Companies Act 2006 Implementing the Transparency Directive slaughter and may January 2007
companies act 2006 implementing the transparency directive Companies Act 2006 received royal assent at the beginning of November. The substantial part of the Act is not expected to come into force before October 2008. Provisions related to the implementation of the Transparency Directive came into effect on 20 January 2007. Transparency Directive The Transparency Directive has been implemented in the UK through changes to the Financial Services and Markets Act 2000 ( FSMA ) and new transparency rules made by the Financial Services Authority ( FSA ). These new rules have been incorporated in the FSA s Disclosure Rules Sourcebook and which have been re-named the Disclosure and Transparency Rules ( DTR ). > Periodic Financial Reporting (DTR4) The periodic financial reporting rules apply to financial reporting periods starting on or after 20 January 2007. So, for companies with a 31 December year end, the relevant rules will not apply until the first quarter of 2008. Until that time, the existing requirements as set out in Chapter 9 of the Listing Rules relating to half-yearly reports, preliminary results statements and annual report and accounts will continue to be applicable. However, companies with reporting periods starting after 20 January 2007 (for example, April 2007), will need to comply with the rules from the start of their financial year in 2007. The FSA has produced a table showing when companies must comply with the rules depending on their year end. The table is reproduced in the appendix. > Annual and Half-yearly Financial Reports The timing of publication of annual and half-yearly financial reports has been shortened. Annual reports must now be produced within four months (rather than six) of the financial year end and half-yearly reports within two months (rather than three) of the end of the first six month period of the financial year. Annual reports must contain a detailed business review (an OFR). Interim reports must describe important events in the half year. Both annual and interim reports must include a description of the principal risks and uncertainties facing the business. There is a new requirement for responsibility statements to be included in the reports. The responsibility statements are required to confirm that the relevant financial statements give a true and fair view (for the half year this can be satisfied by confirming preparation in accordance with IAS 34) and that the management report includes a fair review of the development and performance of the business together with the principal risks and uncertainties faced. The FSA has said that companies can decide who should sign responsibility statements on their behalf. The FSA has clarified that companies are responsible for the information included in reports and that directors are not personally responsible, even if they sign responsibility statements on behalf of the company. The statutory liability regime (see below) should operate to avoid personal liability to third parties for directors who provide responsibility statements. 1 slaugh ter and may
Aside from those matters set out above, the contents requirements for annual and half-yearly reports will remain broadly the same as under the existing regime. > Interim Management Statements Unless a company publishes quarterly financial reports, it must make management statements during both the first and second six month period of any financial year. The statements must be made between 10 weeks after the beginning and six weeks before the end of the relevant six-month period. The interim management statement must provide an explanation of material events and transactions that have taken place during the relevant period and their impact on the financial position of the company and its subsidiaries and a general description of the financial position and performance of the company and its subsidiaries during the relevant period. FSA informal guidance in this area suggests that information of the kind certain companies have become used to publishing in quarterly operating performance statements (and, possibly, trading statements) may be sufficient to satisfy IMS requirements. > Dissemination Half-yearly reports and interim management statements must be disseminated in full text, that is, the text of the report must be included in an announcement released through a RIS. Annual reports must also be released either in full text or by releasing an announcement with the information currently included in preliminary statements of annual results together with a link to the rest of the report. > Statutory Liability Regime A new statutory liability regime is introduced for periodic financial reports. A company is liable to compensate a person who has acquired its shares and suffered loss on those shares as a result of any untrue or misleading statement in, or omission from, any periodic financial report. The relevant person must have acquired the shares in reliance on the information in the relevant report. A company will only be liable if a director (a) knew that the statement was untrue or misleading or was reckless as to whether it was or (b) knew any omission was a dishonest concealment of a material fact. The company (and not its directors) alone will be liable to third parties, although the directors concerned may be liable to the company. Section 463 Companies Act 2006 introduces a similar safe harbour for directors for personal liability to third parties in respect of directors reports and remuneration reports. This provision also came into force on 20 January 2007. To maximise the benefit of the safe harbours for directors described above, the following could be considered: 2 slaugh ter and may
- Ensuring that all required information is contained in the reports which benefit from a safe harbour. For example, by reformatting the annual report so that all of the narrative commentary (including chairman s statement and chief executive s review) is presented as part of a single report (the management report for DTR purposes and the directors report) it should be possible to argue that all of that narrative commentary is within the safe harbour. - It is unlikely that the safe harbours for directors could be relied on outside the UK. Companies should consider including a disclaimer in the relevant financial reports to the effect that they have been drawn up and presented in accordance with English law and, where applicable, DTRs and that liability for them should be governed by English law. Ultimately the extent to which the disclaimer can be relied on will be a matter of the law of the relevant jurisdiction. > Listing Rules Requirements which will cease to apply Companies will no longer be required to send half-yearly reports to shareholders or publish them in newspapers. Companies will no longer be required to produce preliminary statements of annual results. The FSA has said that it believes preliminary statements could still be required for market transparency reasons on the basis that if the results are known before the publication of the annual report, this could constitute price sensitive information which must be disclosed to the market. In addition, given that the dissemination requirements for annual reports require either the whole report to be published or (effectively) the production of a preliminary statement, the practice of issuing preliminary statements is likely to continue. To the extent that a preliminary statement is made, the existing requirements as to content have been retained. These two requirements will continue to apply to companies until such time as they follow the new rules. So, a company whose next financial year starts before 20 January 2007 will need to follow existing requirements for one more year. > Implications for Model Code The changes to the deadlines for producing financial reports, the preliminary statement regime and the requirement to produce interim management statements will necessitate changes to the close periods in the Model Code. The FSA has indicated that the following changes will apply: For preliminary statements the close period will be amended to take account of the permissive nature of the new regime and the existing 60 day close period will be linked to either the preliminary statement (if the issuer makes one) or the annual report itself. 3 slaugh ter and may
For half-yearly reports the close period will be the period from the end of the relevant six-month period up to the time of publication of the report. There is currently no guidance on close periods around interim management statements and companies should maintain their current practice for close periods around the time of publication of trading statements. > Application A company with shares admitted to trading and whose home state is the United Kingdom must comply with all the requirements of DTR4. A company with debt securities admitted to trading and whose home state is the United Kingdom must comply with the annual and half-yearly financial reporting requirements in DTR4. There is an exemption for so-called wholesale debt, that is, debt issued in denominations of at least 50,000 euros (or its equivalent). Listing Rule requirements will apply in this case. There is also a transition period for issuers of debt below this denomination made before 1 January 2005. These issuers must comply with the annual financial reporting requirements but need not comply with the halfyearly financial reporting requirements before January 2015. A company with other transferable securities (for example, depositary receipts or warrants) admitted to trading and whose home state is the United Kingdom must comply with the annual financial reporting requirements in DTR4. The FSA is looking at the extent to which it can legally declare equivalence in relation to DTR4. The Commission is currently assessing the equivalence of international accounting standards and the FSA has indicated it will not be granting any exemptions before the Commission reaches a decision. However, as an interim measure the Commission has declared that for financial periods beginning before 1 January 2009, US, Canadian and Japanese GAAP can be used for the preparation of annual and halfyearly financial reports under the Transparency Directive. > Information about Major Shareholdings (DTR5) DTR5 implements the Transparency Directive provisions on disclosure of major shareholdings. DTR5 will replace the disclosure of interests in shares provisions in the Companies Act 1985. Responsibility for monitoring the regime will pass from the Department of Trade and Industry to the FSA. The new regime is similar to the existing regime as regards obligations of UK listed companies. However, it is likely that companies will receive a greater number of notifications given certain changes in thresholds and the removal of certain exemptions. Accordingly, companies are likely to have a correspondingly greater number of notifications to make to the market. Regular notifications by companies of capital changes will also be required. 4 slaugh ter and may
The principal points to note are: The trigger for disclosure under the DTRs will be where a person controls the exercise of voting rights attached to shares rather than where a person acquires an interest in shares. This obligation is extended to deal with specified situations where a person is not a shareholder but is able to control the exercise of voting rights (for example, where a shareholder has agreed for consideration that a person can exercise voting rights). Such person is known as an indirect shareholder. In addition, certain contracts such as options, futures and forward rate agreements giving a person the unconditional right to acquire shares to which voting rights are attached or the discretion to acquire them or not also give rise to notification obligations. Direct and indirect holdings and holdings through such contracts are to be aggregated in order to determine if a threshold has been reached or exceeded. These holdings must also be separately identified in notifications to the company. For UK companies the FSA is keeping the 3% and subsequent 1% thresholds for disclosure. The current provisions which entitle investment managers and similar categories of persons not to make disclosures until they have a 10% holding will be changed so that disclosure will be at a 5% and then 10% threshold (and at every 1% threshold above 10%). Certain disclosure requirements will no longer apply. A beneficiary under a trust will no longer have to make a notification unless he is treated as an indirect shareholder because, for example, he has a life interest or he controls voting rights. Conditional contracts to acquire shares where the conditions are beyond the control of the parties will no longer give rise to a notification obligation before the relevant transaction settles. Interests of a person s spouse and children are no longer to be attributed to that person for notification purposes. The exemptions from notification are not identical. For example, the market maker exemption will only be available up to the 10% threshold. Certain exemptions will no longer apply. A person appointed proxy and able to exercise voting rights at his discretion in the absence of specific instructions will be an indirect holder of shares. The only exception is where a proxy confers only minor and residual discretions such as to vote on an adjournment. Proxy forms appointing the chairman of a meeting proxy for shareholders tend to entitle the chairman to exercise his discretion as to how to vote on other business which properly comes before the meeting. This would include, for example, proposals to amend an ordinary resolution. Unless proxy forms appointing a chairman as proxy limit the chairman s power to voting on adjournments, the chairman will have a notification obligation under DTR5. DTR guidance clarifies that in this case only one notification (covering both shareholder and proxy holder) need be given on or after the deadline for receiving proxies provided that it is clarified what happens to voting rights when the proxy expires. 5 slaugh ter and may
Existing shareholders interested in three per cent. or more of a company s voting capital will have to re-notify under the new rules. There is an initial grace period until 20 March 2007 for shareholders to make notifications under the new regime. The notification deadline of two business days will continue to apply. The company s obligation to notify the market by the close of the next business day also remains the same. Notifications must be made on a prescribed form that will be available on the FSA website with accompanying user notes. Shareholders must also file a notification electronically with the FSA. The FSA has provided detailed examples of the application of the new rules in the TD-edition of List! which it published at the end of December. Disclosure by companies In order to enable shareholders to comply with the new notification obligations, companies are required to disclose changes in share capital: A company must, at the end of each month during which there has been a change in its share capital announce the total number of votes attributable to its issued capital and the amount of that capital. If a company buys shares or transfers shares out of treasury, it must announce the percentage of voting rights attributable to those shares within four business days where that percentage reaches, exceeds or falls below the thresholds of 5% or 10% of the voting rights within four business days. This notification is in addition to notifications under the listing rules for the purchase of shares and the transfer of shares out of treasury. Changes to terms in voting rights attached to shares must be disclosed with immediate effect. There is no longer any requirement for companies to maintain a register of interests disclosed to it. > Application DTR5 applies to UK issuers with shares traded on regulated markets. In this case the Companies Act 1985 disclosure thresholds have been retained. Issuers and shareholders of UK public companies traded on a prescribed market such as AIM or PLUS must also comply with DTR5, again retaining the Companies Act 1985 disclosure thresholds. Non-UK issuers on these markets are not required to comply with DTR5. 6 slaugh ter and may
Non-EEA issuers and their shareholders whose shares are traded on a regulated market for which the UK is their home member state must comply with Transparency Directive minimum disclosure requirements only. This means the thresholds are, 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%. In addition, non-uk issuers can be exempt from the requirements if their domestic regime is deemed equivalent. To date the FSA has confirmed that the laws in the USA, Japan, Israel and Switzerland are equivalent and so issuers with shares admitted to trading on a regulated market in the UK that are incorporated in any of these countries will be exempt from the requirements of DTR5. EEA issuers incorporated in another member state with a registered office outside the UK but with listed shares on a UK regulated market will not be expected to comply with DTR5, as they will already be required to comply with corresponding requirements in their home member states. DTR5 applies only to issuers with shares admitted to trading and does not apply if an issuer only has depositary receipts admitted to trading but not the underlying shares. Section 212 notices The provisions in Part 22 of the Companies Act 2006 concerning a public company s right to investigate who has an interest in its shares also came into force on 20 January 2007. Part 22 of the Companies Act 2006 essentially restates sections 212 to 219 Companies Act 1985 which have been repealed. In future a company will be able to serve a notice in electronic form where the recipient has consented to communication in electronic form. There is no change to the definition of interest in shares, in contrast to the changes introduced by DTRs described above. Certain other minor clarificatory changes have been made. Section 1297 Companies Act 2006 provides that any references in any enactment, instrument or document to a repealed provision are to be construed as being or including a reference to the corresponding provision of the Companies Act 2006. Thus, references to section 212 et seq. in, for example, articles of association and notices served by a company should be treated as being references to the new provisions, subject to any general provisions contained in these documents that would preclude this interpretation. Nevertheless, companies should amend their existing notices to update the statutory references. This briefing paper is not intended to provide legal advice, which should be sought on particular matters. Please refer to your usual contact at Slaughter and May for further information about the Companies Act 2006 or the Transparency Directive. January 2007 Slaughter and May 7 slaugh ter and may
appendix Reporting Deadlines Example A: Example B: Accounting year start date Accounting year start date prior to 20 Jan 2007 1 Jan 2007 1 Apr 2007 Accounting year start date after 20 Jan 2007. Accounting year Year 1 Year 2 Year 1 1st Interim Management Statement Half-yearly report By end-sep 2007 n/a No sooner than 10 weeks after 1 Jan 2008 and no later than 6 weeks before end of Jun 2008. By end-aug 2008 No sooner than 10 weeks after 1 Apr 2007 and no later than 6 weeks before end of Sep 2007. By end-nov 2007 2nd Interim Management Statement Preliminary statement (annual report) (within 90 days of half year) n/a By end-apr 2008 (within 120 days) Annual report By end-jun 2008 (6 months after year end) (within 2 months of half year) Between 10 weeks after 1 Jul 2008 and six weeks before end of 2008 Optional Before end-apr 2009 (4 months after year end) (within 2 months of half year) Between 10 weeks after 1 Oct 2007 and six weeks before end of Mar 2008 Optional Before end-jul 2008 (4 months after year end) 8 slaugh ter and may
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