FSA: Enhancing the effectiveness of the Listing Regime, feedback on CP 12/2 and proposed changes to the Listing Rules resulting from the implementation of the Alternative Investment Fund Managers Directive - Consultation Paper 12/25
On 2 October 2012, the Financial Services Authority (FSA) published Consultation Paper 12/25 (CP 12/25). CP 12/25 can broadly be divided into three parts:
- feedback on the specific changes proposed in the FSA’s consultation paper 12/2 (relating to reverse takeovers, sponsors, financial information requirements, transactions and externally managed companies) (CP 12/2) - the relevant amendments to the FSA Handbook are set out in Handbook Notice 123 and, other than the provisions in relation to sponsors which do not come into force until 31 December 2012, came into force on 1 October 2012 (subject to transitional provisions in certain cases);
- consultation on enhancing the effectiveness of the Listing Regime; and
- consultation on proposed changes to the Listing Rules resulting from the implementation of the Alternative Investment Fund Managers Directive.
Each of these areas is covered in further detail below.
Feedback on specific changes proposed in CP 12/2
As outlined in CP 12/2, the proposed changes in relation to reverse takeovers were intended to ensure that the structure could not be used as a ‘back door’ route to listing for companies that would otherwise be ineligible.
CP 12/25 notes that, overall, a good level of support was received for these proposals and therefore only minor amendments have been made to the position outlined in CP 12/2 (mostly to provide greater clarity on certain points - for example, additional guidance has been included in relation to the meaning of a reverse takeover being ‘in contemplation’).
The main areas relating to reverse takeovers covered by the changes outlined in CP12/2 and adopted pursuant to CP12/5 are:
- scope - the exemption providing that an acquisition of one listed issuer by another is not treated as a reverse takeover (but rather as a class 1 transaction) has been narrowed so that it only covers acquisitions by a listed issuer of another listed issuer in the same listing category. The reverse takeovers regime has also been expanded to cover issuers with a standard listing of shares or certificates representing equity securities;
- proportionality - for example, the revised rules include specific provisions relating to circumstances where a listed issuer takes over another listed issuer that is in a different listing category. In these circumstances, subject to certain information and eligibility requirements being complied with, cancellation and re-admission will not normally be required; and
- consolidation - consolidation of the reverse takeover requirements and guidance (including codification of guidance previously included in the FSA’s Technical Note on the Listing Rules) into LR 5 of the Listing Rules.
The changes in relation to reverse takeovers came into force on 1 October 2012, subject to transitional provisions in the case of certain sponsor confirmation requirements which do not come into force until 31 December 2012.
As outlined in CP 12/2, the proposed amendments to LR 8 were intended to clarify the expectations of sponsors, particularly in relation to communications made by sponsors with the FSA, and to ensure that the Listing Rules fully reflected the scope and nature of a sponsor’s role. CP 12/25 notes that a good level of support was received for the proposals outlined in CP 12/2, with majority support being received in relation to all of the questions raised by the FSA. As a result, only minor drafting changes have been made to the proposals outlined in CP 12/2, although additional guidance has been included on certain points to address concerns raised by respondents (for example the inclusion in LR 8.3.1B of guidance on the steps that it might be considered ‘reasonable’ for sponsors to take in the context of reliance on information provided by third parties).
The main areas relating to the roles and responsibilities of sponsors covered by the changes outlined in CP 12/2 and adopted pursuant to CP 12/25 are:
- amendments to LR 8.2 clarifying and expanding the circumstances in which a sponsor is required to be appointed or their guidance sought;
- strengthening the rules for sponsor communication with the FSA, including through a combination of (i) an extension of the definition of ‘sponsor services’ to include the sponsor’s communications with the FSA in connection with a sponsor service (so that the principles for sponsors will apply to such communications); (ii) an obligation on sponsors to take such reasonable steps as are sufficient to ensure that any communication or information they provide to the FSA in carrying out sponsor services is, to the best of their knowledge and belief, accurate and complete in all material respects; and (iii) a requirement for sponsors to provide the FSA with any explanation or confirmation the FSA reasonably requires to ensure that the issuer is complying with the Listing Rules - premium listed issuers will also be required to co-operate with their sponsor by providing all information reasonably requested by the sponsor for the purpose of carrying out the sponsor service;
- a new principle for sponsors requiring them to act with honesty and integrity;
- requirements for sponsors to retain accessible records which are sufficient to demonstrate the basis on which sponsor services have been provided - additional guidance (not previously included in the proposals set out in CP 12/2) has also been provided in relation to what the FSA would expect such records to include; and
- the obligation for sponsors to take all reasonable steps to identify conflicts of interest that could adversely affect their ability to carry out their obligations under LR 8 has been supplemented by additional guidance (not previously included in the proposals set out in CP 12/2) clarifying that, in identifying conflicts of interests, sponsors should take into account circumstances that could compromise their ability to fulfil their obligations to the FSA.
The revised Listing Rules also require sponsors to notify the FSA in a number of specific situations, for example, information that a sponsor reasonably believes would be likely to adversely affect market confidence in the sponsor regime.
The changes in relation to sponsors as referred to above will come into force on 31 December 2012.
As outlined in CP 12/2, these changes are intended to codify existing practice in relation to transactions. CP 12/25 notes that the FSA received a good level of support for the proposals in relation to transactions and, as a result, has only made a few minor drafting changes in light of feedback received.
The key changes outlined in CP 12/2 and adopted pursuant to CP 12/25 (most of which relate to LRs 10, 11 and 12) include:
- the requirement for a supplementary circular to be published where there is a material change or a material new matter has arisen following publication of a circular but prior to the shareholder meeting;
- clarification of the FSA's approach to break fee arrangements;
- removal of the concept of class 3 transactions; and
- clarification of the FSA’s approach to the areas to be covered by risk factors included in class 1 circulars.
These changes came into effect on 1 October 2012.
Financial information requirements
As outlined in CP 12/2, these amendments are intended to codify existing practice in relation to the requirements for financial information to be provided by issuers under LRs 6 and 13 and to address areas where the rules were otherwise unclear or silent. CP 12/25 notes that, in general, the proposals in this area were well supported, although certain drafting changes have been made to accommodate comments received and to clarify the FSA’s intentions.
Examples of the areas covered by the changes outlined in CP 12/2 and adopted pursuant to CP 12/25 include:
- clarification of the track record requirements under LR 6 for issuers seeking a premium listing;
- a requirement that, in the case of an issuer seeking a premium listing, the financial information must be not more than six months old at the date of the prospectus/listing particulars and not more than nine months old at the date of admission;
- the inclusion of detailed requirements in LR 13 for the disclosure of financial information for class 1 transactions;
- increased disclosure requirements for figures relating to synergy benefits;
- clarifying the scope of LR 13.5.27 to allow targets admitted to certain multilateral trading facilities and investment exchanges to take advantage of reduced information requirements; and
- clarification of the requirements in relation to profit forecasts and estimates - these have also been extended to apply to class 1 disposals (as well as class 1 acquisitions).
These changes came into effect on 1 October 2012.
Externally managed companies
As outlined in CP 12/2, the FSA has seen the development of a new corporate structure adopted by listed special purpose acquisition vehicles that outsource significant management functions to an offshore advisory firm. The FSA termed these ‘externally managed companies’ and was concerned that the structure could be more widely adopted by listed companies and so undermine the ability of shareholders to hold management to account. CP 12/2 therefore proposed various changes to address this concern. CP 12/25 notes that respondents were overall very supportive of these proposals and the FSA has therefore proceeded substantially as proposed.
The key areas covered by the changes outlined in CP 12/2 and adopted pursuant to CP 12/25 include:
- the inclusion of the senior executives of the advisory firm (in addition to the issuer and its directors) as persons responsible for any prospectus published by the issuer - minor changes have been made to the drafting proposed in CP 12/2 to clarify that this is not intended to apply to collective investment undertakings;
- clarification that the reference to senior executives of an issuer in the definition of a PDMR could potentially catch a wider range of persons than just those with an employment contract (for example, principals of the advisory firm if they have regular access to inside information and the power to make managerial discussions); and
- new rules and guidance inserted in LR 6.1 to the effect that issuers using an externally managed company structure will not be eligible for a premium listing, and an equivalent ongoing obligation inserted in LR 9.2.20 (again, these do not apply to investment undertakings listed under LR 15 or LR 16).
The changes came into force on 1 October 2012 but issuers that were premium listed on that date have until 1 January 2014 to comply with the requirements of LR 9.2.20.
Consultation on enhancing the effectiveness of the Listing Regime
CP 12/2 initiated a high-level discussion of wider issues around the quality of the premium listing regime, free float requirements, minority protection and governance. In CP 12/25 the FSA has proposed what it considers to be a proportionate response to address concerns raised in these areas.
The proposals centre around four key elements which the FSA believes are central to ensuring better aligned behaviour (both in the context of initial eligibility and, where appropriate, on an ongoing basis):
- optimising entry criteria for the premium segment to maintain the strength of the premium listing standard;
- ensuring eligibility requirements continue to apply as meaningful continuing obligations;
- clarifying the operation of the free float provisions; and
- providing shareholders with better quality information.
Some of the key points proposed in the consultation are summarised below.
While no significant changes are proposed to free float requirements for premium listed issuers, the FSA is consulting on various changes to clarify how the free float provisions operate. For example, it is proposed that shares subject to a lock up period of more than 30 days should be excluded for these purposes. Guidance is also proposed in relation to the criteria the FSA would apply when determining whether to modify the free float requirement for a particular premium segment issuer, although it is noted that a free float of less than 20 per cent. is unlikely to be acceptable even if the relevant criteria apply (other than in exceptional circumstances).
For standard listed issuers, the FSA is proposing changing its interpretation of the free float guidance in LR 14 and LR 18 (relating to when free float requirements may be modified for a particular standard segment issuer) to focus entirely on the criteria within the relevant guidance. The consultation paper notes that this could allow a very small percentage free float provided sufficient liquidity would be present.
Independence of issuer (premium listing)
Various new requirements are proposed in the context of ensuring the independence of premium listed issuers. These include:
- a requirement for a relationship agreement complying with certain minimum contents requirements to be in place with any controlling shareholder - any material amendment to its terms would need to be approved by independent shareholders and certain disclosures in relation to compliance would also be required to be made in the annual report; and
- additional guidance on circumstances where the FSA considers an issuer is not capable of carrying on its business independently.
Control of business (premium listing)
It is proposed that the requirement for a premium listed issuer to control the majority of its assets be amended to refer to it controlling the majority of its business, and new guidance is proposed to aid interpretation (including factors that the FSA would consider evidence that the issuer does not control its business).
Voting of shares (premium listing)
A new requirement is proposed to the effect that, where a shareholder vote is required by virtue of an issuer’s premium listing, it must be decided by holders of the issuer’s premium listed shares. This is intended to address a concern that issuers should not be eligible for premium listing where they have a share structure which allows holders of an unlisted class of shares to decide such matters. Proposed guidance indicates that circumstances where the FSA may modify this requirement would include special arrangements designed to protect national interests, dual listed company structures where holders in both companies vote as one and preference shares enfranchised as a result of the issuer’s default.
Board independence (premium listing)
The FSA has presented two options in relation to independence of directors: (i) retain the existing ‘comply or explain’ approach against the UK Corporate Governance Code; or (ii) include an additional requirement that (where an issuer has a controlling shareholder) the board must either comprise a majority of independent directors or an independent chairman and independent directors must make up at least half of the board, independence being determined by reference to the UK Corporate Governance Code.
Appointment of the independent directors would involve a dual voting structure requiring approval by shareholders as a whole and, separately, approval by independent shareholders (i.e. shareholders other than the controlling shareholder and its associates).
The FSA proposes extending the application of the Listing Principles relating to adequate systems and controls and open and co-operative interaction with the FSA to standard listed issuers.
Two further new Listing Principles are also proposed in relation to premium listed issuers: (i) the voting power of each share within a premium listed class must be equal; and (ii) where an issuer has more than one class of equity share admitted to premium listing, the aggregate voting rights of the shares in each class should be broadly proportionate to the relative interests of those classes in the issuer’s equity.
Consultation on proposed amendments relating to the implementation of the Alternative Investment Fund Managers Directive (AIFMD)
Discussion Paper 12/01 ‘Implementation of the Alternative Investment Fund Managers Directive’ (DP 12/01) was published by the FSA in January 2012. DP 12/01 covered all aspects of implementation of the AIFMD, including proposals to change the Listing Rules relating to investment entities, given the changes to the wider regulatory landscape in which fund managers will operate.
CP 12/25 notes that an AIFMD consultation paper will be published by the FSA in due course which will put forward proposals to amend the rules in light of feedback received from DP 12/01 but that the FSA felt it was more appropriate to include proposals in relation to Listing Rules changes in CP 12/25.
The FSA is proposing a new eligibility requirement and continuing obligation (to be contained in LR 15) requiring the board of the issuer to be in a position to effectively monitor and manage the performance of its key service providers (including any investment manager). It is noted that the FSA will expect boards to ensure appropriate contracts are in place upon listing and that the board is in a position to take action if the contractual obligations are breached or the contractual arrangements are no longer in the best interests of shareholders.
Responses to the proposals in CP 12/25 are requested by 2 January 2013.
(FSA: Consultation Paper 12/25, 02.10.2012)
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ESMA: Consultation Paper - Further amendments to ESMA’s recommendations for the consistent implementation of the Prospectus Regulation regarding mineral companies
On 1 October 2012, the European Securities and Markets Authority (ESMA) published a consultation paper setting out further amendments to the Committee of European Securities Regulator’s (CESR) recommendations for the consistent implementation of the Prospectus Regulation regarding mineral companies.
The consultation paper sets out ESMA’s proposals for endorsement of a further reporting code, clarifications of and amendments to CESR’s recommendations concerning mineral companies and to align the content with the amended prospectus disclosure regime, which came into force on 1 July 2012. The key areas covered in this consultation are:
- Endorsement of the NAEN Code: ESMA asks whether the Russian NAEN Code should be added to the list of recommendations of mining reporting codes suitable for use in prospectuses, following its alignment with the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) template.
- The materiality test: ESMA sets out guidance on the materiality concept for the question of whether a company has “material mineral projects” by introducing qualitative criteria to be included in the assessment and asks whether these proposed recommendations are supported.
- The Competent Person’s Report (CPR): ESMA proposes changes to the CPR regime by changing the scope and structure of the exemption to produce CPRs and certain definitions and seeks views as to whether ESMA's proposed approach to generally exempt non-equity securities (other than depositary receipts over shares) from the requirement to produce a CPR is supported.
- Other issues in need of clarification or amendment: ESMA proposes further clarifications in relation to: the application of Appendices II and III; on-site inspections; amendments to the scope of the application of the recommendations; and the requirement of a specific risk factor in a prospectus.
Responses should be received by 21 December 2012. ESMA expects to publish revised guidelines during the second quarter of 2013.
(ESMA: Consultation Paper - Further amendments to ESMA’s recommendations for the consistent implementation of the Prospectus Regulation regarding mineral companies, 01.10.12)
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ESMA: Version 17 of FAQs in relation to prospectuses published
On 28 September 2012, the European Securities and Markets Authority (ESMA) published the 17th version of its Frequently Asked Questions (FAQs) in relation to prospectuses. The FAQs, last published in early July 2012, provide responses to common questions on the Prospectus Directive and the Prospectus Regulation.
The key changes since the last version include the insertion of a new question 82 (Summaries in relation to proportionate disclosure regimes). ESMA is aware that Article 24 and Annex XXII of the Prospectus Regulation, as amended by Commission Delegated Regulation (EU) No 486/2012, which determine the disclosure requirements in summaries, contain no explicit reference to the proportionate schedules set out in Annexes XXIII to XXIX. ESMA’s view is that there was no intention to exclude the proportionate disclosure regime from the requirements for summaries, and the Commission Services confirms this view. ESMA expects that Annex XXII should also be applicable to issuers, to offerors or the person asking for admission, using the proportionate disclosure regimes and elements in Annex XXII which are not required by the relevant proportionate schedules could be left out in the summary of a prospectus which complies with the proportionate disclosure regime.
Question 81 (The consent given in “retail cascades”) and section V (Q&As on issues concerning prospectus legislation that has not yet entered into force, June 2012) have been deleted.
(ESMA: Version 17 of FAQs in relation to prospectuses published, 28.09.2012)
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HM Treasury: The Wheatley Review of LIBOR: Final Report
On 28 September 2012, HM Treasury published the final report on the review of the London Interbank Offered Rate (LIBOR), which was led by Martin Wheatley, Chief Executive-designate of the future Financial Conduct Authority (the Wheatley Review), following an initial discussion paper published in August 2012.
The Wheatley Review reached three fundamental conclusions that support its recommendations:
- There is a clear case in favour of comprehensively reforming, rather than replacing, LIBOR. Replacing LIBOR would pose an unacceptably high risk of significant financial instability and risk large-scale litigation between parties holding contracts that reference LIBOR. Furthermore, LIBOR clearly plays a large role in financial markets for which there is no immediately obvious alternative.
- Transaction data should be explicitly used to support LIBOR submissions. A number of the Wheatley Review’s recommendations are intended to establish strict and detailed processes for verifying submissions against transaction data and limiting the publication of LIBOR to those currencies and tenors that are supported by sufficient transaction data.
- Market participants should continue to play a significant role in the production and oversight of LIBOR.
The Wheatley Review sets out a ten-point plan for the reform of LIBOR, including:
- New regulation of LIBOR;
- Institutional reform;
- The rules governing LIBOR;
- Immediate improvements to LIBOR, including the publication of individual LIBOR submissions and banks to be encouraged to participate in the LIBOR compilation process;
- International co-ordination.
The Wheatley Review contains recommendations for the Government, the British Bankers’ Association (BBA), banks, and the regulatory authorities both in the UK and internationally. The conduct business unit of the Financial Services Authority, and in particular the markets division, will work closely with the BBA and the banks to ensure that the recommendations addressed to market participants are implemented. The Financial Services Bill, which is currently being considered by the House of Lords, will be the legislative vehicle for taking the recommendations forward.
(HM Treasury: The Wheatley Review of LIBOR: final report, 28.09.2012)
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