Legal privilege in M&A transactions

In its Akzo Nobel judgement, issued on 17 September 2007, the European Court of First Instance has re-affirmed the long-standing rule that EC law does not confer legal privilege protection on communications between in-house lawyers and their internal clients (For further analysis of the implications of this case please click here). This can be contrasted with the position under UK law which recognises legal privilege as attaching to communications with both in-house and external lawyers.

While Akzo Nobel arose in the context of a competition investigation carried out by the European Commission (a so-called "dawn raid"), legal privilege, and the differing treatment of it under EC and UK law, can have an impact on M&A transactions which are the subject of either EC or UK merger control.  Broadly, UK merger control will apply where the UK thresholds are met by the merging parties and EC merger control will apply where the EC Merger Regulation thresholds are met by the merging parties. Both EC and UK merger rules place extensive disclosure requirements on merging parties, and legal privilege, if correctly engineered, can be a useful tool to mitigate the disclosure risk.  In particular, the continued lack of recognition of in-house legal privilege at the EC level (and therefore in relation to mergers that meet the EC thresholds) necessitates careful consideration at the early planning stage of any proposed merger.

25 October 2007

CESR - Frequently asked questions regarding prospectuses

In September 2007, the Committee of European Securities Regulators (CESR) published an updated version of its Q&A publication "Frequently asked questions regarding Prospectuses: Common positions agreed by CESR members".  The CESR FAQs were first published in July 2006 and were previously updated in February 2007.  The new areas covered by the updated publication include:

• The incorporation by reference, into a prospectus written in one language, of information published in a different language or translated from a different language.
• The incorporation by reference, into a prospectus, of valid information contained in a previous prospectus which itself is no longer valid.
• The requirement to mention a right of withdrawal and the period during which such right may be exercised in a supplementary prospectus.
• The practical application of the exemption (under Article 4.2(a) of the Prospectus Directive (Directive 2003/71/EC)) from the requirement to publish a prospectus where shares representing, over a period of 12 months, less than 10% of the number of shares of the same class already admitted to trading on the same market are admitted to trading.
• The use of the term "prospectus" by issuers to refer to documents that do not satisfy the requirements set out in the Prospectus Directive.
• Various matters relating to pro forma financial information in prospectuses.    

The full text of the document can be viewed here.

25 October 2007

Changes to Listing Rules, Prospectus Rules and Disclosure and Transparency Rules

On 6 October 2007 a number of minor changes to certain parts of the FSA Handbook took effect.  The relevant parts include the Glossary, the Conduct of Business Sourcebook (which will, in any event, be replaced by a new Conduct of Business Sourcebook on 1 November 2007), the Market Conduct Sourcebook, the Listing Rules, the Prospectus Rules and the Disclosure and Transparency Rules.

LR 9.8.6R(1) was amended (as indicated by the FSA in LIST! 16) to make clear that an issuer's disclosure obligations in relation to directors' interests which require to be disclosed in annual reports need only report on the position as at the end of the period under review (and not changes that may have taken place during the relevant financial period).  This change is supplemented by new guidance contained in LR 9.8.6A G.

Changes were also made to DTR 3.1.6R to clarify that where an issuer has made an announcement under DTR 3.1.4R(1)(a) (notification of transactions by persons discharging managerial responsibilities), it need not make a further announcement in the event of it receiving information in respect of the same dealing under section 793 of the Companies Act 2006 (notice by company requiring information about interests in its shares).

The majority of the other changes were made to replace references to sections of the Companies Act 2006 which are not yet in force.

These changes were introduced by Handbook Administration (No. 7) Instrument 2007, the full text of which can be viewed here.

25 October 2007

Markets in Financial Instruments Directive and changes to FSA Handbook

The Markets in Financial Instruments Directive (MiFID) is due to come into force across the European Union on 1 November 2007. MiFID is a core element of the EU's Financial Services Action Plan that aims to create a truly single EU market in securities and remove obstacles to cross-border investment business by harmonising EU legislation as closely as possible.  MiFID replaces the Investment Services Directive adopted by the EU in 1993.  This article aims to provide a high level overview of certain aspects of the new regime. 

MiFID will impact on all firms operating in the investment services sector including investment banks in relation to investment business and financial advisers holding assets on behalf of clients. While the UK, through the Financial Services Authority (FSA), was one of the few EU states to incorporate the necessary changes into national law by the 31 January 2007 deadline, it seems that most EU states should have the necessary laws in place by 1 November when the national law provisions must take effect.

In broad terms, relevant firms' organisational systems and procedures for the conduct of business will be the main areas affected by MiFID. There will also be new operational rules for participants in equity markets such as regulated markets (e.g. the London Stock Exchange), multilateral trading facilities (MTFs) and "systematic internalisers" (SIs) (primarily large investment banks who systematically trade shares on their own account).  As well as prescribing the organisation and operational requirements that apply to relevant firms, MiFID also clarifies the rules that apply where a firm "passports" into another member state by providing services from its home state.

Even if authorised firms do not come directly within the Directive's scope, they will be affected by the changes being made to the FSA Handbook.  In particular, from 1 November the FSA will introduce a completely new Conduct of Business Sourcebook (COBS) which will replace the existing Conduct of Business Sourcebook (COB).  As well as implementing the conduct of business requirements of MiFID, COBS is intended to simplify the UK conduct of business regime and is the first major part of the FSA Handbook to be reviewed as part of the FSA's move towards principles-based regulation.  Other affected parts of the FSA Handbook include Client Assets (CASS), Market Conduct (MAR), Senior Management Arrangements, Systems and Controls (SYSC), Supervision Manual (SUP) and Recognised Investment Exchanges and Recognised Clearing Houses (REC).

Given the key focus on uniform information capture, data handling and reporting as a means to achieve market efficiency, MiFID has perhaps impacted most on relevant firms' IT, outsourcing and information management systems.  Under the MiFID regime:

• Organisational requirements: Relevant firms and markets will need to adhere to comprehensive rules covering internal systems, risk management and audit. Firms need to comply with extensive record keeping requirements in relation to business conducted and contractual arrangements for outsourcing (including existing agreements) will need to conform to prescribed requirements. It may also be necessary to notify the FSA of the terms of such arrangements if they relate to critical or important operations.
• Transparency requirements: To ensure transparency in the securities market, MiFID sets out comprehensive trade-data publication requirements. In general, certain prescribed trading information - pre-trade data (for sell side trading platforms and SIs) and post-trade data (in relation to trades by all investment firms, whether conducted over the counter or through a regulated market) - must be made available as close to real time as possible (and not later than three minutes) through a chosen reporting venue. Firms are also obliged to ensure that such post trade transaction data is accurate and made available to market participants on reasonable commercial terms.

Conduct of Business Sourcebook
As indicated above, the existing COB is being entirely replaced by COBS.  There are new rules on client categorisation. While the categories under the new regime do not exactly match those under the old regime, broadly speaking, the existing categories of "private", "intermediate" and "market counterparty" will be replaced with the new MiFID categories of "retail", "professional" and "eligible counterparty". Firms are also required to secure "best execution" in relation to a client's trade order depending on the client categorisation.  COBS also contains new guidance in a number of areas including communications with clients and financial promotions, client agreements (previously terms of business letters) and suitability/appropriateness.

25 October 2007

Combined Code – FRC proposed changes

On 11 October 2007, the Financial Reporting Council (FRC) announced the findings of its latest review of the Combined Code on Corporate Governance (Combined Code).  The review focussed on the impact and effectiveness of the Combined Code.  The FRC concluded that the Combined Code was working reasonably well and that there is currently no need for major changes, but that improvement in the way the Combined Code was being applied could be achieved.  Two amendments to the Combined Code's existing provisions have been proposed:  

• to remove the restriction on an individual chairing more than one FTSE 100 company, and
• to allow the chairman of a smaller listed company to be a member of the audit committee where he or she was considered independent on appointment.

Consultation on the proposed amendments is due to begin in November 2007. If the suggested changes are accepted, it is anticipated that a revised Code will come into force in June 2008, at the same time as new FSA Rules made under Part 6 of the Financial Services and Markets Act (which include the Listing Rules) implementing new EU requirements on corporate governance.

25 October 2007

ICSA - Update Guidance Notes on Board Committees

On 18 October 2007, the Institute of Chartered Secretaries and Administrators (ICSA) published updated versions of several of its guidance notes which seek to help companies comply with the Combined Code on Corporate Governance.  The ICSA guidance has been updated to reflect the June 2006 version of the Combined Code and perceived developments in best practice.  Changes have also been made to deal with amendments to the Listing Rules, Prospectus Rules and Disclosure & Transparency Rules as well as certain aspects of the Companies Act 2006.

Terms of reference for audit, remuneration and nomination committees
The Combined Code requires that the board of relevant companies should constitute audit, remuneration and nomination committees.  In order to assist companies with these aspects of the Combined Code, ICSA has published updated model terms of reference for such committees.  Like the previous guidance (prepared in connection with the July 2003 version of the Combined Code), the terms of reference deal with, amongst other things, committee composition, procedural aspects, and the scope of delegated matters.

Schedule of reserved matters
A separate requirement of the Combined Code is that relevant companies should have a schedule of matters specifically reserved for the decision of the board as a whole (rather than being decided by, for example, senior management with delegated authority or a committee of the board).  ICSA has also updated its guidance on this aspect of the Combined Code.  The ICSA guidance is designed to assist boards (and company secretaries) by setting out a list of specific matters that might be considered appropriate to be reserved to the board.  The guidance recognises that the particular matters which ought to be reserved will vary depending upon the size and nature of a company's interests and, accordingly, the suggested list is not necessarily exclusive or prescriptive.

The new guidance notes are available from the ICSA website.

25 October 2007

Companies Act 2006 - Implementation Table

The table below is intended to provide guidance on the commencement timetable for the Companies Act 2006.

This table was last updated on 26 October 2007. Whilst it cannot be considered definitive, the table has been compiled based upon the Companies Act 2006 Table of Commencement Dates produced by the Department for Business, Enterprise and Regulatory Reform ("BERR") and the first, second, third and fourth Companies Act 2006 commencement orders.

Those commencement dates indicated with an asterix (*) are taken from the commencement orders rather than the guidance commencement timetable produced by BERR.  The orange highlighting indicates those provisions which are already in force.

25 October 2007