, Energy and Industrial Strategy (BEIS) has published a consultation on the next stage of its proposed reform of its ability to review investments on national security grounds. The changes are designed to give the Government greater power to intervene in acquisitions of assets and entities by “hostile actors”.

The consultation follows the Government’s green paper in October 2017 and the resulting “short-term” amendments to the UK’s merger control regime, which came into effect on 11 June 2018. These initial amendments lowered the jurisdictional thresholds for the Secretary of State (and the Competition and Markets Authority (CMA)) to intervene on public interest grounds in mergers in sectors involving military and dual-use items, computing hardware and quantum technology (see our previous article here).

The new consultation sets out the Government’s longer-term proposals. These proposed reforms will introduce a new voluntary notification system and an expanded, economy-wide call-in power. This will require primary legislation and the removal of national security considerations from the existing competition and public interest processes in the Enterprise Act 2002.

The key proposals are as follows:

• The new regime would apply where there is a “trigger event”.
• Where a transaction involving a national security dimension raises a trigger event, the parties would be “encouraged” to submit a notification. The Government has published a draft statement of policy intent setting out the areas of the economy most likely to raise national security concerns.
• Following responses to its green paper, the Government intends to operate a voluntary notification system, rather than a mandatory one. However, non-notified transactions will be subject to a call-in power where the Government has reasonable grounds for suspecting that a trigger event has taken place, is in progress or is in contemplation, and it has a reasonable suspicion that the entity or asset involved may give rise to a risk to national security.
• If a notification is submitted, the process would involve an initial screening stage, designed to filter out transactions with no national security concerns, followed by a full assessment if the Government decides to “call in” the trigger event due to national security concerns.
• The paper lists five different potential trigger events:
  • Acquiring more than 25% of the votes or shares in an entity (including unincorporated entities, such as partnerships). This is modelled on the UK’s existing persons with significant control (PSC) regime.
  • Acquiring more than 50% of an asset. This would include property (whether within or outside the UK), contractual rights and intellectual property. It would not include money.
  • Acquiring significant influence or control (SIOC) over an entity, or acquiring SIOC over an asset (two separate tests).
    
    The draft statement of policy intent mentioned above sets out how (among other things) SIOC should be interpreted. Unsurprisingly, the guidance for entities is based heavily on the equivalent statutory guidance for the PSC regime. The guidance for assets is new, but adopts a similar approach.
  • Further acquisitions of SIOC over an entity beyond the above thresholds. Broadly, this would apply if the person’s share or voting rights holding moves over 50% or 75%, or if the person acquires additional rights giving it further SIOC.
    
    The purpose of this trigger is to allow the Government to call in a transaction where control is increased (e.g. when an interest increases to 51%) if it declined to scrutinise the transaction on the initial trigger event (e.g. when a 26% interest was acquired).
• The white paper also includes details on how these trigger events might apply in the context of new ventures, loans, futures and options.
• The draft statement of policy intent sets out factors the Government would consider when deciding whether to conduct a full national security assessment. These include whether the asset or entity being acquired poses a national security risk (“target risk”), whether the level of control could allow someone to cause disruption or undertake espionage (“trigger event risk”), and whether the acquirer itself may use that control to undermine national security (“acquirer risk”).
• If a full assessment indicates that national security is at risk, the Government would be able to allow the acquisition to proceed but impose conditions that prevent or mitigate the risk. Alternatively, it could block the transaction or (if it has already taken place) unwind it. The Government estimates that around half of transactions called in for a full assessment will merit some kind of remedy.
• The regime would be backed up by civil and criminal sanctions for non-compliance.

Practical implications

The Government is seeking to strike a balance between ensuring the UK remains an attractive economy open to foreign investment and its duty to safeguard against national security threats. While introducing a separate national security regime will bring the UK in line with a number of other countries that already have well-developed systems for screening foreign investments (such as Australia, Germany and the USA), the White Paper proposals are likely to have wide implications on the viability and timetable of a large number of transactions.

Indeed, the White Paper notes that the Government expects around 200 trigger events to be notified to it each year, with around 100 of those requiring a full national security assessment. This would be a significant increase on the eight interventions by the Secretary of State on national security grounds since the Enterprise Act 2002 came into force.

The Government has asked for comments on its proposals by 16 October 2018.

Other items

• FRC publishes revised guidance on the strategic report. The Financial Reporting Council (FRC) has published a revised version of its guidance for directors and companies on preparing their strategic report for inclusion in their annual report and accounts. The revised guidance replaces the FRC’s previous guidance from 2014.
  
  The FRC has not made substantial changes to the guidance. However, it has clarified that the primary audience for the strategic report is the company’s shareholders, although a company should also consider the interests of wider stakeholders.
  
  The guidance also now places greater emphasis on non-financial reporting, particularly the forthcoming duty to report on how the directors have discharged their duty under section 172 of the Companies Act 2006 to promote the company’s success and considered various matters in that section which directors are to take into account.
• FCA amends Listing Rules and DTR. The Financial Conduct Authority (FCA) has published Instrument 2018/41. The Instrument amends Premium Listing Principle 6 in the FCA’s Listing Rules, which requires listed companies to communicate information to their shareholders in such a way as to avoid creating a false market, by extending the principle to avoid the “continuation” of a false market. This conforms the wording of Premium Listing Principle 6 with that of its predecessor, former Listing Principle 4.
  
  The Instrument also amends the FCA’s Disclosure Guidance and Transparency Rules to confirm that, where a regulated market issuer is required to produce a diversity policy (under DTR 7.2.8AR), it must include that policy in its corporate governance statement.
  
  Both changes follow the FCA’s previous recommendations in its consultation CP 17/39.
• Consultation on AIM Disciplinary Procedures. The LSE has published AIM Notice 53, in which it is consulting on changes to its AIM Disciplinary Procedures and Appeals Handbook (the “Handbook”). The changes flow from a discussion paper published by the Exchange in July 2017. The changes involve extensive reformatting and so the Exchange has published the proposed new handbook in clean format, but not mark-up. It has requested comments by 10 September 2018.
• Court sanctions SE merger as part of Brexit planning. In In the matter of Liberty Mutual Insurance plc and another, the High Court has approved the merger of a UK public limited company and a Luxembourg société anonyme into a single European company (SE). There are two interesting points to note in the case. First, the merger was conducted specifically as part of the UK company’s Brexit planning.
  
  Second, the Luxembourg company had been created specifically as a device to achieve the merger, but this did not prevent the court from approving the merger. In reaching its decision, the court referred to the similar case of Re Easynet Global Services Ltd, in which the court sanctioned a cross-border merger when the sole overseas company had been included merely as a device to achieve the merger.