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Corporate Finance

Disclosure regime for significant short positions in companies undertaking rights issues

On 13 June 2008, at the same time as signalling the initiation of a wider review on how capital raising by listed companies can be made more orderly and efficient, the FSA announced the introduction of a new disclosure regime for significant short positions in companies undertaking rights issues.

The new regime has been implemented through changes to Chapter 1 of The Code of Market Conduct (MAR), which forms part of the FSA Handbook. Chapter 1 of MAR provides assistance in determining whether or not behaviour amounts to market abuse.

Broadly, the new regime provides that market abuse will be committed:

  • where a person has reached or exceeded a significant short position,
  • in securities which are the subject of a rights issue,
  • during the period that commences on the date a company announces a rights issue and ends on the date that the shares issued under the rights issue are admitted to trading,

if that person fails to make a disclosure of the significant short position via a RIS by no later than 3:30pm on the business day following the day on which the significant short position was reached or exceeded. A significant short position is a short position that represents an economic interest of 0.25% of the issued capital of a company. The new regime applies to all shares (but not depository receipts) admitted to trading on a prescribed market (which includes both AIM and the main market of the London Stock Exchange as well as PLUS markets).

Interestingly, once the 0.25% threshold is crossed and an appropriate notification has been made, no further notification is required for any increase in the short position or if the short position falls below the 0.25% threshold.

The FSA has indicated that the new regime and, in particular, the threshold of 0.25% which triggers the requirement to make a disclosure, will remain under review and may be subject to change in light of experience. The FSA also indicated that, in addition to the introduction of this new regime, they are examining a number of other options in this area including:

  • restricting the lending of securities which are the subject of rights issues for the purposes of enabling short selling; and 
  • restricting short sellers from covering their positions by acquiring the rights to the newly issued shares.

The full text of the changes, which were implemented on 20 June 2008, can be found here.

The FSA has also published a number of FAQs on the new regime which can be found here.

30/06/2008

Market abuse regime – Extension of expiry date for sunset clauses

On 6 June 2008, HM Treasury published its feedback statement on the responses to its February 2008 consultation on certain provisions of the UK's market abuse regime.

When the UK implemented the Market Abuse Directive in 2005, the definition of market abuse in the Financial Services and Markets Act 2000 (FSMA) was broader than that required by the Directive. The market abuse super-equivalent provisions are set out in sections 118(4) (misuse of information) and 118(8) (behaviour likely to give a false or misleading impression or likely to distort the market) of FSMA. These provisions are known as the "sunset clauses" and had been due to expire on 30 June 2008. In its February consultation paper, the Treasury proposed to extend the sunset clauses until 31 January 2010 because the EU is reviewing the entire market abuse regime this year and may make its own changes. The Treasury reasoned that two sets of changes in a short period of time would pose unnecessary costs on industry. In its June feedback statement, the Treasury took into account the responses to its consultation, and shortened the proposed extension of the expiry date of the sunset clauses to 31 December 2009.

For the full text of the feedback statement please click here.

30/06/2008

FSA Market Watch newsletters – Issue Nos. 27 and 28

The FSA published two issues of its Market Watch newsletter during June 2008.

Market Watch No. 27

Market Watch 27 was published on 5 June 2008. It provides an update of work undertaken by the FSA since July 2007 when it published Market Watch No. 21 which set out the findings of its thematic review of controls over inside information relating to public takeovers. The following areas are covered in Market Watch No. 27:

  • Actions taken by FSA regulated firms – In July 2007 the FSA wrote to more than 60 firms to share the findings of its thematic review and to ask them to review their own systems and controls. Market Watch No. 27 identifies a number of areas where regulated firms have improved their systems and controls as a result of reviewing Market Watch No. 21.
  • The 'need to know' concept and the number of insiders – The FSA reports on discussions it has had with firms regarding the large numbers of insiders on many M&A deals. While the FSA accepts that it is a challenge to manage numbers on deals and is encouraged by the fact that some firms have reduced the number of insiders, it considers that more could still be done.
  • Leak enquiries – To assist firms in developing leak enquiry policies, the FSA sets out its views in relation to the circumstances in which they would consider it appropriate for a firm to begin an internal review following a leak of inside information on an M&A deal. Market Watch No.27 contains a summary of factors a firm might consider when developing a leak enquiry policy.
  • Principles of good practice for handling inside information – In Market Watch No. 21 the FSA indicated that it was considering the desirability of having a statement of good practice for handling inside information for market participants that are not either regulated by the FSA or subject to the Disclosure and Transparency Rules. An industry working group, sponsored by the FSA, has produced a document headed "Principles of good practice for handling inside information" which is attached to Market Watch No. 27. Intended to assist organisations that are not FSA-regulated to develop their own policies and practices for handling inside information, the document sets out six general principles and various examples of good practice for organisations to consider in developing their own procedures and controls. The following is a summary of the six principles of good practice for handling inside information:
    1. Policies and procedures – policies and procedures for the use and control of inside information should be established and reviewed from time to time; 
    2. Awareness and training – appropriate measures should be taken, including training, to assist staff in understanding the importance of keeping information secret and the implications of improper disclosure; 
    3. "Need to know" and other information controls – reasonable steps should be taken to limit the number of those with access to inside information and where practicable a "need to know" policy should be applied; 
    4. Passing price sensitive information to third parties – reasonable care should be taken to ensure that where inside information is provided to a third party, the third party is aware of its obligations in relation to the use and control of the information; 
    5. Information technology security – appropriate consideration should be given to the security of and access to inside information on IT systems, including the implementation of controls to limit access; and 
    6. Personal dealing policies – reasonable consideration should be given to establishing personal account dealing policies and such policies should be made clear to staff along with the civil and criminal penalties for dealing on the basis of inside information or for enabling such dealing.

For the full text of Market Watch No. 27, please click here.

Market Watch No. 28

Market Watch 28 was published on 19 June 2008. It deals with the following areas, namely: how the FSA may ask firms to retain recordings of conversations for longer than six months; the FSA's discussions regarding market abuse systems and controls with firms operating in the commodities markets; the systems and controls in place in firms to control interaction between the public and private side in debt capital markets businesses; and transaction reporting.

Private placings and client categorisation under COBS

Market Watch No. 28 also clarifies the FSA's views regarding client categorisation under the Conduct of Business Sourcebook (COBS) in the context of private placings. The FSA explains where, in its view, the client relationship generally lies in such transactions. The FSA states that a firm's client for the purposes of a placing will be the issuer and not the underlying investor. Generally, an underlying investor will fall within the definition of "corporate finance contact" and will therefore not be considered to be a client for the wider purposes of COBS. A corporate finance contact could, however, be a client of a firm if the firm was providing other investment services to it or if the conditions for a corporate finance contact were not met. As noted in Market Watch No. 28, firms also need to bear in mind the categorisation provisions that apply for the purposes of the financial promotion rules set out in COBS 4.

For the full text of Market Watch No. 28, please click here.

30/06/2008

LSE imposes public censure and fine for breaches of the AIM Rules

On 19 June 2008, the London Stock Exchange announced that it was imposing a public censure and fine of £75,000 on Meridian Petroleum plc for various breaches of the AIM Rules in the period from August 2004 to February 2007. Meridian, whose principal activity is oil and gas exploration and production, was publicly censured for breaches of the following AIM Rules:

  • AIM Rule 10 – which provides that an AIM company must take reasonable care to ensure that information notified by it is not misleading, false or deceptive and does not omit anything likely to affect the import of such information,
  • AIM Rule 11 – which provides that an AIM company must issue notification without delay of any new developments which are not public knowledge concerning a change in (amongst other things) its expectation of its performance which, if made public, would be likely to lead to a substantial movement in the price of its shares, and
  • AIM Rule 31 – which provides (amongst other things) that an AIM company must seek advice from its nominated adviser regarding compliance with the AIM Rules whenever appropriate and take that advice into account.

The full text of the notice may be viewed here.

30/06/2008

FRC issues revised Combined Code

In the January edition of our E-Bulletin we reported that the Financial Reporting Council had issued a consultation paper in relation to amendments which it proposed to make to the Combined Code on Corporate Governance. The key amendments proposed were:

  • to remove the restriction on an individual chairing more than one FTSE 100 company, and 
  • to allow the chairman of a smaller listed company (that is, a company outside the FTSE 350) to be a member of the audit committee where he or she was considered independent on appointment.

At the end of May, the FRC announced that it intended to make these changes to the Combined Code. The revised Code was published on 27 June 2008. The changes will apply to financial periods beginning on or after 29 June 2008.

To view the revised Combined Code please click here.

30/06/2008

UKLA Update – Electronic communication

In an update sent to LIST! subscribers on 30 May 2008, the FSA has clarified its position in relation to letters from listed companies to shareholders relating to the introduction of electronic communication.

By way of background, in LIST! 17 (published in November 2007) the FSA stated that where a company writes to shareholders seeking agreement to receive documents electronically in accordance with the Companies Act 2006 that letter will be a "circular" for the purposes of the Listing Rules. As such, the letter would need to comply with LR13.3.1R (contents of all circulars). Under LR13.3.1R (6), a statement must be included in a circular asking shareholders who have transferred their shares to pass the document on to the transferee.

In its June 2008 update, the FSA acknowledges that such letters are often personalised and can contain confidential shareholder information. As a result the FSA indicates that, in these circumstances, it may not be appropriate to include in the shareholder letter the wording required by LR13.3.1R (6).

For the full text of the update, please click here.

30/06/2008

Companies Act 2006 - Implementation timetable

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

This table was last updated on 25 July 2008. 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, fourth, fifth, sixth and seventh Companies Act 2006 commencement orders.  Future commencement dates may be subject to change. Certain provisions of the Act are subject to transitional provisions which are outside the scope of the table below.

Those commencement dates indicated with an asterisk (*) 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.

 Part   Commencement Date
1  General introductory provisions (sections 1 to 6) 1 October 2009
Exceptions:  
  • section 2 (The Companies Acts)
6 April 2007*
2  Company formation (sections 7 to 16) 1 October 2009
3  A company's constitution (sections 17 to 38) 1 October 2009
Exceptions:  
  • section 17 (a company's constitution) which came into force so far as necessary for the purposes of those provisions brought into force in October 2007 and again in April 2008 so far as necessary for the purposes of those provisions brought into force in April 2008
1 October 2007*
  • sections 29 (resolutions and agreements affecting a company's constitution) and 30 (copies of resolutions or agreements to be forwarded to registrar)
1 October 2007*
4  A company's capacity and related matters (sections 39 to 52) 1 October 2009
Exceptions:  
  • section 44 (execution of documents)
6 April 2008*
5  A company's name (sections 53 to 85) 1 October 2009
Exceptions:  
  • sections 69 to 74 (similarity to other name in which person has goodwill)
1 October 2008*
  • sections 82 to 85(1)(b) (trading disclosures)
1 October 2008*
6 A company's registered office (sections 86 to 88) 1 October 2009
7  Re-registration as a means of altering a company's status
(sections 89 to 111)		 1 October 2009
8  A company's members (sections 112 to 144) 1 October 2009
Exceptions:  
  • sections 116 to 119 (rights to inspect and require copies of the Register of Members)
1 October 2007*
  • sections 121 (removal of entries relating to former members) and 128 (time limit for claims arising from entry in register)
6 April 2008*
9  Exercise of members' rights (sections 145 to 153) 1 October 2007*
10  A company's directors (sections 154 to 259) 1 October 2007*
  Exceptions:  
  • sections 155 to 159 (underage and natural directors)
1 October 2008*
  • sections 162 to 167 and 240 to 246 (directors' residential addresses)
1 October 2009
  • sections 175 to 177 and 182 to 187 (directors' conflict of interest duties)
1 October 2008*
  • sections 180(1), (2) and (4)(b) (consent, approval or authorisation by members) and 181(2) and (3) (modification of provisions in relation to charitable companies)
1 October 2008
  • section 247 (power to make provision for employees on cessation or transfer of business)
1 October 2009
11  Derivative claims and proceedings by members (sections 260 to 269) 1 October 2007*
12  Company secretaries (sections 270 to 280) 6 April 2008*
Exceptions:  
  • section 270(3)(b)(ii) (private company not required to have secretary)
1 October 2009
  • sections 275 to 279 (provisions applying to private companies with a secretary and to public companies)
1 October 2009
13  Resolutions and meetings (sections 281 to 361) 1 October 2007*
Exceptions:  
  • sections 308 (manner in which notice to be given), 309 (publication of notice of meeting on website) and 333 (sending documents relating to meetings etc in electronic form)
20 January 2007*
  • sections 327(2)(c) (notice required of appointment of proxy etc) and 330(6)(c) (notice required of termination of proxy's authority)
Unlikely to be brought into force
14  Control of political donations and expenditure (sections 362 to 379) 1 October 2007*
Exceptions:  
  • section 362(a) (introductory) and the words "and to independent election candidates"
1 October 2008*
  • section 363(2)(a) (political parties, organisations etc to which this part applies) and the words "or an independent election candidate to whom"
1 October 2008*
  • section 363(3) (political parties, organisations etc to which this part applies)
1 October 2008*
  • section 363(4) (political parties, organisations etc to which this part applies) and the words "or independent election candidate" and "independent candidate"
1 October 2008*
  • section 364(3) (meaning of "political donation")
1 October 2008*
  • section 365(1)(a) and (b)(i) (meaning of "political expenditure") and the words "or an independent election candidate"
1 October 2008*
  • section 366(1)(a) (authorisation required for donations or expenditure) and the words "or to an independent election candidate"
1 October 2008*
  • section 367(3)(a) (form of authorising resolution) and the words "or independent election candidates"
1 October 2008*
  • section 378(2) (donations not amounting to more than £5,000 in any twelve month period) and the words "or to an independent election candidate"
1 October 2008*
15  Accounts and reports (sections 380 to 474) 6 April 2008*
Exceptions:  
  • section 385 (quoted and unquoted companies) which came into force in so far as necessary for the purposes of those provisions brought into force in October 2007
1 October 2007*
  • section 417 (contents of directors' report: business review)
1 October 2007*
  • section 463 (liability for false or misleading statements in reports)
20 January 2007*
16  Audit (sections 475 to 539) 6 April 2008*
  Exceptions:  
  • sections 485 to 488 (appointment of auditors by private companies)
1 October 2007*
17  A company's share capital (sections 540 to 657) 1 October 2009
Exceptions:  
  • section 540(1) and (4) (shares) which came into force so far as necessary for the purposes of those provisions brought into force in April 2008
6 April 2008*
  • section 544 (transferability of shares)
6 April 2008*
  • sections 545 (companies having a share capital), 546 (issued and allotted share capital), 548 (equity share capital) and 629 (classes of shares) which came into force so far as necessary for the purposes of those provisions brought into force in October 2007 and again in April 2008 so far as necessary for the purposes of those provisions brought into force in April 2008
1 October 2007*
  • section 558 (when shares are allotted) which came into force so far as necessary for those provisions brought into force in April 2007
6 April 2007*
  • sections 641(1)(a) and (2)-(6) (circumstances in which a company may reduce its share capital), 642 (reduction of capital supported by solvency statement), 643 (solvency statement), 644 (registration of resolution and supporting documents) and 654 (treatment of reserve arising from reduction of capital)
1 October 2008*
 
  • sections 610(2) to (4) (application to share premium account as if it were paid up share capital) and 652(1) and (3) (liability of members following reduction of capital) which come into force so far as necessary for those provisions brought into force in October 2008
1 October 2008*
18  Acquisition by limited company of its own shares (sections 658 to 737) 1 October 2009
  Exceptions:  
 
  • section 733(5) and (6) (application to capital redemption reserve as if it were paid up share capital) which comes into force so far as necessary for those provisions brought into force in October 2008
1 October 2008*
19  Debenture (sections 738 to 754) 6 April 2008*
20  Private and public companies (sections 755 to 767) 6 April 2008*
21  Certification and transfer of securities (sections 768 to 790) 6 April 2008*
22  Information about interests in a company's shares (sections 791 to 828) 20 January 2007*
Exceptions:  
  • sections 811(4) (right to inspect and require copies of entries), 812 (court supervision of purpose for which rights may be exercised) and 814 (register of interests disclosed: offence in connection with request for or disclosure of information)
6 April 2008*
23  Distributions (sections 829 to 853) 6 April 2008*
24  A company's annual return (sections 854 to 859) 1 October 2009
25  Company charges (sections 860 to 894) 1 October 2009
26  Arrangements and reconstructions (sections 895 to 901) 6 April 2008*
27  Mergers and divisions of public companies (sections 902 to 941) 6 April 2008*
28  Takeovers etc (sections 942 to 992) 6 April 2007*
29  Fraudulent trading (section 993) 1 October 2007*
30  Protection of members against unfair prejudice (sections 994 to 999) 1 October 2007*
31 Dissolution and restoration to the register (sections 1000 to 1034) 1 October 2009
32  Company investigations: amendments (sections 1035 to 1039) 1 October 2007*
33  UK companies not formed under the Companies Acts
(sections 1040 to 1043) 		1 October 2009
Exceptions:  
  • section 1043 (unregistered companies)
6 April 2007*
34  Overseas companies (sections 1044 to 1059) 1 October 2009
35  The registrar of companies (sections 1060 to 1120) 1 October 2009
Exceptions:  
  • sections 1060 (the registrar) and 1061 (the registrar's function) which came into force in so far as necessary for those provisions brought into force in April 2007
6 April 2007*
  • section 1063 (fees payable to registrar)
6 April 2007*
  • sections 1068(5) (registrar's requirements as to form, authentication and manner of delivery), 1077 to 1080 (public notice of receipt of certain documents), 1085 to 1092 (inspection etc of the register), 1102 to 1107 (language requirements: translation) and 1111 (registrar's requirements as to certification or verification)
1 January 2007*
  • sections 1068(1) to (4), (6) and (7) (registrar's requirements as to form, authentication and manner of delivery), 1114 (application of provisions about documents and delivery), 1117 (registrar's rules) and 1120 (application of this Part to overseas companies) which came into force so far as necessary for the purposes of those provisions brought into force in January 2007
1 January 2007*
  • section 1068(1) to (4), (6) and (7) (registrar's requirements as to form, authentication and manner of delivery) which came into force so far as necessary for the purposes of The Companies (Cross-Border Mergers) Regulations 2007
15 December 2007*
  • section 1117 (registrar's rules) which came into force so far as necessary for the purpose of enabling rules to be made under that section before the date on which the section is brought into force generally
6 April 2008*
36  Offences under the Companies Act (sections 1121 to 1133) With relevant provisions
Exceptions:  
  • sections 1121 (liability of officer in default), 1122 (liability of company as officer in default), 1125 to 1131 (general provisions) and 1133 (transitional provisions) which came into force so far as necessary for those provisions brought into force in January 2007
20 January 2007*
  • sections 1121 to 1123 (liability of officer in default) and 1125 to 1133 (general provisions, production and inspection of documents and supplementary) which came into force so far as necessary for those provisions brought into force in April 2007
6 April 2007*
  • sections 1121 to 1123 (liability of officer in default) and 1125 to 1133 (general provisions, production and inspection of documents and supplementary) which came into force so far as they apply to offences under Part 14 or 15 of the Companies Act 1985
1 October 2007*
  • sections 1121 to 1123 (liability of officer in default), 1125 (meaning of "daily double fine") and 1127 to 1133 (general provisions, production and inspection of documents and supplementary) which came into force so far as necessary for those provisions brought into force in April 2008 and again in October 2008 so far as necessary for those provisions brought into force in October 2008
6 April 2008*
  • section 1124 (amendments of the Companies Act 1985)
1 October 2007*
  • section 1126 (consents required for certain prosecutions)
6 April 2008*
37  Companies: supplementary provisions (sections 1134 to 1157) With relevant provisions
Exceptions:  
  • sections 1134 (meaning of "company records"), 1135 (form of company records) and 1138 to 1140 (duty to take precautions against falsification and service of documents on the company, directors, secretaries and others) which came into force so far as necessary for those provisions brought into force in April 2007
6 April 2007*
  • section 1137(1), (4), (5)(b) and (6) (regulations about inspection of records and provision of copies)
30 September 2007*
  • sections 1139 (service of documents on company) and 1140 (service of documents on directors, secretaries and others) which came into force so far as necessary for the purposes of those provisions brought into force in April 2008
6 April 2008*
  • sections 1143 to 1148 (sending or supplying documents or information)
20 January 2007*
  • section 1157 (power of court to grant relief in certain cases)
1 October 2008*
38  Companies: interpretation (sections 1158 to 1174) With relevant provisions
Exceptions:  
  • section 1158 (meaning of "UK-registered company") which came into force so far as necessary for the purposes of those provisions brought into force in October 2007

1 October 2007*
  • sections 1159 and 1160 (meaning of "subsidiary" and related expressions) which came into force so far as necessary for the purposes of those provisions brought into force in April 2008

6 April 2008*
  • sections 1161 (meaning of "undertaking" and related expressions), 1162 (parent and subsidiary undertakings), 1164 (meaning of "banking company" and "banking group"), 1165 (meaning of "insurance company" and related expressions), 1169 (dormant companies) and 1172 (references to requirements of this Act)

6 April 2008*
  • section 1167 (meaning of "prescribed")

30 September 2007*
  • sections 1168 (hard copy and electronic form and related expressions) and 1173 (minor definitions: general) which came into force so far as necessary for the purposes of those provisions brought into force in January 2007 and again in April 2007, October 2007, December 2007, April 2008 and October 2008 so far as necessary for the purposes of those provisions brought into force in April 2007, October 2007, December 2007, April 2008 and October 2008
1 January 2007*
  • section 1170 (meaning of "EEA State" and related expressions)
6 April 2007*
  • in section 1173 (minor definitions: general) the definitions of "credit institution" and "working day"

6 April 2008*
39  Companies: minor amendments (sections 1175 to 1181) 6 April 2007*
Exceptions:  
  • sections 1175 (removal of special provisions about accounts and audit of charitable companies) which came into force so far as it relates to Part 7 of the Companies Act 1985
1 April 2008*
  • sections 1180 (repeal of certain provisions about company charges) and 1181 (access to constitutional documents of RTE and RTM companies)
1 October 2009
40  Company directors: foreign disqualification etc (sections 1182 to 1191) 1 October 2009
41  Business names (sections 1192 to 1208) 1 October 2009
42  Statutory auditors (sections 1209 to 1264) 6 April 2008*
Exceptions:  
  • sections 1242 to 1244 (registered third country auditors: duties and information)
29 June 2008*
43  Transparency obligations and related matters (sections 1265 to 1273) 8 November 2006*
44 Miscellaneous provisions (sections 1274 to 1283) With relevant provisions
Exceptions:  
  • sections 1274 (grants to bodies concerned with actuarial standards etc) and 1276 (application of provisions to Scotland and Northern Ireland)
8 November 2006
  • sections 1277 to 1280 (information as to exercise of voting rights by institutional investors)
1 October 2008*
  • section 1281 (disclosure of information under the Enterprise Act 2002)
6 April 2007*
  • section 1282 (expenses of winding up)
6 April 2008*
  • section 1283 (amendment of memorandum or articles of commonhold association)
1 October 2009
45  Northern Ireland (sections 1284 to 1287) With relevant provisions
Exceptions:  
  • section 1284 (extension of Companies Act to Northern Ireland) which came into force so far as necessary for those provisions brought into force in April 2007 and again in September 2007, October 2007, December 2007, April 2008 and October 2008 so far as necessary for those provisions brought into force in September 2007, October 2007, December 2007, April 2008 and October 2008
6 April 2007*
 
  • section 1286(1)(a) and 2(a) (extension to Northern Ireland of Great Britain enactments relating to limited liability partnerships) which comes into force so far as relating to the application of Part 15 (accounts and reports), Part 16 (audit) and Part 42 (statutory auditors) to limited liability partnerships
1 October 2008*
46  General supplementary provisions (sections 1288 to 1297) 8 November 2006*
Exceptions:  
  • section 1295 (repeals) which comes into force in stages so far as necessary to repeal existing legislation as appropriate
1 January 2007
47 Final provisions (sections 1298 to 1300) 8 November 2006*

28/05/2008