UK Quoted Company Newsletter Q3 2021
07 October 2021
1. Temporary restrictions on winding-up petitions coming to a close
From 1 October 2021, blanket restrictions on winding-up petitions introduced near the start of the pandemic to protect all businesses from insolvency have been replaced with new targeted, tapering measures.
The aim is to help businesses get back to normal without yet having to face the full force of reinstated creditor remedies. See the table below for a summary of the measures.
These insolvency tapering measures will remain in place until 31 March 2022. By this time, it is understood that the government's proposed binding arbitration scheme should be available to deal with any remaining COVID-19-rent arrears, and all remaining temporary measures will be lifted.
| NEW INSOLVENCY TAPERING MEASURES: KEY ASPECTS |
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For more analysis of the changes, see our September 2021 RSSG thought of the month on the new tapered insolvency measures.
2. The new national security regime for transactions
In our Q3 2020 newsletter, we wrote about the then National Security and Investment Bill. The bill gained Royal Assent on 29 April 2021 and became the National Security and Investment Act (the "NS&I Act").
The NS&I Act will strengthen significantly the government's powers to investigate and potentially prohibit transactions on national security grounds. The new regime may have significant impacts on deal timetables and deal certainty, and is already relevant to transactions currently being negotiated. See the next table for the key features of the new regime.
On 2 July 2021, the government announced that the substantive provisions of the NS&I Act will come into force on 4 January 2022. At the same time, the government published new guidance on its scope and application as well as draft regulations and a draft statement on the Secretary of State’s expected use of the NS&I Act "call-in" power.
See our Ashurst competition updates in May and July 2021 for a more detailed description of the NS&I Act and its concepts. Government information on the new regime can be found here.
| NS&I ACT: KEY FEATURES |
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| The NS&I Act establishes a new statutory regime for government scrutiny of, and intervention in, investments and acquisitions for the purpose of protecting national security. Key features include: |
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3. FCA consultation on diversity and inclusion in listed companies
On 28 July 2021, the Financial Conduct Authority (FCA) published a consultation paper, CP21/24, which proposes significant changes to the FCA Listing Rules (LRs), as well as changes to the Disclosure Guidance and Transparency Rules (DTRs), on the issue of board and senior management diversity.
The FCA's aim is to enable companies and investors to assess progress in these areas and to inform shareholder engagement and investment decisions, and so enhance market integrity. Responses are requested by 20 October 2021.
As regards the LRs, the FCA is seeking to increase transparency for investors by way of better and more comparable information in annual financial reports (AFRs). The measures include a new data table and additional narrative disclosures, on the diversity of company boards and executive management. See the next table for the key aspects of the LRs proposals.
| FCA PROPOSALS FOR NEW LISTING RULES ON DIVERSITY AND INCLUSION: KEY ASPECTS |
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| Who? |
UK and overseas companies with equity shares, or certificates representing equity shares, admitted to the premium or standard segment of the FCA’s Official List. Open-ended investment companies, shell companies, companies with listed debt securities and securities derivatives and AIM companies would not be caught. |
| What? |
Companies in scope should disclose in their AFR whether they meet specific board diversity targets on a ‘comply or explain’ basis (indicating any targets they have not met and explaining the reasons for not having met them). The proposed targets are:
Alongside these disclosure, companies should publish, in a standardised table format, data on the composition of their board and the most senior level of executive management by gender and ethnicity, as at a specified date during their accounting year. |
| When? | Subject to feedback, the FCA plans to make relevant rules by late 2021 to be effective for accounting periods starting on or after 1 January 2022. This means that reporting will start to be seen in AFRs published in 2023. |
| Which Rules? |
New LRs 9.8.6R (9) and 14.3.27R(1) as regards new narrative disclosures. New LRs 9.8.6R(10) and 14.3.27R(2) as regards the new data tables. |
As regards its DTRs proposals, the FCA proposes to amend existing DTR 7.2.8AR to encourage considerations of broader diversity aspects within diversity policies and related disclosures by companies in their AFRs. See the table below for the key aspects of the DTRs proposals.
| FCA PROPOSALS FOR DTRS ON DIVERSITY: KEY ASPECTS |
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| Who? | The existing scope of DTR 7.2.8AR would be maintained, broadly certain UK and overseas listed companies admitted to UK regulated markets and, as currently under this rule, small and medium-sized companies would be excluded. |
| What? |
Companies in scope should augment existing DTR disclosures as regards board diversity policies to:
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| When? | As with the LRs proposals mentioned above, the new rules would be effective for accounting periods starting on or after 1 January 2022. |
| Which Rules? | Additions to existing DTR 7.2.8AR. |
4. New FCA Listing Rules on SPACs come into force
On 27 July 2021, the FCA published final amendments to its Listing Rules (and technical note) in relation to special purpose acquisition companies ("SPACs"), further to its consultation paper published earlier this year. The new rules and guidance came into force on 10 August 2021.
The new rules respond to Lord Hill's UK Listings Regime Report which set out a broad range of recommendations to modernise both the UK listing and prospectus regimes whilst maintaining the UK's high standards of regulation, including a recommendation on the relaxation of the Listing Rules relating to SPACs. (See our April 2021 client briefing on Lord Hill's UK Listings Regime Report and also our Q2 2021 newsletter).
The new rules are designed to remove a barrier to listing by providing an alternative approach for SPACs that must otherwise provide detailed information about a proposed target to the market in order to avoid being suspended. In essence, by removing the presumption of suspension for SPACs that meet certain criteria (which are intended to strengthen investor protections), the new rules seek to put SPACs on a level playing field with commercial companies. The additional investor safeguards that the FCA requires SPACs to provide in order to benefit from this alternative approach (i.e. no presumption of suspension) include:
- a "redemption" option allowing investors to exit a SPAC prior to any acquisition being completed;
- ensuring money raised from public shareholders is ring-fenced;
- requiring shareholder approval for any proposed acquisition; and
- a time limit on a SPAC's operating period if no acquisition is completed.
SPACs unable to meet the conditions, or those choosing not to, will continue to be subject to a presumption of suspension.
5. ESMA disclosure and investor protection guidance on SPACs
On 15 July 2021, in response to increased EU SPAC activity in the first half of the year, ESMA issued a public statement on prospectus disclosure and investor protection issues raised by SPACs. Given the complexity and diversity of SPAC transactions, the statement sets out ESMA's expectations on how companies should satisfy the specific disclosure requirements of the EU Prospectus Regulation to enhance the comprehensibility and comparability of SPAC prospectuses.
As set out in its Guidance – Brexit: our approach to EU non-legislative materials, the FCA may consider EU non-legislative materials, including public statements such as the above, following the ending of the Brexit transition period (31 December 2020) if considered relevant.
6. ESMA updated Q&A on MAR
On 6 August 2021, ESMA published an updated version of its Q&As on the EU Market Abuse Regulation ("EU MAR"). The updated document now includes Q&As on the following:
- the interaction between article 7 of EU MAR (inside information) and article 10(2a) of the EU CRA Regulation (disclosure and presentation of credit ratings): credit ratings, rating outlooks and information relating thereto are presumed to be inside information until their disclosure to the public;
- disclosure to the public of credit ratings and article 7 of EU MAR: credit ratings, rating outlooks and information relating to them are no longer to be considered inside information following their disclosure on the public website of the credit rating agency; and
- the distribution of subscription ratings and disclosure of inside information under article 7 of EU MAR: credit ratings are no longer to be considered inside information once disclosed to a distribution list of subscribers.
As set out in the FCA's Guidance – Brexit: our approach to EU non-legislative materials, market participants should continue to have regard to the ESMA Q&As post 31 December 2020 as they remain relevant to the interpretation and application of UK MAR.
7. Defined benefit schemes - new developments
Groups with defined benefit pension schemes should take note of the changes being made to the regulatory landscape by the Pension Schemes Act 2021 (the Act).
New criminal liability in relation to defined benefit pension schemes in force. On 1 October 2021, a number of wide-ranging measures with potential criminal liability which strengthen the powers of the Pensions Regulator (TPR) in relation to defined benefit pension schemes (DB Schemes) came into force. There are new offences related to 'avoidance of employer debt' or 'conduct risking accrued scheme benefits'.
The existing moral hazard regime allows TPR to take action where corporate activity has a materially detrimental effect on a DB Scheme, but this action is limited to issuing financial penalties – in the form of contribution notices and financial support directions - against a limited number of entities or individuals. The Act introduces criminalisation of such corporate actions, together with the potential application of the offences to "any person", a real step-change in the regulatory landscape. See our February 2021 pensions update - Defined benefit pension schemes: new criminal offences for corporates, lenders, counterparties and advisers – for more.
On 29 September 2021, key TPR guidance relating to the new offences has also been finalised and published by TPR. The purpose of this guidance is to explain TPR's approach to the investigation and prosecution of the new criminal offences. It includes some examples of the types of behaviour that may fall within, and outside, the scope of these new offences. It also seeks to shine a light on TPR's approach to "reasonable excuse".
To be found liable under the new offences, it must be established that the relevant party had no "reasonable excuse" for the particular course of conduct. If TPR decides to prosecute, whether a person has a reasonable excuse is ultimately a matter for the criminal courts, but TPR would need to form its own view in the first instance. See the next table for the three key factors that will be significant for TPR's analysis.
| TPR'S ASSESSMENT OF "REASONABLE EXCUSE": KEY FACTORS |
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In addition to these three key factors, TPR will assess all other relevant factors when reaching a view on whether a person has a reasonable excuse. These might include the extent of communication and consultation with the trustees of the scheme before the act took place. See the TPR guidance here for more.
Fines for misleading trustees in force. Also from 1 October 2021, TPR has the power to fine any person up to £1m for knowingly or recklessly providing the trustees of a DB Scheme with information which is false or misleading in a material particular. While this will not be a criminal offence, we suggest that extra care, and where appropriate, legal advice, should be taken when engaging with trustees of DB Schemes.
Consultation on notifiable events. The Government has also launched a consultation on making changes to the pensions "notifiable events" regime, under which companies with DB Schemes are required to notify TPR of certain events as soon as reasonably practicable after the event. The Government is proposing to shake up the regime, by requiring companies to notify TPR of the proposed sale of a company (or its assets) which participates in a DB scheme, and the granting of security in priority to the DB Scheme - before the event takes place.
Companies will also be required to provide an "accompanying statement" to TPR which must include a description of the event, any adverse effects of the event on the DB Scheme, the steps taken to mitigate those adverse effects, and details of engagement with the trustees in relation to the event. This statement will also need to be provided to the trustees.
The consultation is due to run until 27 October 2021, and the changes are expected to be finalised and come into force in 2022. If they come into force in their current form, companies with DB Schemes will need to consider the position of the scheme, and engage with the trustees and TPR, at an earlier stage of any transaction than currently.
8. FRC feedback on the future of corporate reporting
In October 2020, the Financial Reporting Council (FRC) published a discussion paper seeking to stimulate a debate about what the future of corporate reporting should look like. In the paper, the FRC sets out a vision for a new principles-based framework for corporate reporting as a whole involving, among other things, a network of interconnected, objective-driven reports.
On 30 July 2021, the FRC issued a feedback statement on its discussion paper which provides an analysis of the feedback received and explains how the FRC will move forward with developing its proposed initiatives.
In terms of feedback, the statement notes strong support for the role of technology and the importance of non-financial reporting in any future corporate reporting model. There was broad support for a reporting model that accommodates the information needs of investors and wider stakeholders, the concept of a reporting "network", the development of standards for non-financial reporting and the importance of businesses providing information on how they view their obligations as regards the public interest (though support was more muted for a "Public Interest Report").
Respondents expressed mixed views on whether an objective-driven model that was neutral as regards the audience for certain aspects of reporting should replace the current model whereby the annual report prioritises the information needs of primary users. Concern was expressed as to how to determine materiality in such a model. More detail was requested on the FRC proposals on proportionality. Respondents also called for the FRC to consider the practical challenges of implementing the proposals including the level of audit and assurance that would be needed over the various network reports.
On next steps, the FRC aims to progress the initiatives through different channels and has set short, medium and long-term goals. It will collaborate with regulators, government departments and standard setters including ensuring that any steps the UK takes are consistent with international developments such as the proposed International Sustainability Standards Board (see item 11 below for more).
| FRC NEXT STEPS FOR CORPORATE REPORTING: KEY ASPECTS |
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Short to medium-term goals
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Medium to long-term goals
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9. FRC thematic reviews of (i) streamlined energy and carbon reporting, and (ii) viability and going concern disclosures
Streamlined energy and carbon reporting. On 8 September 2021, the FRC published a thematic review of reporting on emissions, energy consumption and related matters under the Streamlined Energy and Carbon Reporting (SECR) rules which came into effect from 1 April 2019.
The review considered how a sample of companies and limited liability partnerships had complied with the SECR requirements, identified examples of emerging good practice and outlined the FRC's expectations for future reporting.
While the sample of reports largely complied with the minimum statutory disclosure requirements, the FRC believes that more needs to be done to make these disclosures understandable and relevant for users. In particular, entities need to explain more clearly:
- how information is calculated;
- which operations and emissions are included in their reported numbers; and
- the level of third-party assurance obtained over the information.
Relevant entities also need to consider how to integrate these disclosures with other narrative reporting on climate change, especially any emission-reduction targets.
The review ends with a list of FRC key disclosure expectations for 2021 in this reporting area.
Viability and going concern. On 22 September 2021, the FRC issued a report on its findings from its thematic study of viability and going concern disclosures. The study reviewed a selection of annual reports and accounts for Main Market and AIM companies with year ends between December 2020 and March 2021.
The review aims to provide useful guidance for preparers of annual accounts by identifying areas where viability and going concern disclosures could be improved, and by providing examples of better disclosures. Key aspects of the review are set out in the next table.
| FRC STUDY ON VIABILITY AND GOING CONCERN DISCLOSURES: KEY ASPECTS |
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10. FRC Lab reports on (i) stakeholders, decisions and Section 172, (ii) risks, uncertainties, opportunities and scenarios and (iii) electronic reporting
Reporting on stakeholders, decisions and Section 172. On 19 July 2021, the FRC's Financial Reporting Lab (FR Lab) published a report on "Reporting on stakeholders, decisions and Section 172".
The report highlights that information on stakeholders and on decisions can help investors understand how a company is progressing in fulfilling its stated corporate purpose and achieving long-term success. It outlines what investors want to see reported in these areas and provides examples from current reporting practice that reflect possible helpful ways of addressing investor needs. Specifically, the report has three sections as summarised in the next table.
| REPORTING ON STAKEHOLDERS, DECISIONS AND SECTION 172: KEY ASPECTS |
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A link to the report, related documents (including a separate document containing the questions for companies to consider in determining what information to report on stakeholders and decisions) and a podcast can be found here.
Reporting of risks, uncertainties, opportunities and scenarios. On 2 September 2021, the FR Lab published a report focusing on the reporting of risks, uncertainties, opportunities and scenarios.
The FR Lab noted that there remains a gap between the information users want and the disclosures that organisations provide which it believes will widen with climate-related uncertainty and an increased demand for enhanced environmental, social and governance (ESG) reporting. Specifically, while companies generally communicate opportunities well, they fail to meet investors' needs as regards explaining the integration of opportunities and risks and giving a comprehensive understanding of risks.
The report focuses on what investors want to see and understand as regards: governance and processes; the nature of risks, uncertainties and opportunities; how management are responding; and scenarios and stress testing. In each section, the report provides company-specific examples of disclosures that the FR Lab believes have better met investor needs.
A link to the report, related documents (including a one page summary) and a podcast can be found here.
UK structured electronic reporting survey and resources for companies. On 9 September 2021, the FR Lab published the results of its survey on electronic reporting to see how companies were responding to the requirements of DTR 4.1.14. This rule requires listed (not AIM) companies to issue their AFRs in structured electronic format, also known as the European Single Electronic Format (ESEF).
The report highlights some of the survey results, showing that UK companies have begun to put the right steps in place to meet the ESEF requirements, but still have some important outstanding actions.
The FR Lab has also published a List of Resources to help companies understand and implement the ESEF requirements. It is also reviewing an early set of UK and EU ESEF filings, with the aim of publishing a best practice report in October 2021.
11. ESG –miscellaneous matters
Proposed International Sustainability Standards Board—ISSB. We have written in previous newsletters about the IFRS Foundation Trustees proposals for the new ISSB to be focused on sustainability-related disclosure standards. Work continues on a prototype climate-related financial disclosure standard to be a basis for the ISSB to consider in preparing its first exposure draft. The Trustees will meet again in October to make a final decision on establishing the ISSB.
FRC statement of intent on environmental, social and governance challenges. In July 2021, the FRC issued a statement of intent on ESG challenges. The FRC believes that collaborative solutions are required if ESG information is to be useful to stakeholders and provide them with consistent and comparable information. The FRC has grouped the ESG challenges into six stages as set out below.
| FRC STATEMENT OF INTENT ON ESG CHALLENGES: KEY ASPECTS |
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To achieve these goals, among other things, the FRC has stated that it intends to continue to consider the role of the UK Corporate Governance Code in ensuring boards are taking appropriate account of ESG issues in their consideration of the long-term success of the company. It will also develop guidance for UK GAAP reporters on the impact of climate-related issues on companies' financial statements and consider whether changes need to be made to accounting standards.
FR Lab call for participants regarding ESG data collection. On 28 September 2021, the FR Lab announced that it is inviting companies, service and systems providers, investors and other interested parties to participate in a new project looking at how companies produce ESG data. This constitutes the first phase of a Lab project considering the production, distribution and consumption of ESG data. The first phase will cover what ESG data companies collect; what methodologies companies use to measure ESG data; how they achieve comfort on the accuracy of the data; and how they transform the data into meaningful external disclosure. Applicants should contact the FR Lab by 15 November 2021 if they wish to participate.
12. Companies House developments
Companies House is gradually resuming its same day services. On 19 July 2021, Companies House resumed same-day filing for Form SH19 - statement of capital when reducing capital in a company supported by a solvency statement. Applications must be made before 11.00 am for the same day service. Applications after that will be processed on the next working day. (Note that where Form SH19 is supported by a court order (as opposed to a solvency statement), the form and all relevant supporting documents must be sent to Companies House by post).
On 23 August 2021, Companies House updated its "Coronavirus: guidance for Companies House customers" to note that the cut-off time for using its same day service for the electronic filing of a change of company name or to incorporate a company (software filing only) has been extended. Applications must be made by 3.00 pm on a particular day (previously 11.00 am). If applications are made after 3.00 pm, they will not be processed until the next working day. Other same day services (i.e SH19 as mentioned above) remain with an 11 am deadline in order to be processed on the same day.
Ashurst publications in the third quarter of 2021
Ashurst has published a number of client updates and podcasts in the third quarter of 2021, a selection of which are set out below.
Corporate, Finance and Restructuring
The new tapered insolvency measures: back to business as usual?
UK National Security and Investment Act to come into force in January 2022
Business as usual is over. Get ready for transformational change
Ashurst Governance & Compliance update - Issue 5
Ashurst Governance & Compliance update - Issue 4
Ashurst Governance & Compliance update - Issue 3
Dispute Resolution
Litigation Trending - Cyber-attacks and data loss
Supreme Court clarifies the test for determining the scope of duty in professional negligence cases
Sanctions in the era of Brexit & Biden: what the past six months tell us about the future
UK Bribery Act turns Ten: Looking back at the past decade, and at the future of ABC enforcement
Employment, Incentives and Pensions
What's next for flexible working and carer's leave
