#15462 - Continuing Obligations - Corporate Finance

Corporate Finance: SGS 7: Continuing Obligations

INDEX OF ABBREVIATIONS

- RIE – Recognised Investment Exchange

- IPO – Initial Public Offering

- PR – Prospectus Rules

- LR – Listing Rules

- DTR – Disclosure Guidance and Transparency Rules

- LP – Listing Principles

- PLP – Premium Listing Principles

- FSMA 2000 – Financial Services and Markets Act 2000

- RAO – Financial Services and Markets Act 2000 Regulated Activities Order 2001

- FPO – Financial Services and Markets Act 2000 Financial Promotions Order 2005

- MAR – Market Abuse Regulations

- CJA – Criminal Justice Act 2002

- FSA – Financial Services Act 2012

- UK CGC – UK Corporate Governance Code

- RCF – Revolving Credit Facility

- LSE – London Stock Exchange

- AIM – Alternative Investment Market

- FCA – Financial Conduct Authority

- MAC - Material Adverse Change

- EoD – Event of Default

OVERVIEW OF CONTINUING OBLIGATIONS

- Continuing Obligations – Obligations which a company must comply with at all times once its shares are listed – impose greater/additional costs burdens on listed companies + exposes listed companies to greater public scrutiny.

- Imposed in order to protect parties investing in/affected by listed companies + facilitate informed decisions about trading in a listed company’s shares by providing potential investors with information about the listed company in question.

- Continuing Obligation: Aims – Continuing obligations rules seek to ensure:

(a) timely/accurate disclosure of relevant information to shareholders;

(b) equal treatment of all shareholders of listed companies; and

(c) maintenance of orderly market in the listed company’s shares.

- Continuing Obligations: Methods – Continuing obligations rules seek to achieve aims by requiring:

(a) disclosure of information about listed companies to the market/shareholders;

(b) key transactions entered into by listed companies to be approved by shareholders; and

(c) specified information to be sent to shareholders in accordance with prescribed methods/time limits.

- Forms of Continuing obligations – 3 areas of continuing obligations:

(1) Disclosures – General inside information (MAR Art 17 + DTR 2) + specific inside information (LR 9 + MAR Art 19 + DTR 3-7).

(2) Shareholder Approval – Share issues + significant transactions (LR 10) + related party transactions (LR 11).

(3) Communications with Shareholders – Annual General Meetings + shareholder circulars (LR 13).

- Market Abuse Regulation 2014 (MAR) – Aimed to enhance market integrity + protection of investors – changed rules on disclosure/inside information – included disclosure rules relating to share dealings by persons discharging managerial responsibilities (PDMR’s) and persons closely associated to PDMR’s.

- Level 1 Measures – Directly effective provisions which are automatically applicable in all Member States.

- Level 2 Measures – Detailed/legally binding standards on how the MAR must be implanted in EU Member States.

- Level 3 Measures – Prepared by the European Securities and Markets Authority (ESMA) to provide guidance on how financial regulators in each Member State (e.g. FCA) should interpret/apply the MAR.

GENERAL OBLIGATION TO DISCLOSE INSIDE INFORMATION

- LR 7.2.1: Listing Principles/Premium Listing Principles – General principles which seek to ensure that companies listed on Official List pay due regard to role they play in maintaining market confidence + ensuring fair/orderly markets (LR 7.1.2G) + assist listed companies in identifying and complying with their obligations/responsibilities under LDPT Rules (LR 7.1.3G).

- Listing Principle 1: Compliance Systems – All listed companies must take reasonable steps to establish/maintain procedures/systems/controls to enable them to comply with their obligations under the LPDT Rules.

- Premium Listing Principle 6: Market Communication – All premium listed companies must communicate information to holders/potential holders of their listed equity shares in such a way as to avoid the creation/continuance of a false market in those listed equity shares.

- DTR 2.6.1G: Control of Access to Inside Information – Issuer should establish effective arrangements to deny access to inside information to persons other than those who require it for exercise of their functions within the issuer.

(1) Obligation on an Issuer to Disclose Inside Information

- MAR 2014 Arts 17-19 – Listed company’s disclosure obligations – apply to all companies with shares listed on Official List/traded on LSE Main Market AND companies with shares admitted to trading on AIM.

- MAR 2014 Recital 49: Purpose – Inside information disclosure obligations intended to avoid insider dealing and ensure that investors are not misled.

- MAR 2014 Art 17(1): General Obligation – Issuer must inform the public as soon as possible of ‘inside information’ which directly concerns the issuer + disclosure of inside information must NOT be combined with marketing of issuer’s activities.

- Disclosure must be made to the public in a manner which enables fast access to a timely/complete/accurate assessment of the information being made public.

- DTR 2.2.8G – Directors of issuer should carefully/continuously monitor whether changes in circumstances of the issuer require an announcement to be made under MAR 2014 Art 17(1).

- MAR Art 7(1)(a): ‘Inside Information’ – Information which is PRECISE and has NOT been made public + relates directly/indirectly to 1/more issuers or 1/more financial instruments, which, if made public, would have a SIGNIFICANT EFFECT on the price of those financial instruments.

- MAR 2014 Art 7(2): ‘Precise Information’ – Information is ‘precise’ if it indicates:

(a) a SET OF CIRCUMSTANCES which exists or may reasonably be expected to come into existence; or

(b) an EVENT which has occurred or which may reasonably be expected to occur

where the information is sufficiently specific to enable a conclusion to be drawn as to the possible effect of the circumstances/event on the price of the listed company’s financial instruments.

- Lafonta v Authorite des Marches Financiers (2013) – Information can be ‘precise’ regardless of whether or not it will have an upwards/downwards effect on the listed company’s share price.

- Ian Hannam v FCA (2014) – Reasonable expectation of a set of circumstances/event requires a REALISTIC PROSPECT that the circumstances/event will actually come to pass.

- MAR 2014 Art 7(3): Protracted Process – Intermediate step in a protracted process which leads to particular circumstance/event which is likely to have an effect on share price of a listed company may alone/of itself satisfy the requirements for ‘inside information’ IF that intermediate step of itself satisfies the definition of ‘inside information’ in MAR Art 7(1)(a).

- MAR 2014 Art 7(4): Reasonable Investor Test – Information which, if made public, would be likely to have a significant effect on the price of shares in a listed company, for purposes of the Art 7(1)(a) definition of ‘inside information,’ is information which a REASONABLE INVESTOR would be likely to use as part of the basis for his investment decisions.

- DTR 2.2: Guidance on Inside Information – Information will NOT necessarily be inside information simply because it is undisclosed/selectively disclosed – must focus on the content of that information + events/circumstances to which the information relates and the effect it would be likely to have on company’s share price if disclosed.

- DTR 2.2.7 – An issuer and its advisers are best placed to make an initial assessment of whether particular information amounts to inside information.

(2) Exceptions to Requirement for Immediate Disclosure of Inside Information

- MAR 2014 Art 17(1): Timing – Issuer must disclose inside information affecting the issuer AS SOON AS POSSIBLE – no specific provision for delay of disclosure on grounds that event/circumstances are unexpected or that issuer requires more time in order to fully identify the inside information.

- DTR 2.2.9G: Delay – Delay in disclosure of inside information MAY be acceptable if:

(a) there is an UNEXPECTED EVENT and a short stay is necessary in order to CLARIFY the situation prior to making the disclosure; BUT

(b) a HOLDING ANOUNCEMENT should be made where the issuer believes that there is a danger that the inside information may be leaked before it can confirm the facts and their impact.

- ‘Holding Announcement’ – Must include as much detail about the unexpected event/development as possible + reasons why full announcement has been delayed + undertaking by the company to announce further details of that inside information as soon as possible.

- MAR Art 17(4): Protection of Legitimate Interests Exception – Issuer may ‘on its own responsibility’ DELAY public disclosure of inside information PROVIDED that:

(a) immediate disclosure would be likely to prejudice the LEGITIMATE INTERESTS of the issuer;

(b) delay of disclosure NOT LIKELY TO MISLEAD the public; and

(c) issuer is able to ensure the continued CONFIDENTIALITY of the inside information during the period of delay.

- MAR Recital 50/DTR 2.5.3G: ‘Legitimate Interests’ – Can include

(a) ongoing negotiations or related elements where the outcome/normal pattern of those negotiations would be likely to be affected by public disclosure;

(b) where the financial viability of the issuer is at grave/imminent risk (although it has yet entered insolvency) and the public disclosure of the inside information would seriously jeopardize the interests of existing/potential shareholders by undermining the conclusion of negotiations designed to ensure...