Legal development

Ashurst Governance Compliance Update Issue 14

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    IN THIS EDITION WE COVER THE FOLLOWING
    Corporate Transparency, Economic Crime and the reform of Companies House

    1. New register of property held by overseas companies

    2. Corporate transparency and reforming Companies House

    Market disclosure

    3. UK MAR: FCA publishes statement on events in Ukraine and their impact on financial markets

    UK Prospectus regime

    4. UK Prospectus regime: HM Treasury publishes policy approach

    5. FTSE Russell publishes changes to Ground Rules for UK Index admission

    AGMs in 2022
    6. Investment Association publishes Shareholder Priorities and IVIS approach for 2022 AGMs
    Regulatory Enforcement Action

    7. Former CFO and Finance Director found guilty of misleading investors

     

    CORPORATE TRANSPARENCY, ECONOMIC CRIME AND THE REFORM OF COMPANIES HOUSE

    New register of property held by overseas companies

    The government has published the Economic Crime (Transparency and Enforcement) Bill in part in response to the invasion of Ukraine. From a corporate perspective, its principal intention is to require any overseas company (or similar legal entity) that wishes to purchase property in the UK to take steps to identify any 'beneficial owner' which has significant influence or control over that company (or entity) and to register them on what will be a new publicly available Register of Overseas Entities to be held at Companies House. The definition of a beneficial owner is based on the definition of a 'Person with Significant Control" or 'PSC' under the transparency regime focused on the ownership of UK corporations which was introduced in 2016.

    Entities within scope of the legislation are those which own land in the UK, are governed by the law of a country outside the UK, and which are 'legal persons' under that governing law. Information supplied by an overseas company or entity will need to be verified and updated annually.

    Supplying false or misleading information or failing to update the Register will be an offence. The requirement to register will apply retrospectively to property purchased in England and Wales by overseas buyers up to 20 years ago (and since December 2014 in Scotland). The government has published a useful accompanying Factsheet and more detail can be found in our Dispute Resolution team's update. We will publish a further, more detailed, overview of the legislation on the Bill receiving Royal Assent. Note that even though it appears likely that the Bill will become law in the near future, it is not clear when the measures will be brought into force, not least given the practicalities of creating the relevant register at Companies House.

    The Bill also seeks to extend the application of Unexplained Wealth Orders (UWOs) by bringing those who hold property in the UK in a trust within the scope of UWOs and increasing the time available to law enforcement agencies to review material provided in response to a UWO. Finally, the Bill amends financial sanctions legislation, helping to deter and prevent breaches of sanctions imposed.

    Corporate transparency and reforming Companies House

    In the context of policy drivers linked to our first item, the government has also published a White Paper which sets out a wide range of proposals on corporate transparency and reforms to Companies House. Specifically, it views these as delivering on priorities centred around: national security, anti-corruption and organised crime; protecting individuals and businesses from fraud; and boosting enterprise.

    The proposals will be introduced in the coming months via a further Economic Crime Bill and develop the findings of three previous consultations: enhancing the powers of the Registrar of Companies; improving the quality and value of financial information on the UK Companies Register; and prohibiting corporate directors.

    The proposals signal the government's position on reforms to the Companies House framework and seek to: (i) transform Companies House; (ii) strengthen the role and powers of the Registrar; (iii) enhance identity verification processes in respect of directors, beneficial owners and their agents; (iv) enhance data sharing; (v) prevent abuse of personal information on the Register; and (vi) improve financial information on the Register.

    The next step will be for the government to publish draft legislation to implement the changes. 

    Please click here for a more detailed note on the content of the White Paper.

    MARKET DISCLOSURE

    UK MAR: FCA publishes statement on events in Ukraine and their impact on financial markets

    The Financial Conduct Authority has published a statement reflecting on the impact of Russia's invasion of Ukraine and the implications of that for the financial markets and issuers in particular. The statement makes the following key points:

    • The events themselves and the range of financial sanctions imposed in response on Russia, Russian individuals and Russian businesses will have multiple impacts on companies with securities admitted to UK markets.
    • Companies in scope of the UK Market Abuse Regulation are required to fulfil their obligations to disclose inside information as soon as possible unless they have a valid reason under UK MAR to delay disclosure. These obligations include continuing to assess carefully which information constitutes inside information, noting that both the invasion of Ukraine and responses to it by governments globally may alter the nature of information that is material to the assets, operations and prospects of a business. Companies assessing the effect of financial sanctions in relevant jurisdictions should seek legal advice where necessary.
    • Companies should ensure the market is fully informed of any information or changes that are required to be disclosed under UK MAR.
    • Companies are also reminded that disclosure obligations continue to apply even when trading of securities has been suspended.
    UK PROSPECTUS REGIME

    UK Prospectus regime: HM Treasury publishes policy approach

    One year on from the publication of Lord Hill's UK Listing Review – which included a fundamental review of the prospectus regime amongst its recommendations - and following HMT's UK Prospectus Regime Review, on 1 March 2022, the government has announced the policy approach it will take to reforming the UK's prospectus regime.

    The proposed regime changes form part of a wider review of the capital markets landscape in a post-Brexit world, the aim of which is the promotion of London as a global financial centre capable of competing effectively with other major jurisdictions.

    Regime changes include the following:

    1. Admissions to trading on UK regulated markets

    Central to the regime changes is the decoupling of the regulation of public offers of securities and the regulation of admissions of securities to trading. Whilst the prospectus will be retained as an important part of the regulation of public offers of securities admitted to trading on UK regulated markets, the FCA will be given enhanced rule-making responsibilities in this sphere. Amongst other things, the enhanced responsibilities will allow the FCA to: (i) specify in its rulebook if and when a prospectus is required, including for further issuances; (ii) determine prospectus content requirements; (iii) decide whether - and, if so, in which circumstances – a prospectus must be reviewed and approved by the FCA prior to publication; and (iv) address the manner and timing of publication. In connection with this, the government will remove the criminal offence prohibiting requests for admission of securities to trading on UK regulated markets without an FCA-approved prospectus first having been published.

    2. A new architecture for public offerings of securities in the UK

    Although the FCA will be able to require a prospectus for admissions to trading on UK regulated markets, prospectuses will not be a feature of the public offerings regime. It is envisaged that there will be a general prohibition on public offerings of securities which will be subject to exemptions. The exemptions will be derived from those that currently apply under the UK Prospectus Regulation, but will be expanded to include, amongst others: (i) offerings of securities which are, or will be, admitted to UK regulated markets; (ii) offerings to existing shareholders (subject to certain conditions, including that the offer is made pro-rata to a person's existing holding); and (iii) public offers from overseas. Retained exemptions will include the 'Qualified Investors' and '150 persons' exemptions in addition to offers under employee share schemes.

    3. The 'necessary information' test

    Under the new regime, the government will retain the existing statutory remedy for false, misleading or omitted information in respect of a prospectus (under section 90 of Financial Services and Markets Act 2000(FSMA)) allowing investors who can show they have sustained losses to seek compensation through the courts. In connection with this, the government intends to retain a single statutory 'necessary information' test as a basic standard of preparation for a prospectus, with some alterations, including a clarification that 'necessary information' may vary according to whether an offer of securities relates to a first-time admission or a secondary issuance.

    4. Facilitating forward-looking information

    While retaining the existing statutory remedy for false, misleading or omitted information, the government intends to raise the threshold for liability applying to certain categories of forward-looking information in prospectuses from the current 'negligence' standard (under Schedule 10 of FSMA) to a 'recklessness' standard. As a safeguarding measure, such disclosures will be clearly labelled as forward-looking information to which the revised liability threshold applies. The FCA will also be given responsibility for specifying the categories of forward-looking information which will be subject to the new liability threshold.

    5. Junior markets

    It is envisaged that offers of securities which are, or will be, admitted to trading on certain multilateral trading facilities (MTFs), such as the London Stock Exchange's AIM, will be added to the public offering exemptions, set out above (2). The government also intends to introduce a mechanism by which admission documents published in accordance with the rules of the relevant MTFs are treated as a type of prospectus, in light of the proposed reform of liability for forward-looking information. Operators of MTFs will continue to establish admission criteria and rules for the facilities they run, subject to FCA rules and oversight.

    6. Private companies

    The government aims to increase the capital raising options available to private (i.e. unlisted) companies and, in line with this, the government intends to remove the current requirement for an FCA-approved prospectus to be published for offers over €8 million. Companies will instead be able to offer securities to the public provided the offer is made through a platform operated by a specifically authorised firm. In connection with this, the government intends to create a new regulated activity covering the operation of an electronic platform for the public offering of securities, such as an equity crowdfunding platform. The FCA will then determine the detailed requirements to which such platforms will be subject.

    7. Public offerings from overseas

    A new regime of regulatory deference is envisaged for offers into the UK of securities listed on certain designated overseas stock markets, allowing offerings to be extended into the UK on the basis of offering documents prepared according to the rules of the relevant overseas jurisdiction and market. The FCA will not review or approve the offering documentation and will instead rely on an assessment of the effectiveness of the regulation of the relevant overseas market. There will, however, be appropriate powers for the FCA to intervene to protect UK investors in exceptional circumstances.

    Next steps

    The government will replace the prospectus regime currently reflected in the UK Prospectus Regulation and will legislate to do so when parliamentary time allows. Given the FCA's extended rule-making responsibilities, the suite of reforms will take full effect after the FCA has consulted on, and is ready to implement, its new rules.

    FTSE Russell publishes changes to Ground Rules for UK Index admission

    Changes to the FTSE UK Index Series Ground Rules, which set basic admission requirements for the FTSE UK Index Series, have been published by FTSE Russell, part of the London Stock Exchange, and will take effect at the FTSE March quarterly review.

    The updated Ground Rules, which relate to: (i) free float; (ii) dual class share structures; and (iii) investable market capitalisation, have been introduced further to the FTSE consultation on the eligibility criteria for inclusion in the FTSE UK Index Series and certain FCA Listing Rule changes which came into effect in December 2021.

    1. Free float

    In respect of free float (defined by FTSE as the percentage of a company's shares that are considered to be freely available for public purchase), the minimum free float requirement for UK incorporated issuers has been reduced in the Ground Rules from 25 per cent to 10 per cent and, for non-UK incorporated issuers, from greater than 50 per cent to a minimum of 25 per cent.

    2. Dual class share structures

    The Ground Rules now also accommodate dual class share structures within the voting rights test, which provides that a company must have more than five per cent of its voting rights in the hands of unrestricted shareholders. Where a company has implemented a dual class share structure in line with the updated Listing Rules (see below), these shares are generally counted as one vote per share for the purpose of the voting rights test.

    3. Market capitalisation

    A security level minimum investable market capitalisation (broadly, full market capitalisation adjusted for free float restrictions and foreign ownership limits) requirement has been introduced pursuant to which, amongst other things, an investable market capitalisation of more than £50 million is required for non-constituents to be considered for inclusion and existing constituents with an investable market capitalisation of less than £30 million for two consecutive quarters will be removed.

    By way of reminder, the key Listing Rules changes, which form part of a wider reform drive to enhance the attractiveness of London as a listing venue, particularly for companies operating in innovative growth sectors, were, in overview, as follows:

    • a reduced free float requirement at listing and as a continuing obligation of 10 per cent from the previous requirement of 25 per cent;
    • a targeted and time-limited form of dual class share structure within premium listing; and
    • an increased minimum market capitalisation threshold for listing of £30 million from the previous requirement of £700,000 for shares in companies other than funds.

    While the updated Ground Rules do not replicate the FCA updates to the Listing Rules, they do serve to underpin their success. Indeed, in the UK Listing Review, Lord Hill encouraged index providers to consider how their approach to certain index eligibility rules, including free float, could be suitably adapted to respond to any FCA rule changes. FTSE indexation is a significant consideration for companies looking to list - among other things, it provides prestige and allows a company to benefit from passive investment by index tracking funds. In line with this, FTSE has confirmed that it will continue to monitor any developments to the Listing Regime, making further announcements in due course, if appropriate.

    AGMS IN 2022

    Investment Association publishes shareholder priorities and IVIS approach for 2022 AGMs

    The Investment Association has published its Shareholder Priorities and IVIS approach for 2022 in which it sets out the approach that its voting arm, IVIS, will take in 2022 and specifically for companies with financial years ending on or after 31 December 2021.

    By way of reminder, IVIS does not provide voting recommendations. Each IVIS report is colour coded to reflect breaches of best practice or to highlight areas of concern. The colour showing the strongest level of concern is Red, followed by Amber which raises awareness of particular issues. A Blue Top indicates no major areas of concern, while a Green Top indicates that an issue has now been resolved. The issue which is driving the colour top will be outlined in the 'Key Issues' section of the IVIS report.

    Priority areas in 2022 are as follows:

    1. Climate change

    The IA states that its members expect companies to take immediate action: 'Climate change and the transition to net zero is not an issue which can be left for future managements teams or Boards; investors wish to see the actions the current leadership will be taking'.

    The IA welcomes the government's plan to require listed companies to publish transition plans and encourages listed companies to do so ahead of them becoming mandatory. It also expects to see progress on the setting of robust targets to achieve net zero, with a clear preference for these targets to be aligned with 'robust methodologies' such as the Science Based Target initiative.

    Directors are expected to continue to affirm that the financial impact of climate-related matters have been incorporated into the company's accounts, as per the IA's Priorities for 2021. They should provide a statement in the annual report that directors have considered the relevance of the risks of climate change and the transition risks associated with achieving the goals of the Paris Agreement when signing off the accounts. Auditors are also expected to highlight climate change-related risks in their Key Audit Matters.

    Colour Top Approach: IVIS will Amber Top all companies that do not make disclosure against all four pillars of the TCFD recommendations. This mirrors the approach taken in 2021.

    2. Audit quality

    Companies are expected to meet the IA's 2021 shareholder expectations and to demonstrate how they have judged the quality of the audit that they have received.

    IVIS will continue to monitor whether the Audit Committee has demonstrated how it has assessed the quality of the audit and how it has challenged management's judgements.

    3. Diversity

    The IA supports the proposals set out in the Financial Conduct Authority's consultation on changes to the Listing Rules to incorporate additional diversity reporting and diversity targets on a comply or explain basis and the recommendations of the FTSE Women Leaders Review which we covered in Ashurst Governance and Compliance update, Issue 13. It expects companies to articulate to investors the approach that they are taking to meet the new targets and encourages companies to disclose against the new reporting template and to set out how they expect to meet the new Listing Rules prior to their formal adoption, as well as the FTSE Women Leaders Review targets over time.

    Colour Top Approach: IVIS will.

    • Red Top FTSE 100 companies that have not met the Parker Review target of one director from a minority ethnic group.
    • Amber Top FTSE 250 companies that do not disclose either the ethnic diversity of their board or a credible action plan to achieve the Parker Review targets by 2024.
    • Red Top FTSE 350 companies where women represent:
      • 33% or less of the board of directors; or
      • 28% or less of the Executive Committee and their direct reports.
    • Red Top FTSE Small Cap companies where women represent:
      • 25% or less of the board of directors; or

      • 25% or less of the Executive Committee.

    4. Stakeholder engagement

    According to the IA, investors continue to expect companies and their boards to identify and disclose material stakeholders, decide on the most appropriate mechanism to engage with them and report back to shareholders on their engagement, the views heard and how they have impacted on board decision-making. In the current environment, investors expect these disclosures to include the impact of increases to the cost of living and inflationary pressures in the economy on consumers and suppliers, as well as the impact of the COVID-19 pandemic. Disclosures should set out how the board reflected the stakeholder views in key decisions.

    As set out in the IA's Letter to remuneration committee chairs of FTSE 350 companies in November 2021, consideration of the wider stakeholder experience when determining executive remuneration outcomes by Remuneration Committees continues to be a critical investor expectation. More detail on the Chair's letter and a reminder of the IA's 2022 Principles of Remuneration can be found in Ashurst Governance and Compliance update, Issue 8.

    REGULATORY ENFORCEMENT ACTION

    Former CFO and Finance Director found guilty of misleading investors

    In November 2015, Redcentric Plc, an IT service provider and AIM-quoted company, was found to have issued false and misleading unaudited interim results, and false and misleading audited final year results in June 2016. Both materially overstated Redcentric’s cash position – by £13.1m and £12.2m respectively – and consequently misstated its net debt position by the same amount each time. When the true position was revealed, shareholders suffered immediate losses in the value of their shares. As a consequence of the Financial Conduct Authority's proceedings against the company, it agreed to pay compensation to affected investors. The FCA's Decision Notice can be found here.

    Following a prosecution brought by the FCA against three former employees of Redcentric, the former Chief Financial Officer has been found guilty of four charges concerning the making of false and misleading statements to the market. He has been sentenced to five and a half years in prison, and disqualified from acting as a director for 10 years.

    At an earlier stage in proceedings, a second defendant, the former Finance Director, pleaded guilty to charges of making false statements and false accounting, and making false statements to Redcentric’s auditors, PwC. She was sentenced to a total of three years’ imprisonment, and ordered to pay £120,346.70 following confiscation proceedings.

    A third defendant, the former Chief Executive Officer, was acquitted by the jury on all charges.

    Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said: 'These false statements are directly attributable to the appalling misconduct of [the CFO and FD], which caused substantial damage to confidence in the market for Redcentric shares. While Redcentric has done the right thing in compensating affected shareholders, this case shows the FCA will bring criminal cases against company directors and other officers and hold them personally to account when their conduct damages UK markets.'


    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.