Included in this issue: Equity Capital Markets; Corporate Governance; Narrative Financial Reporting; and Brexit. Read more...

Equity Capital Markets

Public censure and fine for AIM company failing to update market and keep Nomad informed

The London Stock Exchange (LSE) has published an AIM Disciplinary Notice publicly censuring and fining Bushveld Minerals Limited (Bushveld) £700,000 (reduced to £490,000 for early settlement) for failing to discharge its obligations of market disclosure under AIM Rule 11 and to provide its nominated adviser (Nomad) with all relevant information under AIM Rule 31.

In the context of a transaction which would have constituted a reverse takeover for Bushveld, the Nomad advised that, on payment of a material fee in relation to an exclusivity undertaking, Bushveld would have committed itself to a binding obligation which required announcement to the market without delay in accordance with AIM Rule 11. The Nomad also advised that Bushveld would need to announce the fact of the transaction as a whole at the same time which, as a reverse takeover, would lead to the suspension of its securities under AIM Rule 14.

Bushveld wanted to avoid a suspension so as to enable it to complete a fundraising for the purposes of the transaction, fund development of its existing assets and reduce the materiality of the exclusivity fee. Bushveld received legal advice which conflicted with that of the Nomad and entered into the exclusivity undertaking on 7 April 2016 without informing the Nomad or the market. When the Nomad discovered the arrangement had been entered into, an announcement was made on 22 April 2016 and the company's securities were suspended from trading.

In censuring Bushveld, the LSE has emphasised that AIM Rule 11 should not be approached in a narrow way and stressed the importance of advice from, and the experience of, a Nomad in these circumstances. In particular, the fact that a company had received separate advice does not override that of its Nomad nor justify or mitigate a breach of the AIM Rules. Bushveld knew or ought to have known that, given the Nomad's advice, it was relevant to inform the Nomad that the exclusivity undertaking had been given, not least because it withheld that information at a time when it knew the Nomad was seeking the LSE's guidance as regards the transaction.

FCA's Market Watch focuses on the MAR

The Financial Conduct Authority (FCA) has published a Market Watch newsletter focusing on a review of the industry's implementation of the EU Market Abuse Regulation (EU No.596/2014) (MAR). Key conclusions and observations include:

• The FCA has not observed any impact on the ability of issuers to raise capital on UK markets following the introduction of the market soundings regime.
• Issuers, their advisors, the sell-side and the buy-side, have an obligation to identify when they are in possession of inside information and to control it, as well as to ensure those in possession of it are properly trained.
• The FCA ascribes importance to receiving the mandated insider list template in a complete and timely fashion, not least as a means of an issuer demonstrating that robust systems and procedures are in place to comply with MAR.
• The quality of insider lists received to date has been varied. The FCA encourages issuers to ensure that all those with access to inside information, including those who have accessed information according to electronic access logs, are included on insider lists. The FCA also expects all insider list fields, including relevant personal information, to be completed.
• The number of employees on permanent insider lists should not be 'disproportionately large' and should be restricted only to employees who have access at all times to inside information – those that do not have such access should be captured in a deal-specific or event-based insider list.
• The FCA expects completed insider lists to be provided within two days of a request and any chronology of events be provided within five days.
• Issuers should ensure that they can identify and assess whether they have inside information outside of normal reporting timetables and in an accelerated manner. By way of example, the FCA states that where information that may not be in line with market expectations comes to light, such as in weekly sales reports or when preparing monthly management reports, this should be immediately investigated.

If information is deemed to meet the conditions of inside information, issuers are required to maintain an insider list. Using 'confidential' / 'project' / 'prohibited' dealing lists to record individuals who may have access to confidential information that has not been deemed inside information can be an important tool to aid compliance and ease the transition where a change in circumstance means that information meets the threshold for inside information. 

NEX Exchange sanctions corporate adviser for inaccuracies in issuer’s admission document

NEX Exchange has sanctioned an unnamed corporate adviser for failing to advise and guide its client on its obligations under the NEX Exchange Issuer Rules (Issuer Rules). In particular, the corporate adviser failed to ensure that the geographical focus of its client's investment policy was 'full and accurate' (in contravention of Appendix 1, paragraph 14 of the Issuer Rules) as well as failing to ensure that its own representations to NEX were 'accurate and complete'.

NEX Exchange announces NEX Exchange Growth Market designation as an ‘SME Growth Market’

NEX Exchange has announced that the NEX Exchange Growth Market (NEX Growth) has been designated as an ‘SME Growth Market’. The rules relevant to the market have been amended as a consequence and came into effect on 29 January 2019. More information on the consultation process leading to the changes can be found here. The designation will allow NEX Growth issuers to benefit from certain reduced compliance requirements (for example, as regards the creation and maintenance of insider lists under MAR) in the same way as those quoted on AIM have been able to since the LSE's successful application for such status in January 2018.  

Corporate Governance

FRC publishes FAQs on the UK Corporate Governance Code 2018

The Financial Reporting Council (FRC) has published a series of frequently asked questions in relation to the 2018 version of the UK Corporate Governance Code (Code). The FAQs will be used alongside the FRC's guidance (and, in particular, the FRC's Guidance on Board Effectiveness) to issue clarifications on the interpretation of the Code. The FRC will also monitor early adopters and issue a statement on progress in late 2019. For more detail, please read our Governance & Compliance update.

QCA conducts review of Governance Code application by AIM companies 

The Quoted Companies Alliance (QCA) has conducted a review of the level of application of the QCA Corporate Governance Code by the 800 plus companies on AIM that have adopted it. 

The QCA has also conducted a review of the websites of all 927 companies on AIM to determine which recognised corporate governance code such companies have adopted – this concludes that by far the majority have adopted the QCA Code. From 28 September 2018, all companies on AIM have been required to name on their website which corporate governance code they follow in accordance with the amended AIM Rules for Companies.

FRC finalises Wates Principles for Larger Private Companies

The Wates Corporate Governance Principles for Large Private Companies (Principles) have been published in final form. This follows the consultation launched by the FRC in June 2018 on behalf of James Wates' Coalition Group and the publication of the Companies (Miscellaneous Reporting) Regulations 2018 (Reporting Regulations) which require companies with more than 2000 employees and/or with a turnover of more than £200m and a balance sheet total of more than £2bn to report on their corporate governance arrangements in relation to financial years beginning on or after 1 January 2019. For more detail on the changes made to the Principles, please read our Governance & Compliance update.

Investment Association publishes 2018 update of its ‘principles of remuneration’

The Investment Association (IA) has published the 2018 update of its ‘principles of remuneration’ and, in advance of the 2019 AGM season, highlighted certain items of focus. For a summary of the changes made, please read our Employee Incentives update. The IA has also published an open letter to the chairs of remuneration committees of FTSE 350 companies, in which it expressed growing frustration that many companies were not listening to investor views which was leading to negative votes on certain remuneration-related resolutions.

Kingman review recommends replacement of the FRC

The independent review of the FRC, led by Sir John Kingman, has published its report to government. While many of the 83 recommendations will require primary legislation to take forward, the report recommends a number of issues that the government and the FRC might accelerate.

Significant recommendations include:

• The replacement of the FRC with an independent, statutory regulator: the 'Audit, Reporting and Governance Authority'. This would be accountable to Parliament, with its Chair and CEO pre-approved by the BEIS Select Committee and funded by statutory levy.
• As part of its work on corporate reporting, the new regulator should have jurisdiction over, and stronger powers in relation to, the entirety of the annual report, including the governance statement. Such powers should include the ability to require the restatement of accounts without the need for a court order.
• The government, working with the FCA and the new regulator, should consider whether there is a case for strengthening qualitative regulation around a wider range of investor information than is currently covered by the FRC's existing corporate reporting work.
• The government should review the existing definition of a public interest entity, noting that this definition has been more broadly construed in other countries to include major private companies and pension funds. With the new regulator, it should also develop detailed proposals for an effective enforcement regime that holds all relevant directors to account for their duties to prepare and approve true and fair corporate reports.
• The new regulator should promote brevity and comprehensibility in annual reports and be more sparing and disciplined in promulgating guidance and discussion documents, only issuing them if they are 'genuinely useful'.
• A 'fundamental shift' in approach is required to ensure that the revised Stewardship Code more clearly differentiates excellence in stewardship, focusing more on outcomes and effectiveness, not on policy statements.

As regards corporate failure:

• The new regulator should develop a robust market intelligence function to identify emerging risks and be able to deploy a range of responses including requiring a company to make a rapid formal response, providing additional assurance on any aspect of the annual report, including its viability statement (a concept which needs to be made 'more effective' in any event), and requiring an independent board performance evaluation or examination of the audit committee. The regulator should be able to require the production of a recovery plan, the prompt restatement of accounts, or other disclosure to the market.
• New powers should allow the regulator to order the removal of the auditor or to require an immediate retendering. In the most serious cases, the regulator should also be able to recommend that shareholders consider a change of CEO, CFO, Chair or audit committee chair, or that they reconsider the payment of dividends.
• The government should consider introducing a duty of alert for auditors to report viability or other concerns. It should also give serious consideration to strengthening the framework around internal controls, learning relevant lessons from the operation of the US Sarbanes-Oxley regime.

Other publications of note:

• Sir John has also published his letter to the Secretary of State setting out his case for change as to who appoints company auditors and how their fees are set.
• The government has announced the independent Brydon Review into standards and requirements for the UK audit profession. This will consider:
  • how far audit can and should evolve to meet the needs of investors and other stakeholders, putting the UK regime at the forefront;
  • how auditors verify the information they are signing off;
  • how to manage any residual gap between what audit can and should deliver; and
  • what are the public's expectations from audit.
• The Competition and Markets Authority (CMA) has published an update paper in relation to its study of the statutory audit market outlining serious concerns about the audit sector and the quality of audit. Concerns focus particularly on the lack of choice of auditor, the fact that companies select their own auditor often preferring a 'cultural' fit rather than choosing the candidate that will offer the toughest scrutiny; and the fact that the auditor's focus on quality can often be diluted by its provision of non-audit services. The CMA proposes the following remedies:
  • regulatory scrutiny of auditor appointment and management;
  • mandatory joint audits to break down the barriers to 'challenger firms';
  • separating audit and advisory businesses; and
  • peer reviews of audits, commissioned by and reporting to the regulator.

Both the Kingman and the CMA reviews will feed into, and inform, a wider inquiry on the future of UK audit to be undertaken by the BEIS Select Committee in 2019. 

FTSE 350 companies must do more to meet Hampton-Alexander Review’s targets on gender balance

The Hampton-Alexander Review (Review) has published its third annual report which finds that if progress on female appointments continues at a similar rate, the FTSE 100 is 'on track' to achieve the 33% target for women on boards but elsewhere there needs to be a step-change in pace for the targets to be achieved.

In the FTSE 100, 30.2% of board positions are now occupied by women, up from 27.7% in 2017. In the FTSE 350, almost 25% have one woman on their board (there remain five all-male boards), up from 22.8% in 2017. This means that 50% of appointments to board positions will have to be filled by women over the next two years for FTSE 350 companies to meet the target.

By way of reminder, the Review's aspirational targets are:

• 33% target for women on FTSE 350 boards by the end of 2020;
• 33% target for women on FTSE 350 executive committees and direct reports to the executive committee on a combined basis by 2020; and
• FTSE 350 companies to increase number of women in roles of chair, senior independent director and executive director on their boards

Glass Lewis updates its Corporate Governance Policy Guidelines

Glass Lewis has published its latest UK corporate governance policy guidelines. For more detail on the key issues, please read our Governance & Compliance update.

ISS updates its EMEA Proxy Voting Guidelines

Institutional Shareholder Services (ISS) has published an updated version of its EMEA Proxy Voting Guidelines, which apply to shareholder meetings held on or after 1 February 2019. For more detail on the key issues, please read our Governance & Compliance update.

Blackrock CEO writes letter to CEOs

Blackrock CEO, Larry Fink, has published his annual letter to CEOs of the companies in which Blackrock invests. In the letter he states that Blackrock will focus on the following issues:

• governance, including companies' approach to board diversity where, if there is no progress within a reasonable time frame, nominating and/or governance committees may be held accountable;
• corporate strategy and capital allocation;
• compensation that promotes long-termism;
• environmental risks and opportunities; and  
• human capital management, including as regards preparing employees for retirement.

ICSA survey of FTSE 350 published

FT-ICSA has published the latest version of its Boardroom Bellwether survey which focuses on the FTSE350's outlook for 2019. The survey makes for depressing reading with:

• 81% predicting a decline in UK economic conditions;
• only 11% predicting an improvement in global economic conditions; and
• 73% of companies predicting damage to their company as a result of Brexit.  

IOSCO issues good practices report to assist audit committees 

The Board of the International Organisation of Securities Commissions (IOSCO) has published the IOSCO Report on Good Practices for Audit Committees in Supporting Audit Quality, which aims to assist audit committees in promoting and supporting audit quality.

The report sets out good practices audit committees might consider when:

• recommending the appointment of an auditor;
• assessing potential and continuing auditors;
• setting audit fees;
• facilitating the audit process;
• assessing auditor independence;
• communicating with auditors; and
• assessing audit quality.

Narrative Financial Reporting

FRC to examine the Future of Corporate Reporting

The FRC has announced the launch of a major project to review company reporting which will also consider how companies should better meet the information needs of shareholders and other stakeholders.

It is inviting participants to join an advisory group to support the project. The project will:

• review current financial and non-financial reporting practices;
• consider what information shareholders and other stakeholders require;
• review the different types of corporate communications employed by companies; and
• fundamentally consider the purpose of company reporting and the annual report.

The FRC anticipates that the initiative will prompt calls for changes to regulation and practice. During the second half of 2019, the FRC will publish a thought leadership paper consolidating the outcomes of the project.

BEIS publishes revised Q&A on Companies (Miscellaneous Reporting) Regulations 2018

The government has updated the Q&A document that it first published in June 2018 which provides guidance on the forthcoming reporting requirements under the Reporting Regulations. The Reporting Regulations were approved by Parliament in July 2018 with the majority of the requirements applying to companies with financial years beginning on or after 1 January 2019. A summary of the key proposals in the Reporting Regulations can be found in our Governance & Compliance update issued at the time of their publication. 

Brexit

Further draft legislation published in anticipation of a 'no deal' Brexit

The government has published further draft statutory instruments to cater for a possible 'no deal' Brexit on 29 March 2019. These include in relation to:

• The Listing regime – The draft Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019 will amend EU law relating to securities, prospectuses and transparency requirements to ensure the relevant legislation operates effectively on exit. The explanatory memorandum provides further detail, particularly as regards the status of prospectuses that straddle the date of exit.
• The Market Abuse regime – The draft Market Abuse (Amendment) (EU Exit) Regulations 2018 will amend retained EU law relating to market abuse to ensure that the relevant legislation continues to operate effectively. This includes MAR and associated UK legislation. In short, the regulations seek to maintain the same systems of regulation and market oversight by the FCA as currently exist. An explanatory memorandum has also been published. The draft Regulations will transfer the powers of ESMA to the FCA; retain the existing scope of MAR in UK law; and retain the requirements as regards certain notifications, disclosures and suspicious transaction reports. The FCA has also consulted on changes to its Handbook to cater for a 'no deal' scenario – see below.

Amendments to FCA Handbook proposed in the event of a no-deal Brexit

The FCA has published a consultation paper CP18/36 containing detailed changes to the FCA Handbook that it proposes to make in the event of a no-deal Brexit, which includes changes to each of the Listing Rules (LR), the Prospectus Rules (PR) and the Disclosure Guidance and Transparency Rules (DTR). Most of the proposed changes to the LR, PR and DTR are to ensure consistency with HM Treasury's proposal that UK's primary markets regime after Brexit should apply to all issuers that have securities which are admitted to trading on a UK regulated market or are admitted to listing in the UK, or issuers that are making a public offer in the UK. The proposed changes are therefore largely centred around removing existing home/host member state distinctions and references to regulatory requirements that are equivalent to UK requirements. For example:

• Approval of prospectuses – Issuers intending to rely on a passported prospectus approved by the competent authority in another member state will, going forward, need to have a prospectus approved by the FCA. Whilst the government has committed to continue to treat prospectuses that are valid in the UK before the UK's exit from the EU as valid for the remainder of the 12 month period from their date of approval (notwithstanding that this period may run until after the UK exits the EU), it is not clear from the current proposals whether any supplement published post-exit day that relates to a prospectus approved in another member state before exit day would be valid in the UK or whether a new FCA-approved prospectus would be required.
• Free float requirements – The existing free float requirements, designed to ensure sufficient liquidity in the listed securities, are crafted in terms of the level of shares in public hands within the EEA. Given the participation of overseas investors in UK markets, the FCA has proposed that, rather than reframing the free float requirement by changing the reference from the EEA to the UK, holders from any jurisdiction can be counted towards the free float. The FCA note that in practice it already regularly grants waivers from the EEA-focused free float requirements to allow inclusion of 'rest of world' investors in the calculation.
• Transparency requirements – DTR 1A and 4 to 6 currently apply only to issuers with securities admitted to trading on a regulated market in the EU and for which the FCA is the home competent authority. The proposals will remove the home/host state distinction meaning that these transparency rules will apply to all issuers with securities admitted to trading on a UK regulated market.
• Audit committees – An issuer which is the subsidiary of a parent undertaking that is itself subject to the requirements in relation to audit committees either contained in DTR 7.1 or equivalent requirements under the Audit Directive are exempt from the requirements in DTR 7.1. Post exit day, the subsidiary issuer will only benefit from this exemption if its parent undertaking is subject to DTR 7.1 (regardless of the application to the parent of equivalent provisions in the Audit Directive). The current scope of the exemption will continue for financial years that begin before exit day.

The consultation paper also sets out changes to various binding technical standards, including those on insider lists and notification of PDMR dealings. These are generally limited to minor amendments, such as replacing references to 'competent authority' with the 'FCA'.