This first edition of 2023 covers recent guidance from the FCA’s Primary Market Bulletin 42 and Market Watch 71, major changes to the Takeover Code’s “acting in concert” presumptions, an FCA penalty for publishing misleading information, EU proposals to reduce the compliance burden of the Market Abuse Regulation (MAR), and key topics to consider heading into the 2023 AGM and reporting season.
FCA Newsletter Highlights Common Compliance Gaps
On 12 December 2022, the FCA published Primary Market Bulletin 42 which provides key guidance to listed companies, including:
- Unlawful disclosure of inside information — The FCA described highlights of a recent enforcement decision and general themes arising from enquiries that the FCA carried out regarding suspected unlawful disclosures. Takeaways:
- MAR does not prohibit discussions of a general nature between a listed company and its shareholders, and the FCA explicitly recognized the value of high quality shareholder engagement. However, no investor should be given an unjustifiable or unfair advantage by being provided with inside information, as the usual rules in MAR around the strict necessity of providing inside information continue to apply to shareholder engagement.
- Imposing confidentiality and no-dealing obligations on the recipient of inside information does not render a disclosure lawful if it was not strictly necessary for the exercise of an employment, profession, or duties.
- Situations which present a particular risk of unlawful disclosure of inside information include social media, leaks to mainstream media, fundraisings, and going off-script at analyst and media briefings.
- Climate-related financial disclosures — To help listed companies with their climate-related financial disclosures, the FCA provided reminders of its rules, guidance, and expectations. For further details, see “Key Topics for the 2023 UK AGM and Reporting Season” below.
- The National Security and Investment Act (NSIA) — Listed companies need to consider their obligations under MAR to disclose inside information when acquisitions are subject to review or assessment under the NSIA. This requirement could be a challenge because the Secretary of State’s interim and final orders are not public (although certain details from a final order would be made public through a notice on the government website). The Department for Business, Energy and Industrial Strategy (BEIS) may also impose non-disclosure restrictions on national security grounds. In such instances, the listed company should contact BEIS and the FCA in advance, given failure to disclose inside information could otherwise result in the suspension of its securities.
FCA Reminds Advisory Firms to Maintain Complete Insider Lists
On 13 December 2022, the FCA published Market Watch 71 which raised important points on insider lists. Listed companies should consider the guidance in this publication although it focuses on the insider lists of advisory firms:
- The number of “permanent insiders” has significantly reduced at several advisory firms. Shorter permanent insider lists generally represent the preferred approach since they limit the opportunities for unlawful disclosure of that information.
- MAR requires advisory firms to include personal information in insider lists and no exemptions apply in relation to local data protection laws. Issuers need to ensure that firms contracting with them provide personal data in response to regulatory requests.
Significant Changes to Takeover Code “Acting in Concert” Presumptions Taking Effect 20 February
On 14 December 2022, the Takeover Panel published Response Statement RS 2022/2, the individual responses received from respondents to the consultation paper PCP 2022/2, and Instrument 2022/6 which sets out amendments to the “acting in concert” presumptions and related provisions of the Takeover Code taking effect on 20 February 2023.
Many investors in UK listed companies are already reviewing the changes to reassess how the presumptions apply to their investment structures.
Key changes include:
- The Panel replaces the previous “associated company” presumption with:
- new presumption (1) related to a presumption a company is acting in concert with any company which it controls, or controlled by or is under the same control as, and where the control threshold is ≥30% voting interest or >50% equity interest; and
- new presumption (2) which refers to direct or indirect control through equity interests. Crucially, the threshold for control has increased from 20% to 30% of the equity share capital.
- Updates to the presumptions and related provisions in relation to investment funds, investment managers, and investors. The new presumptions (1) and (2) would apply to interests in funds similar to interests in company shares, which would determine whether an investor would be presumed to be acting in concert with a fund investing in a bid vehicle or acting as the offeror.
RS 2022/2 also includes Panel guidance on how the presumptions apply and the circumstances in which the presumptions may be rebutted. In particular, the response statement provides guidance on the application of new presumptions (1) and (2) to joint ventures and government-owned entities, and updates to the Panel’s practice in relation to private-equity portfolio companies.
Most of the changes codify current Panel practice in relation to the “acting in concert” presumptions, which previously were largely unchanged since first introduced in the 1970s. Although highly technical, the amendments and guidance within RS 2022/2 serve to clarify the rules and enhance their prescriptive character. This will likely reduce the Panel’s tolerance for missteps in the future, highlighting the importance of early advice.
Metro Bank plc Fined for Publishing Misleading Information
On 8 December 2022, the FCA imposed on Metro Bank a financial penalty of £10,002,300 for its contravention of Listing Rule 1.3.3R (misleading information not to be published). By way of background, Metro Bank regularly reported to the market certain data regarding the “Risk Weighted Assets” (RWA) on which its regulatory capital requirements are based. On 24 October 2018, Metro Bank published incorrect information concerning its RWA figure in its third quarter trading update, despite being aware at the time that this figure was wrong.
This decision serves as an important reminder for listed companies in that compliance with their disclosure obligations is not merely a matter of determining the existence of inside information (and when to disclose) - they also need to take reasonable care to ensure that their disclosures are not misleading, false or deceptive and do not omit relevant information. In this case, Metro Bank failed to consider whether the incorrect RWA figure ought to be qualified or explained in the trading update, and also failed to specifically seek legal advice on including the inaccurate and unqualified RWA figure in the trading update.
Potential Divergence Between EU and UK Requirements to Disclose Inside Information
- On 7 December 2022, the EU Commission published a package of legislative proposals which include proposals to reduce the regulatory burden of the EU Market Abuse Regulation. If enacted, the changes could result in significant regulatory divergence with the UK (given that the UK has not, to date, proposed similar reforms). The proposals include:
- General disclosure obligation — the scope of a listed company’s general disclosure obligation in the case of a protracted process (such as a M&A transaction) would no longer cover the intermediate steps of that process. Further, any decision to delay the disclosure of inside information would need to be disclosed to the competent authority immediately after the decision to delay, rather than immediately after the information is eventually disclosed.
- Insider lists — listed companies (but not persons acting on their behalf, such as advisers) would be permitted to draw-up a less burdensome list of “permanent insiders”.
- PDMR transactions — the threshold above which PDMRs are required to disclose their dealings would be increased, and the list of exemptions to the closed period prohibition against PDMR dealings would be expanded.
- Market soundings — the proposals clarify that the market soundings regime operates as an optional safe-harbour against any allegation of unlawful disclosure of inside information (an important change from ESMA’s recent pronouncements).
Key Topics for the 2023 UK AGM and Reporting Season
Latham has published a Client Alert setting out key focus areas for the 2023 UK AGM and reporting season. Main points:
- Given the recent developments around climate-related reporting, companies can expect more scrutiny on climate matters in this reporting season. New boardroom diversity disclosure requirements will also apply to financial years beginning on or after 1 April 2022.
- Executive remuneration will face scrutiny in terms of the cost-of-living crisis, windfall gains arising from the vesting of awards granted during the pandemic, and alignment of pension contributions across the workforce.
- Companies should consider recent guidance on AGM meeting formats and comply with requirements around the structured filing of annual financial reports.
In addition, reporting teams (together with audit committee chairs and company secretaries) should consider the FRC’s “What makes a good Annual Report and Accounts” report (published on 13 December 2022) which identifies the characteristics generally associated with a high quality annual report and provides a range of good practice examples. Broadly, these attributes are: (i) compliance with relevant accounting standards, laws and regulations; (ii) being responsive to the needs of stakeholders; and (iii) demonstrating the corporate reporting principles and effective communication characteristics as outlined in the report.