Brexit Corporate Update

In this blog post we summarise the latest developments in UK corporate law and regulation related to Brexit.

• FCA confirms Handbook changes in the event of no deal
• Accounting and corporate reporting in the event of no deal
• Takeover Code – rule changes for Brexit and asset valuations

FCA confirms Handbook changes in the event of no deal

The FCA has published its Policy Statement PS19/5 and the near final form rule changes to the FCA Handbook that will come into force in the event of a no-deal Brexit. It has also published amendments to binding technical standards to deal with deficiencies resulting from leaving the EU.

The rule changes follow a number of consultations by the FCA, including CP18/28 (see our corporate update 2018/21) and CP18/36 (see our corporate update 2018/24).

Timing

The draft instruments setting out the rule changes must be approved by the Treasury before they can be made. The FCA expects to make the final instruments on 28 March 2019 if a withdrawal agreement has not been agreed and ratified.

In response to concerns about the short timeframe to implement the changes, the FCA reminds firms and issuers of its Statement about its temporary transitional powers. It has said it will provide transitional relief to ensure that firms and other regulated entities do not generally need to prepare now to meet the changes to their UK regulatory obligations as a result of Brexit. However, there are certain areas (set out in the Annex to the Statement) where it will not provide transitional relief, including rules that require issuers to submit information to the FCA and disclose certain information to the market. Listed companies should therefore prepare now for any change in their notification obligations post-Brexit (see item 1 above for further detail).

Changes to the LPDT Rules

For listed companies, the changes that will be of most interest are amendments to the Listing Rules, Prospectus Rules and Disclosure Guidance and Transparency Rules (DTRs).

Key changes to note include:

• Free float – Under the current rules, when an issuer applies for shares, or depositary receipts over shares, to be admitted to the Official List, it must demonstrate that enough securities of that class are distributed to the public in one or more EEA States. This is also a continuing obligation for listed issuers. The FCA is removing the reference to EEA holders in the rules so that holders from any jurisdiction will be counted towards the free float.
• Validity of prospectuses approved in other EU Member States – Issuers will no longer be able to rely on a  document passported into the  UK, following its approval by a competent authority elsewhere in the EU, to offer securities to the public in the UK or admit securities to trading on a regulated market in the UK. Post-Brexit, they will need to have a prospectus approved by the FCA.
• Transparency requirements – The Transparency Rules in DTR 1A and DTRs 4 to 6 currently apply to issuers with securities admitted to trading on a regulated market in the EU for which the FCA is the home competent authority. The FCA will remove the home/host member state distinction so that, post-Brexit, the Transparency Rules will apply only to issuers with securities admitted to trading on a UK regulated market.
• Audit committees – There is currently an exemption from the requirements in DTR 7.1 (Audit committees) for an issuer with a parent undertaking which is itself subject to DTR 7.1 or to the equivalent requirements under the Audit Directive as implemented in another EEA State. Post-Brexit, this exemption will no longer be available where the parent complies with equivalent requirements in another EEA State. The current exemption will continue to apply in respect of financial years beginning before Brexit day. The FCA says it will not provide additional transitional relief but says there is nothing to stop subsidiaries using the same audit committee arrangements as their parent.

Binding technical standards

Appendix 2 to the Policy Statement sets out very minor amendments to binding technical standards (BTS) (that is the detailed EU rules that will be incorporated into UK law and for which the FCA will have responsibility after Brexit). The BTS relevant to listed companies include EU Regulations made under:

• the Market Abuse Regulation, including on the format of insider lists and notification of PDMR dealings;
• the Prospectus Directive, relating to supplementary prospectuses and the approval and publication of prospectuses and dissemination of advertisements; and
• the Transparency Directive in relation to notifications of major holdings and access to regulated information.

Guidance

The FCA has said it will not, before Brexit, update guidance published outside of the FCA Handbook (referred to as non-Handbook guidance) where it relates to EU or EU-derived law. This would include the FCA guidance notes. Instead, it expects users to interpret the guidance sensibly and purposively, taking into account the provisions of the European Union (Withdrawal) Act 2018 and any changes made to the underlying requirement as it is preserved or converted into UK law.

It also expects firms and market participants to continue to apply Level 3 Guidelines published by the ESAs (such as the Q&A, Guidelines and Recommendations published by the European Securities and Markets Authority (ESMA)) to the extent they remain relevant. They will not however be incorporated into UK law or FCA rules/guidance.

Accounting and corporate reporting in the event of no deal

The Department for Business, Energy & Industrial Strategy (BEIS) and the Financial Reporting Council (FRC) have published letters to the accounting and audit sectors setting out the implications for them if the UK leaves the EU with no deal.

The letter on accounting includes the following reminders for companies and groups:

• Annual accounts prepared using IAS – The Companies Act requires UK incorporated companies to prepare their annual accounts either in accordance with international accounting standards that have been endorsed by the EU (EU-adopted IAS) or in accordance with UK Generally Accepted Accounting Practice (UK GAAP) standards. For financial years straddling the date of Brexit (that is years beginning on or before 29 March 2019 and ending after that date), companies will be able to use EU-adopted IAS. For financial years beginning after the date of Brexit, UK incorporated companies will be required to use UK-adopted IAS. At the point of Brexit, these will be the same as EU-adopted IAS.
• UK companies with a presence in the EEA – UK incorporated parent companies with subsidiaries or branches in the EEA will need to check the reporting requirements in the relevant EEA State(s). UK reporting requirements may no longer be considered equivalent to the reporting requirements of that EEA State.
• Group exemptions – EEA incorporated companies and groups that have a UK subsidiary will no longer be eligible for certain exemptions from preparing and filing of accounts. For example, an intermediate UK parent company with an immediate EEA parent will no longer be automatically exempt from producing group accounts.

Takeover Code – rule changes for Brexit and asset valuations

The Takeover Panel has published response statements on the Takeover Code rule changes required as a result of Brexit (RS 2018/2), including revoking the shared jurisdiction regime, and its amendments to Rule 29 on asset valuations (RS 2018/1) to codify the Panel's existing practice.

The rule changes, which will not result in significant changes to the current regime, will come into force as follows:

• The changes required for Brexit will take effect at 11pm on 29 March 2019 in the event of a no-deal Brexit; if Brexit is delayed, the changes will come into effect on the date on which the UK ceases to be an EU Member State or, if a withdrawal agreement is reached, at the end of any transition period.
• The rule changes relating to asset valuations will take effect on 1 April 2019.

Rule changes required for Brexit

The changes required to be made to the Code as a result of Brexit set out in RS 2018/2 will not have a significant impact on transactions. In particular, the Panel is not at this stage changing its treatment of conditions relating to the EU Merger Regulation to align it with its treatment of other merger control regimes around the world. The key changes are:

• Removal of the shared jurisdiction regime – Under the Takeovers Directive, where a company is incorporated in one EEA Member State and has its securities admitted to trading on a regulated market in a different Member State, the regulation of any offer for that company is shared between the takeover regulators in the two Member States. Following Brexit, the shared jurisdiction regime will cease to apply to UK incorporated companies. As a result:
  • the Code will apply in full to an offer for a UK incorporated company that has its securities listed on an EEA market, provided the company has its place of central management and control in the UK; and
  • the Panel will no longer have any jurisdiction over offers for EEA-incorporated companies which have their securities admitted to trading on a UK market.

There are no grandfathering provisions and the response statement sets out how it will apply to shared jurisdiction offers that straddle Brexit day.

• Sending documents to shareholders in the EEA – The Note on Rule 30.4 currently says that the Panel will not normally grant a dispensation from the requirement to send offer documentation to shareholders or employee representatives in the EEA. This Note will be amended to refer only to the UK, Channel Islands or Isle of Man. The Panel may therefore be prepared, post-Brexit, to grant a dispensation from the requirement to send documentation to shareholders in the EEA if it could result in a significant risk of civil, regulatory or, particularly, criminal exposure for the bidder or target. However, the Panel says that it is unlikely to grant a dispensation in the short term post-Brexit, assuming there is no immediate change in the current convergence of laws.

Asset valuations

The amendments to Rule 29 on asset valuations set out in RS 2018/1 are intended to reflect the way that the Rule is currently applied in practice by the Panel Executive and provide a more logical framework for the Rule.

Changes include clarifications in relation to:

• the types of asset it applies to;
• when it will apply to asset valuations published by the target or a securities exchange offeror; and
• the requirements when an asset valuation is required.