Corporate weekly highlights—19 July 2018
This week’s edition of Corporate highlights includes news and analysis on the FRC’s new UK Corporate Governance Code and Guidance on Board Effectiveness published earlier this week, ESMA’s consultations on draft technical advice on minimum information content for prospectus exemption and draft guidelines on risk factors under the Prospectus Regulation, ESMA’s regulatory technical standards on certain provisions in the Prospectus Regulation, analysis on the impact of the GDPR on unincorporated associations and the government’s White Paper on the future relationship of the UK and the EU.
In this issue:
FRC publishes new UK Corporate Governance Code and Guidance on Board Effectiveness
Following its December 2017 consultation, the Financial Reporting Council (FRC) has published revised versions of the UK Corporate Governance Code (UKCG Code) and its Guidance on Board Effectiveness (FRC Guidance), which will apply to premium listed companies with accounting periods beginning on or after 1 January 2019. Key changes cover the relationship between companies and workforce, company culture, succession and diversity, and remuneration. The FRC wishes to see clear, meaningful reporting and calls on investors and proxy advisors to assess explanations carefully, rather than taking a ‘tick-box’ approach.
New UKCG Code
The new UKCG Code aims to ‘put the relationship between companies, shareholders and stakeholders at the heart of long-term sustainable growth in the UK economy’. The FRC also calls for companies to establish a corporate culture that is aligned with the company purpose, business strategy, promotes integrity and values diversity.
The final version of the UKCG Code is in substantially similar form to the version published in December 2017 at the start of the consultation. The FRC has published in red line the changes made from the consultation version in its Feedback Statement: Annex—Code changes since December 2017 consultation. We also consider some of the key changes in News Analysis: FRC publishes revised UK Corporate Governance Code.
In terms of key differences between the 2016 and the 2018 versions of the UKCG Code, the supporting Principles from the 2016 UKCG Code have been removed and, in some cases, been incorporated into the new Principles or Provisions, while others have been moved to the FRC Guidance. The new UKCG Code is made up of five sections:
- Section 1—Board leadership and company purpose
- Section 2—Division of responsibilities
- Section 3—Composition, succession and evaluation
- Section 4—Audit, risk and internal control
- Section 5—Remuneration
The FRC has published a comparison of the structure of the current UKCG Code with the revised version in section 5 of the Feedback Statement: Consulting on a revised UK Corporate Governance Code.
Among other new provisions that have been introduced, the 2018 UKCG Code includes a new provision to enable greater board engagement with the workforce to understand their views. Boards are asked to describe in their annual reports how they have considered the interests of stakeholders when performing their duty under section 172 of the Companies Act 2006. This new provision supports the reporting requirements introduced by the Companies (Miscellaneous Reporting Requirements) Regulations 2018.
Responding to the publication of the new UKCG Code, Matthew Fell, chief policy director of the Confederation of British Industry, said: ‘The Corporate Governance Code plays a vital role in ensuring companies are well run and clear about the behaviours expected of them. With the spotlight on the role business plays in society, it is important the [code] continues to evolve to meet changing expectations and maintain high standards.
‘Companies should define their most important stakeholders—which will often be employees—and then set out how they choose to engage with them to take their views into account. It is helpful to see this new emphasis by the FRC.’
New FRC Guidance
The FRC has also published its revised Guidance on Board Effectiveness which accompanies the revised UKCG Code.
The final version of the FRC Guidance is in a substantially similar form to the version consulted on, but revisions have been made to align it with the changes made to the revised UKCG Code. Key changes to the FRC Guidance include:
- a change in tone to make it less prescriptive
- amendments to the introduction to emphasise its importance in promoting high standards and to encourage its use alongside the revised UKCG Code
- indicating an intent to update the FRC Guidance more frequently and as practice develops
- referencing through footnotes relevant Principles and Provisions of the revised UKCG Code
- revisions to section 1 to adjust its focus and embed the themes more effectively
- a new section on externally facilitated board evaluations in section 3
- the addition of an appendix highlighting the overlap of key provisions of the revised UKCG Code and the Listing Rules and Disclosure Guidance and Transparency Rules
Among other things, the revised FRC Guidance encourages boards and their committees to consider how the gender pay gap is being addressed—this was included as a result of the introduction of the Companies (Miscellaneous Reporting) Regulations 2018. In addition, the revised FRC Guidance encourages companies to think about providing more information about different aspects of diversity in their workforce, other than gender.
We will be updating our content to reflect the revised UKCG Code and FRC Guidance.
For further information, see LNB News 16/07/2018 64 and News Analysis: FRC publishes revised UK Corporate Governance Code.
Equity capital markets
ESMA consults on draft technical advice on minimum information content for prospectus exemption and on draft guidelines on risk factors
The European Securities and Markets Authority (ESMA) has launched two public consultations under the new Prospectus Regulation (Regulation (EU) 2017/1129) (PR)—one in relation to its draft technical advice on minimum information content for prospectus exemption and the other on draft guidelines on risk factors under the Prospectus Regulation.
ESMA is seeking views on its draft technical advice on exempt documents produced for the purpose of offers/admission of securities connected to a takeover, merger or division, as well as in relation to its proposed guidelines to assist national competent authorities (NCAs) on their review of risk factors. Both consultations close on 5 October 2018. ESMA has also called on the European Commission to make some changes to the level 1 text (ie, general, framework principles) of the PR.
ESMA expects to publish final reports containing summaries of all consultation responses and final versions of its technical advice and guidelines in Q1 219.
Minimum information content for prospectus exemption
Issuers may offer/admit securities connected with a takeover, merger or division without publishing a prospectus provided that a document is made available to investors describing the transaction and its impact on the issuer.
ESMA is consulting on its draft technical advice regarding the minimum information content of this document, specifically in relation to:
- the offer of securities to the public or the admission to trading of securities on a regulated market
- the description and impact that a takeover, merger or division may have on the issuer’s operational and financial activities
ESMA also proposes the operative provisions that are necessary to ensure that exempted documents are fit for purpose and sets out the methodology followed in preparation of the technical advice.
In a letter to Olivier Guersent, the Commission’s Director General for Financial Stability, Financial Services and Capital Markets Union, ESMA chair Steven Maijoor says ESMA is concerned that the scope of the prospectus exemption could hinder investor protection, as the securities of some non-listed issuers could be admitted to trading on a regulated market without an approved IPO prospectus. He also notes that the scope of the exemption is unclear, which could make some issuers reluctant to rely on it.
In addition, Mr Maijoor sets out ESMA’s concerns over the potential for regulatory arbitrage and a likely negative impact on supervisory convergence given:
- the absence of limitations in the scope of the exemption
- the lack of definitions in the PR in relation to the concepts of ‘takeovers’, ‘mergers’ or ‘divisions’, and
- the fact that Directive 2004/25/EC on Takeover Bids and Directive 2017/1132 on Mergers and Divisions are minimum harmonisation directives and have been transposed differently in Member States
ESMA notes that these issues fall outside its mandate and therefore cannot be dealt with in its technical advice. It therefore invites the Commission to address them in amendments to the level 1 text of the PR.
ESMA considers that it would be appropriate to limit the scope of the exemption to cases where all companies involved in takeovers, mergers or divisions already have shares admitted to trading on a regulated market or an SME growth market as, in these cases, information concerning these companies is already available to investors before the transactions take place.
ESMA also recommends amendments to the level 1 text to ensure that PR provisions covering areas such as the responsibility statement, materiality test, publication of supplements, incorporation by reference and language regime apply to exempted documents.
ESMA has prepared draft guidelines to assist NCAs in their review of risk factors included in a prospectus. The aim of these draft guidelines is to provide NCAs with a means of ensuring that risk factor disclosure is material and specific to the issuer concerned and that NCAs can ensure that risk factor disclosure is prepared in a concise and succinct form.
For further information, see LNB News 13/07/2018 91.
ESMA issues final RTS on certain provisions in the Prospectus Regulation
ESMA has issued regulatory technical standards (RTS) specifying the implementation of certain provisions in the PR. Under the new PR, ESMA was mandated to develop draft RTS by 21 July 2018. The draft RTS have been sent to the European Commission for endorsement.
ESMA’s RTS cover the following areas of PR provisions:
- key financial information to be disclosed by issuers for the prospectus summary
- data for classification of prospectuses and the practical arrangements to ensure that such data is machine readable
- advertisements disseminated to retail investors
- requirements to publish supplements to a prospectus
- publication of a prospectus
- arrangements for the notification portal used for passporting prospectuses
The final RTS incorporate stakeholder feedback from an earlier consultation, launched in December 2017. The final report provides an overview of the consultation responses to each question and contains the changes to the draft RTS, setting out the reasoning for such amendments in light of the feedback received.
For further information, see LNB News 17/07/2018 116.
Unincorporated associations and the GDPR
Information law analysis: As the dust settles on the arrival of General Data Protection Regulation (Regulation (EU) 2016/679) (GDPR), organisations big and small are still getting to grips with what the changes on such fundamental legislation will entail. Derek Hamill, partner and head of Corporate at Gilson Gray LLP, provides a few thoughts on issues that unincorporated associations and their lawyers will want to bear in mind.
The analysis considers the following questions:
- does the GDPR apply to unincorporated associations, such as sports clubs, and who is responsible for compliance by an unincorporated association with the GDPR? Who is ‘controller’ or ‘processor’?
- to what extent will the GDPR change the data protection compliance obligations for unincorporated associations (leaving aside those impacts which apply to all organisations)?
- to what extent will such associations have to pay fees to the Information Commissioner's Office (ICO) under the new fee structure?
- in the event an unincorporated association is involved in illegal processing contrary to the GDPR regime, who is the ICO likely to take enforcement action against?
For further information, see News Analysis: Unincorporated associations and the GDPR.
Government publishes White Paper on UK-EU future relationship
The Department for Exiting the European Union has published its White Paper on the future relationship between the EU and UK, which seeks to ensure ‘frictionless trade’ between the UK and EU post-Brexit while enabling the UK to make global trade deals and avoid a hard border between Ireland and Northern Ireland. The White Paper reiterates, among other things, the UK’s priorities and red lines, acknowledges that the UK will have more trade barriers than at present and reaffirms that the UK will end the free movement of people. Legal experts from Lewis Silkin LLP and Dechert, as well as academics from the University of Durham, the University of Leicester, and the University of Warwick, explore the White Paper and discuss what the proposals might mean in the future.
The White Paper sets out proposals in four areas of future co-operation:
- the economic partnership between the EU and the UK—this includes separate proposals relating to goods, services and investment, mobility of people, digital, competition, socio-economic cooperation and UK independent trade policy
- security co-operation — this includes proposals relating to law enforcement and criminal justice cooperation, data and information sharing, foreign policy, defence and development cooperation (including space programmes), continued UK participation in key agencies and wider security issues including asylum, illegal migration, cybersecurity, counter-terrorism, civil protection and health security
cross-cutting priority areas and other co-operation—this includes proposals for specific arrangements in areas like data protection and fisheries, a new Security of Information Agreement for classified information and cooperative accords between the UK and EU on science and innovation, culture and education, international development, defence capability and space technology
- the ‘institutional frameworks’ that will enforce the agreement—this includes proposals relating to sustainable dialogue, operational administrative provisions and parliamentary processes, dispute resolution and enforcement (outside the Court of Justice)
The new Brexit Secretary Dominic Raab said: ‘There should be a firm commitment in the withdrawal agreement requiring the framework for the future relationship to be translated into legal text as soon as possible.’
The EU's chief negotiator Michel Barnier said he would analyse the White Paper with the European Parliament and Member States, and was ‘looking forward’ to further negotiations in the future.
For further information, see LNB News 12/07/2018 126.
Brexit Bulletin—keeping up to date on Brexit
The Brexit Bulletin—keeping up to date on Brexit contains helpful Brexit research tips and reminders, including links to useful materials to help you keep up to date on the latest Brexit developments, updates on Brexit legislation (through the Brexit legislation tracker and Brexit SI database), instructions for setting up Brexit alerts and links to further resources. It is a must read for anyone looking for information and updates on Brexit.
Additional news—daily and weekly news alerts
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Dates for your diary
|21 July 2018||EU public reporting framework: The European Commission consultation on the effectiveness of the EU framework on public reporting by companies closes.
See LNB News 21/03/2018 142.
|21 July 2018||The Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) Regulations 2018, SI 2018/786 will come into force.
See LNB News 29/06/2018 104.
|23 July 2018||Limited partnerships: The government’s consultation seeking views on proposed reforms to the regulatory regime governing limited partnerships closes.
See LNB News 30/04/2018 149.
|23 July 2018||Revised Financial Conduct Authority Technical Note: FCA’s consultation on changes to its Technical Note on periodic financial information and inside information (FCA/TN/506.2) closes.
See LNB News 11/06/2018 115.
|24 July 2018||Audit: The International Organization of Securities Commission’s consultation on good practices for audit committees in supporting audit quality closes.
See LNB News 24/04/2018 113.
|30 July 2018||The revised AIM Rules for Nominated Advisers will come into force on 30 July 2018.
See further news, LNB News 05/07/2018 51.
To track key legislative and regulatory developments, see our Trackers:
- Brexit legislation tracker
- Brexit timeline
- MiFID II—timeline
- Market Abuse—timeline
- Prospectus Regulation tracker
- Transparency Directive tracker
- Listing Rules tracker
- Disclosure Guidance and Transparency Rules Sourcebook tracker
- Prospectus Rules tracker
- Small Business, Enterprise and Employment Act 2015 tracker
We have added one new Q&A this week:
To view analysis of the latest deals in the market and the underlying transaction documents, use our Market Tracker deal analysis tool.
To read about the latest corporate announcements, see our Market Tracker weekly round-up: Market Tracker weekly round-up—13 July 2018.