This week:
- The FCA is consulting on a major overhaul of the UK's equity and debt securities listing regime
- The FCA publishes guidance on the treatment of inside information in the context of stewardship activity
- The FCA publishes the results of an assessment of sponsors' procedures to ensure compliance with TCFD disclosure obligations
- The court approves the first step in a rare UK statutory merger
- The court clarifies the overlap between a derivative claim and an unfair prejudice petition
- Draft regulations set out forthcoming transparency changes for limited liability partnerships
- Final legislation is published to amend the financial promotion exemptions for high-net worth individuals and sophisticated investors
- The EU is consulting on guidelines for enforcing disclosure under the Corporate Sustainability Reporting Directive
FCA consults on changes to Listing Rules to facilitate UK listings
The Financial Conduct Authority (FCA) is consulting on changes to its Listing Rules designed to encourage companies to list in the UK.
The consultation follows extensive engagement by the FCA with stakeholders, including through public discussion papers.
In a significant overhaul, the FCA is proposing to replace the Listing Rules with an entirely new sourcebook, to be called the "UK Listing Rules" (or UKLR) sourcebook.
The new regime would collapse the current "premium" and "standard" listing categories into a single "commercial company" category. (There would be separate categories for shell companies, funds secondary listings, depositary receipts, debt instruments and derivatives.)
The new handbook would dispense with many requirements under the current Listing Rules, including by making the following changes.
- Removing the requirements for historical financial information, a revenue track record and a clean working capital statement on admission (although some of these requirements would remain as part of prospectus content requirements).
- Removing the ongoing requirement for a company to have an independent business and operational control over its main activities (but maintaining protections relating to controlling shareholders).
- Continuing to permit dual-class share structures but removing the requirement for enhanced voting rights to expire at a particular point in time (sunset clauses).
- Removing the requirement for a shareholder vote on significant transactions (other than for reverse takeovers), removing the so-called "profits test" for classifying transaction size, and raising the transaction size threshold for announcements to the market.
- Paring back the ongoing role of the sponsor following admission, so that sponsors would be involved principally only on further issuances, related party transactions and class test analyses.
The consultation is over 400 pages long and contains significant detail. We will be digesting it over the festive period with a view to reporting in more detail at the beginning of 2024.
The FCA has asked for feedback on proposed changes to sponsor competence by 16 February 2024. For all other proposals, it has asked for feedback by 22 March 2024.
Access the FCA's consultation paper CP23/31 on overhauling the UK's listing regime (opens PDF)
FCA publishes guidance on inside information in connection with stewardship activity
The Financial Conduct Authority (FCA) has published Primary Market Bulletin 46, in which it has provided guidance, following questions from stakeholders, on its interpretation of Article 10 of the UK Market Abuse Regulation (UK MAR).
Under Article 17 of UK MAR, an issuer must publish inside information to the market as soon as possible, unless it has a legitimate interest in delaying disclosure.
Until inside information has been published, Articles 10 and 14 of UK MAR collectively prohibit a person from disclosing inside information to another person, other than in the normal exercise of an employment, a profession or duties.
The FCA has stated the following.
- Article 10 should not inhibit high-quality engagement between companies and their shareholders or prevent collective engagement by institutional shareholders designed to raise legitimate concerns on particular issues. To this end, the FCA's historic approach, set out in FCA Market Watch 20 (May 2007), continues to apply.
- Market abuse is unlikely to occur where a shareholder trades solely based on its own intentions and strategy. It could occur if other market participants also trade based on the knowledge of that party's voting intentions or stewardship plans, but this is unlikely in the context of bona fide discussions between shareholders on ESG stewardship.
- The FCA notes that asset managers and institutional shareholders can choose to publish their ESG stewardship programmes, which would reduce the risk of inside information arising and make collaboration between shareholders more straightforward.
Read the FCA's guidance in Primary Market Bulletin 46 on disclosure of inside information
Read the FCA's Market Watch 20 on shareholder activism and market abuse (opens PDF)
FCA publishes review of sponsor procedures for TCFD disclosures
The Financial Conduct Authority (FCA) has published Primary Market Bulletin 46, in which it has set its initial assessment of how sponsors have amended their own procedures to assess whether new applicants for listing have procedures in place to comply with their TCFD disclosure requirements.
Under the FCA's Listing Rules, listed companies must either make disclosures in accordance with the Recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) or explain why they have not done so.
Under Rule 8.4.2R(3) of the Listing Rules, the sponsor of a premium-listed company must come to a reasonable opinion that the directors of an applicant for listing have established procedures to enable the applicant to comply with the Listing Rules, including the requirement to make TCFD disclosures.
The review will be useful to sponsors of premium-listed companies in understanding what the FCA expects of them, as well as for applicants for listing.
Court opens door for rare UK statutory merger
The High Court has allowed proceedings to begin for a rare kind of statutory merger in the UK.
What happened?
Under section 900 of the Companies Act 2006, it is possible to enter into a form of statutory merger designed to transfer all of the assets of one or more transferor companies into a single transferee company. Following the merger, the transferor companies are dissolved.
The merger needs to be carried out as a scheme of arrangement and must qualify as an "amalgamation" or "reconstruction".
Statutory mergers are common in jurisdictions outside the UK. However, although theoretically possible, statutory mergers in the UK are very rare. This is because, although legislation states that the transferors' assets will pass automatically to the transferee company, if the consent of a third party is required to transfer an asset, the asset will not transfer until that consent has been obtained.
As a result, statutory mergers under section 900 are now very rare indeed and restricted to specific circumstances. Instead, most mergers take the form of a share or asset sale or a combination of both.
In In the case of Almida Group Unlimited and others [2023] EWHC 3053 (Ch), 11 transferor companies wished to transfer their assets into a single transferee company. At the time of the application to court, it was yet to be determined what assets each transferor company held, and it was entirely possible that some transferor companies had no assets at all.
Under the proposals, the shareholders of the transferor companies would be entitled to receive shares in the transferee company (which is common on a statutory merger). However, the proposed merger was a pure internal reorganisation and, in practice, this would serve no purpose, and so the transferor companies proposed to waive their entitlement to receive shares.
What did the court say?
The court had to decide whether the proposal amounted to an "amalgamation" or "reconstruction".
In particular, the court had to decide two key questions:
- If any transferor companies turned out to have no assets, would they be eligible to be included in the proposed merger, given that the legislation requires "the whole or any part of the undertaking or the property of any company concerned ... to be transferred to another company"?
- Did the fact that the transferor companies intended to waive their entitlement to shares in the transferee company cause any issues?
The judge concluded that the proposals would, in principle, amount to an amalgamation. The key questions were whether there would be a "coming-together" of two or more businesses and whether, following the merger, there would be a "substantial identity" between the old and new shareholders.
The court found that there was no requirement for the transferee company to issue shares to the transferor companies, and that, although the legislation referred to a transfer of assets, the key factor was the continuing identity of the shareholders following the merger.
Finally, the court noted that the transferor companies had obtained consent from all third parties they had been able to identify, except for one major retail bank which it would be easy to contact.
The court therefore permitted the proposal to proceed to the next step.
What does this mean for me?
It's important to note that this was merely an initial hearing, the main purpose of which was to convene meetings of the various companies' shareholders to approve the merger scheme (which would seem to be a foregone conclusion in this case).
To finalise and implement the scheme, the companies will need to return to court for a "sanction hearing", at which the court must approve (or sanction) the scheme. It is possible that the questions the court considered could be reviewed again at that stage, so the court's decision is very much a preliminary one.
However, the decision provides useful guidance on when an amalgamation may be possible or useful and that the courts are prepared to show flexibility when considering a scheme.
In particular, the case means that a statutory merger may be a potential option when looking to tidy up a group structure, particularly if the structure is relatively simple and it is easy to obtain any third-party consents. Using a statutory merger should provide better closure than simply striking defunct group companies off and may well save the costs of formally winding them up.
The restrictions on transferring assets mean that statutory mergers in the UK will remain unavailable in cases where they would be used in other jurisdictions. There have long been calls for legislative reform in this area to make it easier to carry out proper mergers, and this judgment will not change that.
Court clarifies overlap between derivative claims and unfair prejudice
The Court of Appeal has clarified the test it will apply when deciding whether a petition for unfair prejudice can be used to seek compensation for a company.
Ntzegkoutanis v Kimionis [2023] EWCA Civ 1480 concerned a company (Coinomi Limited) established by two individuals (Mr Ntzegkoutanis and Mr Kimionis) to develop a cryptocurrency wallet app. Mr Ntzegkoutanis and Mr Kimionis became Coinomi's sole shareholders and directors.
In due course, Mr Ntzegkoutanis claimed that Mr Kimionis had excluded him from the management of Coinomi's business and, in breach of his statutory duties to Coinomi, had diverted Coinomi's assets to a new company established and owned by him.
Mr Ntzegkoutanis brought a petition in unfair prejudice under the Companies Act 2006. He sought an order that Mr Kimionis compensate Coinomi for its loss and sell his shares in Coinomi to Mr Ntzegkoutanis at a reduced value.
Mr Kimionis argued that two of the remedies sought amounted to remedies for Coinomi, not for Mr Ntzegkoutanis as a shareholder of the company, and that the only way to obtain these remedies was to bring a derivative claim on behalf of Coinomi (and not through an unfair prejudice petition).
The court disagreed. The judges acknowledged that the court has a significant degree of flexibility to make any order it considers appropriate to address unfair prejudice, and this can include an order compensating the company itself, rather than a shareholder.
However, they agreed that an unfair prejudice petition cannot simply be used as an alternative way of seeking a remedy that would not be available through a derivative claim.
Detail emerges on changes to limited liability partnership law
The Government has published draft regulations that will amend the law relating to limited liability partnerships (LLPs) to increase transparency and enhance the integrity of public information.
The regulations are made under the new Economic Crime and Corporate Transparency Act 2023, which makes several significant changes to UK company law for the same purpose.
The regulations, if they become law, will make the following key changes to LLPs, most of which mirror the corresponding changes for companies.
- An LLP will need to ensure that its registered office is situated at an "appropriate address" where it can acknowledge receipt of documents.
- An LLP will also need to provide a registered email address to which Companies House can send electronic communications.
- It will not be possible to register an LLP under a name designed to facilitate criminal purposes, which suggests a connection with a foreign government, or which contains computer code.
- An individual will not be permitted to be a member of an LLP if they are disqualified from acting as a company director.
- The new restrictions on delivering documents to Companies House will apply to LLPs. A document to be submitted on behalf of an LLP will need to be delivered either through an authorised corporate service provider (ACSP) or by a member or employee of the LLP who has first verified their identity.
The regulations have been laid under the affirmative resolution procedure, meaning they will become law if and when Parliament approves them.
Final legislation published to amend financial promotion exemptions for HNWs and sophisticated investors
Final regulations have now been published to amend the UK's financial promotions regime, specifically to exemptions that relate to high-net worth individuals (HNWs) and sophisticated investors.
The changes will increase the threshold for the exemption that allows financial promotions to be made to HNWs, as well as amend the criteria for the exemption that allows financial promotions to be made to sophisticated investors.
The changes take effect from 31 January 2024.
Read more about the changes to financial promotions in our previous Corporate Law Update
Access the regulations that amend the HNW and sophisticated investor financial promotion exemptions
EU consults on enforcement of sustainability reporting requirements
The European Securities and Markets Authority (ESMA) is consulting on guidelines to enforce disclosure under the EU's Corporate Sustainability Reporting Directive (CSRD).
The CSRD mandates sustainability-related reporting for larger companies in the EU (including larger foreign issuers), increasing the availability and comparability of data available to asset managers and institutional investors, among other interested parties.
It will come into effect in stages, beginning in 2024 for companies already subject to the EU's Non-Financial Reporting Directive (NFRD). From 2025, it will apply to large companies that are not currently subject to the NFRD and, from 2026, to listed small and medium-size enterprise (SMEs), small and non-complex credit institutions and captive insurance undertakings.
The CSRD does not apply in the UK but will affect UK companies with securities listed on an EU-regulated market. In addition, from 2028, it will also affect UK companies that generate net turnover in the EU above €150m and have a large subsidiary or branch, or a listed subsidiary, in the EU.
The purpose of the proposed guidance is to provide a harmonised approach to enforcement of disclosure under the CSRD across the European Union.
The consultation is open until 15 March 2024.
Read ESMA's consultation on guidance for enforcing CSRD disclosure requirements (opens PDF)
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