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"Changes have been made to the circumstances in which the Code presumes persons to be acting in concert with each other because they have a significant degree of common interest."
In our final article of the current series, we focus on amendments to the Takeover Code (the “Code”) which recently came into force, as well as some further proposed amendments to the Code, and the draft minimum standard for audit committees that the Financial Reporting Council (“FRC”) put out for consultation in November 2022. As annual general meeting (“AGM”) season is approaching, we have also taken the opportunity to flag the FRC guidance published in July 2022 on running effective AGMs.
Our previous articles in relation to developments in the London listing markets can be found here.
Amendments to the Code¹
In December 2022, the Panel on Takeovers and Mergers (the “Panel”) published Response Statement RS 2022/2² confirming changes to the Code following consultation paper PCP 2022/2³ published in May 2022. The amendments relate to the presumptions of the definition of “acting in concert” and related provisions and are as originally proposed but with certain modifications. They took effect on 20 February 2023.
Concept of “acting in concert”
The definition of “acting in concert” is a fundamental Code concept, pursuant to which the Panel effectively treats persons acting in concert as a single person for the purposes of Code rules. This means that, if a member of a concert party deals in shares in a Code company, that dealing could have consequences not only for them but also for other persons acting in concert with them. The Panel has not amended the general definition of “acting in concert” (broadly, persons who cooperate to obtain or consolidate control of a company or to frustrate the successful outcome of an offer for a company). Instead, changes have been made to the circumstances in which the Code presumes persons to be acting in concert with each other because they have a significant degree of common interest.
"Many of the changes codify existing Panel practice and clarify the application of certain presumptions; however, some do represent a change from the previous position."
Key changes
Many of the changes codify existing Panel practice and clarify the application of certain presumptions; however, some do represent a change from the previous position. The most significant changes are in respect of what was presumption 1, which applied to companies within a group structure and presumed companies to be associated with each other when there was ownership or control of 20% or more of the equity share capital of the company.
This old presumption 1 has been replaced by two new presumptions (presumptions 1 and 2) and the threshold for when companies are presumed to be acting in concert with each other has been increased from 20% to 30% to align it with the Code’s definition of “control”. The threshold will explicitly apply both to shares carrying voting rights and to equity share capital (whether or not the shares carry voting rights), with the 30% threshold being applied differently for each when there is a chain of ownership (voting control will not dilute through links in the chain but an interest in equity share capital will dilute). Long derivative and option positions will count towards the 30% threshold and the presumptions apply to individuals, partnerships, trusts and interests in funds.
Guidance, illustrations and webinar
The response statement includes helpful detail on the Panel’s approach to concert parties. It sets out guidance on the circumstances in which new presumptions 1 and 2 may be rebutted, the application of the presumptions to joint ventures, portfolio companies of private equity firms and government-owned entities. It also contains useful illustrative examples of how new presumptions 1 and 2 apply to: (i) shareholdings representing shares carrying voting rights; (ii) shareholdings representing equity share capital; and (iii) a consortium offer.
The Panel hosted a webinar on 1 February 2023 on the amendments and a recording of the webinar is available on the Panel’s website.⁴
"The amendments to the Code apply to all companies and transactions from 20 February 2023."
Application of amendments
The amendments to the Code apply to all companies and transactions from 20 February 2023, except in relation to transactions where the amended rules would have retroactive effect. Parties to a transaction should consult the Panel if they have any doubt as to the consequences of the amendments.
Commentary
The Panel indicated in the original consultation that the presumptions of the definition of “acting in concert” had remained largely unchanged since they were originally introduced and that the changes are intended to ensure the amended presumptions properly reflect both changes in the nature of investment markets since the presumptions were introduced and the current practice of the Panel. This additional clarity and codification of the Panel’s existing practice is to be welcomed. The Panel has also indicated that raising the threshold to 30% should result in fewer cases in which a shareholder is presumed to be acting in concert with the company in which it is invested, leading to less requirement to consult the Panel and reduced costs associated with monitoring and compliance.
Further proposed amendments to the Code
In October 2022, the Panel published two further consultation papers proposing changes to the Code.
PCP 2022/3
The first consultation, PCP 2022/3,⁵ sets out certain proposed amendments relating to the application of the offer timetable prescribed by the Code in competitive takeover bid situations. These are intended to clarify the manner in which a competitive situation will be resolved where one or more of the bidders is proceeding by way of a scheme of arrangement rather than a contractual offer and to provide greater certainty to parties to an offer and to market participants. Generally, the parties must consult the Panel regarding the applicable timetable where one of the competing bids is being implemented by scheme of arrangement. However one of the changes to the Code is to make clear that the Panel will not normally introduce an auction procedure to bring the competitive situation to a conclusion until after the last condition relating to a relevant official authorisation or regulatory clearance has been satisfied or waived by each bidder.
PCP 2022/4
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"The Panel expects to publish Response Statements setting out the final changes to the Code in Spring 2023 and anticipates that the amendments will come into effect approximately one month later."
The second consultation, PCP 2022/4,⁶ proposes miscellaneous amendments to the Code. There is no overarching theme to the proposals, but they include:
- giving the Panel more flexibility to grant a derogation or waiver from Code requirements in exceptional circumstances, such as to facilitate the rescue of a company in serious financial difficulty, including in relation to mandatory offers – this should help facilitate the rescue of distressed companies, to the benefit of shareholders and other stakeholders;
- introducing an express requirement for the target board to make a recommendation to shareholders and holders of convertible securities, options and subscription rights as to the action they should take in respect of an offer or any alternative offer;
- where there are alternative offers, requiring that the target board circular specify which alternative (if any) the directors intend to elect for in respect of their own shares and the Panel may require the circular to include the directors’ reasons for such election; and
- requiring copies of irrevocable commitments or letters of intent that have been obtained to be published on a website by the deadline for announcing details of the same via a regulatory information service.
Next steps
The two consultations closed on 13 January 2023. The Panel expects to publish Response Statements setting out the final changes to the Code in Spring 2023 and anticipates that the amendments will come into effect approximately one month later.
Commentary
The Panel is of the view that these various amendments will be of benefit to shareholders, offeree companies and other market participants and will clarify or improve existing rules and better reflect current practice and understanding. The amendments should not place any significant new burdens on parties to an offer.
"The FRC expects that most FTSE 350 companies are already following the requirements of the standard if they are following the UK Corporate Governance Code and best practice."
Consultation on minimum standard for audit committees
In November 2022, the FRC published a consultation document⁷ on its draft minimum standard for audit committees. The purpose of the standard is to increase performance across audit committees in the FTSE 350, ensuring a consistent approach and supporting a well-functioning audit market. The standard will be applicable to all UK incorporated companies with a Premium Listing on the London Stock Exchange which are included within the FTSE 350 index.
The draft standard⁸ focusses on those audit committee responsibilities that relate to the external audit, including:
- the appointment of the auditor and the tendering process associated with that appointment;
- the ongoing oversight of the audit and the auditor; and
- reporting on the work the audit committee has done in respect of the audit and on compliance with the standard.
The vast majority of the draft standard’s content already exists in other FRC publications including the UK Corporate Governance Code and related guidance. The FRC therefore expects that most FTSE 350 companies are already following the requirements of the standard if they are following the UK Corporate Governance Code and best practice. In relation to the wider responsibilities of audit committees, the FRC states that the standard is not intended to replace the UK Corporate Governance Code and associated guidance, and audit committees should continue to follow those on a comply or explain basis. The consultation closed on 8 February 2023 and the plan is for the standard to be available to audit committees on a voluntary comply or explain basis by the end of 2023, ahead of planned legislation that will make the standard mandatory.
"The guidance gives practical advice to help companies ensure that their AGMs are well-run and that they promote effective and transparent shareholder participation and engagement."
Commentary
Given that there is currently significant variation in the performance of audit committees within the FTSE 350, the introduction of a minimum standard for audit committees should help to ensure that they are consistently focused on audit quality. Making the standard mandatory through legislation, and the planned introduction of a new regulator, the Audit, Reporting and Governance Authority, with a new set of enforcement powers, should reinforce this.
FRC guidance on running effective AGMs
In July 2022, the FRC published good practice guidance for listed companies on running effective AGMs.⁹ This followed a review published by the FRC in October 2020 on the different approaches taken by companies to holding AGMs during the COVID-19 pandemic and input received from a stakeholder group convened by the FRC.
Overview of guidance
The guidance gives practical advice to help companies ensure that their AGMs are well-run and that they promote effective and transparent shareholder participation and engagement, particularly now that many companies have moved to a hybrid form of meeting using electronic platforms. The use of technology is encouraged as a way to maximise shareholder engagement but the need for flexibility is emphasised; the FRC recognises that all companies are different and that companies will need to take different approaches and use different technologies and methods depending on their circumstances. Companies will need to consider carefully which approach is right for them and their shareholder base and should explain the reason for their decision in their meeting notice. While some companies may decide to continue to hold physical-only meetings, the FRC is clear that, in normal circumstances, “behind closed door” AGMs are not appropriate.
Seven principles
The guidance sets out the following seven principles, as well as suggested actions for listed companies to consider taking in relation to each one:
"Companies will need to consider carefully which approach is right for them and their shareholder base."
- information disseminated prior to the meeting must offer clear instructions on how to attend the meeting and participate, in order to enable effective shareholder engagement;
- whether meetings are physical, hybrid or virtual, shareholders should, as far as practicable, be able to engage in the business of the meeting;
- the board should provide an update at the AGM on matters raised by stakeholder groups that are considered by the board to materially affect the company’s strategy, performance and culture;
- companies should seek the broadest access to and participation in meetings by a diverse range of shareholders – however attending, shareholders should have the opportunity to raise questions;
- shareholders should be able to cast their vote in real-time or submit proxies in advance. Appropriate technology should be used by companies to ensure that shareholders have the ability to appoint proxies and send instructions to proxies prior to the meeting;
- companies should be as transparent as possible with shareholders in relation to matters discussed and raised by shareholders at the meeting; and
- effective and transparent shareholder engagement should not be limited to an annual event – opportunities to update shareholders on company matters should be offered throughout the year, with an emphasis on ensuring all shareholders have access to similar information.
Commentary
AGMs continue to be an important aspect of corporate governance and this guidance is useful for companies to refer to when planning their 2023 AGMs and considering how best to try and maximise shareholder engagement.
"This guidance is useful for companies to refer to when planning their 2023 AGMs."
Conclusion
In this current series of articles, we have outlined a number of developments that we believe are of interest to companies and others involved in the London listing markets or in fundraisings. As 2023 progresses, it will be interesting to see, firstly, what the impact is of those changes that have already come into force and, secondly, how those changes that are still at the proposal or at a preliminary stage progress.
[1] This section largely replicates text from FromCounsel’s article “Takeovers: Takeover Panel publishes changes to ‘acting in concert’ presumptions” published on 14 December 2022 (14 December 2022 © FromCounsel 2022) with kind permission of FromCounsel
[2] https://www.thetakeoverpanel.org.uk/wp-content/uploads/2022/12/RS2022-2.pdf
[3] https://www.thetakeoverpanel.org.uk/wp-content/uploads/2022/05/PCP-2022_2-Presumptions-of-the-definition-of-acting-in-concert.pdf
[4] Webinar link: https://stream.brrmedia.co.uk/broadcast/63a18d40e26c8329adf0e339/63da4ae81874497653f351bb
Slides: https://www.thetakeoverpanel.org.uk/wp-content/uploads/2023/02/Webinar-presentation-on-Presumptions-of-the-definition-of-_acting-in-concert__-Part-2_010223.pdf
[5] https://www.thetakeoverpanel.org.uk/wp-content/uploads/2022/10/PCP-2022_3-The-offer-timetable-in-a-competitive-situation.pdf
[6] https://www.thetakeoverpanel.org.uk/wp-content/uploads/2022/10/PCP-2022_4-Miscellaneous-Code-amendments.pdf
[7] https://www.frc.org.uk/getattachment/a732daac-27ed-48b4-9bd0-ca76e52f98ab/Consultation-Document-Audit-Committee-Standard.pdf
[8] https://www.frc.org.uk/getattachment/4b7577d4-6845-417a-8e39-dec213019083/Draft-Minimum-Standard-for-Audit-Committees.pdf
[9] https://www.frc.org.uk/getattachment/3501347c-2394-4ec4-94c8-9cd62b62d1fe/FRC-Good-Practice-Guidance-for-Company-Meetings_July_2022.pdf
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