corporate update july 2015 - clifford chance...of a new market abuse regime the current uk market...

July 2015

Corporate Update July 2015

Contents1. Company Law Update 2

2. Case Law Update 10

3. Corporate Governance Update 12

4. Regulatory Update 14

5. Takeovers Update 19

6. Antitrust Update 20

In this edition, we look ahead 12 monthsto the implementation of the EU MarketAbuse Regulation in July 2016 which willbring about changes to the currentmarket abuse regime. We highlight thekey issues that will affect UK premium andstandard listed companies and addressthe changes that they will need to get togrips with in order to be ready for theimplementation of the new legislation.

In March this year, the Small Business,Enterprise and Employment Act 2015came into force. We review the progressin implementing some of the keyprovisions of that Act, namely therequirement for certain companies toestablish a register of people withsignificant control, the ban oncorporate directors (in respect of which

implementation in October 2015 hasnow been delayed) and the requirementfor certain companies to report onpayment practices.

We also take a look at the recent £4.6mfine issued by the FCA to Asia ResourceMinerals for breach of the ListingPrinciples, Listing Rules and theDisclosure and Transparency Rules. Likethe fine issued to Reckitt Benckiser inJanuary this year, this case highlights yetagain that it is not sufficient forcompanies simply to put in placecompliance policies without ensuring thatthey are properly implemented, withrelevant staff training where necessary,and their effectiveness monitored goingforward to ensure due compliance.

Welcome to the July 2015 edition of Corporate Update, our bi-annual bulletin in whichwe bring together the key developments in company law and corporate financeregulation which have occurred over the previous six months and consider how thesemight impact your business. In addition, we look ahead to forthcoming legal andregulatory change.

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2 Corporate Update

The countdownbegins: 12 monthsto implementationof a new marketabuse regimeThe current UK market abuse regime isderived from the EU Market AbuseDirective (MAD) which established anEU-wide framework for tackling marketabuse and market manipulation.However, since MAD’s adoption in 2003,the financial markets have seen both thecreation of new forms of financialinstruments and the emergence of newtrading platforms. This has been coupledwith a poor track record for theprevention and enforcement of marketabuse in some Member States. Againstthis backdrop, the Market AbuseRegulation (MAR) was negotiated and isintended to update and strengthen theexisting EU market abuse regime.Companies will need to start planningnow to ensure they are ready for theimplementation of MAR in July 2016.

Structure of the new regimeMAR will have direct effect in MemberStates from 3 July 2016, and will besupplemented by supporting regulations(in the form of technical advice andstandards) which are currently beingprepared by the European Securities andMarkets Authority (ESMA) for theEuropean Commission. There is also likelyto be further Q&A guidance issued byESMA, and finally, national implementationvia changes to the Financial Services andMarkets Act 2000 and the Listing Rulesand the Disclosure Rules. A FCA/HMTconsultation paper on these changes isexpected in late summer 2015.

MAR is complemented by the Directiveon Criminal Sanctions for Market Abuse1

(CSMAD), although the UK has chosennot to opt-in to CSMAD on the basisthat criminal sanctions for insider dealingand market manipulation already exist inthe UK under the Criminal Justice Act1993 and the Financial Services Act2012. Note however that, whilst the UKhas not opted into CSMAD, there maywell be further changes to the sanctionsthat apply to the criminal offences ofinsider dealing and market manipulation.On 10 June 2015, the Bank of Englandpublished its Fair and Effective MarketsReview. The review recommends thatthe maximum sentence in the UK forboth insider dealing and marketmanipulation be extended from sevenyears to ten years, in line with otherfraud or bribery offences. It remains tobe seen whether the government actson this recommendation.

Key changes beingintroduced by MARUntil all of the regulatory changes referredto above are put in place, it is notpossible to fully understand the changesin detail, but key points to note include:

n MAR will apply to a wider range ofsecurities and derivatives than thecurrent regime e.g. it will also applyto financial instruments on othertrading platforms including MTFs(multilateral trading facilities, such asAIM) and OTFs (organised tradingfacilities) and will cover the trading ofemissions allowances.

n The definition of “inside information”and the insider dealing offence will belargely unchanged, although there willbe a new offence of cancelling oramending orders whilst in possessionof inside information.

n An issuer will still be able to delayannouncing inside information so asnot to prejudice its legitimate interests,but if it does so, there will be a newobligation on announcement to informthe regulator of its decision to delayand to explain in writing why it thinksthe delay was permissible (note thatthe FCA has a discretion onimplementation to require that such anexplanation need only be provided ifrequested by the FCA).

n As a result of the wider scope ofMAR, more issuers will be required tokeep insider lists and issuers will berequired to ensure insider lists follow aprescribed format, the detail of whichis still under review.

n The introduction of a de minimisthreshold for notification by personsdischarging managerial responsibility(PDMRs) of transactions in theissuer’s securities of €5,000per calendar year (to be calculated byadding without netting all relevanttransactions). The FCA has the powerto raise this threshold to €20,000 if itso chooses.

n The time limit for notification ofdealings by PDMRs will be reduced tothree business days, although, inpractice, the obligation is generallysatisfied more quickly than this.

n New rules will cover marketsoundings which are undertaken togauge investor interest in offerings ofsecurities or in connection withproposed takeovers and mergers.

Planning aheadThere are a number of issues that directors,in-house legal teams and companysecretaries will need to think about inadvance of MAR taking effect in July 2016.

Company Law Update

1 EU Directive 2014/57/EU

© Clifford Chance, July 2015

Corporate Update 3

Record keepingThe introduction of a new requirement tonotify the FCA of any decision to delaythe announcement of any insideinformation at the same time as theinformation is announced to the marketwill require some thought. In particular,companies will need to consider thenature of the records that they will needto maintain during the period of the delayin order to demonstrate, if asked by theFCA to provide an explanation in writing,why they believed the delay waslegitimate. This is likely to mean that acompany will need to keep detailedrecords of the reasons why it initiallybelieved it was legitimate to delayannouncing inside information and, as thesituation progressed, how it continued to

satisfy itself that it remained legitimate notto announce such information.Companies will need to update theirdisclosure policies to reflect the newprocedures for delaying disclosure ofinside information.

In addition, when providing a writtenexplanation to the FCA, care will need tobe taken to ensure that, where legaladvice has been sought about thecompany’s ability to delay announcinginside information, the substance of thatadvice is not disclosed in a manner whichwould result in legal privilege being waived.

Changes to share dealing codeCompanies will also need to amend theirshare dealing code. The time limit fornotification to the company of PDMR

dealings is to be shortened to threebusiness days (currently four businessdays under DTR 3) and a de minimisthreshold is to be introduced meaningthat, helpfully, fewer PDMR notificationsare likely to be required. Relevantdealings should, in any event, be notifiedas soon as possible and the current four(and the new three) day deadline is, ineffect, a long stop date.

In a change to the current position underMAD, MAR will prohibit trading byPDMRs in close period, a concept thatalready exists under the FCA’s ModelCode. However, under MAR theprohibition only applies during the 30 dayperiod before the announcement of aninterim financial report or a year-end


Published in Official Journal

and in force (12 June 2014)

ESMA published draft Technical Standards

on MAR and draft Technical Advice on possible delegated acts under MAR

(July 2014)

ESMA published Final Report on

Technical Advice on possible delegated acts under MAR (February 2015)

Commission likely to publish final delegated acts

Publication by ESMA of Final Report on

Technical Standards delayed from July to

September 2015

FCA expected to begin

consultation on national

implementation

Consultation on national implementation

ESMA/Commission Consultation on level 2 measures

Co

nsul

tatio

n/ad

op

tion

of

Leve

l 2 m

easu

res

Leve

l 1 a

nd n

atio

nal

tran

spo

sitio

n

Note:n The Commission/ESMA may develop FAQs and Guidance

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2014 2015 2016

MAR takes effect CSMAD to be

implemented by Member States MAD repealed (3 July 2016)

Final provisions of MAR take effect (3 January 2017)

2017

EU Market Abuse Regulation Implementation Timeline

4 Corporate Update

report which the company is obliged tomake public according to the rules of thetrading venue on which the company’sshares are admitted to trading or nationallaw2. For companies admitted to tradingon the main market of the London StockExchange, they are required, pursuant toDTR 4, to publish half-year and full yearresults. They are not required, althoughthey may chose, to publish a preliminaryresults announcement. Under the ModelCode, there would currently be a closeperiod prior to publication of apreliminary results announcement, butupon publication of the preliminaryresults announcements, the companywould no longer be treated as being in aclose period and PDMRs would not beprevented from dealing in the company’sshares unless it or they were otherwise inpossession of inside information. UnderMAR, publication of a preliminary resultsannouncement would not bring a closeperiod to an end and the close periodwould continue to apply up topublication of the company’s annualfinancial report. This could have thepractical effect of significantly reducingthe “open” period in which PDMRs candeal during the course of a year.

There are also differences between thecircumstances in which the Model Codewould currently permit dealings duringclose periods and those in which PDMRswould be permitted to deal during a closeperiod under MAR. For example, MARdoes not include exemptions for theacceptance of a takeover offer or thetake up of entitlements pursuant to arights issue during a close period. Toreflect these changes, companies willneed to issue revised versions of theirdealing codes, as well as ensuring thattheir PDMRs receive training in advance

of the new rules coming into effect inorder to ensure they fully understand thechanges and are able to ensurecompliance with them.

Prescribed format for insider listsMAR also prescribes a detailed format forinsider lists. This has caused muchdebate since the format of the proposedinsider list was published by ESMA. It isbelieved by many to be too detailed andrequires, at best, superfluous informationand, at worst, information that may put acompany in breach of its data protectionobligations. ESMA’s proposals in thisregard have not yet been finalised and weare not expecting their final report on thisissue until September 2015. In any event,companies will need to publish revisedguidance on the maintenance of insiderlists and ensure existing lists areamended to meet the prescribed format.

Small Business,Enterprise andEmployment Act2015 now in forceAs anticipated, the Small Business,Enterprise and Employment Act 2015(SBEE) received Royal Assent on26 March 2015 and the provisions dealingwith the prohibition/abolition of bearershares came into force two months afterthat date. Other provisions of the SBEE,which are not yet in force, but which areof interest to corporates include therequirement for companies (other thanDTR 5 issuers) to keep a register ofpeople with significant control over thecompany, the ban on corporate directorsand the requirement for large companiesto report on their payment practices.

Creating a Register ofPeople with SignificantControlAs discussed in previous editions ofCorporate Update, one of the mostsignificant elements of the government’stransparency and trust agenda has beenthe creation of a central public register ofpeople with significant control (PSCs)over UK companies (sometimes referredto as a register of beneficial owners). Thepurpose of such a register is, in thegovernment’s view, to increase theaccountability of companies by making iteasier to see who actually owns orcontrols them and who might be makingdecisions about how they are run.

The government legislated for this in theSBEE. The SBEE includes a new


Editor Comment:We are still waiting for ESMA to finaliseits technical standards and we are notexpecting the FCA and HM Treasury tobegin consultation on the nationalimplementation of MAR until latesummer 2015. Until we have thecomplete picture, it is difficult to bedefinitive about the extent of thechanges that companies will need tomake. For now, companies shouldkeep a watching brief and plan tomake time during the coming year toconsider and implement the changesthat they will, inevitably, need to makein advance of July 2016. Ensuring thattheir management teams are fullyaware of the new requirements shouldalso be a key area of focus.

2 Article 19(11) MAR

Corporate Update 5

obligation on companies to maintain aregister of people with significant controlover them (the PSC register).Companies will then have to provide thisinformation to Companies House, whereit will be made publicly available in acentral searchable register. The SBEEalso sets out the duties on companies toobtain and on PSCs/relevant legalentities to supply information to beincluded in the PSC register (and to keepsuch information up to date); provisionsdealing with the consequences of failureto obtain/supply such information (acriminal offence for the company/officersin default; and which may result in thePSC’s/relevant legal entity’s interest inthe company being frozen); rights toinspect the PSC register and detailedprovisions as to whether a person/legalentity is a PSC (or, in the case of a legalentity, would be a PSC if it were anindividual) in relation to a company.These provisions are due to come intoforce in January 2016. However, much ofthe additional detail has been left to beincluded in regulations.

On 19 June 2015 BIS published the firstdraft of one set of such regulations aspart of a consultation paper in relation tothe Register of People with SignificantControl covering the scope, nature andextent of control, the fees companies cancharge for providing copies of the entriesin their PSC register, the protectionregime and warning and restrictionsnotices (see below for more on each ofthese). On 23 June 2015 BIS updatedthis consultation paper to state that it haddecided not to implement the ban oncorporate directors in October 2015, andthat it would announce its intentions forimplementing these provisions shortly(see below for further discussion of this).

Overview of the PSC regimeThe consultation contains a helpfuloverview of the PSC regime. The firststep is to determine whether an individualor legal entity satisfies one or more of thefollowing conditions:

1. directly or indirectly owns more than25% of the shares in the company;

2. directly or indirectly holds more than25% of the voting rights inthe company;

3. directly or indirectly has the power toappoint or remove the majority of theboard of directors of the company;

4. otherwise has the right to exercise(or actually exercises) significantinfluence or control over the company(statutory guidance on what thismeans is currently being prepared); or

5. has the right to exercise or actuallyexercises significant influence orcontrol over a trust or firm that is nota legal entity, which in turn satisfiesany of the first four conditions overthe company.

A PSC is defined in the SBEE as a person(i.e. an individual) who meets one or moreof the conditions. For many corporategroups, it will often be a legal entity (i.e.another group company) rather than anindividual that fulfils one or more of theconditions set out above. Entities thatsatisfy one of the conditions and arerequired to hold a PSC registerthemselves or are a DTR 5 issuer(or similar) are called relevant legal entities.

Once you have identified a PSC or arelevant legal entity, the next step is towork out whether the PSC or the relevant


6 Corporate Update


legal entity is registrable ornon-registrable. In the case of acorporate chain of companies, each ofwhich is a relevant legal entity, only thefirst entity in the chain will be registrable.The entities further up the chain arenon-registrable. This is to avoid having toinclude all of the entities in the chain inthe PSC register given it is possible totrack the information through the chain bylooking at the PSC register of each entityin the chain. A similar approach isadopted with regard to individuals whohold their interests in a company througha chain of relevant legal entities, so thatonly the first relevant legal entity in thechain needs to be entered in the relevantcompany’s PSC register. In order for therelevant legal entities to be part of a chainof legal entities for SBEE purposes, eachcompany in the chain (other than the last)must have a majority stake in the entityimmediately below it in the chain.A “majority stake” is defined as holding orcontrolling a majority of the voting rights,having the right to appoint or remove amajority of the board of directors orotherwise having the right to exercise oractually exercising dominant influence orcontrol (similar to the subsidiaryundertaking test in the CompaniesAct 2006).

All UK incorporated companies, otherthan DTR 5 issuers or other companiesthat are subject to similar disclosureregimes, must hold their own PSCregister from January 2016. DTR 5issuers have been exempted from thenew regime (and the government isproposing to exempt companies subjectto similar disclosure regimes) on the basisthat they already have to provide asubstantial amount of information abouttheir major owners and the governmentfelt that it was an unnecessary duplication

to require these companies to provideinformation about their controlling ownersin different formats to different authorities.Further regulations will apply the regimeto LLPs and UK Societas Europaea (SEs),and adapt it for foreign limitedpartnerships (so that only the generalpartner/manger and not the limitedpartners are caught) as well asimplementing it for corporations sole andgovernment bodies etc. From April 2016onwards, companies (and other entitieswithin the scope of the regime) will needto send the information to CompaniesHouse with their confirmation statement(which replaces the annual return), whichwill then be included in the centralpublic register.

Details contained in the draftregulationsThe draft regulations and the consultationpaper cover the following areas:

n Which companies should not berequired to keep a PSC register – thegovernment is proposing to add anexemption for companies that havevoting shares admitted to trading on aregulated market in any EEA state(on the basis that they are subject tosimilar disclosure/transparencyrequirements to those in DTR 5).

n Recording the nature and extent ofcontrol – the SBEE sets out theinformation that should be recorded inthe PSC register, which, for individualsor relevant legal entities, includes theirname, residential or registeredaddress (which will not be madepublicly available), a service address,date of birth (for individuals) andinformation about how they havesignificant control. To address this lastpoint, the draft regulations proposerequiring a statement to be includedin the PSC register indicating which ofthe conditions (1 to 5 above) are met

and to what extent i.e. over 25% to50%; over 50% to 75%; and over75% in the case of holdings of sharesor voting rights. The consultationpaper seeks views on this approachand in particular whether it would behelpful to have another category of100%. It also suggests requiringcompanies to include certain otherstatements in the register e.g. thatthere is no PSC/relevant legal entity orwhere the company has been unableto identify a PSC/relevant legal entity.

n The fees that companies can chargefor providing copies of entries in theirPSC register.

n The protection regime – theregulations propose that anapplication for “protection” can onlybe made in “exceptional”circumstances i.e. where theapplicant reasonably believes thatthere is a serious risk that the PSC(being an individual), or a person wholives with them, will be subjected toviolence or intimidation broadly as aresult of the activities of thecompanies of which they are PSCsor directors.

n Warning and restrictions notices – if acompany identifies a person or entitythat should be included in its PSCregister, or who might have knowledgeof such a person or entity, it may berequired to contact them (by serving anotice under s.790D or E of theCompanies Act 2006 (as amended bythe SBEE)) in order to obtain thedetails needed for its PSC register. If aperson or entity fails to respond tosuch a notice within one month thecompany may send them a warningnotice, which will inform them that thecompany is proposing to issue themwith a restrictions notice. Failure torespond to the warning notice within afurther one month period will entitle

Corporate Update 7

the company to issue a restrictionsnotice, freezing the person or entity’sinterest in the company until thecompany obtains the information itsneeds and lifts the restrictions. Whilstthe shares or rights are frozen in thisway, the holder of the interest will notbe able to sell, transfer or receive anybenefit from the shares or rights. Thedraft regulations set out proposals forwhat information must be included inthe warning and restrictions notices,and what might constitute a validreason for not responding. Thegovernment is seeking views onthese points.

Further changes aheadIt is worth noting that the EU FourthMoney Laundering Directive, which wasadopted in June 2015, will require allMember States to hold central registersof company beneficial ownershipinformation from 2017. Theserequirements are similar in many respectsto those contained in the SBEE. Anyadditional requirements will not beimplemented until 2017 and will be thesubject of separate consultations byHM Treasury.

The BIS consultation closes on 17 July2015 and a copy can be obtained fromhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/395478/bis-14-1145-the-register-of-people-with-significant-control-psc-register-register-final-1.pdf.

Exception to the ban oncorporate directorsAs mentioned in the January 2015 editionof Corporate Update, in November 2014BIS consulted on whether the Secretaryof State should make exceptions to theban on corporate directors contained inthe SBEE. In response to the feedback

received, it published a questionnaire inMarch 2015 seeking views on whether a“principles based” exception should beintroduced. This “principles based”exception proposes that a company mayonly appoint a corporate director if all ofthe directors of the corporate director arethemselves natural persons and the lawunder which the corporate director isestablished (if overseas corporatedirectors are to be permitted) requirescertain details of the directors of thecorporate director to be included in apublicly available register. Thequestionnaire also covered whether thecorporate director could be somethingother than a UK incorporated companye.g. an LLP, European or overseascompany; if it were an LLP, whether all ofits members would have to be naturalpersons; if it were an overseas companywho would be the equivalent of thedirectors who would have to be naturalpersons and what details of these

persons would have to be publiclyavailable. The deadline for responses was27 April 2015 and we are currentlyawaiting the outcome. However, asmentioned above, BIS has announcedthat it intends to postpone theimplementation of the ban on corporatedirectors beyond the previouslyannounced date of October 2015.

Reporting on paymentpracticesThe SBEE also contains a power for theSecretary of State to make regulationsrequiring certain types of (large) companyto report on their payment practices andpolicies. On 20 March 2015 BISpublished a statement setting out itsplans for implementing this regime and anindicative format for the report; as aresult, large companies will be required toreport on their payment practices andpolicies from April 2016.


https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/395478/bis-14-1145-the-register-of-people-with-significant-control-psc-register-register-final-1.pdf





8 Corporate Update

The stated purpose of these newprovisions is to tackle the UK’s latepayment culture, which the governmentperceives to be a significant problem forthe UK economy and small businesses inparticular. The government wants largebusinesses to lead by example in payingtheir suppliers promptly and fairly, with 30days terms the norm and 60 days themaximum. Whether these reforms willachieve these aims remains to be seen.

The government has concluded that thereporting duty should only be mandatedfor large organisations, by which theymean large quoted companies, largeprivate companies and large LLPs. Smalland medium sized quoted companies willnot be caught. The definitions of small,medium and large to be used are thoseset out in the Companies Act 2006 i.e. acompany is large if it satisfies two ormore of the following conditions: turnoverof more than £25.9m; balance sheet totalof more than £12.9m; or more than250 employees. Interestingly, previousprovisions requiring disclosure around acompany’s policy and practice onpayment of creditors in the Large andMedium Sized Companies and Groups(Accounts and Reports) Regulations 2008were revoked back in October 2013.

The types of payment which are caughtby the regulations are in respect ofbusiness to business contracts(for example contracts for goods,services or intangible assets (such asintellectual property) and which areconnected to the carrying on of abusiness). Financial services contracts arespecifically excluded. The report willinclude, amongst other things, details of

standard payment terms; the averagetime taken to pay; and the proportion ofinvoices paid in 30 days or less (“goodpractice”), between 31 and 60 days andbeyond 60 days (“bad practice”).Reporting will be on a half-yearly basisand the reports will need to be providedin open data format to a single centrallocation. The government has said that itis going to work with stakeholders in thecoming months to design and implementa system that is as business- anduser-friendly as possible, and that thepurpose of publishing the statement inMarch 2015 was to give those affectedas much notice as possible of theirfuture obligations.

Companies tobe required tomake “slavery andhuman trafficking”statementThe Modern Slavery Act received RoyalAssent on 26 March 2015 and will requirecertain businesses to disclose what stepsthey are taking to eliminate slavery andtrafficking from their supply chain andtheir own business.

The Act consolidates offences relating toslavery and human trafficking and, inparticular, section 54 will requirecommercial organisations who supplygoods or services and have a prescribedminimum turnover (to be specified inregulations yet to be published) toprepare a slavery and human traffickingstatement for each financial year. The

statement should outline the steps thatthe organisation has taken during thefinancial year to ensure that slavery andhuman trafficking is not taking place inany part of its supply chain or any part ofits business, or, where the organisationhas taken no such steps, to provide astatement to that effect.

The statement will not be required to beincluded in a company’s strategic report.The Act mandates that companies makea stand-alone and readily accessiblestatement on an annual basis that mustbe published on their website. In addition,a company must include a link in aprominent position to the statement on itswebsite homepage.

BIS is currently consulting on the size ofbusinesses that will be required tocomply with the requirement to make aslavery and human trafficking statementand the content of that statement. Nodate has been set for section 54 of theAct to come into force.

EU proposals toreward long termshare ownershipIn our July 2014 edition of CorporateUpdate we reported on the EUCommission’s proposals to amend theEU Shareholder Rights Directive, adirective that was first adopted back inJuly 2007 with the aim of improvingcorporate governance for companies inthe EU with shares admitted to trading onregulated markets.


Corporate Update 9

Draft legislation is currently making itsway through the European legislativeprocess. One particularly interestingprovision has been inserted into the draftdirective by the Legal Affairs Committeeof the European Parliament that wouldrequire member states to introducespecific mechanisms to reward long-termshareholders. These mechanisms shouldinclude one or more of the following:

n additional voting rights;

n tax incentives;

n loyalty dividends;

n loyalty shares.

It would be up to member states todefine “long term”, but it should not meanless than two years. The concept of “longterm” shareholders having additionalvoting rights would go against the FCA’slisting principles, applicable to premiumlisted companies, that state that all equityshares must carry an equal number ofvotes on any shareholder vote (PremiumListing Principle 3). Interestingly, inFrance, double voting rights for long-terminvestors is a long-established principle,although concerns have been expressedthat this practice enables entrenchedinvestors to use their powers todisenfranchise minority shareholders andundermine corporate governance.


Editor Comment:The proposals for an amendedShareholder Rights Directive still havesome way to travel through theEuropean legislative process and itmay be that this proposal does notmake it into the final directive. If it doeshowever, it would signal a significantredistribution of power in favour oflong-term shareholders in UK listedcompanies. There are a number ofsignificant challenges that will need tobe addressed if this proposal were tobecome law, not least, how companiescan identify who is a truly long-termshareholder given the use of nomineesand corporate vehicles to hold shares.In addition, in an environment whereinstitutional investors are encouragedto disclosure the way in which theyvote, the introduction of loyalty shareswill distort, rather than assist,transparency of voting behaviour.Whether such proposals will actuallyresult in improved corporategovernance is very much upfor debate.

10 Corporate Update

Contractualinterpretation:commercialcommon sensedoes not over ridethe importance ofthe actual wordsBy a majority decision (4:1), theSupreme Court has confirmed that wherethe meaning of a particular contractualprovision is clear, commercial commonsense is not a relevant consideration andthe court will not step in to preventa party from being bound by abad bargain3.

FactsA dispute arose between the landlord ofOxwich Leisure Park and the tenants of21 of the 91 chalets at the Park, each ofwhich was let on a 99 year lease, underthe terms of which tenants were requiredto pay an annual service charge to covermaintenance expenses. The leases inrelation to the other 70 chalets had allbeen granted in the early 1970s, with the21 leases which were in dispute havingbeen granted after 1977.

The disputed leases each contained acovenant (in varying formulations) for thelessees to pay “a proportionate part ofthe expenses and outgoings incurred bythe Lessor in the repair maintenancerenewal and the provision of services

hereafter set out in the yearly sum ofNinety Pounds…for the first Year of theterm hereby granted increasing thereafterby Ten Pounds per hundred for everysubsequent year or part thereof”. Thiswould mean that by the end of the leaseeach tenant would be paying an annualservice charge of over £1million. In theother 70 leases, the leases provided foran initial service charge of £90 whichincreased at a compound rate of 10%every three years, rather than annually.

The tenants under the disputed leasesargued that the figure that they wouldeventually have to pay under the relevantservice charge clause was so absurdlyhigh that it could not possibly be right andthat they should only be liable for a fairproportion of the lessor’s costs ofproviding the maintenance services andthat the clause should be read as if thewords “up to” were inserted before “Ten”,so that the £90 duly compounded actedas a cap rather than an absolute sum due.

Majority view ofSupreme CourtThe court was of the view that the naturalmeaning of the wording was that thelessees had to pay £90 a year,compounded annually at 10%. Theunfortunate escalation in payments wasnot enough to allow the court to departfrom that meaning. In context, there wasno obvious mistake because, between1974 and 1981 (the time at which manyof the disputed leases were entered into)inflation had been well over 10% a yearand the lessor took the risk that inflation

would continue at that kind of level forthe remainder of the term while thelessees took the risk that it would drop,as in fact it did.

Of more far-reaching importance are LordNeuberger’s comments about theimportance of the language used by theparties (with which the majority agreed).In particular, he was of the view that:

n the reliance placed in some cases oncommercial common sense and thesurrounding circumstances should notbe invoked to undermine theimportance of the language of theprovision which is to be construed;

n when it comes to considering the keywords to be interpreted, the less clear


Case Law Update

3 Arnold v Britton and others [2015] UKSC 36

they are or, put another way, thepoorer the drafting, the more readythe court should be to depart fromtheir natural meaning;

n commercial common sense shouldnot be invoked retrospectively, inother words, it is only relevant to theextent of how matters would or couldhave been perceived by the parties,or by reasonable persons in theposition of the parties, at the date thecontract was made; and

n the court should be slow to reject thenatural meaning of a provision simplybecause it appears that one of theparties has made a bad bargain.

For more information on contractualinterpretation, see our briefingContractual Interpretation: shades of greywhich is available athttp://www.cliffordchance.com/briefings/2015/06/contractual_interpretationshadesofgrey-jun.html


Corporate Update 11

Editor Comment:Over recent years we have seen amove by the courts away fromapplying a strict literal approach to theinterpretation of commercial contractsto a much more purposive approach.In this decision, the Supreme Courthas signalled a clear reversal of thisposition, placing greater emphasis onthe words in the contract, emphasisingthat interpretation should focus on thewords the parties have chosen toexpress their bargain and should notinvolve the court creating a deal thatthe parties might have reached if theyhad anticipated the events thattranspired. The decision reinforces theneed to get the drafting right at theoutset and, in reaching agreement, tolook ahead and consider the possibleoutcomes and consequences thatmight arise in the future.

http://www.cliffordchance.com/briefings/2015/06/contractual_interpretationshadesofgrey-jun.html



New flexibilityto undertake nonpre-emptiveshare issues inconnection withacquisitions/specificcapital investmentsIn March 2015, the Pre-Emption Grouppublished an updated Statement ofPrinciples (2015 Principles) which set outthe institutional investor community’sviews on the disapplication of pre-emptionrights by premium listed companies andissues of shares for cash on a nonpre-emptive basis. The Principles werelast published in 2008 (2008 Principles).

The general principle, which was set outin the 2008 Principles, is that companiesmay seek an annual disapplication ofpre-emption rights in respect of 5% ofissued share capital for general corporatepurposes. The 2015 Principles introducea new flexibility which enables companiesto seek a disapplication for up to a further5% of issued ordinary share capital foruse in connection with either anacquisition or a specified capitalinvestment. In the circular for the AGM atwhich such additional authority is sought,the company should confirm that itintends to use the additional 5%disapplication only in connection with anacquisition or specified capital investmentwhich is either announcedcontemporaneously with the issue orwhich has taken place in the precedingsix-month period and is disclosed in theannouncement of the issue. Since thepublication of the 2015 Principles,approximately 20% of FTSE 250companies have sought authority for theadditional disapplication.

Other key changes to the 2008Principles include:

n A statement that companies with astandard listing or admitted to tradingon AIM are encouraged to adopt the2015 Principles.

n Confirmation that the 2015 Principlesapply to cash box structures. Manycompanies have utilised a cash boxplacing structure (treated as an issuefor non-cash consideration therebyremoving the need to seek adisapplication of pre-emption rights)to issue new shares of up to 9.9% ofexisting issued share capital. The2008 Principles did not expresslycover the use of the cash boxstructure, although the ABI wrote tothe chairmen of listed publiccompanies in 2009 stating itsconcerns about the use of cashboxes as a means to circumventpre-emption rights and stating that, inits view, the 5% limit should apply tocash box placings of shares. Despitethis, many companies havecontinued to utilise the cash boxstructure for issues of up to 9.9%(the issue is always kept below 10%to avoid the need to prepare aprospectus). It is now clear that cashbox issues should, for the purposesof the 2015 Principles, be treated asan issue of shares for cash andtherefore subject to the limits set outin the 2015 Principles.

n A requirement for greatertransparency about the discount atwhich equity securities are issued ona non pre-emptive basis. Companiesare expected to disclose anydiscount at which equity is issued inthe pricing announcement. In linewith the 2008 Principles, the discountshould continue to be limited to 5%of the middle market price at the timeof pricing.

ICSA expectscompanies to give14 working days’notice of generalmeetingsA new version of the UK CorporateGovernance Code was introduced inSeptember 2014 which applies in respectof accounting periods starting on or after1 October 2014. A company with acalendar financial year-end, will be reportingagainst the new Code in respect of itsfinancial year starting on 1 January 2015.

In the 2014 version of the Code, the FRCamended provision E.2.4 to require thatnot only should companies give not lessthan 20 working days’ notice of an AGM,but that 14 working days’ notice shouldbe given for all other general meetings.The requirement to give 14 working days’notice is of course longer than thestatutory requirement to give 14 days’notice of a general meeting.

The introduction of this amendedprovision was not consulted upon at thetime and it was widely thought that theFRC might retract it. This has, however,proved not to be the case and ICSA hasnow published guidance that,regardless of the legal requirement togive only 14 days’ notice of a generalmeeting, it is of the view that it is helpfulfor shareholders to receive as muchnotice as possible and that, wherecompanies are not in a position tosatisfy provision E.2.4, they shouldexplain such non-compliance with theCode in their annual report. ICSA’sexpectation is that the shorter statutorynotice period should only be usedwhere there is a need for urgency.

12 Corporate Update


Corporate Governance Update

A copy of the ICSA Guidance Note isavailable athttps://www.icsa.org.uk/assets/files/free-guidance-notes/uk-corporate-governance-code-provision-e24.pdf

What is goodpractice forannual reports?In May 2015 ICSA published a guidancenote on what it considers to be goodpractice for annual reports. In itsguidance note, ICSA lists those featuresthat it believes set the best reports apartfrom the others. In particular, the “best”reports demonstrate the following:

n an understanding of the linksbetween governance, shareholdervalue creation, and the avoidance ofvalue destruction;

n responding to the opportunitiescreated by reporting requirementsrather than seeing them as obligations;

n innovative and creative forms ofdisclosure, which move away from‘boilerplate’ reporting that simplyrepeats the language of the Code andinstead explains how the board andcompany is run;

n explanations of the way the boardruns itself and its committees, andhow decisions are taken;

n a governance report thatdemonstrates clear ownership by thechairman and a real desire to usegovernance to enhance the businessrather than treating it as a‘box-ticking’ exercise;

n comprehensive explanations ofdepartures from the provisions ofthe Code;

n a full description, and explanation, ofthe company’s business model and thestrategy, with key performanceindicators, performance against targets,and important information crossreferenced to other parts of the report;

n a discussion of the principal risks tothe strategy, the company’s riskappetite and culture, how the riskprofile is changing, and how the risksare being managed;

n joined-up thinking that links strategy,pay, performance and risk;

n evidence of directors having satisfiedtheir statutory duties, including theduty to promote the success of thecompany over the longer term; and

n recognising and balancing the needsand expectations of differentshareholder and stakeholder priorities.

Whilst this guidance may have come toolate for most companies to take accountof for this year’s annual report, it providesa useful reference point for future reports.

ICSA’s report on good practice for annualreports is available at:https://www.icsa.org.uk/assets/files/free-guidance-notes/good-practice-for-annual-reports.pdf


Corporate Update 13

“The best annual reports are easy to read and give an honestappraisal – “warts and all” – of the year under review.”

ICSA Guidance note on Good Practice for annual reports (May 2015)

https://www.icsa.org.uk/assets/files/free-guidance-notes/good-practice-for-annual-reports.pdf



https://www.icsa.org.uk/assets/files/free-guidance-notes/uk-corporate-governance-code-provision-e24.pdf



14 Corporate Update


Regulatory UpdateFCA fines AsiaResource Mineralsplc £4.6m forbreaches of ListingRules and DTRsThe Financial Conduct Authority hasfined Asia Resource Minerals plc (ARM),formerly Bumi plc, £4,651,200 forhaving inadequate systems and controlsto comply with its obligations as a listedcompany, breaching various rulesapplicable to premium listed companiesand failing to identify related partytransactions (RPTs) valued at justover £8m.

In a Final Notice published on 17 June2015, the FCA found that ARMcommitted serious breaches of ListingPrinciple 2, Listing Rules 8 and 11 andDisclosure and Transparency Rule 4 overa two year period from 28 June 2011, thedate of ARM’s admission to the premiumsegment of the Official List, up to 19 July2013 (the relevant period).

BackgroundIn September 2012, ARM announced itwas aware of allegations of potentialfinancial and other irregularities in itsIndonesian operations. It commissionedan investigation into these allegationsand, in January 2013, announced theinvestigation was complete and that itwas addressing concerns raised. Inaround October 2012, ARM alsocommenced a review of the effectivenessof its internal controls, including a reviewof its RPTs and initiated a further separatereview in December of that year of anyhistoric potential RPTs entered into by itsIndonesian subsidiary, PT Berau CoalEnergy Tbk (PT Berau).

On 19 April 2013, the company notifiedthe UKLA that it would be unable topublish its 2012 annual financial reportwithin the deadline set out in DTR 4, dueto its ongoing review of the integrity of anumber of items on the balance sheet ofPT Berau. On 22 April 2013, ARM’sshares were suspended from trading.

In May 2013, ARM, via its financialadvisers, notified the UKLA of three RPTsthat had taken place since 28 June 2011and had not been identified as RPTs atthe relevant time and that, as such, hadtaken place in breach of the Listing Rules.The value of the three RPTs wasapproximately £8.05million. In addition,the company was unable to confirm thatall previously unknown RPTs had beenidentified during the course of its review.

FCA findingsThe FCA found that, during the relevantperiod, ARM had failed to take reasonablesteps to establish and maintain adequateprocedures, systems and controls toenable it to comply with its obligations inrelation to the Listing Rules and DTRs, inbreach of Listing Principle 2. The FCAalso held that ARM had breached LR 11in respect of its treatment of RPTs and LR8 with regard to the requirement toconsult a sponsor when proposing toenter into a transaction that is, or may be,a RPT. Whilst ARM did have a policy andvarious procedures relating to thetreatment of RPTs, its systems andcontrols were inadequate, leading to afailure to implement such policy at bothcompany and subsidiary level. Thesefailings were particularly significant as thestructure of the group and directorrelationships gave rise to an increased riskof the occurrence of RPTs.

In the FCA’s view, the late discovery andreview of these RPT transactions,coupled with other financial irregularities,

led to ARM’s failure to publish its 2012annual financial report within the requiredtimeframe. ARM’s shares returned totrading in July 2013.

Steps taken by ARMBoth during the relevant period andsubsequently, ARM has taken a numberof steps to address its identifiedfailings, including:

n making changes to senior managementand the boards of both ARM and PTBerau and its subsidiaries;

n implementing a wide scale trainingprogramme in relation to theRPT policy;

n strengthening the oversight andcontrol of the Conflict Committeewhich had been tasked withestablishing and maintaining a processregarding related parties and RPTs;

n formalising the Executive Committeeto make it more effective; and

n implementing and supporting animproved culture across the group.

The Final Notice is available at:https://www.fca.org.uk/your-fca/documents/final-notices/2015/asia-resource-minerals-plc

https://www.fca.org.uk/your-fca/documents/final-notices/2015/asia-resource-minerals-plc



15Corporate Update


Deadline forpublication ofhalf-yearly financialstatements to beextended tothree monthsThe FCA and HM Treasury have issued ajoint consultation on changes to the DTRsand the Financial Services and Markets Act2000 which must be implemented by 26November 2015 as a result of theintroduction of the EC TransparencyDirective (Amending Directive) (TDAD).

TDAD focuses on regulated informationthat has to be disclosed periodically,shareholder disclosures and thedissemination of regulated information.Broadly, the changes proposed includeamending the DTRs to include:

n a requirement to disclose voting rightsarising from holdings of financialinstruments having a similar economiceffect to holding shares (DTR 5); and

n extending the deadline for publishinghalf-yearly accounts to three monthsafter the end of the relevant period(from the current two months) andincreasing the period for which annualand half-yearly reports must bepublicly available from five years toten years (DTR 4).

The UK has a super-equivalent regime forthe disclosure of voting rights and alreadyrequires the disclosure of contracts fordifference and voting rights arising fromholdings of financial instruments having asimilar economic effect to holding shares.As such, the proposed changes to DTR 5in this regard are minimal.

The UK has already implemented certainprovisions of TDAD early, including the

removal of the requirement to publishinterim management statements.

The consultation closed on 20 May 2015.

Fewer circulars torequire FCA priorapprovalOn 1 April 2015 changes to Chapter 13of the FCA’s Listing Rules took effectwhich limit the type of circulars thatrequire prior approval by the FCA to thefollowing types:

n Class 1 acquisition (including reversetakeovers) and disposal circulars;

n Related party circulars;

n Circulars relating to a buyback of morethan 25% of the company’s equityshares (thereby requiring the inclusionof a working capital statement);

n Reconstruction and refinancingcirculars where a working capitalstatement is required; and

n Circulars seeking cancellation of apremium listing or a transfer into orout of the premium listing (investmentcompany) segment or a transfer froma premium listing to a standard listing.

For details of the changes to LR 13 see:http://media.fshandbook.info/latestNews/FCA_2015_3.pdf

Editor Comment:This is the second final notice to beissued in relation to a listed company’sfailure to comply with the Listing Rulesapplicable to RPTs. The first wasExillon Energy plc which in April 2012was fined £292,950. The fine here issignificantly larger.

In determining the appropriate fine, theFCA’s first step is to deprive a firm of thefinancial benefit derived from the breach.In this instance, ARM derived no benefitand, as such, the FCA used the value ofthe RPTs (£8.05m) as the appropriateindicator of the seriousness of thebreach. This was considered to be aLevel 4 breach (Level 5 being the mostserious breach) due to the significantfailings identified and, accordingly, aninitial figure for the fine was held to be75% of the value of the RPTs. The finewas then increased due to the fact that,after the Exillon Energy final notice waspublished in 2012, ARM had takensteps to improve its RPT processes butthese had not been carried outsufficiently quickly or effectively. As ARMagreed to settle at an early stage in theinvestigation, it qualified for a 30%reduction in penalty, but for which thesize of the penalty would havebeen £6,644,641.

Consistent with the action takenagainst Reckitt Benckiser last year forbreach of the Listing Principles, ListingRule 9 and its DTR 3 obligations, thiscase reinforces that it is simply notsufficient to put compliance policies inplace and then fail to ensure they areproperly implemented and monitored.Adequate training must also be givento relevant staff and companies shouldensure that their culture reinforces theimportance of compliance with relevantcompany policies.

Editor Comment:As a result of this change, the number oftypes of circulars requiring FCA approvalhas significantly reduced. For example,circulars relating to share buybackswhere no working capital statement isrequired, schemes of arrangement,ratification circulars and shareholderrequisitioned general meetings will nolonger need prior FCA approval.

http://media.fshandbook.info/latestNews/FCA_2015_3.pdf

http://media.fshandbook.info/latestNews/FCA_2015_3.pdf

Inside information:when is information“precise”?The EU-wide market abuse regimeregulates the misuse of non-publicprice-sensitive information which is of a“precise nature” (inside information). Tobe “precise” information must (i) indicatethat circumstances exist or that an eventhas occurred (or may reasonably beexpected to come into existence oroccur) and (ii) be specific enough toenable a conclusion to be drawn as tothe “possible effect” of thosecircumstances or that event on the priceof the relevant investments.

In the July 2014 edition of CorporateUpdate we discussed the decision inFCA v Hannam4, in which the UK UpperTribunal held that for information to meetthe second part of the precise test, onewould need to be able to draw aconclusion as to the possible direction ofany price movement. In March this year,the EU Court of Justice (CJEU) rejectedthat approach in its decision in the caseof Lafonta v AMF5.

FactsMr Lafonta was chairman of a Frenchcompany, Wendel. Wendel had failed todisclose information concerning aproposed acquisition of a shareholding inanother company. The penaltiescommission of the L’Autorité desmarchés financiers (AMF) imposed apenalty of EUR 1.5 million on each ofMr Lafonta and Wendel.

Before the CJEU, Mr Lafonta argued thatinformation is precise only if it allows theperson in possession of that information

to anticipate how the price of the securityconcerned will change when thatinformation is made public.

Decision of the CJEUThe CJEU held:

n [36] The increased complexity of thefinancial markets makes it particularlydifficult to evaluate accurately thedirection of a change in the prices ofthose instruments…. In thosecircumstances – which can lead towidely differing assessments,depending on the investor – if it wereaccepted that information is to beregarded as precise only if it makes itpossible to anticipate the direction ofa change in the prices of theinstruments concerned, it wouldfollow that the holder of thatinformation could use an uncertaintyin that regard as a pretext forrefraining from making certaininformation public and thus profit fromthat information to the detriment ofthe other actors on the market.

n [37]….. the answer to the questionreferred is that, on a properconstruction of point (1) of Article 1 ofDirective 2003/6 and Article 1(1) ofDirective 2003/124, in order forinformation to be regarded as beingof a precise nature for the purposesof those provisions, it need not bepossible to infer from that information,with a sufficient degree of probability,that, once it is made public, itspotential effect on the prices of thefinancial instruments concerned willbe in a particular direction.

That conclusion is contrary to theconclusion of the Upper Tribunal inHannam, which held as follows (at 121(b)):

As to the requirements for information tobe specific enough to enable aconclusion to be drawn as to possibleeffect on price, and in particular whatthe word “possible” means: theinformation must indicate the direction ofmovement in the price which would ormight occur if the information weremade public. The information does notneed to indicate the extent to which theprice would or might be affected. Theinformation does not need to be such asto enable an investor to know withconfidence that the price will move if theinformation were made public but onlythat it might move and, if it does, themovement will be in a known direction.

ConclusionThe CJEU decision in Lafontasignificantly broadens the definition of“precise” as it was previouslyunderstood in this context. It thereforebroadens the scope of the definition ofinside information and the scope ofan issuer’s obligations to announceinside information.

That said, as well as being precise,inside information must also be likely tohave a significant effect on the price ofthe relevant securities if made public.However, the Upper Tribunal indicatedin the Hannam case that there needonly be a “real prospect” of theinformation having more than a “deminimis” effect on price in order to beregarded as price sensitive information.Therefore, in practice, if non-publicinformation passes the significant effecton price test, it is likely also to beregarded as being precise and thus“inside information” (especially since thecase law also indicates that there needonly be a “realistic prospect” of future

16 Corporate Update

4 [2014] UKUT 02335 Case C-628/13


events coming into existence for theinformation to satisfy the first limb of thedefinition of when informationis precise).

The Lafonta decision reinforces the needto consider carefully whether informationis inside information and whether anissuer has legitimate grounds to delaydisclosure. Notwithstanding the recentHannam decision, the FCA is likely toapply the Lafonta approach in the future.

Our briefing note on the Hannamdecision, Eight things we now really knowabout market abuse (June 2014), isavailable at www.cliffordchance.com.

FCA chalks up twomore successfulinsider dealingprosecutionsEarlier this year, the FCA announced thesuccessful prosecution of two individualsfor insider dealing:

n In February Ryan Willmott, formerlyGroup Reporting and FinancialPlanning Manager for Logica PLC,pleaded guilty to three instances ofinsider dealing. Willmott admitteddealing on the basis of insideinformation he obtained during thecourse of his employment relating tothe takeover of Logica by CGI Group,as publicly announced on 31 May2012. Willmott set up a tradingaccount in the name of a formergirlfriend, without her knowledge, tocarry out the trading. He also admitteddisclosing inside information to a familyfriend, who then went on to deal onbehalf of Willmott and himself. Profitsfrom the related dealing exceeded£30,000. Willmot was sentenced to

10 months imprisonment and orderedto pay £6,122 towards prosecutioncosts and was made subject to aconfiscation order in the sumof £23,239.75.

n Paul Coyle, former Group Treasurerand Head of Tax at WM MorrisonSupermarkets PLC, pleaded guilty totwo counts of insider dealing.Between January and May 2013Coyle, through his role at Morrisons,was regularly privy to confidentialprice sensitive information aboutMorrisons’ ongoing talks regarding aproposed joint venture with OcadoGroup plc. Coyle took advantage ofthis information by trading in Ocadoshares between February and May2013 using two online accountswhich were in the name of his partner.Profits from the dealing exceeded£79,000. He was sentenced to12 months imprisonment and orderedto pay £15,000 costs and was madesubject to a confiscation orderof £203,234.

FCA proposeschanges to ListingRules and DTRs toreflect UK CorporateGovernance CodechangesIn its quarterly consultation paperCP15/19, published in June 2015, theFCA has proposed some minor changesto the Listing Rules to reflect theintroduction of an updated CorporateGovernance Code in September 2014which applies to companies with financialyears starting on or after 1 October 2014.

With regard to the additional informationto be included in the annual financialreport (LR 9.8.6), the changes will reflectthe fact that pursuant to the updatedCode, instead of making a going concernstatement, companies now need to makeboth a statement as to theappropriateness of adopting the goingconcern basis of accounting and as tothe longer-term viability of the company.


Corporate Update 17

Editor Comment:This is part of the FCA’s wider crackdown on market abuse and insiderdealing. Since 2009, the FCA(and previously the FSA) has secured27 successful convictions for insiderdealing and is progressing a furtherseven such cases. These recentprosecutions come at a time when theBank of England is calling on thegovernment to increase the maximumsentence for a criminal conviction forinsider dealing or market manipulationfrom seven years to ten years.

“Ryan Willmott engaged ininsider dealing with no regard forthe consequences for himselfand others, and with anexpectation that he would avoiddetection. This prosecutionsends a clear message to thosewho are tempted to abuse theirposition by disclosing or tradingon inside information.

“We will not hesitate to takerobust action where individualsthreaten the integrity of theUK financial markets.”Georgina Philippou, acting director ofenforcement and market oversight, FCA

The FCA is also proposing to delete theprovision in LR 6 that requires the securitiesof a premium listed company to be capableof electronic settlement (and thecorresponding ongoing obligation in thisregard in LR 9). This requirement has beensuperseded by the EU Central SecuritiesDepositaries Regulations which came intoforce in September 2014 and whichrequires securities that are the subject oftransactions on a trading venue to becapable of being settled in dematerialisedform. This requirement is applicable to bothstandard and premium listed companies.

The consultation closes on 5 August2015. No date has yet been set for thechange to take effect.

A copy of CP15/19 is available athttps://www.fca.org.uk/static/fca/documents/cp1519.pdf

On the horizon…In February 2015 the EuropeanCommission published a consultationpaper setting out a number of proposalsto amend the current EU ProspectusDirective. The purpose of the consultationis to enable the Commission to gatherviews on the functioning of theProspectus Directive and its implementinglegislation. The consultation covers a widerange of issues with a view to exploringways to reduce the administrative burdenfor issuers and any unnecessary costs, aswell as examining whether the regime canbe made more appropriate for small andmedium-sized enterprises and companieswith reduced market capitalisation.

Particular issues being consultedon include:

n Whether a greater number of publicoffers of securities should be able tobe carried out without the need for a

prospectus: this would involveincreasing the current exemptionwhich allows a public offer ofsecurities to be made to fewer than150 persons without triggering therequirement to prepare a prospectus.

n Whether an “exemption” should becreated for secondary issues ofsecurities (i.e. they would not require aprospectus): the rationale for thisproposal is that a company undertakinga secondary issue of securities is, bydefinition, already listed and thereforealready required to comply with themarket disclosures regime. Giveninvestors can already buy its securitieson the open market, the question arisesas to what is the purpose of requiringadditional information to be disclosedsimply because the company itself isissuing new securities?

n Whether the 10% threshold should beexpanded? Currently, where acompany issues shares whichrepresent in aggregate less than 10%of shares of the same class admittedto trading on a regulated market inany rolling 12 month period, it isexempt from preparing a prospectus.Increasing the threshold would makeit easier for companies to raise largeramounts of capital without incurringthe costs of preparing a prospectus.

n Whether a prospectus should berequired when securities are admittedto trading on a multilateral tradingfacility (e.g. AIM)?

n Should there be a maximum limit onthe length of a prospectus? Somecommentators argue that you cannotimpose a maximum limit on the basisthat the issuer must be free to satisfythe legal requirement to include allrelevant information required byinvestors to make an informed decisionabout the issuer and the securities andthat imposing a limit on the length ofthe prospectus may prevent an issuerfrom fulfilling this obligation.

The consultation paper is available athttp://ec.europa.eu/finance/consultations/2015/prospectus-directive/index_en.htm

18 Corporate Update


Editor Comment:The Commission is required to assessthe application of the ProspectusDirective by 1 January 2016. As part ofits wider plans for European CapitalMarkets Union, it has brought thisreview forward. In reality, this is the firststep in a review of the ProspectusDirective regime and any changes tothe regime that might arise from thisreview are unlikely to take effect forseveral years. The consultation itselfclosed in May.

http://ec.europa.eu/finance/consultations/2015/prospectus-directive/index_en.htm

http://ec.europa.eu/finance/consultations/2015/prospectus-directive/index_en.htm

https://www.fca.org.uk/static/fca/documents/cp1519.pdf

https://www.fca.org.uk/static/fca/documents/cp1519.pdf

Panel consultationon treatment ofpayment ofdividends by offereeduring offer periodOn 11 May 2015, the Code Committee ofthe Panel published PCP 2015/1 whichproposes amendments to the TakeoverCode in relation to the treatment ofdividends paid by an offeree company toits shareholders.

The key proposals are as follows:

n Reserving the right to reduce offerconsideration if a dividend is paid:Where an offerer has proposed anoffer at a specified price, it will usuallywish to protect itself against valueleakage from the offeree companycaused by the payment of asubsequent dividend by the offeree. Asan offeror can no longer seek toimpose restrictions on an offereecompany, an offeror could seek to dothis by specifying that any dividend willresult in a corresponding reduction inthe offer price. The PCP proposes thatnew Notes to the Code should beintroduced to clarify that an offeror thatwishes to reserve this right must do soin each of its possible offerannouncement (if any), firm offerannouncement and its offer document.

n Effect of a dividend where the offererhas made a “no increase statement”:The Code Committee proposes tointroduce new Notes to make clearthat where an offeror has made a “noincrease” statement and the offereecompany subsequently pays adividend, the offeror will be requiredto reduce the offer consideration byan amount equal to that dividend in

order that the overall value receivableby the offeree company shareholdersremains the same. This would notapply where an offeror had included aspecific reservation in the “noincrease” statement enablingshareholders to receive a specificdividend that was paid in addition tothe offer consideration.

n Impact of dividends on a minimumoffer price established by sharepurchases: The Code provides that,broadly, the offer consideration mustbe no less than the highest price paidby the offeror (or its concert parties)for an interest in the offereecompany’s shares during a prescribedperiod prior to the offer period orduring the offer period. The CodeCommittee is proposing changes tothe Notes to Rules 6, 9 and 11 toclarify how the minimum offer priceshould be calculated depending onwhether shareholders in the offereecompany are entitled to receive adividend in addition to the offerconsideration or not.

n Proposed Practice Statement:PCP2015/1 contains the text of a newPractice Statement which sets out thePanel Executive’s practice in relation tothe payment of dividends by anofferee. The Statement has beendrafted on the basis that the proposedCode amendments described abovehave come into force. The PracticeStatement addresses the issuesdescribed above and also theapplication of Rule 21.2 of the Code(inducement fees and otheroffer-related arrangements) andclarifies that the Executive applies Rule21.2 of the Code so as to prohibit anofferee from entering into anarrangement with an offeror whichrelates to the payment of dividends bythe offeree, including any undertaking

by the offeree not to pay a dividend.Any such value leakage should beaddressed by the offeror reserving theright to reduce the offer consideration ifa dividend is paid, rather than byseeking to prevent the offeree boardfrom paying dividends.

The consultation closed on 12 June 2015.There is no current indication as to whenrelevant changes are likely to be brought into effect, although the Executive hasconfirmed that it intends to publish thenew Practice Statement on the same datethat any Code changes take effect.

PCP 2015/1 is available athttp://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PCP201501.pdf

Corporate Update 19

Takeovers Update


Editor Comment:The proposed amendments areintended to clarify the application ofthe existing provisions of the Code andensure that the Code is better alignedwith the existing practice of the PanelExecutive rather than bringing about asubstantive change in current practice.

http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PCP201501.pdf

http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PCP201501.pdf

The impact of thenew ConsumerRights Act onantitrust litigationThe Consumer Rights Act 2015 (the Act)will introduce a number of changes toantitrust litigation in England and Wales,through amendments to the CompetitionAct 1998 (CA98) and the Enterprise Act2002 (EA02). The changes are intendedto facilitate damages claims forcompetition law infringements and, inparticular, collective damages actions.They are expected to come into force on1 October 2015.

Key changes to the CA98n Stand-alone claims: The Competition

Appeal Tribunal (CAT) will be able tohear stand-alone claims, includingclaims for damages or an injunction.Currently, it can only hear follow-onclaims after a decision by acompetition authority has establishedthe relevant infringement.

n Collective proceedings: Collectiveproceedings will be able to bebrought before the CAT. These areproceedings that combine two ormore claims for damages or injunctiverelief for breaches of UK or EUcompetition law.

Collective proceedings must bestarted by a representative, and canonly be continued if the CAT makes acollective proceedings order. It willonly do this if it considers that it is justand reasonable for the personbringing the proceedings to act as arepresentative, and it must also besatisfied that the claims raise similaror related issues of fact or law.

Currently, collective claims can onlybe made (a) by a specified body (e.g.the Consumers’ Association), and (b)on an “opt-in” basis – i.e. with theconsent of each individual claimant.Under the amended CA98, collectiveproceedings will not be limited tosuch claims and may be opt-in or“opt-out” – i.e. brought on behalf ofeach class member without specificconsent, unless a class memberelects to opt-out of the claim. Opt-outproceedings will not include classmembers outside the UK – they mustopt-in to the proceedings. The CATwill decide whether a claim shouldproceed on an opt-in or opt-outbasis, taking into account factorssuch as the strength of the claimsand whether opt-in collectiveproceedings would be practicable.

The amended CA98 contains twofurther safeguards against excessiveclaims. The first is a ban onexemplary damages in collectiveproceedings. The second excludesdamages-based agreements (underwhich lawyers’ remuneration is based

on the amount they recover) for opt-out collective proceedings, althoughconditional fee agreements(sometimes called “no win no fee”) arestill permitted. In opt-out collectiveproceedings, the CAT may order thatthe damages be paid to therepresentative on behalf of therepresented persons.

n New powers to grant injunctions: TheCAT will have new powers to grantinjunctions in both stand-alone andcollective proceedings.

n Limitation period for claims extended:At present, the limitation period forclaims brought before the CAT is twoyears from the later of (i) the date onwhich the substantive infringementdecision becomes final and can nolonger be appealed; and (ii) the dateon which the action accrued.

This will be extended to six years fromthe date on which the cause of actionaccrued. As with High Courtproceedings, where there has beendeliberate concealment ofwrongdoing, the time period will not

20 Corporate Update


Antitrust Update

begin to run until the claimantdiscovers, or ought reasonably tohave discovered, the concealment.

n Collective settlements: In opt-outproceedings, it will be possible for theparties to apply to the CAT forapproval of a proposed collectivesettlement. The CAT can approve thesettlement only if it believes the termsto be just and reasonable. Thesettlement will then bind thosedomiciled in the UK who did not opt-out and those who opted-in.

n Voluntary redress schemes: The CMAwill have new powers to approveproposals by infringers tocompensate those harmed by theirinfringements. A proposal can beconsidered at any time, but onlyapproved after the infringementdecision to which the scheme relateshas been made or, in the case of aninfringement decision of the CMA, atthe same time as that decision ismade. The CMA may considerdiscounting any infringement penalty– subject to a proposed maximum of10% – in exchange for participation inthe scheme.

Changes to the EnterpriseAct: a new fast-trackprocedure for SMEsLastly, the Act will also amend the EA02to introduce a fast-track procedure forsimpler competition claims in the CAT.The fast-track procedure is outlined in theDraft CAT Rules 2015, which arecurrently subject to consultation. Theseprovide for the final hearing to be fixedwithin six months of the CAT ordering thefast-track procedure, a cap onrecoverable costs at a level determinedby the CAT, and the possibility for anapplicant to obtain an interim injunctionwithout providing an undertaking as todamages, or subject to a cap on theamount of the undertaking.

When considering whether a claimshould be “fast-tracked”, the CAT maytake into account all matters includingwhether one or more of the parties is anindividual or a micro, small or mediumsized enterprise (SMEs), the estimatedduration of the hearing, the complexityand novelty of the issues, and the scaleand nature of the evidence involved. Theintroduction of a fast-track procedure is

unlikely to be suitable for many follow-onor stand-alone cases which typicallyinvolve the consideration of complexeconomic evidence.

20% of UKbusinesses havenever heard ofcompetition lawResearch commissioned by the UKCompetition and Markets Authority(CMA) indicates a substantial lack ofunderstanding of competition law amongUK businesses.

Is it something to dowith sport?The report, prepared by IFF Research,shows a surprisingly widespread lack ofawareness of competition law amongthose with responsibility for sales, both interms of conduct that infringes the law andthe potential consequences ofinfringement. Over 1,200 UK businesseswere surveyed, and the results of theresearch broken down by region, sectorand size of company. Respondents were

Corporate Update 21


Editor Comment:The most significant change is likely tobe the introduction of opt-out collectiveproceedings. While there are stillconcerns that the availability of opt-outproceedings will lead to a US-styleclass action regime, the safeguards inthe Act requiring the approval of classrepresentatives, the certification ofproceedings and the ban on exemplarydamages and damages-basedagreements are likely to limit theexcesses of US class actions.

22 Corporate Update


typically sales directors for largercompanies and managing directors forsmaller ones. 20% of respondents claimednever to have heard of competition lawand some of the other more notablefindings include the following:

Infringing conductn Only 55% of the companies surveyed

knew that it is illegal “for competitorsto agree prices in order to avoidlosing money” (18% thought it waslegal and 27% did not know).

n 31% thought “businesses can agreenot to sell to the same customers aseach other” and a further 28% did notknow whether this was legal.

n Only 47% of companies knew it isillegal “to discuss prospective bidswith competing bidders”.

n 33% thought resale pricemaintenance was lawful.

Consequences of a breachn Only 27% of respondents reported a

“fair” or “good” awareness of thepenalties for non-compliance. Ofthose, almost half said “don’t know”when asked what the penalties are.

n Only 21% of respondents were awarethat antitrust breaches could leadto imprisonment.

n 85% of companies were unaware ofthe existence of the leniency regime.

Market interactionsand monitoringn 83% of businesses had contact with

other businesses in their industry, ofwhich 9% did so “to discuss prices”.Such contacts were not necessarilyanticompetitive, however, as thoseother businesses may have beensub-contractors or othernon-competitors (which might explainthe higher 22% figure for theconstruction sector).

n 7% of businesses monitor prices oftheir competitors by contacting themto ask what they charge. Again, thisis not necessarily anticompetitive ifthe information requested ispublicly available.

Sector specific findingsSome sectors demonstrated significantlylower levels of antitrust awareness thanothers. In particular, the construction andarts sectors both had the lowestproportion of respondents reportingcompliance training in the last year (lessthan 1%) and some of the highest levelsof respondents who had never heard ofcompetition law (24% and 30%respectively), with theaccommodation/food sector also scoringpoorly in this respect (29%).

Editor Comment:The research suggests that manycompanies would benefit from moreantitrust compliance training. For largerbusinesses (those having 250employees or more), the implications ofthe research are more nuanced. Asmight be expected, these businessesgenerally demonstrated a much betterlevel of antitrust awareness thansmaller ones. For instance, 41% hadrun a compliance training session inthe past year.

However, it seems that suchcompanies are more prone to beingexcessively cautious in ways that riskhaving serious adverse effects. Inparticular, 41% of large companiesbelieved that it is illegal to “tell suppliersthe prices that other suppliers arequoting” – a misapprehension thatcould harm their ability to negotiatebest prices and, ultimately, their abilityto compete. This suggests thatcompanies need to have an effectiveunderstanding of competition law, bothin order to be competitive and to avoidthe risk of behaving in a manner whichis anticompetitive.


Corporate Update 23

This Corporate Update has been produced by the London Corporate Practice and edited by David Pudge.

David specialises in corporate finance, domestic and cross-border M&A (including public takeovers), listed company matters and general corporateadvisory work.

Recent major transactions include advising National Australia Bank on the proposed demerger and IPO of Clydesdale Bank; Booker Group plc on itsacquisition of the Londis and Budgens store businesses and on its recent “B” share scheme; Man Group on its acquisition of Numeric Holdings LLP (aclass 1 transaction under the listing rules); and RBS on the sale of its European locomotive and electric passenger train leasing business to Alpha Trainsand on the sale of its aircraft leasing business to a consortium led by Sumitomo Mitsui Banking Corporation for $7.3bn.

David is a member of the City of London Law Society’s Company Law Committee and a contributing author to “A Practitioner’s Guide to the City Code on Takeoversand Mergers”.

If you would like more information about any of the topics covered in this Corporate Update, please email your usual Clifford Chance contact([email protected]) or contact David Pudge on +44 (0)20 7006 1537 or by email at [email protected].

© Clifford Chance, July 2015.

Clifford Chance LLP is a limited liability partnership registered in England andWales under number OC323571.

Registered office: 10 Upper Bank Street, London, E14 5JJ.

We use the word 'partner' to refer to a member of Clifford Chance LLP, or anemployee or consultant with equivalent standing and qualifications.

This publication does not necessarily deal with every important topic nor coverevery aspect of the topics with which it deals. It is not designed to provide legal orother advice.

If you do not wish to receive further information from Clifford Chance about events orlegal developments which we believe may be of interest to you, please either send anemail to [email protected] or contact our database administrator bypost at Clifford Chance LLP, 10 Upper Bank Street, Canary Wharf, London E14 5JJ.

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Corporate Update24

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