Corporate Law Update

In this week’s update: an FCA reminder about Brexit related changes, ESMA is seeking views on possible changes to MAR and ISS is consulting on changes to its AGM voting policy.

FCA publishes Primary Market Bulletin 24

The Financial Conduct Authority (FCA) has published Primary Market Bulletin 24. The key points arising from the Bulletin are as follows:

Brexit-related changes

The FCA has reminded firms and advisers that the Brexit-related changes it has previously announced in its Primary Market Bulletin 21 (February 2019) and Primary Market Bulletin 22 (March 2019) will take effect immediately at 11:00 p.m. on 31 October 2019 if the UK leaves the EU at that time without a transitional agreement. In particular:

  • Market abuse. Issuers which need to notify dealings by persons discharging managerial responsibilities (PMDRs) or a delay in disclosing inside information under the EU Market Abuse Regulation may need to make dual notifications to the FCA and another EU competent authority.
  • Short-selling. Exempt market makers and authorised primary dealers who need to notify under the EU Short Selling Regulation may need to make dual notifications to the FCA and another EU competent authority.
  • Transparency Rules. An issuer with securities admitted to trading on a UK regulated market would need to comply with the FCA’s Transparency Rules (DTR 1A, 4, 5 and 6), regardless of where the issuer is incorporated. (Currently, EU issuers whose home state is not the UK comply instead with their own territory’s transparency rules.)
  • Voteholder notifications. A person who acquires or disposes of a significant holding of shares in a company admitted to a UK market (including AIM) will need to announce the change in their holding under DTR 5, regardless of where the issuing company is incorporated. (Currently, a DTR 5 notification is required only if the issuer has chosen the UK as its home member state.)
  • Accounting standards. For future financial years, an issuer whose securities are admitted to trading on a regulated market would need to prepare its financial statements, as well as any financial information included in a prospectus, under UK-adopted IFRS. However, the Treasury has determined that EU-IFRS are equivalent and can also be used. (The Treasury is currently updating its determination to deal with the EU Prospectus Regulation coming into effect.)
  • Audit committees. A small number of issuers that are also subsidiary undertakings (namely, those whose parents are not subject to DTR 7.1) would need to establish an audit committee.
  • Free float requirement. The requirement for a listed company to have at least 25% of its shares held in public hands would be expanded to cover securities covered anywhere in the world and not just within the European Economic Area (EEA).

The FCA expects firms to take reasonable steps to comply with these changes from “exit day”.

Other items

  • ESEF. The FCA has reminded firms who wish to do so that they have until 1 November 2019 to respond to the FCA’s consultation on implementing the new European Single Electronic Reporting Format (ESEF).
  • FCA Knowledge Base. The FCA is planning to update its Knowledge Base to reflect the EU Prospectus Regulation in Autumn 2019. In the meantime, its existing Technical and Procedural Notes should be applied to the extent they are compatible with the Prospectus Regulation.
  • Technical Notes. The FCA has proceeded with a minor addition to Technical Note TN/203.4 (proposed in February 2019). It has also proceeded with publishing a new Procedural Note PN/913.1 on how to engage with the FCA when proposing a scheme of arrangement or reconstruction. In particular, the new note sets out two ways in which an issuer can deal with a suspension of its listing when it is proposing to insert and list a new holding company.

ESMA launches consultation on Market Abuse Regulation

The European Securities and Markets Authority (ESMA) is consulting on various aspects of the EU Market Abuse Regulation (MAR).

The consultation is designed in part to fulfil ESMA’s duty to prepare a five-year report on certain aspects of MAR. However, the paper also covers other topics raised by the European Commission. In particular, ESMA is seeking views on the following.

Buy-back programmes

Currently, an issuer can conduct a share buy-back programme without certain parts of MAR applying, provided it notifies any purchases under the programme to the national competent authority (NCAs) of every trading venue to which its shares are admitted to trading or on which its shares are traded.

However, a few trading venues allow securities to be traded at the request of the security-holder, without involving the issuer. This means an issuer may not know whether its shares are traded on a particular venue. The issuer, therefore, either will have to make extensive enquiries to discover which NCAs to notify or may not be able to make all of the required notifications.

ESMA is asking:

  • Should issuers be able to notify only the NCAs of trading venues to which their shares are admitted to trading? Alternatively, should they be able to notify only the NCA of the most relevant trading venue in terms of liquidity?
  • Should the information that needs to be sent to NCAs be simplified, particularly where NCAs already have access to that information?
  • Should information on historic trades be published in aggregated form?

Inside information

Currently, information is “inside information” if it: (i) is of a “precise nature”; (ii) has not been made public; (iii) relates (directly or indirectly) to one or more issuers or financial instruments; and (iv) would, if it were made public, be likely to have a significant effect on the price of those financial instruments.

An issuer must announce inside information to the market “as soon as possible”. However, an issuer can delay an announcement if immediate disclosure is likely to prejudice its legitimate interests, delaying disclosure will not mislead the public, and it can ensure the information remains confidential.

ESMA is asking:

  • Do market participants find it difficult to identify whether information is “inside information” and the point at which information becomes “inside information”?
  • Have market participants come across information which they consider to be “inside information” but which does not meet the formal definition above?
  • Do the conditions for delaying disclosure function properly, are they sufficiently clear and do they allow issuers to delay disclosure where they feel it is necessary?
  • Should there be a requirement for issuers to put systems and controls in place to identify, handle and disclose inside information?

Market soundings

MAR allows an issuer to provide inside information to potential investors in order to take “market soundings”, provided it follows a specific and prescribed procedure. This acts as a “safe harbour” and prevents the issuer from incurring liability under MAR. ESMA is asking:

  • Should MAR be amended to clarify that the market soundings procedure is mandatory and to establish civil penalties for failing to comply with it?

Insider lists

Currently, an issuer must keep a list of all people who have access to inside information (an “insider list”) in a prescribed format. Where individuals (such as directors) have access to inside information at all times, the issuer can keep a separate “permanent insider list”.

ESMA is asking:

  • Should insider lists be limited to individuals who have actually accessed inside information, rather than those who have access to it?
  • Should the current concept of a “permanent insider list” be removed?
  • Should the obligation to keep an insider list extend to any person who performs tasks through which they have access to inside information, rather than merely persons who are acting on behalf of or for the account of the issuer? Significantly, this would extend the obligation to (for example) auditors and notaries.

Managers’ dealings

Currently, persons discharging managerial responsibilities of an issuer (PDMRs) and their closely associated persons (PCAs) must report any transactions they conduct in their issuer’s securities if the aggregate value of those transactions exceeds €5,000 in a given year. Individual EU Member States can elect to raise this threshold to €20,000. (The UK has not raised the threshold.)

However, (in contrast to PCAs) PDMRs cannot not transact during a “closed period” leading up to the publication of financials (with certain, very limited exceptions).

ESMA is asking:

  • Is the €5,000 threshold too low? Should Member States still be able to raise this threshold and (if so) is the higher €20,000 threshold also too low? Are there are other criteria on which the reporting threshold could be based?
  • Is the “closed period” framework working well? Should the prohibition be extended to issuers themselves and to PCAs of PDMRs?
  • Are there other circumstances in which PDMRs should be allowed to transact in a closed period?

ESMA has asked for responses by 29 November 2019.

Any amendments to MAR would need to be made through EU legislation. As things stand, the UK is scheduled to leave the EU at 11:00 p.m. on 31 October 2019. However, if the UK leaves at that time without a transitional arrangement, MAR will continue to apply in the UK with certain modifications.

However, given the likely timescale required to implement any amendments to MAR, in the absence of a significant extension to the UK’s departure date, those amendments are unlikely to form part of UK law. It would be up to the UK to decide whether to make similar amendments in due course.

ISS consults on 2020 benchmark policy

Institutional Shareholder Services (ISS) is consulting on proposed changes to its Benchmark Policy, which will feed into its voting policies for the 2020 AGM season. The consultation covers ISS’s four principal markets (Europe, the United States, Asia and Emerging Markets).

The key proposed changes to ISS’s UK and Ireland voting policies are as follows:

  • Board diversity. ISS would generally recommend voting against the chair of a “widely-held” company’s nomination committee (and other directors on a case-by-case basis) if there are no women on the company’s board. However, factors mitigating against a negative vote would include where there was a women on the company’s board at the last AGM, or where the company has publicly committed to appoint at least one female director in the next year.
  • ESG issues and remuneration. ISS would encourage remuneration committees to set out how they have taken environmental, social and governance matters into account when setting remuneration outcomes. Suggested factors include workplace fatalities and injuries, significant environmental incidents, large or serial fines or sanctions, and significant adverse legal judgments or settlements.

ISS has asked for comments by 5:00 p.m. Eastern Time (10:00 p.m. UK time) on 18 October 2019.