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13 November 2020

Corporate Law Update

In this week’s update: the Government publishes the new national security and investment bill, the court examines whether a scheme of arrangement can be invalidated because of a non-compliant circular, the Government publishes a roadmap for mandatory reporting against TCFD recommendations, the FRC publishes thematic reports on climate change reporting, ESMA updates its Q&A, FCA updates on ESEF and publishing financial statements, and equivalence decisions for EEA and Gibraltar audits.

Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.

Government publishes proposals for long-term national security reforms

The Government has published its National Security and Investment Bill, which (if enacted) would introduce broad new powers to allow the Government to intervene in and screen transactions that give rise to a “risk to national security”. In effect, the proposals act as a means for the UK Government to screen foreign direct investment (FDI) into the United Kingdom.

The Bill follows a white paper consultation launched by the Department for Business, Energy and Industrial Strategy (BEIS) in 2018, which described the purpose of the proposed changes as giving the Government greater power to intervene in acquisitions of assets and entities by “hostile actors”. (For more information on the consultation, see our previous Corporate Law Update.)

The Government has also published an official response to that consultation, setting out the feedback it received. In the response paper, the Government notes that there have been technological, economic and political changes since 2018, including issues raised by the on-going Covid-19 pandemic, which have caused it to re-examine its original proposals and make a number of changes.

Perhaps the most significant changes are that notification would be mandatory in certain sectors, and that the entire regime would apply retrospectively to events that occur on or after 12 November 2020.

We have set out below more detail on the proposed regime (as set out in the Bill).

If implemented, the new regime would also rescind the short-term changes to the UK’s domestic merger control regime (in the Enterprise Act 2002) that were made in July 2018 and July 2020 to lower the merger control thresholds for transactions in certain sectors relating to national security considerations. (See our previous Corporate Law Update for more information.)

However, the proposed new regime would be separate from, and run alongside, the UK’s existing merger control regime. The Government’s power under the Enterprise Act 2002 to intervene in mergers with a public interest dimension would remain in force, including in relation to considerations such as financial security and media plurality.

If enacted, the Bill would bring UK foreign investment regulation more into line with the regimes in the United States, France and Germany.

Overview

  • The new regime would apply where there is a “trigger event”.
  • If the transaction takes place in a specified sector, there would be a mandatory notification obligation. The acquirer would be required to inform the Government, which would then decide whether to screen the transaction.
  • If the transaction takes place in any other sector, the parties may choose to make a voluntary notification if they consider that the transaction may give rise to national security concerns. However, the Government would have a “call-in power” allowing it to scrutinise a transaction if it reasonably suspects that a trigger event has taken or will take place and has given or may give rise to a national security risk.
  • The Government would have wide-ranging powers to request information from the transaction parties and to impose remedies to address national security risks.
  • The regime would be backed up by civil and criminal sanctions.

What are the “trigger events”?

Broadly, a trigger event would occur if someone acquires, or proposes to acquire:

  • shares in a qualifying entity that take its percentage shareholding to above 25%, to above 50%, or to 75% or more;
  • voting rights in a qualifying entity that take its percentage holding voting rights to above 25%, to above 50%, or to 75% or more;
  • voting rights in a qualifying entity that enable it to secure or prevent the passing of any class of resolution governing the entity’s affairs;
  • the ability to materially influence the policy of a qualifying entity; or
  • a right or interest in or relating to a qualifying asset and which gives that person the ability to use, or direct or control the use of, that asset.

The percentage thresholds above reflect the levels at which a person can block a special resolution, pass an ordinary resolution and pass a special resolution of a UK company. They also match thresholds for notifying control under the UK’s persons with significant control (PSC) regime.

Furthermore, if the qualifying entity undertakes activities that pose a higher national security risk (see “When would a mandatory notification be required?” below), there is an additional trigger where someone acquires shares or voting rights that take its percentage shareholding to 15% or more.

The concept of “qualifying entity” is broad and includes companies, limited liability partnerships (LLPs), partnerships, unincorporated associations and trusts. An overseas entity would not be a qualifying entity unless it carries on activities, or supplies goods and services to persons, in the UK.

“Qualifying assets” would include land and certain types of intellectual property (such as trade secrets, databases, source code, algorithms, formulae, designs and software). However, land would not be a qualifying asset unless it is used in connection with activities or supplies in the UK.

The asset trigger would not apply where someone acquires control of an asset outside of a business context. However, there are some exceptions, most notably in relation to land.

How would the “call-in power” operate?

The Government would be able to “call a transaction” in for scrutiny if it reasonably suspects that:

  • a trigger event has taken place, or is in progress or contemplation; and
  • the event has given or may give rise to a risk to national security.

It would need to send a “call-in notice” to the acquirer and, if the trigger event relates to a qualifying entity, to that entity as well.

In most cases, the deadline for the Government to serve a call-in notice would be six months after it becomes aware of the trigger event, or five years after the trigger event takes place (whichever occurs first). So, where notification is voluntary and the parties decide not to make a notification, they would need to wait five years before they can be sure that the transaction will not be unwound.

The response paper notes that this is in line with the equivalent regimes in France, Germany and Italy.

As noted above, the call-in power would apply to transactions on or after 12 November 2020, before the Bill becomes law. If a trigger occurs before the Bill becomes law (the commencement date), different deadlines would apply, with an outside date of five years from the commencement date.

The Bill would allow the Government to publish a “statement of policy intent” (to be approved by Parliament) setting out how it expects to use its call-in power. The Government would need to take that statement into account before serving a call-in notice.

To this end, the Government has published a draft statement of policy intent alongside the Bill. The statement gives illustrative examples of factors the Government will consider when deciding whether to call a transaction in. These include risks relating to the target of the acquisition and the sector in which it operates, the nature of the control that is being acquired, and the identity of the acquirer.

The draft statement notes that the Government would rarely expect to intervene in direct asset acquisitions, but it would consider intervening in acquisitions of land that is or is close to a sensitive site (such as a Ministry of Defence facility).

When would a mandatory notification be required?

Generally, notification would be voluntary (as under the current UK merger control regime). However, if the transaction takes place in certain specified sectors, notification may be mandatory.

The Government has issued a separate consultation on the sectors that should trigger a mandatory notification. The consultation focusses more on the detailed technical definitions of the proposed sectors than on which sectors should be included, although the Government does ask whether the proposed definitions include sectors of the economy where foreign investment has the greatest potential to cause national security risks.

The proposed sector list includes advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical supplies to the Government and emergency services, cryptographic authentication, data infrastructure, defence, energy, engineering biology, military and dual-use technology, quantum technology, space and satellite technology, and transport.

Initially, a mandatory notification would arise only if one of the first three trigger events occurs. In addition, for a mandatory notification, the trigger threshold for acquiring shares and voting rights is effectively dropped to 15%.

The “material influence” and “qualifying asset” triggers would not give rise to a mandatory notification. But the Government would have the power to amend the triggers that give rise to mandatory notification, including to make direct acquisitions of assets subject to mandatory notification.

The obligation to notify would fall on the acquirer, who would need to notify the Government before making the acquisition. The Government would then have 30 working days to call the transaction in for scrutiny or to allow it to proceed.

Where a transaction triggers a mandatory notification, it would not be possible to complete the transaction without Government approval. Any attempt to do so would be void and any person who completes the transaction would commit a criminal offence or may be subject to a civil penalty.

What would the screening procedure involve?

Where the Government calls a transaction in, it would have 30 working days to decide whether to allow it to proceed. It would be able to extend that period by a further 45 working days if it reasonably considers it necessary to do so.

Further, before that additional 45-working day period expires, the Government and the acquirer could agree an additional voluntary extension between themselves, provided that the Government is satisfied that a risk to national security has arisen and requires additional time to consider whether to make a final order.

The Government would be able to impose orders on the transaction parties while it screens the acquisition. These would include (for example) requiring the parties not to consummate the transaction and not to disclose any information to anyone.

If the Government is satisfied that the transaction involves both a trigger event and a risk to national security, it would be able to impose a “final order”. The Bill does not set out precisely what a final order can do, but the draft legislation is very wide. It would appear to allow the Government to attach conditions to the transaction or to block it completely.

What does this mean for me?

The Government has said that the “overwhelming majority of transactions” will not be affected by the proposed powers, and that the Government will not “stand in the way” of genuine overseas investment. The response notes that other countries (such as the United States, New Zealand, France and Spain) have recently strengthened their own screening regimes, and that the UK would be following suit.

The return to mandatory notification in certain sectors is a pivot back from the previous white paper, which proposed an entirely voluntary regime. However, mandatory notification is unsurprising and to be expected if the UK regime is to keep in step with FDI and national security regimes in other countries. The deadline for responding to the Government’s list of sectors that would trigger mandatory notification is 6 January 2021.

It is interesting that, unlike equivalent regimes in other territories, the Bill appears not to contain any “safe harbours”, and it may require repeat notifications if a person increases the size of their existing stake in a qualifying entity above the higher percentage thresholds. This may be designed to give the Government greater visibility into the degree of foreign investment in particular assets or businesses, but it also means that an acquisition, once cleared, would not be immune to further scrutiny if a further trigger event occurs.

It is notable that, in its white paper, the Government anticipated around 200 notifications a year under the new regime, with around 100 call-ins. However, the Government’s impact assessment for the new Bill suggests that, under the modified regime, there could be as many as 1,000 to 1,830 notifications per year, with around 70 to 95 call-ins. This would represent a significant screening task for the Government and necessitate a serious amount of resource to review this level of call-ins.

But a key concern is the Government’s proposal to backdate the regime so that it takes effect from 12 November 2020. This means that transactions that are underway now could conceivably require Government approval under the new regime if it becomes law.

We are still at a relatively early stage and it is difficult to know how the final regime will look. However, even now, parties that are currently negotiating a transaction should consider taking certain steps:

  • Check the sector list. If the transaction takes place in one of the proposed specified sectors, there is a strong possibility that it will need to be notified and will require Government approval. Parties and their advisors should read the sector consultation paper carefully.
  • Check the thresholds. Whether or not the transaction is in a specified sector, it would only be within the new regime if one of the trigger events is met. Remember that the thresholds for acquiring shares and voting rights would be lowered to 15% in a specified sector.
  • Understand the impact on your transaction. If a mandatory notification is likely, it is worth considering whether to make the transaction conditional on Government approval under the new regime or to pause the transaction until there is further clarity. In some cases, the answer will be clear and the parties will need to decide whether to notify in due course or abandon the deal.
  • Consider voluntary notification. Even if the transaction does not fall within a specified sector, there is still a risk of Government call-in if it has a national security dimension. Consider whether there is value in making a voluntary notification in due course and, if appropriate, provide for that process in any transaction documentation. Legal advisers will be used to assisting with this call, as a similar assessment currently needs to be made under the UK’s merger control regime.

Court interprets requirements for a scheme of arrangement circular

The High Court has held that a failure to comply with the statutory requirement to set out the interests of directors in a scheme of arrangement proposed by a company did not necessarily prevent the court from sanctioning the scheme.

What happened?

In the matter of Sunbird Business Services Ltd [2020] EWHC 2493 (Ch) concerned a scheme of arrangement under Part 26 of the Companies Act 2006 (the Act) between a company and its creditors. The purpose of the scheme was to facilitate a debt-for-equity swap and a subsequent rights issue so that the company might avoid formal insolvency proceedings.

Part 26 schemes are frequently put in place between a company and its creditors to restructure debt. A company can also put a scheme in place with its members for certain purposes. These include to insert a new holding company, to facilitate a takeover or to demerge part of a business.

To become effective, a scheme of arrangement must be:

  • approved by the necessary majority of the company’s creditors or members (as applicable) at a meeting ordered by the court (known as the “court meeting”); and
  • sanctioned by the court.

In addition, the company is required, under section 897 of the Act, to send an “explanatory statement” to its creditors or members along with the notice convening the court meeting.

Section 897 also requires the explanatory statement to contain specific details. Primarily, it must explain the effect of the proposed scheme. But it must also set out any “material interests” which the company’s directors have in the scheme and whether those interests will be affected differently by the scheme than any other persons’ interests.

In this case, the court ordered the company to convene the court meeting on 21 days’ notice. The company did so, and it sent the explanatory statement required by section 897 with the notice convening the meeting. However, the explanatory statement did not set out the directors’ interests.

Certain creditors objected to the explanatory statement, claiming that it did not provide enough detail on the effect of the scheme and, in particular, that it did not state the directors’ interests in the scheme.

The company adjourned the court meeting. It subsequently sent an “addendum” to the explanatory statement, setting out more detail on the scheme and noting the directors’ interests. However, it sent that addendum only 11 days before the adjourned court meeting.

The scheme was approved by the company’s creditors with a healthy majority. However, when the company asked the court to sanction the scheme, the objecting creditors complained that the explanatory statement and the addendum still contained insufficient detail on the scheme.

They also claimed that the explanatory statement and addendum did not comply with section 897, because the company’s creditors had not received details of the directors’ interests at the same time the meeting was convened (i.e. on 21 days’ notice), and that the court should not sanction the scheme.

What did the court say?

A key question was whether the court was unable to sanction the scheme on the basis that the explanatory statement did not comply with section 897.

The judge noted that, historically, the basic requirement for a scheme explanatory statement is to provide “all information necessary to enable [the company’s] members or creditors to form a reasonable judgment on whether the scheme is in their interests or not, and hence how to vote”.

To enable a reasonable creditor to assess the fairness of the scheme, the company would need to provide a full understanding of the relevant financial and commercial interests of the company’s directors. In effect, the statutory duty to state the directors’ interests is a facet of the broader requirement to present the full picture of the scheme.

The judge acknowledged that the explanatory statement did not comply with the letter of section 897. This was because the document circulated with the notice of meeting did not state the directors’ interests, and the document that did state those interests was not circulated with the notice of meeting.

But he was not prepared to read section 897 so literally. The obvious purpose of the section was to provide creditors or members with full information on a scheme. That purpose would be defeated if the company could not provide up-to-date information by sending an addendum.

He did, however, issued a caveat. Because a court meeting is convened by court order, any addendum would need to comply with the same period of notice for the court meeting (in this case, 21 days). If that is not possible, the company should seek directions from the court.

In this case, that had not happened, and so the judge needed to decide whether to exercise his discretion to “waive” these procedural improprieties.

As it happened, the judge found that the explanatory statement was defective in other respects, because it did not set out sufficient information on the scheme. For more information on this, read our colleagues’ blog on the case. But he did say that, had that not been the case, he “might well have been inclined” to decide that giving the creditors’ only 11 days’ notice of the directors’ interests, rather than 21 days, would have made no difference to the outcome and so could have been overlooked.

What does this mean for me?

The judgment suggests that a failure to comply with the strict requirements of section 897 when circulating an explanatory statement will not necessarily render a scheme unsanctionable.

But the thrust of the decision is that this is very much a question of degree, and the matter will always remain at the discretion of court. The judge said that he “might well” have overlooked the irregularities in this case, not that he “would” have, leaving the door open for judges in subsequent decisions to apply a degree of personal judgment.

In this case, the directors’ interests in the scheme were not unusual, and, although the original explanatory statement did not set out the directors’ interests, it did confirm that they would not be affected any differently from those of any other creditor. And, ultimately, the company did issue a correction to its explanatory statement.

However, the judge’s decision may well have been different if the directors’ interests had been more significant, or they were treated specially or in a different way from other creditors’ interests, or the company had not issued an addendum correcting the original deficiency. In any of those cases, one can imagine that the judge might have refused to sanction the scheme.

The case does give rise to some practical points for a company which discovers an omission or inaccuracy in an explanatory statement for a scheme of arrangement with its members or creditors:

  • Take corrective action. The overriding principle is that the company should provide its members or creditors with the information they need to make a decision. By acting to remedy any deficiencies, a company will place itself in a better position with the court.
  • Act early. The longer any inaccuracy or omission is allowed to persist, the greater the likelihood that members or creditors will act on unsatisfactory information and the more likely it is that the outcome of the scheme vote will be affected.
  • Respect the court’s order. The order will set out a notice period for the court meeting. If it is not possible to issue a corrective statement with the same period of notice, the company should ask the court for directions. This might result in postponing the meeting further but will at least help in preserving the integrity of the scheme.

Government sets out roadmap for mandatory climate disclosures

The UK Government has published an interim report and a roadmap outlining its proposals to introduce mandatory company reporting against the Taskforce on Climate-related Financial Disclosures’ Final Recommendations (the TCFD Recommendations) as part of its Green Finance Strategy.

The interim report explains the context to the Government’s proposals and introduces its roadmap. It notes that the TCFD Recommendations now command the support of over 1,400 organisations worldwide, but that many organisations are not yet making the “decision-useful disclosures” that markets and stakeholders need to inform their decisions.

The accompanying roadmap therefore sets out an indicative path for introducing regulatory rules and legislative requirements over the next five years, with much of the change front-loaded into the first three years. The proposals are split across seven broad categories of organisation:

  • Listed commercial companies
  • UK-registered companies
  • Banks and building societies
  • Insurance companies
  • Asset managers
  • Life insurers and FCA-regulated pension schemes
  • Occupational pension schemes

The Government recommends that organisations within these categories start taking action now in order to build their capabilities to be in a position to begin comprehensive reporting when the requirements take effect.

The proposals would be implemented by a combination of different Government departments and regulators, including the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), the Department for Business, Energy and Industrial Strategy (BEIS) and the Department for Work and Pensions (DWP). They would initially cover larger organisations and organisations of more systemic importance, gradually taking in smaller organisations over time.

A useful timeline of the proposed phasing-in of the requirements is set out in Figure 1 in the interim report. In summary, the timeline contemplates mandatory reporting being introduced as follows:

  • 2021. Premium-listed companies, occupational pension schemes with more than £5 billion under management, and banks, building societies and insurance companies.
  • 2022. “Wider scope” of listed companies (e.g. standard-listed commercial companies), large unlisted UK companies, occupational pensions schemes with more than £1 billion under management, and the largest UK-authorised asset managers, life insurers and FCA-regulated pension providers.
  • 2023. All other UK-authorised asset managers, life insurers and FCA-regulated pension providers.
  • 2024-2025. The Government will review the scope of the requirements at this stage and may introduce requirements for other occupational pension schemes.

Under this model, the requirements would cover all listed commercial companies and around half of large unlisted UK companies by 2022.

As a reminder, the FCA has already published a consultation on requiring premium-listed companies to report against the TCFD Recommendations on a “comply or explain” basis. See our previous Corporate Law Update for more information. The FCA is intending to publish a policy statement by the end of 2020, with a view to introducing the new reporting requirement from 1 January 2021.

BEIS is expecting to consult on the requirements for unlisted companies in early 2021, with a view to introducing legislation in mid-2021 to come into effect from 2022.

FRC publishes thematic reports on climate reporting

The Financial Reporting Council (FRC) has announced the publication of a series of thematic reports on climate change reporting by UK companies.

The reports are the culmination of a review by the FRC of climate-related issues affecting governance, reporting and audit, as well as the role of a range of market participants. In addition to exploring how companies and their boards and auditors are taking account of climate-related challenges, the FRC asked investors what they want to see in relation to climate change.

The resulting reports highlight the FRC’s views on current market practice, outlines its expectations and sets out where the FRC intends to focus its energy going forward.

The FRC has set its detailed findings out in a summary report, as well as a series of separate reports covering corporate reporting, governance, audit, investor expectations and professional oversight by regulators. It has also published a single page of headline findings.

The key points arising from the FRC’s review are set out below.

Governance

  • Although more companies are disclosing their approach to climate issues, the FRC says it is often unclear how climate issues are informing key decisions or the company’s business model or strategy. But the report states that investors continue to want companies to outline how their boards consider and assess climate change.
  • The FRC notes that some companies have set up committees to help their board understand the impact of climate change on their business and their reporting requirements. However, again, the report notes that disclosures in this respect could have been more useful.

Reporting

  • Companies are increasingly addressing climate change risks in their reporting, but in many cases they are complying with only the minimum requirements in company legislation and not yet meeting the needs of investors. The FRC is calling for a “greater degree of granularity” on milestones, targets and metrics.
  • In particular, the report states that, if a company’s management consider that climate change does not give rise to any significant risks, they should explain why this is the case. Investors want to understand the resilience of the company’s business model.
  • Users of corporate reports are interested in reporting on scenarios and in understanding the impact of the company commitments, such as pathways to ‘net zero’ emissions. The FRC notes that two thirds of companies had set climate change targets, but only half of those companies explained how they had performed against previous targets.
  • Greenhouse gas emissions metrics could be improved, including by describing any judgements made by the board on which emissions to include, particularly where emissions targets form a key component of the company’s strategy.
  • Only 25% of companies reviewed referred to climate change in their financial statements (as opposed to their narrative reports). The FRC notes that investors have a clear interest in the accounting implications of climate uncertainties and in the linkage between forward-looking assumptions in the accounts and narrative discussions in the strategic report.

Investor expectations

  • The FRC says that investors support companies using the TCFD’s eleven recommended disclosures as a framework for considering and assessing the climate-related issues, and that further improvement in reporting is needed.
  • The report notes that investors increasingly expect information on climate issues to be reflected in a company’s financial statements and for auditors to challenge and test management’s assumptions.

ESMA updates prospectus and transparency Q&A to address Brexit

The European Securities and Markets Authority (ESMA) has updated its Q&A document on the EU Prospectus Regulation and its Q&A document on the EU Transparency Directive. The changes address Brexit, profit forecasts and prospectus exemption thresholds.

Brexit

ESMA has added a new question to its Prospectus Regulation Q&A and updated the existing question in its Transparency Directive Q&A to address the end of the UK/EU transition period at 11:00 p.m. UK time on 31 December 2020.

  • Changing home state (Transparency Directive). The substance of ESMA’s guidance on this point remains the same. Once the transition period ends, an issuer whose home state is the UK should choose a new home state and notify the relevant authorities within three months (i.e. by 31 March 2021).
  • Changing home state (Prospectus Regulation). Issuers that currently have the UK as their “home state” for the purpose of prospectus approvals will need to switch to a country within the European Economic Area (EEA).

    In doing so, they should choose a country in which they have made any offer or sought any admission to trading either after the UK/EU transition period ends, or a during the transition period if the offer or admission will continue after the transition period ends. To be clear, an issuer cannot choose a country in which it makes and closes an offer before the transition period ends.

    In ESMA’s view, it will not be possible to change the choice of new home state once made.
  • Prospectus passporting. Following the end of the transition period, prospectuses and prospectus supplements approved by the UK Financial Conduct Authority (FCA) can no longer be used in other EEA countries. Moreover, prospectuses approved by the FCA can no longer be “supplemented”. Effectively, they will lose any regulatory status.

As a result, where an issuer is currently in the course of offering securities to the public in an EEA country based on a prospectus approved in the UK and passported into that country, it will need to halt that offer at the end of the transition period, seek approval for a new prospectus in its new home state, then commence a new offer.

However, ESMA has helpfully confirmed that, where an issuer’s securities have been admitted to trading on a securities exchange in an EEA country based on a prospectus approved in the UK, that admission will remain valid and the issuer will not need to re-apply for admission to that exchange.

Profit forecasts

The updated Prospectus Regulation Q&A contains a new question on how to determine whether something is a “profit forecast”. The new question makes the following points:

  • Issuers should continue to consult ESMA’s Guidelines on disclosure requirements under the Prospectus Regulation (ESMA31-62-1426) on this point.
  • A statement does not need to set out a precise figure to be a profit forecast. A range of figures (e.g. “We expect this year’s profits to be between €30 million and €50 million”), or even an intimation as to the level of likely profits (e.g. “The profit is expended to be higher than the previous year”), can amount to a profit forecast.
  • A statement can be a profit forecast without referring to profit and loss in the issuer’s accounts (the “bottom line” of its profit and loss account or statement of comprehensive income). ESMA gives EBITDA, EBIT, EBT, adjusted EBIT and recurring net income as examples of indicators of profits and losses that can make a statement a profit forecast.
  • Other accounting data and financial indicators can amount to profit forecasts if it is possible to calculate a minimum and maximum likely profit from them. ESMA gives gross profit levels, cash flow projections, alternative performance measures (APMs), key performance indicators (KPIs) and turnover forecasts as examples.
  • Financial information does not need to relate to the issuer’s entire financial results to be a forecast. Results for smaller periods (e.g. quarterly results) or for particular business divisions can also amount to profit forecasts.

ESMA also provides examples of statements that may not, by themselves, amount to profit forecasts.

Prospectus exemption thresholds

Finally, the Prospectus Regulation Q&A contains two new questions on how to calculate the exemption from producing a prospectus under article 1(5)(a) of the Prospectus Regulation. That article allows an issuer to apply to admit securities to a regulated market without publishing a prospectus if the securities are of the same class as those already admitted to the market in question and represent less than 20% of those securities over a 12-month period.

The new Q&A clarifies the following:

  • In calculating the percentage, the issuer must include any securities that have already benefited from this exemption during the preceding 12-month period. However, it should not include any securities that have been admitted to trading without a prospectus under a different exemption.
  • An issuer should calculate the percentage based on the number of securities admitted to trading at the time of the proposed admission (and not based on a 12-month average).
  • The number of shares already admitted to trading should be adjusted to take account of any share splits (sub-divisions) that take place over the course of the 12-month period.

Also this week…

  • FCA to delay ESEF implementation. In July we reported that the Financial Conduct Authority (FCA) was proposing to delay the implementation of the European Single Electronic Format (ESEF) for company reporting, which was due to begin for financial years beginning on or after 1 January 2020, by one year in light of the Covid-19 pandemic. The FCA has now confirmed in Policy Statement 20/14 that it will postpone the implementation of ESEF by one year, although issuers will still be able to publish and file their reports in ESEF format on a voluntary basis in the meantime.
  • FCA extends Covid-19 reporting measures. In the same statement, the Financial Conduct Authority (FCA) has confirmed that the temporary relaxations it announced this year for issuers to publish annual and half-yearly financial statements will continue until April 2021. The relaxations give listed companies six months, rather than four, to publish their annual financial results and four months, rather than three, to publish their half-yearly results.
  • EU publishes clarification on ESEF. The European Commission has published a communication on financial statements drawn up under the new European Single Electronic Format (ESEF). The communication clarifies (among other things) that auditors will need to opine on whether the financial statements comply with ESEF, and that ESEF statements can be signed using an electronic signature.
  • Government publishes further Brexit regulation on audit. The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) (No. 2) Regulations 2020 (SI 2020/1247) have been published, together with an explanatory memorandum. The Regulations grant equivalence to the audit regimes of the EEA member states and Gibraltar for an indefinite period following the end of the UK/EU transition period. They also extend equivalence for the South African regime until 30 April 2026 (instead of 31 July 2022).
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