Corporate Law Update: 3 - 16 June 2023

• The BVCA publishes its bi-annual policy and technical bulletin for May 2023
• New legislation brings cryptoasset promotions within the scope of FCA regulation
• The European Commission is consulting on the first set of EU sustainability reporting standards
• The European Parliament adopts its approach to the new Corporate Sustainability Due Diligence Directive (CSDDD)
• The European Commission approves in principle extensions to its sustainable investment taxonomy
• The Financial Reporting Council publishes a thematic review of fair value measurement

BVCA publishes bi-annual technical bulletin

The British Private Equity and Venture Capital Association (BVCA) has published its bi-annual policy and technical bulletin for May 2023.

The publication covers various items, including the impact of OECD Pillar 2 rules, an update on qualifying asset holding companies, new carried interest elections for UK residents with non-UK tax liabilities, an update on ESG regulation in the UK and the EU Foreign Subsidies Regulation.

The bulletin also includes two items by Macfarlanes authors on:

• the evolving ESG landscape in the EU, authored by Shailen Patel (Head of Corporate Advisory), Gavin Haran (Head of Policy for Asset Management) and Rachel Richardson (Head of ESG); and
• regulatory capital developments, authored by Shailen Patel, Michael Sholem (Partner, Financial Services and Products), James Pont (Senior Manager, Corporate Advisory) and Rachel Serene (Senior Associate, Financial Services and Products).

The bulletin is available only to BVCA members.

New legislation regulates promotions of cryptoassets

New legislation has been made which brings cryptoassets within the UK’s framework for regulating financial promotions.

The legislation was first published in draft in March this year (see our previous Corporate Law Update) and has not been amended substantially since then.

Under section 21 of the Financial Services and Markets Act 2000, a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless they are authorised to do so by the Financial Conduct Authority (FCA) (the financial promotion restriction). Breach of the financial promotion restriction is a criminal offence and it may not be possible to enforce an agreement against a person who entered into it as a result of an unlawful financial promotion.

The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) sets out what amounts to engaging in investment activity and provides exemptions from the financial promotion restriction.

The new legislation amends the Order to make it unlawful to promote cryptoassets unless the promotion is made by, or has been approved by, a person with FCA authorisation to do so or falls within an exemption under the Order.

The prohibition applies only to cryptoassets that are both fungible (i.e. they can be freely exchanged for identical cryptoassets) and transferable, such as tokens and cryptocurrencies. It will not extend to non-fungible tokens (NFTs) or e-money (which is specifically excluded).

Unlike for other types of financial promotion, there will be no exemption from the restrictions for promotions to high-net worth individuals and self-certificated sophisticated investors.

The prohibition comes into force on 7 October 2023. However, the Order gives the FCA immediate powers to make rules and guidance on cryptoasset promotions.

Utilising these powers, the FCA has published a policy statement (PS23/6) confirming that it will be categorising qualifying cryptoassets as “Restricted Mass Market Investments”. This is a medium-regulation category that also applies to unlisted shares and bonds and will allow cryptoassets to be mass-marketed to consumers (subject to certain marketing requirements).

EU consults on first sustainability reporting standards

The European Commission is consulting on the first set of EU sustainability reporting standards (SRS).

The SRS set out information that certain undertakings established in the European Union (EU), which have a subsidiary or branch in the EU, or which have securities admitted to a regulated market in the EU, will be required to disclose in due course.

EU Member States have until 6 July 2024 to transpose the requirements into their domestic law. The standards would come into effect on a staggered basis, with the first cohort of undertakings reporting for financial years starting on or after 1 January 2024.

The standards do not form part of UK law but will affect UK undertakings that are admitted to a regulated market in the EU or which have a branch or significant subsidiary in the EU.

The consultation closes on 7 July 2023.

EU Parliament adopts approach to corporate sustainability due diligence

The European Parliament has formally adopted its negotiation position on a new law to require large businesses to carry out due diligence to identify impacts on human rights and the environment.

Under the Corporate Sustainability Due Diligence Directive (CSDDD), companies would need to carry out targeted due diligence on their own operations and those of their subsidiaries and partners.

This would include identifying actual or potential adverse impacts on human rights and the environment and taking measures to prevent and mitigate identified impacts.

Companies would also need to report publicly on the measures they have taken (to the extent they are not already required to do so under EU non-financial reporting requirements).

Companies within scope could be liable to pay compensation if they fail to take mitigating action and, as a result, a person suffers damage.

The Council of the European Union had proposed to apply the Directive to:

• EU companies with more than 1,000 employees and net worldwide turnover above €300m, stepping down to 500 employees and €150m turnover after three years; and
• non-EU companies that generate more than €300m net turnover in the EU (whether or not they have a branch or establishment in the EU), again stepping down to €150m after three years.

The Council had also proposed to apply lower thresholds of 250 employees and €40m turnover for higher-risk companies (i.e. where at least half of net turnover is generated in specific high-risk sectors).

Among other things, the Parliament has resolved to amend the Council’s proposals so as to lower the “general” thresholds above from 500 employees to 250 employees and from €150m turnover to €40 million, effectively removing the distinction between high-risk and non-high-risk companies.

The Council, the Parliament and the European Commission will now enter into negotiations over the final text of the Directive.

The Directive will not form part of UK law but will affect UK companies that are within scope.

New EU sustainable investment taxonomy regulations progress

The European Commission has approved in principle two new delegated acts that would supplement its existing sustainable investment taxonomy regime in the EU Taxonomy Regulation.

The Commission previously consulted on the new legislation in April this year.

The Taxonomy Regulation establishes a common taxonomy for identifying whether activities are “environmentally sustainable” when deciding the level of environmental sustainability of a particular investment. It applies to certain financial market participants, issuers and public interest entities within the European Union.

The two new delegated acts would incorporate additional taxonomy criteria for activities that contribute to the sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention, control or protection and restoration of biodiversity and ecosystems, low-carbon transport and certain other activities.

The new legislation will now be translated and formally adopted, following which the European Parliament and the Council of the European Union will have between four and six months to scrutinise them. If adopted without objection, the new delegated acts will apply from January 2024.

Alongside these new delegated acts, the European Commission has separately published a legislative proposal under which ESG ratings providers based in the EU would require authorisation from and be supervised by the European Securities and Markets Authority (ESMA).

FRC publishes thematic review on fair value measurement

The Financial Reporting Council (FRC) has published a thematic review on fair value measurement.

The review focusses on International Financial Reporting Standard (IFRS) 13, which defines fair value, sets out a framework for measuring fair value, and requires businesses to make disclosures about fair value measurements.

The review considers the extent to which companies should use market participants’ assumptions, rather than their own, when measuring fair value and take specialist third-party advice.

As is usual, the FRC also notes that high-quality disclosures are key and encourages companies to avoid boilerplate and immaterial information.