uk quoted company newsletter 14 Jan 2021 UK Quoted Company Newsletter Q4 2020

Brexit: Key Corporate Changes

Following the European Union (Future Relationship) Act 2020 which, on 31 December 2020, approved the EU/UK Brexit Deal, the Brexit Implementation/Transition Period (Transition Period) has now ended and the UK has fully left the European Union.

Although there are a number of sections of the Companies Act 2006 and certain related regulations that are amended by UK Brexit regulations, there are few substantive changes. This is due to the government deciding to largely preserve the UK company law framework and retain, with only necessary amendments, as much EU law as is possible frozen as at the end of the Transition Period (known as "Retained EU Law").

The key changes to the Companies Act 2006 generally impact businesses that have a cross-border relationship with the EU, either through conducting business operations in the EU, by being an EU company or individual operating in the UK, or by being a UK subsidiary or branch with an EEA parent. In most cases the changes will be minimal. The table below summarises some key corporate changes affecting companies from 1 January 2021 and the next item (FCA Primary Market Bulletin 32) includes further specific information relevant for quoted companies including guidance about the Market Abuse Regulation.

For more detail, please refer to EU Exit and Company law, published by the Department for Business, Energy and Industrial Support (BEIS) in October 2019 and also letters, dated November 2020, from BEIS and the Financial Reporting Council (FRC) on accounting and corporate reporting and on audit for the end of the Transition Period. Although these were published before the Brexit Deal was agreed, and the October 2019 document still mentions a No Deal Scenario, they remain relevant and helpful.

FCA Primary Market Bulletin 32

In December 2020, the Financial Conduct Authority (FCA) published a special edition of its Primary Market Bulletin in which the FCA reminds issuers, investors and other market participants of changes that have now taken effect following the end of the Transition Period, including those in relation to the Short Selling Regulation, the Market Abuse Regulation and the Prospectus Regulation.

Further to the end of the Transition Period, certain EU legislation, including both the Market Abuse Regulation and the Prospectus Regulation, has been onshored: this legislation now forms part of English law by virtue of the European Union (Withdrawal) Act 2018, having been amended by statutory instrument such that it is effective in a UK-only context.

The FCA also refers to previous Primary Market Bulletins which address Brexit implications: PMB 21, PMB 22 and PMB 24.

Market Abuse Regulation. As of 1 January 2021, there are two market abuse regimes: UK MAR, the Retained EU Law version of the Regulation and the EU regime under the EU Market Abuse Regulation (EU MAR). UK MAR is similar to EU MAR and, as the FCA notes, UK MAR retains the same scope of financial instruments admitted to trading or traded on UK and EU trading venues. However, the FCA highlights some key changes.

(i) Article 17 - Public disclosure of inside information

Whilst the FCA confirms that UK MAR retains broadly the same disclosure and notification requirements for inside information and delaying disclosure, it notes the following change: for reporting purposes, any issuer that has requested or approved admission to trading or approved trading of its financial instruments on a UK trading venue will be required to send the notification on delayed disclosure of inside information to the FCA pursuant to Article 17(4) of UK MAR, irrespective of whether the issuer is also obliged under EU MAR to notify an EU competent authority, where the issuer is registered in an EU member state and/or has instruments admitted to trading on an EU trading venue, for instance. Both the content and format of the reports remain the same.

(ii) Article 19 - Managers' transactions

Similarly, whilst the FCA confirms that UK MAR retains broadly the same requirements for persons discharging managerial responsibilities (PDMRs) and persons closely associated with PDMRs (PCAs), it notes the following change: PDMRs of any issuer that has requested or approved admission to trading or approved trading of its financial instruments on a UK trading venue (and their PCAs) will need to send their transaction reports to the FCA pursuant to Article 19 of UK MAR, irrespective of whether they are also required to report to an EU competent authority under EU MAR, where the issuer is registered in an EU member state, for instance. Again, both the content and format of the reports remain the same.

Finally, in relation to Article 5 (Exemption for buy-back programmes and stabilisation), the FCA confirms that UK MAR retains the same exemptions for buy-backs and stabilisations on UK and EU trading venues and clarifies the reporting requirements for these exemptions. 

Passporting prospectuses. The FCA reiterates that prospectuses that have been passported into the UK before the end of the Transition Period will remain valid in the UK until their expiry (that is, one year from the date on which the prospectus was originally approved). The FCA highlights that as of 1 January 2021, prospectuses will not be able to be passported into an EEA country. Further information in respect of the passporting of prospectuses approved by the FCA prior to the end of the Transition Period can be found in the ESMA Q&A on the Prospectus Regulation (see below). It is possible that an agreement might be reached in the future to replicate, at least in part, the EU prospectus passporting regime.

ESMA Q&A on the Prospectus Regulation. The FCA states that its previously published guidance on its approach to EU non-legislative materials – that it will continue to have regard to such materials where and if they are relevant, taking account of Brexit and on-going domestic legislation and that firms, market participants and other stakeholders should also continue to do so – applies to the ESMA Q&A on the Prospectus Regulation. In relation to any ESMA Q&A published after the Transition Period, the FCA confirms that it will consider whether it is appropriate to set out its expectations on any issues contained therein and will consult where appropriate. 

ESMA Guidelines on disclosure requirements under the Prospectus Regulation. In July 2020, ESMA published its Final Report on guidelines for disclosure requirements under the Prospectus Regulation, containing the final version of the guidelines. As previously noted by the FCA in its Primary Market Bulletin 31 (PMB 31) (see below for additional items), given that the new ESMA guidelines on disclosure requirements under the Prospectus Regulation did not become effective prior to the end of the Transition Period, issuers and their advisors should continue to have regard to the CESR recommendations after the end of the Transition Period for prospectuses approved in the UK. The FCA has previously stated that it will consult on its approach to the guidelines on prospectus disclosure based largely on the new ESMA guidelines in due course.

HM Treasury UK Listings Review – Call for Evidence

In November 2020, HM Treasury launched a call for evidence in relation to a review of the UK listings regime (Review). The Review aims to propose reforms to attract innovative issuers as well as assist issuers in accessing the funds they need to expand, as the UK begins a new chapter following the end of the Transition Period. The Review seeks input on the following specific topics: the free float requirement, dual class share structures, track record requirements, prospectuses and dual and secondary listings; however, broader recommendations and/or comments are also encouraged. The deadline for responses was 5 January 2020.

FCA Primary Market Bulletin 31

COVID-19 related temporary policy measures. In the FCA's Primary Market Bulletin 31 (PMB 31) published in November 2020, the FCA confirms that the COVID-19 related temporary policy measures introduced in April 2020 (see our Q2 2020 newsletter) continue to apply. In respect of the measures relating to the delayed publication of financial statements, the FCA states that these will, at a minimum, continue to be available to listed companies with financial periods ending before April 2021. Such companies have an additional two months to publish their annual financial statements (a total of six months from the financial year-end) and an additional month to publish their half-yearly financial statements (a total of four months from the end of the period to which the report relates).

The FCA also confirms that the other temporary measures, primarily aimed at assisting companies in raising funds (including, for example, general meeting requirements for class 1 and related party transactions), continue to apply. The FCA will provide companies with sufficient notice when it decides to bring these measures to an end. However, please see below in relation to the Pre-Emption Group's (PEG's) recommendation on pre-emptive issuances, which no longer applies. 

Delayed disclosure of inside information. In addition to its review of corporate governance disclosures for listed issuers highlighted below, the FCA also published a review of delayed disclosure of inside information in PMB 31. Some key findings are set out below:

Pre-Emption Group Additional Flexibility

In November 2020, the PEG confirmed that its recommendation for investors to apply additional flexibility in considering issuances of shares on a non-pre-emptive basis would not be extended beyond 30 November 2020. The additional flexibility, which was introduced on a temporary basis in April 2020 in response to the economic situation created as a result of COVID-19, was subsequently extended in September 2020 following its positive reception by the market. 

As of 1 December 2020, the PEG expects its Statement of Principles to apply, which provide that companies are to seek general approvals for issuances of a maximum of 10 per cent of their issued share capital (five per cent for general corporate purposes in any one year, with an additional five per cent for specified acquisitions or investments). The PEG also highlights that non-pre-emptive issuances should be undertaken only when effective consultation has been conducted and encourages companies to consult its April and September statements to determine what constitutes proper consultation.

New Listing Rule on Climate Related Disclosures

As we mentioned in our Q3 2020 newsletter and previous newsletters, in March 2020 the FCA issued Consultation Paper CP20/03. In it, the FCA invited comments on proposals to amend the Listing Rules to encourage certain listed companies to include climate-related disclosures in their annual financial reports (AFR) consistent with the Taskforce for Climate-Related Financial Disclosures (TCFD).

In December 2020, the FCA published Policy Statement PS20/17 with the final form of its new listing rule. New LR 9.8.6(8) applies to premium listed, commercial companies (i.e. companies other than open-ended or closed-ended investment companies) for financial periods beginning on or after 1 January 2021. 

Although very similar to the consultation version, both the final rule and the guidance that supports it have been beefed up in some key respects showing the clear intent of the FCA to impose market discipline on companies to generate better quality disclosures in this area. See the table below for the key aspects of the new listing rule.

The FCA also published the final form of a Technical Note on "Disclosures in relation to ESG matters, including climate change". This is relevant to a wider group of listed companies than the new rule. It clarifies existing obligations in the FCA Handbook, that in the FCA's view may already require listed issuers to disclose information on climate-related and other environmental, social and governance matters in certain circumstances.

The impact of the new listing rule will depend significantly on the nature of a company's operations and the extent of its existing engagement with climate-related issues. For some, addressing the new disclosure requirements may involve significant additional effort in 2021 to be able to report in 2022. We will publish a client briefing on this shortly. 

Roadmap towards Mandatory Climate-Related Disclosures

Showing the pace at which government and regulators are now tackling climate change issues, even before the above final new rule was published further developments were suggested that are likely to strengthen and extend the scope of the new rule amongst other things.

In November 2020, the Joint Government Regulator TCFD Taskforce, of which the FCA is a member, issued an interim report and accompanying roadmap document towards mandatory climate-related disclosures. If the interim report and roadmap proposals are followed, mandatory (not comply or explain) climate-change reporting will be rolled out as set out in the following table.

To achieve the above, BEIS expects to issue a public consultation on new Companies Act 2006 obligations in early 2021. The FCA has also said, in PS20/17, that in the first half of 2021 it will issue a further consultation on, amongst other things, extending the scope of the new LR and strengthening its compliance basis. 

Corporate Insolvency and Governance Act: Extensions

In November 2020, regulations came into force to extend the relevant period of the Corporate Insolvency and Governance Act 2020 (CIGA) temporary flexibilities as regards certain meetings of companies and other qualifying bodies to 30 March 2021 (previously 30 December 2020). This means that for companies with meetings including AGMs before this date, they can still benefit from CIGA's flexibilities should they choose to. For more on the CIGA flexibilities, see our Q3 2020 newsletter. We will be covering this and other related developments in more detail in our 2021 AGM and Reporting Season client briefing which we will publish shortly. 

The regulations also provide for a further period of suspension of liability for wrongful trading. For more on the suspension, which lasts until 30 April 2021, see our November 2020 Restructuring Update on Liability for wrongful trading is suspended again. 

National Security and Investment Bill

New national security notification regime

The government introduced the National Security and Investment Bill ("Bill") into Parliament in November 2020. When implemented, this will significantly strengthen the government's powers to investigate and potentially prohibit transactions on national security grounds. The Bill contains a mandatory notification regime, backed up by criminal sanctions, for transactions in sectors thought most likely to raise national security concerns, and a voluntary notification process (underpinned by a "call-in" power) for other transactions that may affect UK national security interests. 

In its impact assessment of the proposed measures, the government states that it envisages around 1,000-1,830 mandatory notifications being made each year, with 70-95 detailed national security assessments undertaken under both the compulsory and voluntary regimes. The Bill heralds a fundamental change in approach: there have historically been very few transactions which have been formally assessed under the government's existing, more limited, national security powers. The proposals follow an initial consultation launched in October 2017 and a White Paper issued in June 2018.

Key implications. The government has presented the proposals as a measured response to the increased national security risks the UK faces, noting that similar measures have been adopted in many other countries. It is true that many countries, such as the USA, Germany and France, have recently strengthened, or are in the process of strengthening, their national security/foreign investment regimes. There is also a new FDI regime at EU level. However, the new UK regime would involve a sea-change in the UK's approach to national security assessments and will result in:

• a very significant increase both in the number of transactions being assessed for national security concerns and potentially those being the subject of remedies, with serious consequences (criminal and civil penalties) for completing a qualifying acquisition without clearance;
• potentially significant impacts on deal timetables; and
• a potential reduction in deal certainty and an increase in overall execution risk.

Key features of the new regime. These are set out in the table below.

Financial Support for Business: Update

After the Prime Minister’s announcement on 4 January 2021 concerning the closure of many businesses until at least the February 2021 half-term in order to help control the spread of COVID-19, the Chancellor announced on the following day £4.6 billion in new lockdown grants to support businesses and protect jobs. There are one-off top up grants for retail, hospitality and leisure businesses worth up to £9,000 per property to help businesses through to the Spring. There is also a £594 million discretionary fund made available to support other impacted businesses. Further government information is available here. 

First FCA review of Corporate Governance Disclosures by Listed Issuers

In a development that listed companies should take note of, in November 2020, the FCA, for the first time, published a review of corporate governance disclosures by listed companies. The report highlights several areas where the FCA feels that corporate governance disclosures under its rules could be improved. These include application of principles, boilerplate disclosures, board diversity reporting and reporting by standard listed companies. The FCA encourages companies to consider their compliance and make improvements where needed.

Looking forward, the FCA intends to use the results of its review to inform its decisions about future surveillance and monitoring. From this, it is clear that the FCA intends to become more involved in monitoring companies' corporate governance disclosures.

FRC publications on corporate reporting, AGMs and COVID-19

End of year letter and annual review of corporate reporting. Also in November 2020, the Financial Reporting Council (FRC) published its annual End of Year Letter to CEOs, CFOs and Audit Committee chairs. It highlights topics that the FRC expects to scrutinise over the coming year and sets out FRC expectations. This letter is customarily preceded by the FRC's annual review of corporate reporting, published this year in October 2020 along with a short highlights document. Both can be taken to show areas that the FRC is likely to be monitoring closely and so can be seen as a warning to companies of areas to think carefully about. See the table below for some key points from the letter.

FRC review of AGMs in 2020 and Best Practice Guidance. In October 2020, the FRC issued a review of 2020 AGM practice in the face of COVID-19. It aims to open up further debate between stakeholders to determine how future AGMs can be conducted to ensure that the maximum number of shareholders can engage if they choose to do so, and to encourage companies to consider a mixture of approaches in line with their size and shareholder base.

The FRC also took the opportunity to update and re-publish its best practice for AGMs. In it, it urges companies to prepare now to consider what changes they might want to make for their 2021 AGM. For example, if companies wish to use more technology, they should talk to experts and providers and assess the options and costs. Companies should consider whether their articles of association need updating and consult with shareholders. It also mentions good practices as regards matters to put in place before the AGM, questions at the AGM, webcasts and other matters. 

For more on this, see our October 2020 corporate newsflash on FRC review: AGMS an opportunity for change.

Further updated FRC COVID-19 guidance for companies. In December 2020, the FRC published a further updated and consolidated version of its guidance for companies on corporate governance and reporting during the COVID-19 pandemic. It includes new sections on, for example, risk management and internal controls, highlighting the risk of fraud given the changes to working arrangements and normal controls. On the strategic report, it notes that stakeholders are interested in how business models and strategies have evolved in response to COVID-19. It also covers a variety of other financial reporting matters including assumptions as regards the viability statement.

This consolidated guidance is available here and supersedes all previous COVID-19 guidance for companies. The FRC has also published consolidated COVID-19 guidance for auditors.

FRC guidance on section 172 statements. In October 2020, the FRC published guidance to help companies prepare their section 172 statements explaining how the directors, when performing their duty to promote the success of the company, have had regard to the wider stakeholder interests and issues set out in section 172(a) to (f) of the Companies Act 2006. 

The FRC guidance suggests that a section 172 statement should: (i) be specific and genuine; (ii) reflect what is material to the company and what happened during the year; (iii) explain why particular stakeholders are identified as key and include material KPIs on key stakeholders; (iv) explain why particular engagement methods with stakeholders were effective; (v) link to the company's strategy; (vi) describe any difficulties encountered; (vii) reflect the board's oversight; (viii) disclose the impact of decisions on relevant stakeholders and the actions consequently taken or planned as a result; and (ix) be consistent with the rest of the annual report.

In terms of presentation, a section 172 statement should be sensibly located in the strategic report and be clearly identified in the contents page of the annual report. The statement should provide a coherent message by itself, even where cross-referencing is used.

FRC paper on the future of corporate reporting. Also in October 2020, the FRC published a discussion paper, entitled – "A matter of principles: The Future of Corporate Reporting". 

The paper sets out a vision for a new principles-based framework for corporate reporting as a whole. The proposals are designed to be tested with stakeholders and stimulate the conversation about what the future of corporate reporting should look like. Comments on the paper are invited by 5 February 2021.

2021 AGM and Narrative Reporting Season Briefing

In our 2021 AGM and narrative reporting season client briefing, to be published shortly, we will cover several of the above developments in somewhat more detail and certain others including: revised shareholder voting guidelines; various other FRC and FRC LAB publications; Asset Management Taskforce report on stewardship; and BEIS and FRC publications on accounting and corporate reporting given the end of the Transition Period.

Corporate Transparency Reform Consultations

As reported in the previous edition of our Q3 2020 newsletter the QCN, the government signalled its intention of introducing significant reforms aimed at increasing the transparency of UK corporate entities and enhancing the role of Companies House (BEIS: Corporate Transparency and Register Reform) and noted that several of the proposed reforms would require further consultation.

In December 2020 BEIS published three separate consultations that aim to improve corporate transparency and facilitate register reform in the UK. 

The closing date for the consultations is 3 February 2021. The government has noted that it will ensure that the timetable for introducing the new requirements is sensitive to the additional pressures faced by companies under the COVID-19 pandemic.

A link to each consultation together with a brief summary of the key proposals is set out in the following table.

Ashurst publications in the fourth quarter of 2020

Ashurst has published a number of client updates in the fourth quarter of 2020, a selection of which are set out below.

Corporate, Finance and Restructuring

Brexit: The Trade and Cooperation Agreement

Preparing for the end of the transition period – a quick guide on Brexit for the financial services industry

Brexit: Local jurisdictional measures

Pre-pack reforms: independent opinion required for administration sales to connected persons

Temporary restrictions on statutory demands and winding-up petitions extended to 31 March 2021

Competition

The EU/UK trade and cooperation agreement - Key Competition, State Aid and Public Procurement Implications for business

UK Government introduces new National Security and Investment regime

New UK regulatory regime for tech giants proposed

Digital Economy

Navigating the AI transformation journey

Dispute Resolution

Litigation Trending: Top 10 commercial disputes trends for 2021

Corporate Crime: What now for 2021?

Energy Disputes: 10 thoughts for 2021

Employment, Incentives and Pensions

Top employment issues for 2021

What's there to look forward to in the workplace in 2021?

Real Estate

Real Estate talking points for 2021

Planning ahead - what does 2021 have in store?