This edition covers proposed major reforms to the listing and prospectus regimes, corporate governance reforms largely relating to audit and internal controls, and proposed changes to the Takeover Code affecting the restrictions on frustrating action. Most of these are at consultation phase.
FTSE 350 Audit Committees to Adopt New FRC Minimum Standard
On 22 May 2023, the Financial Reporting Council (FRC) published its new minimum standard for audit committees which apply to FTSE 350 companies. The standard’s primary objective is to ensure a consistent approach across FTSE 350 audit committees with respect to the appointment and oversight of auditors.
The standard is currently available to audit committees on a voluntary basis, ahead of anticipated legislation that will make compliance mandatory. Audit committees should therefore familiarise themselves with the requirements and consider updating their terms of reference to refer to the new standard.
Proposed Listing Regime Reforms Reduce Regulatory Burden on Premium Listed Companies
On 3 May 2023, the FCA published a consultation paper (CP23/10) with a blueprint for changes to the UK listing regime. The key reform proposed is to create a single listing segment for equity shares in commercial companies, replacing the existing premium and standard listing segments.
Key proposals which would affect existing premium listed companies include:
- The requirement for compulsory shareholder votes and circulars for certain significant transactions and related party transactions would be removed.
- Rules requiring a relationship agreement between a listed company and its controlling shareholder would be replaced with a comply-or-explain approach in which the absence of a relationship agreement would require specific disclosures.
IPO candidates would be interested in the softer eligibility conditions (including the proposed removal of the three-year revenue earning track record requirement) and a more flexible approach to dual class share structures.
The FCA’s deadline for responses to the consultation paper is 28 June 2023. The FCA aims to issue a further consultation with the proposed specific revisions to the listing rules this autumn, and the new rules could be published by early 2024. For further details, see this Latham Client Alert.
FCA Commences Dialogue on Prospectus Reforms
In May 2023, the FCA launched an engagement and dialogue process on how the UK’s future prospectus regime could operate. The FCA’s first thematic engagement papers, published on 18 May 2023, aim to solicit discussion and feedback on:
- whether or how to set prospectus requirements for issuers seeking admission to trading on UK-regulated markets;
- whether or how to set prospectus requirements for issuers raising further capital. In particular, the FCA is looking to take an ambitious approach in significantly scaling back the current prospectus requirements for further issuances by already-listed issuers; and
- how forward-looking information should be covered in prospectuses.
Feedback to the engagement papers should be sent by email to the FCA by 29 September 2023. Following the engagement process, the FCA intends to provide feedback on key points raised and publish consultation papers in 2024 to develop the specific rule proposals. For further details, see this Latham blog post.
Proposed Corporate Governance Code Changes to Strengthen Board Accountability Over Internal Controls and Risk
On 24 May 2023, the FRC launched a public consultation on proposed changes to the UK Corporate Governance Code (UKCGC). The consultation seeks to implement certain proposals in the UK government’s paper, Restoring trust in audit and corporate governance.
The changes are limited and focus on:
- revising those parts of the UKCGC that deal with the need for a framework of prudent and effective controls to provide a stronger basis for reporting on and evidencing their effectiveness;
- making revisions to reflect the responsibilities of the board and audit committee for sustainability and ESG reporting and providing appropriate assurance in accordance with a company's audit and assurance policy;
- amending the UKCGC to take into account the new FRC minimum standard for audit committees with respect to their role on external audits;
- improving the functioning of comply-or-explain to require a focus on outcomes when reporting on governance practices; and
- updating the UKCGC to ensure that it aligns with the UK government’s proposed changes to legal and regulatory requirements, including strengthening reporting on malus and clawback arrangements.
The FRC intends that the revised UKCGC will apply to accounting years commencing on or after 1 January 2025. The consultation is open until 13 September 2023. As part of its engagement process, the FRC will host a series of roundtables over the summer to discuss the proposals.
Proposed Takeover Code Amendments Give Target Companies More Flexibility to Operate in the Ordinary Course
On 15 May 2023, the Takeover Panel launched a consultation (PCP 2023/1) to consider amendments to Rule 21 of the Takeover Code (restrictions on frustrating action by a target board) and other matters. The proposals are unlikely to result in major changes in practice but should ease the burden on target companies and have some impact on deal processes, particularly in the context of competitive bid situations which have become more prevalent.
Key proposals include:
- Amendment of Rule 21 to provide that it shall not restrict actions that are in the ordinary course of business or not material. This amendment is intended to provide target companies more flexibility to carry on their businesses (e.g., target companies whose business model involves buying and selling assets), particularly when the offer timetable is protracted. The consultation includes a draft Practice Statement to provide additional guidance on matters that the Takeover Panel would take into account when determining whether certain actions would be considered to be in the ordinary course of business. The period for which a target is restricted will also be extended from two days to seven days following the unequivocal rejection of an approach.
- A clarification that the Panel will consent to the restrictions on frustrating action not being applied to a target board seeking to sanction a scheme in a competitive situation, other than in exceptional circumstances (e.g., target board acting in a clearly unreasonable manner by sanctioning the lower of two competing offers).
- The removal of an existing provision which states that a bidder may not request information (pursuant to the rule requiring equality of information to competing bidders) in general terms. Instead, a bidder may make a single weekly request for information given to a competing bidder, which could be phrased in general terms. This change is expected to reduce the administrative burden on the transacting parties.
The consultation closes on 21 July 2023.