This week:
- The Economic Crime and Corporate Transparency Act 2023 is now law
- The Financial Conduct Authority publishes guidance to market sounding recipients on insider dealing and unlawful disclosure
- The Takeover Panel confirms changes to the restrictions on taking "frustrating action" during a takeover bid
- The Takeover Panel confirms its approach to invoking conditions to a takeover bid
- The Financial Reporting Council Lab publishes a report and toolkit on materiality in annual reports
- The Chartered Governance Institute warns boards on artificial intelligence governance
- The Government sets out its position on bringing cryptoasset activities within the financial regulation perimeter
Economic Crime and Corporate Transparency Act 2023 is now law
Last week, we reported that the Economic Crime and Corporate Transparency Act 2023 had received Royal Assent and become law.
The full text of the Act has now been published.
The Act introduces a number of reforms to UK company law, including mandatory identity verification for company directors, restrictions on who can deliver documents to Companies House, enhanced powers for Companies House (including to suppress sensitive information) and abolishing certain internal company registers.
Other changes made by the Act include the following.
- Changes to limited partnership law designed to combat the abuse of limited partnership structures (many of which mirror the changes to company law).
- Amendments to the UK's Register of Overseas Entities to expend the extent of information to be provided to Companies House, including providing information on certain trust arrangements over real estate itself.
- Introducing a new corporate offence of failure to prevent fraud, under which a large organisation will be automatically liable for fraud committed by its associates unless it had reasonable prevention procedures in place.
- Reforming the so-called "identification doctrine", under which a corporate body can more easily be held criminally liable for offence committed by its senior managers.
- Creating enhanced powers of civil recovery in relation to cryptoassets.
FCA encourages caution over trading during market soundings periods
The Financial Conduct Authority (FCA) has published Market Watch 75, in which it provides guidance and urges caution over trading during a market sounding period.
Under UK law, it is unlawful to deal in financial instruments (such as listed shares or bonds) while in possession of inside information relating to those instruments or the issuer of those instruments. It is also unlawful to disclose inside information to someone else unless an exception applies.
One such exception is the market soundings regime. Under this dispensation, provided certain conditions are met, an issuer or its advisers can disclose inside information to investors to gauge appetite for a potential transaction before announcing it publicly. Market soundings are an important part of the smooth functioning of the capital markets infrastructure.
One condition to making a market sounding is that the issuer must inform the recipient of the sounding that it may contain inside information and that, if it does, the recipient must not use that information to deal. Recipients are required to assess for themselves whether any information they receive is inside information and not simply rely on the issuer's own assessment.
Usually, an issuer will need to contact a market sounding recipient before providing any inside information. This results in a "gap" between initial contact and the disclosure of inside information.
The FCA notes that, depending on the circumstances, market sounding recipients may be able to identify relevant financial instruments before they actually receive any information about those instruments or the proposed transaction. This could be because the recipient has other information available to it that enables it, with reasonable confidence, to identify the instruments in question.
The FCA states that it has observed cases where recipients have traded in financial instruments in these circumstances. It notes that recipients have not always been able to provide plausible explanations for this behaviour.
Market Watch 75 reminds market participants that dealing in financial instruments in these circumstances may nonetheless amount to insider dealing, which is a civil offence under the UK Market Abuse Regulation and potentially a criminal offence under the Criminal Justice Act 1993.
It also provides guidance to recipients of market soundings on steps they can take to minimise the risks of insider dealing and unlawful disclosure of inside information.
Read the Financial Conduct Authority's Market Watch 75 on market soundings and insider dealing
Takeover Panel confirms changes to rule against frustrating action
The Takeover Panel has confirmed it is making changes to the parts of the Takeover Code that restrict a target company from taking "frustrating action" on an offer.
The changes follow the Panel's consultation in May 2023.
Broadly speaking, Rule 21.1 of the Takeover Code prohibits the board of a takeover target (in technical terms, an "offeree company") from taking any action designed to defeat an offer for the target.
In particular, the rule prohibits so-called "poison pill" tactics, which are common (and permitted) in other jurisdictions. These include issuing more shares, granting new options, making material acquisitions or disposals and entering into non-routine contracts.
The Code provides certain (limited) exceptions to this restriction, including (most notably) where the target company's shareholders approve the proposed frustrating action.
In its consultation, the Panel stated that it believed Rule 21.1 is functioning satisfactorily, but it proposed some non-material changes to it. The Panel has now confirmed it will proceed with those changes, subject to some minor modifications.
The changes to Rule 21.1 will have the following effects.
- Allowing a target company to issue more shares and to redeem or buy back its own shares, provided that doing so is within the ordinary course of the target's business (for example, under a share option scheme or under a buy-back programme with pre-defined limits).
- Allowing a target company to take other actions that are not material or are within the ordinary course of the target's business. This is designed to allow a target to take exceptional but routine actions, such as a debt refinancing or an exceptional small capital commitment.
- Clarifying the period during which the restrictions on frustrating action apply. Broadly, this would begin when an approach is made to the target company and end at the end of the offer period (or, if there is no offer period, seven days after the target rejects the latest approach).
- Imposing the same restrictions on an offeror where an offer amounts to a reverse takeover.
The Panel is also amending Rule 21.3 so as to require a target company to provide a competing offeror, on request, with all information it has provided, or subsequently provides, to another offeror (and not, as at present, only information specifically requested by the competing offeror).
Finally, the Panel is amending Rule 21.4 on management buy-outs to apply it not only to information already provided to external financiers, but also to information that is subsequently provided to them.
The changes will take effect on Monday, 11 December 2023.
Read Takeover Panel Response Statement RS2023/1 on changes to Rule 21 (PDF)
Read Takeover Panel Instrument 2023/3, which makes changes to Rule 21 (PDF)
Read our previous Corporate Law Update on the Takeover Panel's proposed changes to Rule 21
Takeover Panel clarifies its approach to invoking conditions to an offer
The Takeover Panel has amended its Practice Statement No 5, clarifying the approach it takes when a bidder (in technical terms, an "offeror") wishes to invoke a condition or pre-condition to a takeover offer so as to end the offer.
The clarifications follow significant changes to the Takeover Code (effective from July 2021), which permit a bidder to include a wider a range of pre-conditions or conditions to an offer to deal with regulatory clearances and official authorisations (such as anti-trust and merger control clearances).
Under the Takeover Code, a bidder can invoke a condition only with the Panel's consent. The Panel will normally give consent only if the circumstances triggering the condition are of material significance to the bidder in the context of the offer.
The Panel will now classify conditions according to one of six categories:
- Conditions relating to the level of acceptance by target company shareholders ("category 1").
- Conditions to give effect to certain requirements of law, regulation or the offeror's constitution (such as listing consideration shares or obtaining shareholder approval) ("category 2").
- Conditions relating to "long-stop dates" and "mini-long-stop dates" ("category 3").
- Bespoke conditions relating to the target company ("category 4").
- Official authorisation or regulatory clearances ("category 5").
- Other, principally "protective" conditions, such as a material adverse change ("category 6").
The Panel's approach to a particular condition or pre-condition will depend on the category within which it falls. Panel consent will not be needed to invoke a condition within category 1, 2 or 3. However, Panel consent will be required for any other category of condition.
The amended statement retains the previous factors the Panel will take into account when deciding whether to consent to invoking a condition. It also includes new factors. For example, the Panel will be more likely to give consent if the target company agrees invoking the condition is appropriate.
Conversely, the Panel will be less likely to give consent if circumstances have arisen that allow the bidder to invoke the condition but the bidder has nonetheless taken action suggesting it intends to pursue the offer (such as buying shares in the target company).
The Practice Statement also includes new guidance on factors the Panel will take into account when considering whether to consent to invoking a condition for "Phase 2 clearance". Broadly, this means clearance for an anti-trust or merger control body following an in-depth investigation.
Read Takeover Panel Practice Statement No 5 (HTML)
Read Takeover Panel Practice Statement No 5 (PDF)
Read the Panel's summary of amendments to Practice Statement No 5 (PDF)
FRC Lab publishes report on materiality in annual reports
The Financial Reporting Council (FRC) Lab has published a new report that looks at how companies can improve their corporate reporting by taking a "more focused, strategic approach to assessing materiality".
The report consists of four separate segments, covering materiality in practice, thinking about investor needs, taking a holistic approach, and embedding a materiality mindset.
Read the FRC Lab's press release on its new report on materiality in annual reports
Access the FRC Lab's landing page on "materiality" (with links to its separate segments)
CGI issues warning to boards on artificial intelligence governance
The Chartered Governance Institute of the UK and Ireland (CGI) has published an announcement aimed at boards of FTSE 350 companies, advising them to develop effective governance for artificial intelligence (AI).
The CGI notes that, according to research, only 13% of FTSE 350 companies have implemented or begun to implement policies and processes for the ethical use of AI, and a quarter said they did not see a need to discuss policies at all.
The CGI encourages boards to develop a governance framework for AI, which the board should review regularly and update to reflect changes in the business and the AI landscape.
Read the CGI's warning to FTSE 350 company boards on AI governance frameworks
Government sets out position on regulation of cryptoassets in financial services
HM Treasury has issued a formal response to its consultation on a future financial services regime for cryptoassets, which was published in February 2023.
The response sets out the extent to which the Government intends to bring activities involving cryptoassets within the regulatory perimeter of the Financial Conduct Authority (FCA), to extent they are not already regulated.
The response statement confirms the following:
- The Government will expand the list of "specified activities" in the Regulated Investments Order (the legislation that sets out which activities are regulated by the FCA) so that firms undertaking certain activities involving cryptoassets would need to be authorised by the FCA.
- It intends to establish a framework within which cryptoasset trading venues will define disclosure requirements when admitting cryptoassets to trading. These could include disclosures of a token's underlying code and network infrastructure and any known vulnerabilities and dependencies.
- It also intends to establish a market abuse regime for cryptoassets, based on the UK's current market abuse regime for securities and other financial instruments.
Read the Government's response on a future financial services regime for cryptoassets
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