Corporate weekly highlights—20 December 2018
This week’s edition of Corporate highlights includes the latest updates on Brexit; news of corporategovernance reviews carried out by the QCA, PERG and the EHRC; details of the ongoing scrutiny of the accounting and audit sectors, including the recommendations of the Kingman review and the CMA audit market study; and the findings of the FRC’s industry inquiry into compliance with MAR. We also look at two cases: Morris v Swanton Care & Community Ltd on an agreement to agree in a share purchase agreement and Re MDNX Group Holdings Ltd on the partial approval of a cross-border merger.
In this issue:
Draft of the Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations 2019 published
On 12 December 2018, HM Treasury published the draft Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations 2019 to add to the explanatory informationpublished on the Regulations on 21 November 2018.
It is proposed that the Regulations will address certain deficiencies in retained EU law relating to the Prospectus Directive and the Transparency Directive that arise from Brexit, whether or not a deal is entered into. The FCA Handbook and related rules will be amended to reflect the changes made by the Regulations.
Supreme Court judgment in Re the UK Withdrawal from the European Union (Legal Continuity) (Scotland) Bill)
Re the UK Withdrawal from the European Union (Legal Continuity) (Scotland) Bill—Reference by the Attorney General and the Advocate General for Scotland  UKSC 64,  All ER (D) 58 (Dec)was the first-ever challenge by UK law officers to the competence of a Scottish Parliament Bill.
The European Union (Legal Continuity) (Scotland) Bill (the Continuity Bill) was passed by the Scottish Parliament principally to give the Scottish government the power to prepare the statute book for Brexit in devolved areas (ie areas of law for which the Scottish Parliament has responsibility). It was introduced in February 2018 and fast-tracked through the Parliament’s emergency legislation procedures, in anticipation of the UK and Scottish governments being unable to reach agreement on what, if any, restrictions the European Union (Withdrawal) Act 2018 (EU(W)A 2018) (then progressing through the UK Parliament) could place on the Scottish Parliament’s ability to legislate in areas of law that are not reserved to Westminster by Scotland Act 1998 (SA 1998) but are instead currently dealt with at EU level.
The UK government’s concern was that EU law in those areas ensures that UK businesses can trade in all parts of the UK subject to a single set of rules—but if different rules were introduced in different countries (ie England, Wales and Scotland) post-Brexit that could create barriers to intra-UK trade. The Scottish government’s position was that UK-wide rules should be agreed—but by consent, with no legal restrictions put in place—and that if the Scottish Parliament did not consent to EU(W)A 2018 provisions then it should have been amended so it did not apply to any areas within the Scottish Parliament’s competence.
The Continuity Bill was passed in anticipation of, and with a view to helping to achieve, that latter outcome. The plan was that the Scottish government would use the powers in the Continuity Bill rather than EU(W)A 2018 to make regulations preparing the Brexit statute book, but the Continuity Bill was referred to the Supreme Court before it could receive Royal Assent. The EU(W)A 2018 was then enacted, notwithstanding the Scottish Parliament’s objections to it.
The regulation-making powers in the Continuity Bill were not identical to those in EU(W)A 2018. The Continuity Bill contains provisions with no equivalent in EU(W)A 2018—including conferring powers on the Scottish government to make regulations that would incorporate changes in EU law into Scots law post-Brexit (known as the ‘keeping pace’ power). The Continuity Bill, s 17 also purported to restrict the ability of UK ministers to make regulations in devolved areas under EU(W)A 2018 (or any equivalent UK legislation) without the consent of the Scottish government, anticipating the EU(W)A 2018 being passed without consent and attempting to frustrate its operation.
In the Supreme Court decision, a panel of seven Supreme Court justices held unanimously that while the Continuity Bill as a whole was within the Scottish Parliament’s legislative competence, parts of it were not because they sought to modify either the SA 1998 or the EU(W)A 2018.
In particular, the decision found (among other things) that the Continuity Bill, s 17, which would make the legal effect of subordinate legislation made by UK government ministers under EU(W)A 2018 conditional upon the consent of the Scottish ministers, was outside the legal competence of the Scottish Parliament.
The effect of the court’s judgment is that the Continuity Bill cannot now receive Royal Assent in its current form. The Scottish Parliament has the option of amending it to bring it within competence, although that would mean making key provisions identical to the equivalent sections of EU(W)A 2018 that already give the Scottish government significant powers to prepare for Brexit.
Charles Livingstone, partner, and Jamie Dunne, senior solicitor, both of Brodies LLP, have examined the Supreme Court's decision, see News Analysis: Supreme Court rules parts of Scottish Brexit Bill outside legislative competence (Re the UK Withdrawal from the European Union (Legal Continuity) (Scotland) Bill).
For the views of Adam Cygan, Professor of Law at the University of Leicester; Andrew Mylne, head of the Non-Government Bills Unit at the Scottish Parliament; and Alexander Campbell, barrister at Field Court Chambers, see: LNB News 13/12/2018 170.
Government launches tool to help businesses prepare for Brexit
The government has launched a tool to assist businesses in their preparations for Brexit. The purpose of the tool is to help businesses find out what they should be doing to prepare for Brexit, what changes are occurring in their industry sector and information on specific rules and regulations.
The tool asks users seven questions about their business, such as their industry sector, the extent of any cross-border trade, whether they have any employees in other European countries and their use of personal data. Users are then directed to previously published guidance relevant to their particular circumstances.
For more information, see: LNB News 19/12/2018 117.
QCA conducts review to determine corporate governance codes applied by AIM companies
The Quoted Companies Alliance (QCA) has conducted a review of the websites of all 927 companies on AIM to determine which recognised corporate governance code such companies have adopted. As of September 2018, all companies on AIM are required to name on their website which corporategovernance code they follow to be in line with AIM Rule 26.
The QCA discovered that:
89% of the companies follow the QCA Corporate Governance Code (823 companies)
6% of the companies follow the Financial Reporting Council’s UK Corporate Governance Code (55 companies)
4% of the companies follow the code of another country or territory (34 companies), and
1% of the companies follow either the Association of Investment Companies Code for Investment Companies; an older (2013) version of the QCA Corporate Governance Code or are yet to state which code they follow
For further information, see LNB News 13/12/2018 108.
QCA conducts review of level of application by AIM companies of the QCA Corporate Governance Code
The QCA has conducted a review of the level of application of the QCA Corporate Governance Code (QCA Code) by the 800 plus companies on AIM that have adopted it.
Key findings of the QCA’s review include:
- nearly all of the companies applying the QCA Code (821 of 823) have a corporate governance statement: 66% state that they fully apply the QCA Code; 31% state that they do not fully apply the QCA Code (either explicitly or implicitly); and the extent to which the remainder (3%) apply it is unclear due to vagueness and ambiguity in their statements
- over half of the companies adopting the QCA Code (52%) do not fully meet the four aspects of the Chair's statement in the QCA Code (being to set out the chair's role and responsibility for governance; explain how the QCA Code has been applied; highlight where practice differs from the QCA Code’s recommendations; and identify key governance matters during the year, including changes to arrangements)
- Principle 5 (‘maintain the board as a well-functioning, balanced team led by the chair’) is the least fully adhered to Principle of the QCA Code, with 27% of companies not meeting this; most commonly, this is because the companies do not have the minimum recommendation of two independent non-executive directors; sometimes because the board is not supported by committees (eg audit, remuneration and nomination) that have the necessary skills and knowledge to discharge their duties and responsibilities effectively, and
- Principle 7 (‘evaluate board performance based on clear and relevant objectives, seeking continuous improvement’) created some confusion, especially with regard to board evaluations; many companies began discussing the formality of their evaluation process(es) and believed themselves to be transgressing because of their informal, ‘ad hoc’ approach, but the QCA notes that this does not necessarily go against the principle
For further information, see: LNB News 13/12/2018 130.
PERG issues 11th report on private equity industry’s conformity with the Walker Guidelines
The Private Equity Reporting Group (PERG) has reviewed the private equity industry’s conformity with the Guidelines for Disclosure and Transparency in Private Equity, as recommended by Sir David Walker in 2007 (the Guidelines). The Guidelines seek to increase transparency through enhanced reporting and disclosure by the largest UK portfolio companies and their private equity owners. PERG was established in March 2008 to monitor conformity with the Guidelines and make periodic recommendations to the British Private Equity and Venture Capital Association (the BVCA).
The review covers 56 portfolio companies (2017: 54) that fall within the scope of the Guidelines and the 51 firms (2017: 59) that back them (private equity firms and those operating in a private equity-like manner).
The key findings of the PERG review were that:
- all portfolio companies reviewed in the sample complied with the disclosure requirements in the annual report this year (2017: 79%)
- comparing only those portfolio companies that have complied with all of the disclosure requirements in their annual reports, 73% prepared disclosures to a good standard (2017: 80%)
- 81% of portfolio companies have published an annual report in a timely manner on their website (2017: 78%)
- 74% of portfolio companies have published a mid-year update in a timely manner on their website (2017: 72%)
- 7% of portfolio companies have not complied with any of the three components of the Guidelines that apply to them this year (2017: 12%). These companies are backed by non-BVCA members
- all BVCA members have published certain disclosures on their own websites to communicate information about the firm, its portfolio companies and its investors as required by the Guidelines or provided an explanation, and
- 85% of portfolio companies have provided data, which is presented in aggregate in the EY performance report published alongside this report (2017: 85%)
- PERG has also issued an edition of Guidelines updated in December 2018.
For further information, see: LNB News 14/12/2018 138.
EHRC calls on employers to take meaningful action against the gender pay gap
The Equality and Human Rights Commission (EHRC) has published an analysis of the gender pay gap action plans of employers in an effort to understand the steps being taken to tackle the inequalities faced by women at work.
As a result of its findings, the EHRC is calling for the government to make the publication of action plans mandatory, so that such reporting can drive meaningful change in the workplace. The EHRC believes more employers should voluntarily publish their action plans to demonstrate a real commitment to reducing the pay gap.
Findings from the EHRC’s analysis reveal that:
- only one in five of employers sampled produced an gender pay gap action plan
- only 11% of those employers set themselves targets to enable them to measure the annual progress of their action plan, and
- larger employers were more likely to set targets for themselves, as opposed to employers with less than 499 staff
The EHRC makes several recommendations to assist employers in the creation of good gender pay gap action plans.
For further information, see: LNB News 14/12/2018 136.
Accounts and reports; audit
Independent review recommends Financial Reporting Council be replaced
John Kingman’s independent review of the Financial Reporting Council (FRC) has been published. Broad proposals for a new organisation with a new mandate, clarity of purpose, leadership and powers are put forward in order to create a regulator that is a beacon for best practice in governance, transparency and independence in UK companies.
The government’s response to the review will be published in due course—if the recommendations are followed, primary legislation would be required to radically overhaul the FRC’s existing structure, which has no statutory base and did not start its life as a regulator.
Key recommendations include:
the FRC should be replaced as soon as possible with a new independent regulator, with clear statutory powers and objectives (with a proposed name of ‘Audit, Reporting and Governance Authority’)
the new body should be accountable to Parliament, with a remit letter to the regulator at least once each Parliament (as it does for the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA))
the regulator should have an overarching duty to promote the interests of consumers of financial information, not producers
a new board should be appointed, and should not be self-perpetuating, as it currently is
the regulator should be better equipped to ensure its work and decision-makings is informed by market analysis
the current self-regulatory model for the largest audit firms should end
the regulator’s corporate reporting work should be extended to cover the entire annual report, with stronger powers to require documents and other relevant information in order to conduct that review work
the regulator needs to engage at a more senior level in a much wider and deeper dialogue with UK investors, and
the regulator should not be funded on a voluntary basis—a statutory levy should be put in place
For further information, see: LNB News 18/12/2018 53.
Future of Corporate Reporting Advisory Group announced
At the end of October 2018, the FRC announced that it was undertaking a review into corporatereporting which would look at existing financial and non-financial practices, consider what information investors and other stakeholders require and the purpose of corporate reporting and the annual report. The Future of Corporate Reporting Advisory Group has now been formed for that purpose and the FRC has published details of its members. The members are representatives of the FRC’s major stakeholder groups—companies, investors, civil society groups, academics, auditors, audit committee chairs, lawyers and design agencies.
CMA market study: Update paper outlines serious competition concerns in statutory audit market
On 18 December 2018, the Competition and Markets Authority (CMA) published an update paper for its statutory audit market study, identifying serious competition concerns and proposing changes to legislation to improve the audit sector for the benefit of both savers and investors.
The CMA launched its market study in October 2018 and has now identified several reasons why it believes audit quality is falling short.
In the update paper, the CMA is consulting on proposed legislation to:
- separate audit from consulting services: auditors should focus exclusively on audit, not on also selling consulting services, to ensure higher quality; the CMA proposes that audit and non-audit businesses be split into separate operating entities, with separate management, accounts and remuneration, meaning auditors will only be rewarded for scrutinising an organisation’s accounts but will still be able to draw on expertise from other parts of the firm
- introduce measures to substantially increase the accountability of those chairing audit committees in firms: the CMA proposes close scrutiny of audit appointment and management to make sure those appointing auditors are held to account and independent enough to choose the most challenging audit firm, rather than the cheapest, and
- impose a ‘joint audit’ regime giving firms outside the Big Four a role in auditing the UK’s biggest companies: competition is weak in this industry, therefore, the CMA proposes audits of the UK’s biggest companies (FTSE 350) should be carried out by a minimum of two firms, at least one of which would be from outside the Big Four (ie not Ernst & Young, Deloitte, KPMG or PricewaterhouseCoopers); this will give mid-tier firms access to the largest clients, allowing them to develop their experience and credibility, while also ensuring a cross-check on quality; the CMA is also considering an alternative, which is a market share cap to ensure some major audit contracts are only available to non-Big Four firms
The deadline for responses to the update paper is 21 January 2019.
For further information, see: LNB News 18/12/2018 43.
Government opens independent review of audit standards
The government has launched an independent review into standards in the UK audit market, appointing Donald Brydon, outgoing Chair of the London Stock Exchange Group, to lead the review. The Brydon Review will consider standards being delivered by UK auditors, what more can be done to make them more effective and reputable and look at what the standards and requirements should be for the UK audit profession in the future.
The Brydon Review builds on the findings of two parallel reviews:
- the independent review by Sir John Kingman of the industry’s scrutiny body—the Financial Reporting Council (FRC)
- the Competition and Market Authority’s (CMA) market study looking at the effectiveness of competition in the audit market
For further information, see: LNB News 18/12/2018 51.
Private M&A (share purchase)
An enforceable agreement to agree (Morris v Swanton Care & Community Ltd)
Commercial analysis: Kristina Lukacova, a barrister at New Square Chambers, analyses Morris v Swanton Care & Community Ltd  EWCA Civ 2763.
In that case, the Court of Appeal upheld the first instance decision that the claimant did not have an enforceable right to provide consultancy services to a company during a period to be reasonably agreed between the parties to a share purchase agreement. The relevant provision, which was in the earn out consideration clause of the share purchase agreement, was found to be an agreement to agree and there was no objective standard by reference to which the court could determine the length of the period referred to.
It provides a useful summary of the principles regarding agreements to agree and serves as a warning to parties tempted to leave matters to be agreed at a later date. Where the parties leave an essential matter to be agreed between them in the future, on the basis that either party remains free to agree or to disagree about it, there is no bargain which the courts could enforce.
For further information, see News Analysis: An unenforceable agreement to agree (Morris v Swanton Care & Community Ltd).
Public company takeovers
Partial approval of a cross-border merger (Re MDNX Group Holdings Ltd)
Re MDNX Group Holdings Ltd  EWHC 3396 (Ch) concerned two cross-border mergers aimed at reorganising subsidiaries within the same corporate group. Eleven UK companies and two Dutch companies were involved.
In the first merger (merger 1), the transferors were seven wholly owned subsidiaries of MDNX Group Holdings Ltd (MDNX). MDNX would merge with those seven companies, making MDNX the transferee company for merger 1. MDNX was an English registered company. Of the seven transferors: (i) one was a Dutch registered company; (ii) one was a Scottish company (Easynet); and (iii) the other five were English companies. Once merger 1 had taken place, merger 2 would occur, at which point an English company (Networks) would merge with: (i) MDNX, which was its sister company; (ii) three other English companies; and (iii) one Dutch company. Following the mergers, Networks would continue to conduct the business formerly carried out by the transferor companies.
It was necessary for pre-merger certificates to be obtained, pursuant to regulation 6 of the Companies (Cross-Border Mergers) Regulations 2007, SI 2007/2974 (the Cross Border Merger Regulations). Among other things, regulation 11 of the Cross Border Merger Regulations required a members' meeting to be summoned and a notice published in the Gazette.
Hearings took place to obtain the pre-merger certificates in London (for the English companies) and in Edinburgh (for Easynet). At the Edinburgh hearing, the Court of Session noted that the notice published in the Gazette had not included particulars of the date, time and place of the meetings summoned, as required under regulation 12 of the Cross Border Merger Regulations. The pre-merger certificate issued by the Court of Session stated that Easynet had properly completed the pre-merger acts and formalities, so far as applicable, with the exception of certain requirements of regulation 12 of the Cross Border Merger Regulations. The same omissions had been made from the Gazette notice for the English companies, but this had not been noticed or drawn to the attention of the judge in London who had issued a pre-merger certificate stating that the companies had properly completed the pre-merger acts and formalities for the cross-border merger.
The applicants applied to the Companies Court for the sanctioning of the two mergers.
The court held that merger 2 would be approved. There was jurisdiction under regulation 16 of the Cross Border Merger Regulations to make an order to approve the completion of merger 2. Further, there was no reason for the court not to exercise its discretion in favour of approving merger 2.
However, the court found that the jurisdictional requirement in regulation 16(1)(b) of the Cross Border Merger Regulations, which requires that an order has been made under regulation 6 (ie a pre-merger certificate has been obtained) in relation to each UK merging company, had not been satisfied in respect of the merger 1. The court could not make an order to approve the completion of merger 1, because of the pre-merger certificate made in respect of Easynet. It found that the fundamental requirement of article 127 of Directive (EU) 2017/1132 and of regulation 6 of the Cross Border Merger Regulations was that the court issuing a pre-merger certificate was satisfied, following its scrutiny, that all the pre-merger acts and formalities had been complied with. The term 'pre-merger certificate' for the purposes of regulation 6 of the Cross Border Merger Regulations was limited to an order given that stated that the court had concluded just that. An order which certified that some, but not all of the acts and formalities had been completed was not such a pre-merger certificate, in the view of the court.
Financial services regulation for corporate lawyers
FCA publishes review of Market Abuse Regulation implementation—Market Watch 58
The FCA has published the findings of a review into industry implementation of the Market Abuse Regulation (EU) 596/2014 (MAR) in the latest edition of its newsletter, Market Watch 58. The review involved meetings with firms, surveys sent to issuers of financial instruments and asset management firms and analysis of its own data. Market Watch 58 includes FCA advice on some of the issues raised by the review.
The findings and advice relate to market soundings; insider lists; systems and controls for identifying and disclosing inside information; and suspicious transaction and order reports (or STORs).
Overall, the FCA found that many market participants have a good understanding of their obligations under MAR and have configured their systems and controls accordingly. However, there remain areas where firms are struggling to comply, which includes surveillance of all orders and transactions. When MAR came into force, firms told the FCA that quote surveillance would require an additional technology build and they recognised that this might take time to design and implement. However, 2 years into the regime, the FCA now expects firms to be fully compliant with the obligation to undertake quote surveillance.
For further information, see: LNB News 18/12/2018 44.
Additional news—daily and weekly news alerts
This document contains the highlights from the past week’s news. To receive all our news stories, whether on a daily or a weekly basis, amend your personal settings within your ‘News’ tab on the homepage by clicking on either ‘Email’ or ‘RSS’ (depending on how you prefer to receive them) on the right hand side of the blue banner.
New and updated content
New Practice Note
We have published a new Practice Note in our Corporate Governance topic: Corporate governance for private companies.
Dates for your diary
|21 December 2018||Deadline for comments on the FCA consultation on its approach to Brexit.|
The consultation paper (CP18/36) sets out proposals on how the FCA will amend the FCA Handbook and EU derived binding technical standards if the UK leaves the EU without an implementation period. The FCA also consults on its proposed approach to non-Handbook guidance and to forms which appear in the FCA Handbook.
See LNB News 23/11/2018 119.
|26 December 2018||Deadline for feedback on the European Commission’s draft delegated regulation to supplement the Prospectus Regulation (EU) 2017/1129.|
The European Commission is seeking views on a draft delegated regulation to supplement the Prospectus Regulation (EU) 2017/1129 as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and to repeal Commission Regulation (EC) No 809/2004.
See LNB News 28/11/2018 112.
|1 January 2019||International Financial Reporting Standard (IFRS) 16 (Leases) applies to public companies with accounting periods beginning on or after this date (although if FRS 15 is also applied, earlier application is permitted).|
IFRS 16 replaces IAS 17.
See IFRS 16 (leases).
|1 January 2019||The revised UK Corporate Governance Code will apply to premium listed companies with accounting periods beginning on or after this date.|
See News Analysis:FRC consultation on revised CorporateGovernance Code and LNB News 29/08/2017 118, LNB News 29/08/2017 122, LNB News 22/09/2017 70 and LNB News 06/06/2018 77.
|1 January 2019||Companies (Miscellaneous Reporting) Regulations 2018, SI 2018/860, apply to accounting periods beginning on or after this date (other than the restoration of the requirement for small community interest companies (CICs) to report on directors’ remuneration, which will apply to CIC reports for financial years ending on or after 7 August 2018).|
The Companies (Miscellaneous Reporting) Regulations 2018 introduce new company reporting requirements on executive pay, corporate governance arrangements and how directors have regard to certain matters in the Companies Act 2006.
See News Analysis: Parliament approves the Companies (Miscellaneous Reporting) Regulations 2018 and LNB News 11/06/2018 77.
|11 January 2019||Deadline for written submissions to inquiry on the future of audit launched by the Department for Business, Energy and Industrial Strategy (BEIS).|
The BEIS committee’s inquiry will look into the impact of the CMA audit market study and review of the FRC by Sir John Kingman. Evidence hearings are planned to be held in January 2019.
See LNB News 12/11/2018 32.
|11 January 2019||Deadline for submissions to BEIS on ethnicity pay reporting by employers.|
BEIS is seeking views on ethnicity pay reporting by employers, asking questions on what ethnicity pay information should be reported by employers to allow for meaningful action to remove the barriers faced by under-represented groups in the labour market and which employers should be expected to report.
See LNB News 11/10/2018 75.
|15 January 2019||Deadline for feedback on the consultation launched by the Prudential Regulatory Authority (PRA) on a draft supervisory statement on banks’ and insurers’ approaches to managing the financial risks from climate change.|
The PRA’s consultation is relevant to all UK insurance and reinsurance firms and groups, banks, building societies and PRA-designated investment firms. It sets out how effective governance, risk management, scenario analysis and disclosures may be applied by firms to address the financial risks from climate change.
See LNB News 15/10/2018 25.
|21 January 2019||The technical advice issued by the European Securities and Markets Authority (ESMA) under the Prospectus Regulation will form the basis for the delegated acts to be adopted by the Commission by this date.|
The technical advice covers the format and content of prospectuses, the EU Growth Prospectus and the scrutiny and approval of prospectuses. In developing the advice, ESMA has taken into account responses to three consultation papers published on 6 July 2017.
See LNB News 03/04/2018 79.
To track key legislative and regulatory developments, see our Trackers:
New Q&A added this week: What defines a financial year for a limited partnership?
To view analysis of the latest deals in the market and the underlying transaction documents, use our Market Tracker deal analysis tool.
To read about the latest corporate announcements, see our Market Tracker weekly round-up—7 December 2018.
This is our final weekly highlights for 2018. The first weekly highlights of 2019 will be published on 10 January 2019. For details on how to keep up to date with the latest news on a daily and weekly basis, see Additional news—daily and weekly news alerts above.