Corporate Law Update
- The Government updates its market guidance on the UK’s national security and investment screening regime
- The FCA is consulting on a major overhaul to the UK’s listing regime for equity securities
- HMRC is consulting on a new single share transfer tax to replace stamp duty and SDRT
The Government has published an updated version of its market guidance notes on the National Security and Investment Act 2021.
Under the Act, the Government has the power to call in, investigate and ultimately block or impose conditions on acquisitions of a particular size that pose a risk to the UK’s national security.
Parties to an acquisition can notify the Government in advance of a transaction and seek clearance to avoid the risk of a call-in. For certain kinds of acquisition in certain sectors, the parties are obliged to notify the Government and cannot proceed with the acquisition without clearance.
The updated notes introduce new guidance on the following.
- The point at which the Government considers it appropriate to notify a transaction. This could be when heads of terms are agreed, finance is put in place or an offer is announced publicly.
- How transaction parties can contact the Government for a view on whether an acquisition is subject to mandatory notification.
- Examples of useful information transaction parties can include in a notification.
- How the Government will handle notifications where parties are facing “material financial distress”, including (in exceptional circumstances) expediting the assessment process.
The Financial Conduct Authority (FCA) has published Consultation Paper CP23/10, in which it is consulting on a major overhaul of the UK’s listing regime for equity securities.
The consultation follows the FCA’s previous discussion paper on the topic (see our previous Corporate Law Update) and is designed to provide a boost to listings in the UK.
The key proposals on which the FCA is consulting are as follows.
- Single listing segment. The two current listing categories – “premium” and “standard” – would be collapsed into a single segment, designed to balance creating a more straightforward framework with maintaining transparency for investors.
- Simplified eligibility criteria. A company would no longer need a three-year financial and revenue-earning track record or a “clean” working capital statement to list in the UK.
- No more shareholder votes for class 1 transactions. Currently, a listed company is required to publish a circular and obtain shareholder approval to implement a “class 1 transaction” (one that exceeds certain size thresholds). This requirement would be abolished, although the FCA is proposing to take a different approach for companies in financial difficulty and will be consulting on that in due course.
- No more shareholder votes for related party transactions (RPTs). As with class 1 transactions, the requirement to obtain shareholder approval for a larger RPT would be abolished. However, a company would still near to obtain a “fair and reasonable” opinion from its sponsor.
- No more announcements for class 2 transactions. The threshold for announcing significant transactions would be raised, effectively eliminating the need to announce a class 2 transaction. (A company may, however, still be required to announce under market abuse rules.)
- The class tests would change. When classifying a transaction to decide whether an announcement is required, companies would no longer run the so-called “profits test”. In addition, except on RPTs, sponsors would have more discretion to modify the class tests or to substitute them with “other appropriate measures” without seeking approval from the FCA.
- Modified controlling shareholder regime. A controlling shareholder would no longer be required to enter into a “relationship agreement” with a listed company. Instead, issuers would disclose whether a relationship agreement is in place, allowing investors to factor this into their decisions.
- More flexibility for dual-class structures. Currently, dual-class share listings are permitted in the UK, but subject to various restrictions. These restrictions would be eased significantly, allowing directors to hold shares with enhanced voting rights for up to ten years.
The FCA has decided to keep certain aspects of the existing listing regime, such as the following.
- The requirement for a listed company to retain a “sponsor”, both when listing and on an ongoing basis for certain disclosure purposes.
- The requirement to comply with the UK Corporate Governance Code or explain any areas of divergence.
- The requirement to obtain a “fair and reasonable opinion” for RPTs and to disclose key details for both RPTs and class 1 transactions.
- The requirement for a full circular and shareholder approval for a “reverse takeover”.
- The requirement that a listed company operate an independent business and has operational control over its activities (albeit in a slightly modified form).
- The requirement for a minimum 10% “free float”.
- Controls over discounted non-pre-emptive share offers and delisting.
- Separate listing categories and rules for special purpose acquisition companies (SPACs), closed-ended investment funds (CEIFs) and open-ended investment companies (OEICs).
Any requirements above that do not currently apply to standard-listed companies would apply to those companies when they move onto the new single segment. (There would be a separate new category of listing for standard-listed companies that do not meet the new requirements, although the FCA contemplates this occurring only in particular circumstances.)
The FCA has asked for responses by 28 June 2023.
HM Revenue & Customs is consulting on a new single tax on securities transactions, which would replace the two existing UK taxes on share transfers: stamp duty reserve tax (SDRT) and stamp duty.
There are currently two taxes in the UK that apply to transfers of shares.
Stamp duty is payable on instruments that transfer the beneficial interest in “stock” and “marketable securities”. This includes transfers of shares in most private UK companies, as well as certain instruments that can be “converted” into shares (such as convertible loan notes) and transfers of interests in partnerships that hold stock or transferable securities.
As a paper-based tax, stamp duty has long been perceived as something of an anachronism in the UK tax system that can cause significant delays – often weeks – in transferring legal title to shares to a buyer.
Stamp duty reserve tax (SDRT) is payable on agreements to transfer shares and other securities (so-called “chargeable securities”). It was introduced to deal with uncertificated, or “paperless”, securities, which can be transferred without an instrument of transfer and so do not attract stamp duty. Unlike stamp duty, which is assessed by HMRC, transaction parties assess their own liability to SDRT.
Stamp duty and (for the most part) SDRT are charged at the rate of 0.5%, with stamp duty being rounded up to the nearest £5 and SDRT up to the nearest penny.
Although introduced as a tax on electronic transfers of shares, SDRT also applies to agreements to transfer securities that do require an instrument of transfer. This means that both stamp duty and SDRT can arise on a single transaction, but SDRT will not be payable if stamp duty is paid, or the transaction is exempt from stamp duty or relief from stamp duty applies.
Stamp duty becomes payable when the instrument of transfer is executed, which, on a typical transaction, is at completion (or closing). SDRT becomes payable when the agreement to transfer the shares is made. On a typical transaction this is at signing (or exchange). This mismatch in timing can, in some cases, cause difficulties.
The consultation proposes the following.
- Stamp duty and SDRT would be replaced by a new single tax on shares (STS), which would be self-assessed (like SDRT) with minimal involvement from HMRC.
- STS would apply to transfers of equity securities in UK incorporated companies (including stocks and bonds with “equity-like features”), wherever they are bought or sold.
- STS on electronic transfers would be paid through CREST. STS on all other transfers would be paid using a new online portal at HRMC.
- It would be possible to pay STS (or claim a relief) and obtain confirmation instantaneously, meaning that a buyer could be registered as the legal owner of shares straight away.
- STS would become payable when there is an unconditional agreement to acquire shares. This would either be when the acquisition agreement is signed (if it is unconditional) or when the conditions for completing the acquisition have been satisfied, with an overall two-year time limit.
- STS would be payable within 14 days of becoming due.
- The new tax would be enforced in the same way that SRDT currently is using the existing tiered framework of four-, six- and 20-year periods for recovering tax. The current position for stamp duty – that, in theory, payment cannot be enforced – will disappear.
- Transfers of partnership interests would no longer be subject to any transfer tax (although the Government would introduce anti-avoidance measures to prevent abuse).
- The existing rules under both stamp duty and SDRT where the price for acquiring shares is contingent or unascertainable would be replaced with rules similar to those that currently apply under the stamp duty land tax (SDLT) regime in England.
- The existing exemption from stamp duty for transactions under £1,000 would be removed.
- Group relief, reconstruction relief and acquisition relief would be extended across the entire tax. Uncertificated securities would no longer need to be “materialised” to benefit from the exemption. The reliefs would also be extended to open-ended investment companies (OEICs).
- Existing exemptions for securities intermediaries, stock lending and growth-market companies would remain unchanged. Share buy-backs would continue to be subject to tax.
HRMC has asked for responses to the consultation by 22 June 2023.