slaughter and may REVERSE TAKEOVERS INTRODUCTION

Transcription

1 slaughter and may The Financial S ervices Authority: Consultation Paper CP12/2 Amendments to the Listing Rules, Prospectus Rules, Disclosure Rules and Transparency Rules ( UKLA Rules or Rules ) BRIEFING march 2012 INTRODUCTION On 26 January 2012, the Financial Services Authority ( FSA ) published a consultation paper on a number of proposed changes to the UKLA Rules. The proposed changes aim to update or clarify existing rules in order to reflect changes in market practice and also to incorporate into the UKLA Rules practice notes already issued by the FSA on various matters. The consultation paper also aims to start a wider debate on the nature and status of premium listing; in particular, whether the premium listing standard remains correctly positioned as a benchmark of high standards. PROPOSED CHANGES The FSA s proposed changes cover five areas: Reverse Takeovers Sponsors Transactions Financial Information Externally Managed Companies This note provides a brief description of the main changes proposed and a short commentary. REVERSE TAKEOVERS The FSA is proposing a full overhaul of the rules on reverse takeovers. The amended rules will apply both to premium and standard listed companies, although an investment company will continue to be exempt if a transaction falls within its investment policy. The main issues are suspension and cancellation of listing - suspension of listing applying to the initial period during which the market is insufficiently informed about the new business being acquired, and cancellation (followed by re-admission) occurring on completion of the transaction. Definition of reverse takeover The existing Rules define a reverse takeover as an acquisition by a listed issuer of either a business or asset, or an unlisted company, where any transaction percentage ratio is 100% or more, or which would result in a fundamental change in the issuer s business or a change in its board or voting control. The new Rules would also extend to acquisitions of listed companies except where the issuer is acquiring a company within the same UK listing category (e.g. a premium listed issuer acquiring a premium listed target). Other proposed changes to the definition of reverse takeover include: incorporation of an existing UKLA note that brings acquisitions involving new holding companies (which acquire both the listed issuer and the larger target) within the definition;

2 guidance on factors that will be indicative of fundamental change, which include changes in strategic direction, changes in industry sector and fundamental changes in suppliers and end users; and removal of the exemption for certain transactions with ratios of less than 125%, where there would be no real change to the business, or the board or voting control, of the listed issuer. Suspension of listing The current Rules state that, on a reverse takeover, there will generally be insufficient public information about the proposed transaction, and the issuer may be unable to assess accurately its financial position and inform the market accordingly. Therefore, suspension of listing is usually required once the transaction becomes public, until publication of a prospectus for the enlarged group. The new Rules require that an issuer must consult the FSA in good time before any reverse takeover in order to confirm the position on suspension. In the case of an issuer with a premium listing, this must be done through its sponsor. The requirement for a suspension of listing will depend on the status of the target. If the target is a company in the same UK listing category as the issuer, no suspension will be required. If the target is a company admitted to a regulated market (e.g. Euronext and other main European exchanges), the FSA will generally be satisfied that no suspension is required. However, suspension will only be avoided if the issuer announces that the target has complied with the disclosure requirements of the relevant market and provides details of where the relevant information can be obtained. If the target is subject to the disclosure regime of a non-regulated market (e.g. Nasdaq, AIM), the FSA may be satisfied that no suspension is required. This requires:- confirmation to the FSA by the issuer (or its sponsor, if the issuer has a premium listing) that the disclosure standards of the relevant market relating to financial and inside information are equivalent to those that apply under the Disclosure and Transparency Rules ( DTRs ); and an announcement by the issuer that there are no material differences in disclosure standards, together with a confirmation of target compliance and details of where the relevant information can be obtained. If (a) the target does not fall into either of the above categories; or (b) the required confirmations cannot be given, the FSA has codified its current technical note and provided that, in order to avoid a suspension, an issuer must publish an announcement containing:- three years financial information on the target (including a description of key differences from the issuer s accounting policies); a description of the target, including trend information; a declaration that the issuer s directors consider the announcement to contain sufficient information about the target to provide a properly informed basis for assessing its financial position; and a statement confirming that the issuer has made the necessary arrangements with the target vendors to enable the issuer to keep the market informed without delay of any developments concerning the target that would be required to be released were the target already part of the issuer s group. 02

3 If the issuer has a premium listing, its sponsor must confirm to the FSA that it is reasonable for the issuer to make the last two statements. Following the announcement, the issuer must thereafter comply with DTR 2.2.1R (relating to disclosure of inside information) on an enlarged group basis. Cancellation of listing On completion of a reverse takeover, the issuer s listing will generally be cancelled and it must apply for immediate re-admission as an enlarged group. No cancellation should be required if the target is in the same UK listing category as the issuer. If the issuer is acquiring a target in a different UK listing category (e.g. a premium listed issuer acquiring a standard listed target), no cancellation is required if the issuer: provides an eligibility letter for the enlarged group to the FSA 20 business days prior to announcement of the transaction; and explains (in an announcement or circular) various points about the acquisition, including how the issuer will continue to meet its eligibility requirements and the effect on the issuer s obligations under the Listing Rules. As under the current Rules, if the target is not UKlisted, the new enlarged group will have to comply with the general listing requirements. Application for re-admission as a premium listed commercial company will require recent audited accounts of the target, which (under the new Rules - see below) must be prepared to a date no more than nine months prior to re-listing. The proposals continue to place a greater onus on the issuer to make the case if it wishes to avoid a suspension of listing. As currently framed, the new Rules require the issuer, where applicable: to make qualitative statements as regards the adequacy of target financial information disclosed in the initial announcement, which will also require a sponsor s confirmation if the issuer has a premium listing (already required under existing practice notes); to assess disclosure standards for equivalence with UK standards and to make such assessment public (required on a private basis under existing practice notes); and to confirm target compliance with disclosure standards, with no awareness qualification and looking back indefinitely (not required under existing practice notes). This will place a heavy burden on the issuer even where the target is co-operative. The requirement in certain circumstances for the issuer to disclose information to the market as if the target was already part of its group will continue to present considerable challenges, especially where there is a lengthy gap before completion. It will require the issuer to secure full co-operation from the target, which may have to disclose information that would otherwise remain confidential, at a time when conditions to the transaction remain unsatisfied. Where there are regulatory hurdles to overcome, there could be additional sensitivity over the sharing of some information between issuer and target. The new Rules also do not clarify how the requirement to make disclosures on this enlarged group basis will be affected by the subsequent publication of a prospectus for the enlarged group, which would, under the current Rules, itself be sufficient for suspension to be lifted. An issuer may have to choose between an early lifting of suspension, accompanied by a continuing additional disclosure requirement, or waiting to publish its prospectus in order to avoid the additional obligation. The requirement for an eligibility letter to be provided to the FSA 20 business days prior to announcement where the acquisition is of a listed company in a different UK listing category is unduly onerous, given that there would generally be ample opportunity to deal with this at a later 03

4 point. By contrast, a reverse takeover of an unlisted company, involving a re-listing of the issuer, would only require submission of an eligibility letter when the draft prospectus is first submitted to the FSA. The new requirement for audited accounts of the target to be no more than nine months old at readmission may leave an issuer with an unexpected requirement to procure and publish a new set of audited target accounts if the satisfaction of conditions to closing (e.g. anti-trust or other regulatory) takes longer than expected. SPONSORS The FSA s explanation for amending the sponsors regime is that it has, among other things: identified instances where it believes that the current Rules do not fully describe the scope and nature of sponsor services; encountered situations where sponsors have apparently provided incomplete or inaccurate information; and witnessed apparent failures by sponsors to balance their duties to the UKLA with the commercial interests of clients. The following section summarises those proposed amendments which are likely to be of most significance to listed issuers. Occasions when a sponsor is required The situations in which an issuer will require the services of a sponsor will be expanded by the new Rules. This results both from: (i) the new Rules on reverse takeovers, which require a number of sponsor confirmations; and (ii) adjustments to other existing Rules to require sponsor involvement; for example, any fair and reasonable opinion given in connection with a related party transaction must now be given by a sponsor, rather than simply by an independent adviser. Relationship with FSA Under the new Rules, a sponsor will be required to take all reasonable steps to ensure that any communication or information it provides to the FSA while carrying out a sponsor service is, to the best of its knowledge and belief, accurate and complete in all material respects, and it must also immediately provide to the FSA any information of which it becomes aware that materially affects the accuracy and completeness of previously provided information. The FSA has also included a provision that clarifies that a sponsor remains responsible for complying with its responsibilities to the FSA, even where it is relying on a third party (e.g. the issuer or the issuer s advisers) in giving an assurance. Disclosure of breaches Sponsors are already required, in relation to a sponsor service, to disclose to the FSA any material information they have concerning noncompliance with the Listing Rules or the DTRs. The new Rules remove the materiality qualification and require disclosure to the FSA of any information about rule breaches of which a sponsor becomes aware in connection with the provision of sponsor services. Co-operation with sponsors The new Rules introduce an express requirement for an issuer to co-operate with its sponsor, including in relation to the disclosure of any breach of rules. The new duties imposed on sponsors as regards the FSA could potentially cause tension in the relationship between sponsors and issuers, and increase the level of verification and due diligence a sponsor will require. The removal of the materiality threshold from the requirement to notify information concerning rule breaches may lead to an increase in potentially unnecessary notifications to the FSA and again may cause tension in the relationship between sponsors and issuers. 04

5 In addition, the emphasis on sponsor responsibility, notwithstanding their reliance on third party assurances, could lead to an increased requirement from sponsors for separate advice and possible increased costs for issuers. TRANSACTIONS Many of the changes being made in the transactional area involve amendment of the UKLA Rules to incorporate existing FSA technical notes and/or otherwise codify what is existing practice. However, there are also substantive changes to the Rules on class transactions and related parties. Class transactions Where a significant change or a significant new matter arises after publication of a circular but before the shareholder vote on a class 1 transaction, a new circular must now be published (the current requirement is limited to an announcement, unless the terms of the transaction are changing materially), and the shareholder meeting must if necessary be adjourned to ensure that the supplementary circular is sent to shareholders at least seven days before the meeting. The current requirement to obtain further shareholder approval for any material change to the terms of the transaction still applies if the change occurs after initial shareholder approval has been given. LR 10 defines transactions caught by the Listing Rules very widely, but excludes transactions of a revenue nature in the ordinary course of business. Under the new Rules, this exemption will be extended to all transactions in the ordinary course of business, whether revenue or otherwise. The new Rules also: clarify that all compensatory arrangements that include some element of money for nothing (e.g. non-refundable deposits and go-shop fees ) must be classified on the much stricter basis that currently applies to break fees, and confirm that an issuer must also aggregate all such arrangements relating to the same group of assets in a 12-month period, except where the payment triggers are mutually exclusive; and provide that an uncapped director s loan made for the purposes of defending a claim would benefit from the same exemption as an uncapped directors indemnity, rather than being classified as a class 1 transaction as under the current Rules. Class 1 circulars will be required to contain a responsibility statement on behalf of the issuer as well as its directors, in line with the current requirements under the Prospectus Rules. The requirements in relation to class 3 transactions (where all the class tests result in a percentage ratio of 5% or less) are to be removed in their entirety. Related parties The ordinary course of business exemption in the related party rules is also to be extended to all ordinary course of business transactions, and not just those of a revenue nature. All co-investment transactions involving a related party and an issuer will also be exempt if they are made in the ordinary course of the issuer s business. The definition of a related party associate is to be extended to catch partnerships in which a related party holds a significant interest (that is, a voting interest greater than 30% or at least 30% of the partnership). The new provisions relating to supplementary circulars and the requirement for additional shareholder votes where the terms have changed will apply to related party transactions in the same way as they do for class 1 transactions. 05

6 The expansion of the ordinary course of business exemption to cover capital as well as revenue transactions for both class 1 and related party transactions is a welcome change, given the number of ordinary course of business transactions of a capital nature which are required to be analysed under the current Rules. Likewise, the change exempting co-investment in the ordinary course of business will be welcome for issuers with significant shareholders operating in the same business. The requirement for supplemental circulars for class 1 and related party transactions where there is a significant change or new significant matter, and for a seven-day adjournment to shareholder meetings, could lead to significant delays in closing transactions, with a questionable benefit to the investor community, as compared to existing requirements under which a new class 1 circular is only required where the terms of the transaction are changing materially. The changes have failed to fully clarify the position on the aggregation of related party transactions over a 12-month period. They do not address whether transactions (other than small transactions) which are exempted from the related party rules by Annex 1 to LR 11 (e.g. take up of rights issues, loans to directors, transactions agreed before the counterparty was a related party) should or should not be aggregated with later transactions with the same related party, when deciding how to classify those later transactions. The new partnership definition of a related party associate may be difficult to apply as currently framed; for example, the reference to voting rights does not translate very well to a partnership context. The removal of the requirements for class 3 transactions is welcome, given that the disclosures generally provided little value to investors. An issuer will no longer have to monitor public disclosure of minor transactions (e.g. in its accounts and/or through regulatory filings) which could technically trigger the requirement for an announcement some time after the transaction has occurred. The FSA has pointed out that any relevant disclosures would in any event continue to be required under the disclosure obligations in the DTRs. The FSA has not addressed another similar issue, where significant changes to information disclosed in, or significant new matters related to, a class 2/class 1 announcement are required to be announced on an indefinite basis. Other There are two other, more minor, proposed changes which are of interest: under the new Rules, issuers may, with shareholder approval, carry out share repurchases of 15% or more of a class of shares without utilising a tender offer; and sales or transfers of treasury shares must only be immediately notified to an RIS if they represent over 0.5% of the issuer s share capital, thereby removing the current requirement for frequent announcements if small numbers of treasury shares are used to satisfy share awards under employee share schemes. FINANCIAL INFORMATION The amendments relating to financial information are extensive, but to a great extent reflect the codification of existing practice, reordering of Rules to aid clarity, and removal of confusion due to the interaction of some existing Rules. This note highlights the more significant changes. Age of financial information A new applicant under LR 6 must now have audited historical financial information prepared to a date no more than nine months prior to admission. At present, the audited accounts 06

7 need only be prepared to a date no more than six months prior to publication of the related prospectus, with the prospectus then remaining valid for up to 12 months. Class 1 transactions The new Rules on financial information for a class 1 circular recognise that, in certain circumstances, it may be impossible for a listed issuer to comply with the requirement to include full financial information in a class 1 circular (for example, if the target is refusing to provide the detailed accounting information in connection with a forced sale, or if the assets do not amount to a business). In these cases, the new Rules provide that the issuer must include in the class 1 circular an appropriate independent valuation of the interest to be acquired. Profit forecasts/estimates The FSA had previously introduced a concession to LR 13 allowing issuers to step away from previously published profit forecasts that were no longer valid, and thereby avoid the need to report on them in a class 1 circular. The new Rules provide that a profit forecast cannot be treated as invalid solely because it was prepared for a different purpose. If an issuer does decide to treat a forecast as invalid, the new Rules require the circular to include both the invalid forecast itself and an explanation of the directors rationale for this decision. Synergy benefits The FSA has been reviewing its position on synergy statements in conjunction with the Takeover Panel, which is also considering its practice in this area. The new Rules would require an issuer to include relatively detailed information on any synergy benefits stated to arise from a class 1 acquisition, including analysis and explanation of the constituent elements, a statement that the synergies could not be achieved without completion of the acquisition and a confirmation that both benefits and costs are reflected. However, the new Rules do not require an accountants report to be published on the synergy numbers. There may in certain circumstances be a requirement for a supplementary prospectus where there is a long gap between publication of a prospectus and admission of shares to listing, given the new requirements for recent audited financial information at admission. The proposals as regards stated synergy benefits are likely to require issuers to prepare detailed analysis for disclosure and could prove challenging in terms of the confirmations required. EXTERNALLY MANAGED COMPANIES The structure described by the FSA and dealt with in this section involves a listed issuer which receives key strategic services from an independent entity outside its group. These services are viewed by the FSA as covering areas which form a significant part of the strategic decision making of, or planning for, the listed issuer. The FSA recognises that only a very few such companies exist, but is concerned that the structure might be widely adopted and could undermine the ability of shareholders to hold management to account. The proposed rule changes are intended to apply only to commercial listed companies, not investment companies (which often have investment managers or advisers providing these kinds of services). The proposed changes are as follows: a change to the eligibility requirements in LR 6 for new applicants, such that they must satisfy the FSA that the discretion of the board to make strategic decisions has not been limited or transferred and that the board can act on key strategic matters in the absence of a third party recommendation; a change to the continuing obligations applicable under LR 9, to require continuing 07

8 compliance with the new eligibility requirement; a requirement for senior executives of external management companies providing key strategic services to take responsibility for any prospectus issued by the relevant listed issuer; and an amendment to the guidance on what constitutes a person discharging managerial responsibilities for the purposes of DTR 3 to include any individual who has regular access to inside information concerning an issuer and has the power to make managerial decisions affecting that issuer, even where not employed within the issuer group. The proposed changes to LR 6 and LR 9 are intended to ensure that externally managed companies will not be able to obtain a premium listing in future, and also that any such companies with an existing premium listing must change their structure or move to a standard listing. This is subject to any transitional arrangements considered necessary, which have yet to be addressed by the FSA. There is a risk that, in seeking to draft new Rules for a type of structure that is still very unusual, the FSA may find itself catching in the potential scope of its Rules companies and arrangements that are nothing to do with the targeted structure, and it may need to expend considerable effort in refining the wording and/or in providing guidance on application of the new Rules, for what may be seen as little real gain. WIDER ISSUES FOR PREMIUM LISTING Proposals In its paper, the FSA highlights the ongoing debate on the nature of the premium listing standards, largely driven by concerns arising out of the recent listing of certain high profile international issuers. While the FSA notes that other bodies have more direct control over the corporate governance regime that applies to listed companies, it also accepts that the Rules are integral to the overall UK corporate governance framework, and seeks views as to whether any specific changes should be made to provide added protection to investors. Suggestions made include: enhancing the rights of minority shareholders by giving them veto rights over certain important decisions, such as the election of directors; strengthening the related party transaction requirements and disclosures; and reinstating previous requirements that set as conditions to listing that companies with controlling shareholders must be capable of carrying out their business independently. These suggestions appear to have been made to elicit comment rather than necessarily as a foundation for forthcoming changes, and may not be easy to implement in practice. For example, weighting the voting rights of minority shareholders in certain circumstances would cut across fundamental shareholder rights and serve to negate the power associated with ownership. In relation to the related party rules, it is notable that recent amendments to these rules have tended to relax rather than strengthen them (e.g. removing 50/50 joint venture parties from the definition of a related party). It could be that a better way to afford investors greater protection would be by re-visiting the FTSE criteria for entry to the FTSE 100, in order to introduce governance requirements where appropriate. FTSE has suggested that they intend to undertake further consultation on this topic. 08

9 DEADLINE FOR COMMENTS The FSA has requested comments on the proposed amendments by 26 April In relation to the concrete proposals made, it intends to publish its feedback and policy statement in the summer of 2012, with the implementation of the new Rules coming into effect shortly afterwards. In relation to the other, general issues on which opinions are being sought, further proposals may be developed later in the year, along with a number of further, more technical amendments that apparently remain to be dealt with. Slaughter and May 2012 This material is for general information only and is not intended to provide legal advice. For further information, please speak to your usual Slaughter and May contact. kmh96.indd312