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Corporate Matters – March 2018

Corporate Matters – March 2018

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Changes to the Takeover Code

Rule changes At the end of 2017, the Code Committee of the Takeover Panel published […]

Rule changes

At the end of 2017, the Code Committee of the Takeover Panel published response statement 2017/2 setting out amendments to the Takeover Code in relation to statements of intention. These changes have taken effect and apply to all companies and transactions that are subject to the Takeover Code.

The key changes are to Rules 2.7, 24.1 and 24.2. They include:

Rule 2.7 – an offeror will now have to make statements of intention with regard to the business, employees and pension schemes of the target company (and, where appropriate, of the offeror itself) at the time of the offeror’s announcement of its firm intention to make an offer (rather than wait for the actual offer). The offeror will also still be required to state its intentions in the offer document.
Rule 24.1 – an offeror must not publish an offer document for 14 days from the announcement of its firm intention to make an offer without the consent of the target’s board.
Rule 24.2 – an offeror, when making statements of intention with regard to the business, employees and pension schemes of the target company (and, where appropriate, of the offeror itself), must explain the long term justification of the offer and make specific statements of intention with regard to any research and development function of the target company, any material change in the balance of the skills and functions of the target’s employees and management, and the likely repercussions of its strategic plans on the location of the target’s headquarters and headquarters functions.

New Practice Statement 32

The Takeover Panel has recently published Practice Statement 32 which relates to Rule 21.1 – Application following the unequivocal rejection of an approach.

Rule 21.1(a) provides that, during the course of an offer, or even before the date of the offer if the board of the target company has reason to believe that a bona fide offer might be imminent, the board must not, without the approval of shareholders in general meeting:

take any action which may result in any offer or bona fide possible offer being frustrated or in shareholders being denied the opportunity to decide on its merits; or
take certain specific actions described in the Rule.

The application of Rule 21.1(a) can sometimes be unclear where the board of a target company has received, and subsequently unequivocally rejected, an approach and does not know whether the potential offeror continues to be interested in making an offer. In this situation the question of whether, and if so for how long, the board should then be considered to have reason to believe that a bona fide offer might be imminent is left unanswered.

Practice Statement 32 clarifies that where the target’s board has received, and subsequently unequivocally rejected, an approach and does not know whether the potential offeror continues to be interested in making an offer, the Takeover Panel will normally consider that Rule 21.1(a) will continue to apply until 5pm on the second business day following the date on which the approach was unequivocally rejected unless before that time the rejected potential offeror has given the target’s board reason to believe that it continues to be interested in making an offer.

The Takeover Panel should be consulted if the board of a target company intends to take any action described in Rule 21.1(a) following the unequivocal rejection of an approach.

LSE issues revised AIM Rules

Introduction AIM Notice 50 was issued by the London Stock Exchange (LSE) on 8 March […]

Introduction

AIM Notice 50 was issued by the London Stock Exchange (LSE) on 8 March 2018 confirming changes to the AIM Rules for Companies and AIM Rules for Nominated Advisers. The changes to the AIM Rules for Companies cover formalising the early notification process, the requirement for AIM companies to report against a recognised corporate governance code and clarifying Rule 9. In relation to the AIM Rules for Nominated Advisors, the amendments relate to the guidance on admission responsibilities.

Early notification

AIM Rule 2 will be amended to introduce a formal requirement for a nominated adviser (Nomad) to notify the LSE of key information about an applicant AIM company at an earlier stage in the AIM admission process than is currently the case. The exact timing of the notification is left up to the individual Nomad but it should be prior to the submission of the Schedule One form. A template ‘early notification form’ is available on the LSE’s website. An early discussion with the LSE is already a requirement for Nomads where an admission raises potential issues and this change to Rule 2 now extends the practice of early discussions to all proposed AIM admissions.

The main types of information that should be notified are similar to those currently set out in the Schedule One form. They include details of the applicant’s business and corporate structure, its country of incorporation, the proposed board of directors, any proposed fundraising, significant shareholders pre-admission and as expected post-admission, the amount of shares in public hands and any issues that may give the LSE cause to question whether the admission may be detrimental to the reputation or integrity of AIM.

Corporate governance

All AIM companies will be required to report against a recognised corporate governance code chosen by the board of directors. AIM companies currently have the choice of either noting on their website which corporate governance code they follow, or stating they do not follow a code and setting out their own arrangements. The change means the second option is no longer allowed.

An AIM company will need to disclose on its website how it complies with its chosen corporate governance code or, where it departs from its chosen corporate governance code, explain the reasons for doing so. This information should be reviewed annually and the website should include the date it was last reviewed (Rule 26).

The LSE is not prescribing a list of recognised corporate governance codes as it believes that it is preferable for AIM companies to have a range of options to suit their specific stage of development, sector and size. Examples of existing codes are the Quoted Companies Alliance (QCA) Corporate Governance Code and the UK Corporate Governance Code issued by the Financial Reporting Council.

In practice, most small and mid-size companies find the UK Corporate Governance Code unsuitable for their size and circumstances and are more likely to select the QCA Corporate Governance Code. To that end, the QCA has announced that in April 2018 it will release a new and updated version of its Corporate Governance Code. The revised code will cover (a) what is good corporate governance?; (b) the 10 corporate governance principles to follow; and (c) step-by-step guidance on how to effectively apply the principles within a company.

These changes to the AIM Rules will be implemented from 28 September 2018 although from 30 March 2018 all new applicants to AIM will need to state which corporate governance code they intend to follow but have until 28 September 2018 to fully comply with the new requirements under Rule 26.

Clarification of Rule 9

Rule 9 of the AIM Rules for Companies has been amended to clarify that the LSE has the power either to refuse a company’s admission to AIM where matters are brought to its attention which could affect an applicant’s appropriateness for AIM or to impose additional special conditions on the company.

AIM Rules for Nominated Advisers

AIM Notice 50 also states that the AIM Rules for Nominated Advisers have been amended to include guidance for Nomads on matters the LSE consider relevant to the appropriateness of a new applicant to AIM. A non-exhaustive list of examples will be set out in Schedule 3 to the AIM Rules for Nominated Advisers and these include:

questions as to good character, skills, experience or previous history of a director, key manager or major shareholder;
the rationale for seeking admission to AIM;
any formal criticism of the AIM applicant or any directors by, for example, other regulators;
if the AIM applicant company has been denied admission to trading on another venue;
if the AIM applicant company has a vague or ill-defined business model;
corporate structures that may give rise to concerns, such as legality of business operations or the AIM applicant company has not yet secured key licences or government consents; and
the applicant holds a material part of its assets or business through risky contractual arrangements.

WM Comment

The new version of the AIM Rules will come into force on 30 March 2018, although the requirement to comply with the amended corporate governance code disclosure will take effect from 28 September 2018, to allow companies adequate time to prepare for this change. These deadlines are not far away so action should be taken now to ensure that you are ready for the changes.

The revised UK Corporate Governance Code takes a step closer

As reported previously, on 5 December 2017 the Financial Reporting Council (FRC) published for consultation […]

As reported previously, on 5 December 2017 the Financial Reporting Council (FRC) published for consultation proposed revisions to the UK Corporate Governance Code and Guide on Board Effectiveness (Code). The proposed revised Code is fundamentally rewritten and is shorter and more concise than the existing version, comprising 17 Principles and 41 Provisions.

The period of consultation closed on 28 February 2018 and various responses were received from bodies such as the Pension and Life Savings Association (PLSA), the Institute of Directors (IoD), the Law Society, NEDonBoard and various accountancy practices.

In general the new ‘shorter and sharper’ Code was welcomed with a few provisos. The PLSA in particular welcomed the measures to incorporate stakeholder perspective in corporate governance structures. It also set out its views on the various characteristics that different vehicles for stakeholder representation should include. The response from the PLSA went on to include recommendations to enhance the stewardship code, including clearer guidance for asset owners that invest in companies through an asset manager, rather than directly, and enhanced provisions relating to the social and environmental impact of investments.

In its response, the IoD has called for tougher rules on executive pay including greater transparency over the effect of share buybacks and clearer criteria covering when bonuses can be clawed back for failures. The remuneration committee at large listed companies should be made to report whether boards which had decided to buyback the company’s shares had then seen a boost in the packages paid out to executives. The IoD has also called for the revised Code to force companies to make clear that executives would have to pay back bonuses in cases of gross misconduct, material accounting restatements or insolvency.

WM comment

The FRC aims to publish a final version of the Code by early summer 2018 and we will keep you updated as to progress. The new Code will apply to accounting periods beginning on or after 1 January 2019. The FRC plans to publish a consultation on changes to the Stewardship Code during the middle of 2018.

Protection of residential addresses at Companies House

Historically, a director’s residential address was available for all to see on the public records […]

Historically, a director’s residential address was available for all to see on the public records at Companies House. However, under the Companies Act 2006 (the Act) a new concept was introduced of a director’s service address. Both the service address and the director’s residential address must be notified to Companies House, but a director’s residential address is protected information under the Act and not disclosed. In contrast, a director’s service address is disclosed on the public register.

Directors commonly use the company’s registered address as their service address, but they could use their own residential address if they wanted and had no objection to that address being placed on the public register.

Although we now have a system whereby residential addresses are not necessarily made public, Companies House is not obliged to remove reference to a director’s residential address where it has previously been disclosed on the public register. Instead if an individual, whose usual residential address was entered on the register after 1 October 2003, wants to remove the entry they may, in certain circumstances, make an application to Companies House to make that address unavailable for public inspection.

The grounds on which an application may be made are:

that the applicant considers that there is a serious risk that he, or a person who lives with him, will be subjected to violence or intimidation as a result of the activities of at least one of the companies of which he is, was or proposes to become a director or a company of which he has at any time been a secretary or permanent representative;
that the applicant is or has been employed by a ‘relevant organisation’ (being the Government Communications Headquarters, the Secret Intelligence Service, the Security Service or a police force); or
that the applicant has successfully made a ‘section 243 application’ that stops Companies House from disclosing protected information to a credit reference agency.

However this is all about to change. On 22 February 2018 the draft Companies (Disclosure of Address) (Amendment) Regulations 2018 and an accompanying explanatory memorandum were published.

The draft regulations make the following changes to the current legislation:

an individual whose usual residential address is on the register may apply under section 1088 of the Act to the registrar to make that address unavailable for public inspection on the companies register, without having to make the application on any specified grounds;
the removal of the restriction preventing individuals from applying under the Act where a usual residential address was placed on the register before 1 January 2003;
the removal of the restriction preventing an application by a company to remove usual residential address information of its members and former members in respect of addresses placed on the register before 1 January 2003; and
where there remains a requirement for an applicant’s current address to remain on the register, the usual residential address will be replaced with a service address. Where there is no such requirement, the registrar will suppress all elements of the address except for the first half of the postcode or, where there is no such postcode in the address, information denoting an equivalent or larger geographical area (or, for non-UK addresses, the country or territory and the next principal unit of geographical subdivision).

The government has stated that the draft regulations will come into force by the end of summer 2018.

WM comment

We will provide an update when the implementation date of the regulations is announced. Since it may only be a couple of months away, if you would like to discuss any aspect of the regulations, please do not hesitate to contact the Richard Naish.

Market Abuse – AIM company fined for failing to disclose inside information

The Financial Conduct Authority (FCA) has recently fined an AIM investment company £70,000 (reduced from […]

The Financial Conduct Authority (FCA) has recently fined an AIM investment company £70,000 (reduced from £100,000 because of early stage settlement) for failing to inform the market of inside information as required by Article 17(1) of the Market Abuse Regulation (MAR). This is the first time that the FCA has fined an AIM company for late disclosure following the introduction of MAR in July 2016.

The company was a self-managed closed-ended investment company whose shares had been traded on AIM since 24 March 2006. In early 2016, the company had two material investments, one of which was a shareholding in BEKON Holding AG (BEKON) valued in its accounts at $3.35 million. On 12 July 2016, the company was notified by BEKON about a compulsory acquisition of its shares. The acquisition required the company to sell its BEKON shares for no initial consideration and with only a possibility of receiving deferred consideration at a figure far below $3.35 million.

The information about the impending sale of the BEKON shares was inside information and, under MAR, the company was required to disclose the information as soon as possible. This did not happen. Following completion of the sale in August, the market speculated, in online bulletin boards, about the amount that may have been paid to the company for its shares in BEKON. The bulletin board discussions regarded the sale as a positive development and the company’s share price rose sharply, increasing 38% over the two days.

The company had breached Article 17(1) of MAR because it did not release an announcement about its shareholding in BEKON as soon as possible after being informed that there was a reasonable expectation that it would be required to sell its shares in BEKON for no initial consideration and with only a possibility of receiving deferred consideration that was materially lower than the valuation of its investment.

Mark Steward, FCA Executive Director of Enforcement and Market Oversight, said:

“[The company’s] failure to promptly disclose inside information misled the market and prevented investors from making fully informed investment decisions. This was a serious breach. Issuers must have regard to their disclosure obligations at all times and misunderstanding the commercial reality of a transaction is no excuse.”

WM comment

This case highlights how important it is to ensure that the continuing obligations under the AIM Rules and MAR in relation to inside information are complied with. The FCA had previously announced in a speech in November 2017 that they intended to step up the enforcement of MAR and this fine is evidence that they are doing just that.

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