Welcome to the first of our series on what is new and what to do next for listed companies, in which we intend to cover the key legal developments relevant to listed companies each quarter. If you would like to discuss any of these updates, please feel free to get in touch with any of the contacts listed in this update.
With the publication of the final UK Listing Rules sourcebook earlier this month, there are significant changes ahead for companies whose shares are listed on the Official List of the Financial Conduct Authority. The new Listing Rules will come into force on 29 July 2024. As expected, the general election did not impact on these reforms, which went ahead as planned, although with certain amendments from the draft rules. The key changes from the FCA's previously announced position are covered below.
- Reform of the UK Listing Regime
- Economic Crime and Corporate Transparency Act 2003 ("ECCTA")
- Draft Audit Reform and Corporate Governance Bill
- Directors' Code of Conduct
- International Sustainability Standards Board ("ISSB") Standards
- BHS Judgement
- FCA Review of Long Term Incentive Plan ("LTIP") Disclosures
- European Securities and Markets Authority ("ESMA") Statement on pre-close calls
Reform of the UK Listing Regime
The rules applying to the long-awaited UK Listing Regime reforms were published on 11 July 2024. As noted above, these will come into effect on 29 July 2024. While the substantive changes to the new UK Listing Rules ("UKLR") primarily relate to IPOs, significant transactions, related party transactions and the role of the sponsor, there will be an impact on all companies listed on the Official List as a result of the changes in terminology and to the numbering to the existing listing rules.
The substantive changes include:
(i) Replacement of premium and standard listing categories with a single segment: The premium and standard listing categories are removed and replaced with a new single segment called the equity shares (commercial companies) ("ESCC") category. With a number of other new listing categories being created, the FCA has been in touch with issuers over the last couple of months to confirm the new listing category to which they are to be mapped.
(ii) Relaxation of requirements for significant transactions: The concept of a "Class 2" transaction has been removed and "Class 1" transactions are now called "significant transactions", with the requirement to seek shareholder consent and publish a circular replaced with a disclosure-based regime. The timing and content of the required announcements was modified in the final version of the UKLR, which now allow for a three-stage announcement (once the terms of the significant transaction are agreed, once further information is available and once the transaction has completed). In addition, the final version of the UKLR removed the requirement for historical financial information on the target company or business to be included in an announcement relating to an acquisition, which had previously been included in the draft UKLR (historical financial information is still required for a disposal).
(iii) Relaxation of requirements for related party transactions: As well as replacing a shareholder vote to approve a related party transaction with a disclosure-based regime, and an amendment to the threshold at which a substantial shareholder becomes a related party from 10% to 20%, the duplication between the UKLR and the Disclosure Guidance and Transparency Rules has been removed.
(iv) Amendment of Class Tests: The "profits test" has been removed as one of the Class Tests.
(v) Key persons contact details: A new requirement to provide the FCA with up-to-date contact details for at least two of its executive directors or, if there are no executive directors, at least two directors by 29 January 2025.
(vi) Controlling shareholder agreements: In a change from the previous proposals, the FCA has removed the requirement for a controlling shareholder agreement in the final version of the UKLR.
A more detailed summary of the changes is available in our client note.
In light of the above, all listed companies should:
- Ensure all references to the previous Listing Rules are updated in both internal and external documents and on any website to reflect the new UKLR references (e.g. do not just replicate old AGM posting or results announcements or director appointment announcements as the numbers of the previous Listing Rules will have changed).
- Ensure there are no references to a "premium listing" (now an "ESCC listing"), "Class 1" or "Class 2" transactions (Class 1 transactions are now "significant transactions", and the concept of Class 2 transactions has been removed) or "LR" (which is now "UKLR") in any documents or on any website (e.g. Board reserved matters, committee terms of reference and the MAR manual often contain these terms).
- Allow additional time when preparing the next Annual Report given the changes to the rule references and for any extra checking that might be needed.
- Update Related Party and Significant Transactions policies (these policies will probably need a significant overhaul as there have been a number of rule changes in these areas).
- When next appointing new directors, ensure that an up-to-date directors' duties memorandum is given to the new director reflecting the new requirements of the UKLR.
- Consider which directors' contact details should be provided to the FCA in order to comply with the new requirement to provide key persons' contact details by 29 January 2025.
The FCA's PMB 48 also contains helpful guidance in respect of the update of technical notes and the FCA's knowledge base.
We also await the FCA's consultation on its proposals in relation to the new prospectus regime. The FCA is aiming to consult on proposals (including draft rules) in Q3 2024 and, subject to consultation responses and final approval, seeks to make final rules in 2025.
Economic Crime and Corporate Transparency Act 2003 ("ECCTA")
The Government recently released draft regulations dealing with the identity verification regime required under ECCTA for directors and persons with significant control, as well as anyone who delivers documents to Companies House on behalf of a company. For further information please see our briefing.
ECCTA also introduces a failure to prevent fraud offence, which, although not yet in force, will come into force following a six month implementation period beginning on the date that related Government guidance is published. The new offence is expected to apply late this year or early next year, and it is expected that the guidance will be published imminently.
Draft Audit Reform and Corporate Governance Bill
On 17 July 2024, the Labour Government's proposals in relation to audit and corporate governance were delivered as part of the King's speech. The proposed Audit Reform and Corporate Governance Bill would seek to push ahead with the reforms in the previous Government's response to the 2021 white paper on restoring trust in audit and corporate governance, which had been shelved by the previous Government. It is also proposed that the Financial Conduct Authority will be replaced with a new statutory regulator, to be known as the Audit, Reporting and Governance Authority. This new authority will be equipped with enhanced powers.
Directors' Code of Conduct
The Institute of Directors has published a consultation paper on a Code of Conduct for Directors ("IoD Code"), which is new and represents a voluntary commitment by directors (rather than a new binding legal or regulatory obligation). The IoD Code does not add to the general duties of Directors as a matter of law but is designed to "set a bar for director conduct beyond the legal baseline as a means of enhancing the legitimacy and reputation of directorship in the eyes of society and stakeholders".
The IoD Code is still being consulted on and the deadline for responding to the consultation is 16 August 2024.
International Sustainability Standards Board ("ISSB") Standards
On 26 June 2023, the ISSB published its inaugural standards, which are designed to create a comprehensive global baseline of sustainability disclosures. The UK's 2023 Green Finance Strategy explained that the Government was setting up an endorsement and implementation process for these standards, which was expected to result in the adoption of the ISSB standards as the first UK Sustainability Disclosure Standards this month. However, the Government announced on 16 May 2024 that it would delay the endorsement of the sustainability reporting standards until Q1 2025.
In the FCA's PMB 49, the FCA confirmed that, after the UK endorsement is completed in 2025, it will consult on amending its rules to move from TCFD to UK-endorsed ISSB disclosure standards. In the meantime, however, the FCA encourages listed companies to familiarise themselves with the ISSB standards and notes that companies may also wish to start voluntarily reporting against them.
BHS Judgement
Two former directors of BHS, Lennart Henningston and Dominic Chandler, have been ordered to pay at least £18m for wrongful trading. Wrongful trading occurs when a company's directors continue to trade when there is no reasonable prospect of the company avoiding insolvent liquidation.
A separate claim (a "misfeasance claim") was brought against those directors for breaching their duties as directors. There is (in addition to the duty to promote the success of the company) a common law duty in certain circumstances to consider or act in the interest of creditors when a company is verging on insolvency. This duty is triggered when the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable. Once this duty is triggered, the directors must, in promoting the success of the company, consider the interests of the company's creditors at the same time as considering the interests of the members, balancing these interests against each other where they diverge. The further the company's financial position deteriorates the more weight is to be given to the interests of the company's creditors until, when insolvent liquidation or administration is inevitable, the interests of the company's members cease to have any weight and the company's interests are to be treated as those of the creditors generally.
In these circumstances, the Court found that the two directors of BHS had failed to consider the creditors' interests and were therefore liable in misfeasance. The quantum of this misfeasance claim has not yet been determined, but it has the potential to be up to £133.5m.
For further details, please see our briefing.
FCA Review of Long Term Incentive Plan ("LTIP") Disclosures
In PMB 49, the FCA published details of its review of 25 companies' LTIP proposals during 2023. The original version of the bulletin noted poor compliance, but the FCA (in an about turn) reviewed its findings and updated the bulletin in light of industry feedback and confirmed high levels of compliance with the rules.The bulletin provides a useful reminder of the requirements when seeking shareholder approval for new or amended LTIPs, including the relatively new requirement that where the LTIP rules are not sent to shareholders, they should be available for inspection at the general meeting and be uploaded to the National Storage Mechanism from the date of posting the relevant circular for which approval is sought.
European Securities and Markets Authority ("ESMA") Statement on pre-close calls
ESMA has published a statement on good practices in relation to pre-close calls (communication sessions between issuers and their analysts taking place immediately before the periods preceding an interim or year-end financial report, during which issuers refrain from providing any additional updates or information). While ESMA guidance published following Brexit is not followed by the FCA, it is a helpful reminder of best practice.
Key points from the ESMA statement are:
- The unlawful disclosure of inside information is prohibited and pre-close calls should only provide non-inside information.
- The following are good practices that can reduce the risk of
unlawful disclosure of inside information:
- prior to the pre-close call, issuers should carry out a thorough assessment of the information they intend to disclose to ensure they are not disclosing inside information;
- disclose publicly the pre-close call (i.e. on the website), highlighting the details, date, place, topics to be discussed and the intended participants;
- make the materials and documents used available on the issuer's website simultaneously with the call;
- record the call and make the recording available to the competent authority (i.e. the FCA) upon request; and
- keep a record of the information disclosed and publish such record on the issuer's website.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.