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Ashurst London February 2013 ECM briefing UKLA proposed guidance - equity securities The UKLA has published its Primary Market Bulletin No. 5, in which it announced a consultation in respect of proposed guidance around listing, prospectus, disclosure and transparency rules. We summarise below the key points relating to equity securities (we are separately publishing a client briefing in regard to debt and derivative securities). The consultation is open until 8 April 2013. Contents Eligibility for listing Company guarantees of subsidiaries Disclosure of inside information in the context of results reporting H Sponsor services Supplementary prospectuses Risk factors Eligibility for listing The UKLA has issued a revised procedural note on the eligibility for listing process for issuers. It is proposing to change the process as follows. Currently the UKLA reviews the eligibility letter (submitted by the sponsor) prior to submission of the prospectus to the UKLA for review. The proposal is that eligibility review will in future happen simultaneously with prospectus review. The UKLA points out that the current method is disadvantageous for the issuer as in most cases the UKLA will qualify any approval with the comment that it is subject to review of the prospectus. In reality, the proposed changes may not make much practical difference. It is possible at present for an issuer to receive preliminary approval for listing and to proceed with prospectus drafting and for the UKLA then to decide at a much later stage that the applicant is not suitable for listing. Equally, with the proposed new process, an applicant may start prospectus drafting (and incur substantial adviser and other costs) and find out at a much later stage that the FSA has decided that the applicant is not suitable for listing. The draft technical note states that it may be possible to submit an eligibility letter to the FSA in advance of submission of the prospectus in certain limited cases. This would obviously lengthen the review timetable. The draft note is also helpful for those less familiar with the process as it explains when an eligibility review is needed (i.e. where there is a new applicant). The relevant cases include: a transfer from standard to premium listing; application for readmission following a reverse takeover and new topco transactions. It also explains in some detail how the review process works. Company guarantees of subsidiaries The UKLA has published a new draft technical note in relation to company guarantees, as the Companies Act 2006 (2006 Act) has recently been amended to allow UK incorporated companies to exempt qualifying subsidiaries from the requirement for mandatory audit. New section 479C provides that in order for a subsidiary to be exempt from audit, the parent company must provide a guarantee of all outstanding liabilities to which the subsidiary company is subject as at the end of the relevant financial year. There is no limit in terms of the size of the subsidiary companies who can use the exemption and therefore a guarantee could potentially be provided by a listed holding company in respect of the liabilities of significant trading companies within its group. The proposed UKLA technical note explains that in the opinion of the FSA, these guarantees fall within LR 10.2.4R on indemnities i.e. they would need to be approved by shareholders as a class 1 transaction as they are unlimited in scope. However, the note also states that LR 10.2.4R(1) would apply such that if the agreement relates to a wholly owned subsidiary undertaking the rule does not come into play. AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA The relevant changes to the 2006 Act only came into useful advice in relation to related party transactions, force on 1 October 2012 and whilst it is still too early clarifying that where a sponsor performs the financial to assess the level of take up, we would not expect adviser role in relation to any circular, it will not be many listed companies to take advantage of this deemed to be providing sponsor advice (as it is not exemption by entering into these types of guarantees, acting as sponsor) whereas the advice given on the mainly because in practice subsidiary accounts would application of the Listing Rules to a potential related party transaction would be a sponsor service. need to be produced in any event in order to produce audited consolidated accounts. Auditors' work on these subsidiary accounts may be insufficiently different Supplementary prospectuses from a full audit to justify guaranteeing all the subsidiary's obligations. The UKLA has also produced a new draft technical note on when a supplemental prospectus will be permitted Disclosure of inside information in the context of results reporting and content of the supplement. It is primarily aimed at debt issuers who have a base prospectus and prefer to update by way of supplement (rather than producing a The UKLA has also produced a new draft technical note in relation to DTR 2.2.2.R emphasising that an issuer new prospectus) but some points are relevant for equity issuers as well. cannot delay disclosing inside information when it is in the process of producing financial reports and has a scheduled announcement date in mind. When is a supplement permitted? The UKLA is maintaining its very restrictive interpretation of the permitted scope of supplements, The note expands on an earlier comment in the UKLA's technical note on the disclosure and transparency and will only permit supplements where the proposed change satisfies the following three principles: rules (not carried forward into the new version of the technical notes known as the Knowledge Base) that It is sufficiently material: the subject of the "Companies should not delay the announcement in amendment must fall within the scope of FSMA order to prepare for the announcement of results" and S.87G(1) (PD, Art 16) - i.e. it is a "significant new states categorically that "disclosure of information that factor, material mistake or inaccuracy relating to falls within the definition of inside information, the information included in the prospectus which is including information about financial performance, capable of affecting the assessment of the cannot be delayed merely so that it can coincide with securities…". Otherwise, the issuer must make an a scheduled announcement of a periodic financial announcement to the market (see the ESMA FAQs report". Well advised companies would have followed on Prospectuses Question 23). The UKLA will "not this approach in any event, but the UKLA note is approve a supplement where neither materiality nor relevance to the investor can be established"; useful confirmation of its approach. The key question in any analysis is whether the information in question constitutes inside information. factor, material mistake or inaccuracy must relate to "the securities" – i.e. the securities as described Sponsor services in the original approved prospectus. The UKLA sees "the securities" (as defined in FSMA s87G(3) and The UKLA has produced a new draft technical note Article 16 of the Prospectus Directive) as specific regarding the definition of sponsor services. The note securities that are anticipated to be offered or confirms that a sponsor will be carrying out a listed under the approved prospectus. Only very sponsor service if the sponsor is in discussions with limited changes will be permitted and only where the UKLA concerning a matter that is a sponsor the UKLA is satisfied that such changes are not service even if it has not been formally appointed, inconsistent with the terms of the securities on which the prospectus was originally approved; and and will therefore be subject to the Principles for Sponsors. It also confirms that the sponsor role continues after approval of a prospectus relating to It relates to "the securities": The significant new It arises in the relevant period: the significant new listing or a circular relating transfer of listing factor or event must arise in the period after the category until the effective date of admission or of prospectus has been approved and the later of (i) transfer. In relation to shareholder circulars, the closure of the public offer or (ii) admission to listing. sponsor role ceases on completion of a transaction requiring shareholder approval (LR 8.2.1R(2)(3) and (4)) but this may be some time after the general This means, for example, that the UKLA would not meeting and the sponsor service will therefore permit a supplement, produced for a legitimate reason, continue during this period. The note also sets out to contain other unrelated corrections or amendments which of themselves would not trigger a supplementary prospectus. Risk factors "Key" risks in the prospectus summary vs "material" risks in the main body of the prospectus The UKLA will not permit the addition of risk factors which are not "key risks" in the prospectus summary Approach to vetting risk factors notwithstanding industry concerns that investors may The UKLA will expect that risk factors are grouped focus solely on "key" risks and thereby fail to pay together in a coherent manner and those which are sufficient attention to the broader suite of "material" considered to be of the greatest or most immediate risks set forth in the main body of the base prospectus. significance should be prominent at the beginning of each section. To help address this concern, the UKLA has proposed The UKLA will challenge certain risk factors, including: to the Risk Factors section in the main body of the prospectus: where disclosures conflict with or undermine other "Prospective investors should note that the risks rule requirements where disclosures conflict with relating to the Group, its industry and the Ordinary an issuer's eligibility or continuing obligations; Shares summarised in the section of this where disclosure is contradictory to the Listing document headed "Summary" are the risks that Principles; the [Directors believe/the Company believes] to be where sufficient prominence is not given to the most essential to an assessment by a material risks; prospective investor of whether to consider an where there is disclosure elsewhere in the investment in the Ordinary Shares. However, as documents that seems to clearly present a risk to the risks which the Group faces relate to events an issuer, which has not already been disclosed in and depend on circumstances that may or may not the risk factor section; occur in the future, prospective investors should where the risk factors are simply statements of consider not only the information on the key risks fact that contain no explanation of the risk in the summarised in the section of this document context of the issuer's business or the issue of the headed "Summary" but also, among other things, the risks and uncertainties described below." securities in question; and that the following text may be included as a preamble risks which are not relevant to a particular issuer that are nevertheless included in the issuer's document. Whilst not included in the consultation, the UKLA has elsewhere rejected risk factors on the basis that the particular event had not yet sufficiently materialised or its impact on investors was as yet too unclear (e.g. early FATCA risk factors). This text was discussed with and approved by the Company Law Committee of the City of London Law Society of which Ashurst is a member. If you have any questions or comments please speak to one of the Ashurst partners over the page. Contacts Simon Baskerville London T: +44 (0)20 7859 1141 E: [email protected] Chris Bates London T: +44 (0)20 7859 2388 E: [email protected] Simon Beddow London T: +44 (0)20 7859 1937 E: [email protected] Jeremy Bell London T: +44 (0)20 7859 1913 E: [email protected] Giles Boothman London T: +44 (0)20 7859 1707 E: [email protected] Nick Bryans London T: +44 (0)20 7859 1504 E: [email protected] David Carter London T: +44 (0)20 7859 1012 E: [email protected] Nick Cheshire London T: +44 (0)20 7859 1811 E: [email protected] Anthony Clare London T: +44 (0)20 7859 1927 E: [email protected] Adrian Clark London T: +44 (0)20 7859 1767 E: [email protected] Karen Davies London T: +44 (0)20 7859 3667 E: [email protected] Dhana Doobay London T: +44 (0)20 7859 3133 E: [email protected] Jonathan Drake London T: +44 (0)20 7859 2986 E: [email protected] Jonathan Earle London T: +44 (0)20 7859 1126 E: [email protected] Ray Fisher (US) London T: +44 (0)20 7859 1797 E: [email protected] Charlie Geffen London T: +44 (0)20 7859 1718 E: [email protected] Nick Goddard London T: +44 (0)20 7859 1358 E: [email protected] Richard Gubbins London T: +44 (0)20 7859 1252 E: [email protected] Bruce Hanton London T: +44 (0)20 7859 1738 E: [email protected] Nicholas Holmes London T: +44 (0)20 7859 2058 E: [email protected] Isabelle Lentz London T: +44 (0)20 7859 1094 E: [email protected] Adam Levitt London T: +44 (0)20 7859 1633 E: [email protected] Stephen Lloyd London T: +44 (0)20 7859 1313 E: [email protected] Mark Lubbock London T: +44 (0)20 7859 1762 E: [email protected] Tom Mercer London T: +44 (0)20 7638 1111 E: [email protected] Rob Moulton London T: +44 (0)20 7859 1029 E: [email protected] Sergei Ostrovsky London T: +44 (0)20 7859 1821 E: [email protected] David Page London T: +44 (0)20 7859 1908 E: [email protected] Jonathan Parry London T: +44 (0)20 7859 1086 E: [email protected] James Perry London T: +44 (0)20 7859 1214 E: [email protected] Michael Robins London T: +44 (0)20 7859 1473 E: [email protected] Eavan Saunders Cole London T: +44 (0)20 7859 1838 E: [email protected] Jennifer Schneck (US) London T: +44 (0)20 7859 1744 E: [email protected] Mark Sperotto London T: +44 (0)20 7859 1950 E: [email protected] Nigel Stacey London T: +44 (0)20 7859 1028 E: [email protected] Jeffrey Sultoon London T: +44 (0)20 7859 1717 E: [email protected] Piers Warburton London T: +44 (0)20 7859 1099 E: [email protected] Nick Williamson London T: +44 (0)20 7859 1894 E: [email protected] This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions. For more information please contact us at Broadwalk House, 5 Appold Street, London EC2A 2HA T: +44 (0)20 7638 1111 F: +44 (0)20 7638 1112 www.ashurst.com. Ashurst LLP and its affiliates operate under the name Ashurst. Ashurst LLP is a limited liability partnership registered in England and Wales under number OC330252. It is a law firm authorised and regulated by the Solicitors Regulation Authority of England and Wales under number 468653. The term "partner" is used to refer to a member of Ashurst LLP or to an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Ashurst LLP's affiliates. Further details about Ashurst can be found at www.ashurst.com. © Ashurst LLP 2013 Ref:27948172 27 February 2013