Corporate Law Update

A round-up of developments in corporate law for the week ending 1 February 2019.

This week:

Government consults on merger control guidance on a “no deal” Brexit

The Competition and Markets Authority (CMA) has published a consultation on draft guidance for a situation where the UK leaves the European Union (EU) without a withdrawal agreement (a so-called “no-deal Brexit”). The draft guidance sets out how a no-deal Brexit would impact on the way the CMA carries out its role in relation to (among other things) merger control.

The CMA would like to know whether the draft guidance provides sufficient clarity regarding merger cases that are in the course of being reviewed on the day the UK leaves the EU (exit day). It is particularly interested in hearing from anyone who is currently party to merger control procedures before the European Commission (the Commission).

The draft guidance builds on the Government’s September 2018 technical notice on merger review. It reiterates that, when the UK leaves the EU, the Commission will no longer consider the effects of mergers on UK markets, and this will become the sole preserve of the CMA. In other words, the current “one-stop shop” regime, under which mergers with a "Community dimension" fall exclusively to the Commission, will no longer apply in the UK.

The draft guidance clarifies the position for mergers notified to the European Commission before exit day:

  • If the Commission refers the merger to the CMA, life will continue as before. The CMA will review the merger and the Commission will no longer be involved.
  • If the Commission issues a decision on the merger before exit day, the CMA will not be able to review it and there would be no need for a separate notification under the UK regime. In other words, the “one-stop shop” will apply. However, if the Commission’s decision is annulled following appeal, the CMA could review the merger (provided the UK merger control thresholds are met), and the parties would need to consider whether to notify the merger separately under the UK and the EU regime.
  • If the Commission does not issue a decision before exit day, the CMA will be able to review the merger with effect from exit day (provided the UK thresholds are met). The transaction could lead to notifications under both the UK and EU regimes.

After exit day, the two regimes would be completely separate. Parties to a merger will need to assess the merger separately under both the UK and EU regimes.

In practice, this may mean handling an additional merger control review where the UK aspects of a merger would otherwise have been dealt with by the Commission. This would inevitably be more time-consuming, costly and administratively burdensome than at present. The draft guidance does state, however, that the CMA would endeavour to coordinate merger reviews with the Commission and other authorities.

The draft guidance reminds readers that notifying the CMA under the UK regime is voluntary, but that deciding not to notify a merger may give rise to certain risks for the transaction parties.

The CMA has asked for responses by 25 February 2019.

FCA consults on changes to Prospectus Rules

The Financial Conduct Authority (FCA) is consulting on proposed changes to its Prospectus Rules to align them with the EU Prospectus Regulation.

What is happening?

The Prospectus Regulation is a European Union (EU) regulation which sets out the document that an entity (normally a company) must publish (a “prospectus”) when looking to offer its securities to the public or bring them onto a regulated securities market.

The Regulation replaces the EU Prospectus Directive, which has been implemented into UK law partly through the Financial Services and Markets Act 2000 and partly through the FCA’s Prospectus Rules Sourcebook.

The Regulation applies directly in EU Member States without the need for domestic legislation. Although some parts of the Regulation are already in force (including in the UK), the vast majority of its provisions will not come into effect until 21 July 2019. Under current Brexit legislation, these provisions will not apply in the UK unless the UK and the EU agree otherwise for a transitional period (in the form of a withdrawal or “implementation” agreement).

However, the Government has previously confirmed that, if the UK leaves the EU without an transitional period, it intends to “on-shore” the Regulation — that is, to implement it in UK law with suitable amendments — to ensure the UK’s prospectus regime continues to function properly. To this end, it has published draft legislation designed to incorporate the rest of the Regulation into UK law.

The FCA consultation covers a situation where the UK and EU agree a transitional period. If this does not happen, the FCA will publish revised proposals for how to reform the UK prospectus regime.

What is the FCA proposing?

The key points coming out of the consultation are as follows:

  • Currently, the Prospectus Rules comprise a mixture of text copied out directly from the Prospectus Directive (for ease of reference) and domestic rules enacted by the FCA to implement the Directive. The FCA is proposing to adopt the same approach going forward, but, because the Prospectus Regulation is directly effective, there will be more copy-out and fewer domestic rules.
  • The sourcebook would be re-named the “Prospectus Regulation Rules Sourcebook”.
  • Prospectuses published before 21 July 2019 under the old prospectus regime would continue to be valid until they expire or until 20 July 2020, whichever occurs first. Issuers will continue to be able to submit prospectuses under the old regime up until 21 July 2019.
  • Issuers would no longer be required to file their prospectuses at the National Storage Mechanism (NSM) run by Morningstar. Instead, the FCA itself would lodge copies of approved prospectuses with the NSM. In some cases, this may result in the prospectus becoming public in the NSM before it is published by the issuer.
  • The FCA would be required to submit statistical data on prospectuses to the European Securities and Markets Authority (ESMA). To streamline this process, the FCA is proposing to require issuers to provide this information to the FCA when submitting a prospectus for approval.

Practical implications

The changes proposed in the consultation are largely functional and would implement the new prospectus regime more or less as if the UK were not leaving the EU. In this sense, the changes should entail minimal disruption to companies coming to market or already listed.

However, it is important to remember that this is predicated on the UK entering into a transitional arrangement with the EU. If the UK leaves the EU without a deal, the changes to the regime would be more substantial. In particular, as the Government has previously confirmed, the ability to passport a prospectus from the EU into the UK would simply end.

Review recommends stronger slavery and human trafficking statements

The Government has published a second interim report as part of its review of the Modern Slavery Act 2015. The Home Office commissioned the review in July 2018 to gauge how effective the Act had been in practice. Part of the review has been focussing on how effective section 54 of the Act has been.

What is section 54?

Section 54 requires commercial organisations that carry on business in the UK to publish an annual “slavery and human trafficking statement” on their website. The statement must set out what steps the organisation has taken in the preceding financial year to eliminate slavery and human trafficking in its business and supply chains, or confirm that it has not taken any steps.

The requirement applies to private sector entities that supply goods or services and whose annual worldwide turnover is £36m or more. The Home Office has published guidance on how to comply with section 54.

Section 54 was the first “national” legislation requiring companies to explain their modern slavery policies (although a similar regime has existed in California since 2012). Australia enacted similar measures in November 2018, which will come into practical effect in July 2019.

The Modern Slavery Registry keeps a database of slavery and human trafficking statements published under UK and Californian legislation on its website, and will soon be adding Australian statements.

Section 54 has previously been criticised because it does not set out any penalty for failing to publish a statement. In theory, the Government can seek an injunction to require an organisation to publish a statement, but to our knowledge this has not yet been done.

What did the review find?

Overall, the review calls for tougher action to ensure organisations take their obligations under section 54 seriously. It makes the following key points:

  • It is not clear which entities are caught by section 54, particularly because the concept of “carrying on a business” is not defined. The review recommends that the Government establish an “internal list” of companies within the scope of the regime. It is, however, difficult to see central government finding the resource to do this, and so this goal may well remain aspirational.
  • Organisations should not be allowed to report that they have taken no steps. Instead, they should be required to report on all six indicative content areas set out in section 54, as is the case under the Australian model, with the ability to state that a particular content area is not applicable to the organisation.
  • The statement should set out what steps the organisation intends to take going forward, and not just those it took in the past year. This is a realistic approach and one that many organisations already adopt in their section 54 statements.
  • Organisations should be required to refer to their section 54 statements in their annual reports. This would encourage companies to apply greater rigour to their statements. Again, this change is realistic, and many companies already touch on this in their existing ESG reporting.
  • An organisation should be required to have a named, designated board member who is personally accountable for the section 54 statement, with failure to comply with that obligation punishable by a director disqualification order. This is reminiscent of the requirement to appoint a dedicated Money Laundering Reporting Officer under the UK’s anti-money laundering regime. A potential risk with the approach, however, is that boards might cease to view tackling modern slavery as a collective endeavour.
  • There should be a central Government-run repository for section 54 statements. Although feasible, it seems unlikely the Government would do this while the Modern Slavery Registry effectively does the same work already.
  • There should be greater powers to enforce section 54. The review recommends warning notices initially, culminating in fines, court summons, director disqualifications and disbarment from participating in public procurement processes. In essence, this would put section 54 on a similar footing to the UK’s anti-bribery regime.

Practical implications

Section 54 has faced criticism from its inception, so the review’s findings are not surprising. We wait to see how the Government will respond to the review. There appear three obvious options: “upgrade” the regime to the Australian model; convert it to a full compliance regime (like under the Bribery Act 2010); or leave it as it is.

Given the level of support for change cited by the review, though, it seems likely that the Government will need to take some action in due course.

Investment Association consults on responsible investment

The Investment Association has launched an industry-wide consultation on sustainability and responsible investment. The IA is seeking views from asset managers with the goal of helping savers and investors navigate this “growing feature of the investment management industry”.

The consultation focusses on the following areas:

  • Adopting agreed standard definitions for commonly used terms, such as “environmental, social and governance (ESG) integration”, “impact investing” and “negative screening”.
  • Developing a product label to assist retail investors and their advisers with easily identifying funds that have adopted a sustainable investment approach.
  • Reviewing reporting frameworks used by asset managers to disclose how they embed ESG considerations into their investment process.

The IA has asked for responses by 1 March 2019. Persons who are interested in responding should request a copy of the consultation from the IA.


Other items

  • Investment and stewardship. The Financial Reporting Council (FRC) has published a consultation on its Stewardship Code. The revised Code would place greater emphasis on environmental, social and governance (ESG) matters, purpose, value and culture. It would also apply to investments beyond UK listed equities. We will report on this in more detail next week.
  • Investment and stewardship. Separately, the FRC and the Financial Conduct Authority (FCA) have published a joint discussion paper on effective stewardship. The paper seeks views on how to improve stewardship within the UK capital markets structure and the balance between regulation and the Stewardship Code. We will report on this in more detail next week.
  • Shareholder rights. The FCA has published a consultation paper on proposed changes to its Handbook to implement certain provisions of the Second European Union Shareholder Rights Directive (SRD II). We will report on this in more detail next week.
  • Corporate governance. The Pensions and Lifetime Savings Association (PLSA) has published its Corporate Governance Policy and Voting Guidelines for 2019. The document has been substantially re-structured to relate the guidelines to the principles in the new UK Corporate Governance Code and to give increased prominence to resolutions regarding executive remuneration and sustainability. We will report on the new Guidelines in more detail next week.
  • Financial reporting. The FRC is consulting on changes to FRS 101. The changes would remove the ability to adopt the reduced framework under FRS 101 for entities within the scope of IFRS 17 (Insurance Contracts). The FRC has asked for comments by 30 April 2019.
  • Financial reporting. Separately, the FRC is consulting on changes to FRS 102. The changes would deal with the transition from defined contribution accounting to defined benefit accounting. The FRC has asked for comments by 31 March 2019.