This is an extract of our Continuing Obligations document, which we sell as part of our Corporate Finance Notes collection written by the top tier of Cambridge And Oxilp And College Of Law students.
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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
(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 the long-term financial recovery of the issuer; and 2
(c) decisions taken/contracts made by the management body of an issuer which require the approval of a separate body within the same issuer where the organisation of the issuer requires the separation of those bodies and the announcement of the decision/contract prior to obtaining such approval would jeopardise the correct interpretation of the information by the public.
- FSMA Guidance 2016: 'Legitimate Interests' - Can include IP rights relating to a product/invention or buying/selling of a major shareholding in the issuer OR obtaining public authority/regulatory approval.
- Record Keeping - Where issuer has relied on MAR Art 17(4) to delay disclosure BUT subsequently makes announcement relating to that inside information it must inform FCA that disclosure was delayed using prescribed NOTIFICATION FORM + provide FCA with written explanation of how the MAR Art 17(4) conditions were satisfied if requested by FCA.
- Notification Form - Requires issuer to inform FCA of dates/time when inside information first existed + when decision to delay disclosure made + identify persons within issuer's organisation responsible for taking decision regarding the delay of disclosure.
- MAR 2014 Art 17(5): Risk to Financial Stability of the Issuer/Financial System Exception - Issuer may, 'on its own responsibility' delay disclosure of the inside information PROVIDED that: (a) disclosure involves a risk of undermining the financial security of the issuer/financial system; (b) the delay is in the public interest; (c) the confidentiality of that information can be ensured during the period of delay; and (d) the FCA has consented to the delay in the disclosure of the inside information.
- Record Keeping - Issuer must ensure that it possesses sufficient information regarding the management of the inside information to enable it to satisfy the FSA that delay of disclosure under MAR Art 17(5) was justified in order to protect the financial stability of the issuer/financial system.
- DTR 2.6.3G: Breach of Confidentiality - Where disclosure of inside information delayed in accordance with MAR Art 17(4) (Protection of Legitimate Interests) or MAR Art 17(5) (Financial Stability of Issuer/Financial Markets) the issuer should prepare a HOLDING ANNOUNCEMENT to be publicly disclosed in event of a breach of confidence resulting from the unexpected/unauthorised disclosure of the inside information.
- Necessity of Delay - MAR 2014 Arts 17(4)-(5) are exceptions to general requirement for immediate disclosure of inside information in MAR 2014 Art 17(1) and so should be interpreted NARROWLY .
- Issuer responsible for assessing whether there is a 'legitimate interest' justifying delay in disclosure under MAR Art 17(4) (DTR 2.2.5) + issuer should have processes in place to access existence of inside information and appoint person to determine when a disclosure is necessary + when it may be delayed in accordance with MAR Art 17(4)/
- MAR 2014 Art 17(7): Leak of Inside Information - Where disclosure of inside information has been delayed in accordance with MAR 2014 Art 17(4) (Protection of Legitimate Interests) BUT confidentiality of that inside information is no longer assured, then issuer must disclose that information to the public as soon as possible.
- DTR 2.6.3G: Leak Announcement - If issuer relying on MAR Art 17(4) (Protection of Legitimate Interests) exception to delay disclosure required by Art 17(1) then issuer must prepare a LEAK ANNOUNCEMENT to be released in event of breach of confidence relating to the inside information in question which confirms the information likely to be revealed by such a leak and may be updated prior to release depending on nature of information revealed by the leak.
- MAR 2014 Art 17(7): Rumours Regarding Inside Information - Disclosure must be made where a RUMOUR explicitly relates to inside information AND is sufficiently accurate to indicate that confidentiality of the inside information is no longer assured.
- DTR 2.7.1G: Response to Rumours - Where there is press speculation/market rumour regarding an issuer, the issuer should assess whether disclosure obligation arises under Art 17(1) MAR.
- DTR 2.7.3G: False Rumours - Issuer's knowledge that press/market speculation is false does NOT necessarily amount to inside information BUT not clear whether issuer can indefinitely delay disclosure of fact that speculation/rumour is false - issuer may be required to justify response to speculation/rumour to the FCA.
- MAR Art 17(8): Selective Disclosure - Where inside information is disclosed to a 3rd party in normal course of employment/profession/duties, such information must immediately be disclosed to the public UNLESS 3 rd party owes a DUTY OF CONFIDENTIALITY to the issuer in respect of such information.
- Allows issuer to disclose inside information to advisers/lenders/other negotiating parties/government bodies etc. without having to publicly disclose that information PROVIDED that the recipient owes a duty of confidentiality to the issuer.
- MAR 2014 Art 11: Market Sounding Procedure - Issuer can approach shareholders/potential investors and disclose information relating to issuer/transaction on basis that shareholder/potential investor owe a duty of confidentiality to the issuer and so a public disclosure of the inside information released will NOT be necessary.
- DTR 2.5.7G: Selective Disclosure Guidance - Issuer may disclose inside information to specified 3rd parties who require the information to perform their functions PROVIDED that those 3rd parties are bound by a duty of confidentiality owed to the issuer in respect of such information (includes advisers/lenders/credit-rating agencies/other negotiating parties) - issuer CANNOT make selective disclosure to any person simply because that person owes a duty of confidentiality to the company. (3) Specific Disclosure Requirements 3
- LR 9/DTR 6: Specific Disclosure - Contain rules requiring listed companies to make specific disclosures of specified matters including changes to company's share capital + changes to company's constitution + change of company name + changes to board of directors + changes to shareholdings in company + dealings by the company.
- DTR 6.1.9R: Changes to Class Rights - Company must, without delay, disclose any change in the rights attaching to any class of its shares.
- LR 9.6.11R: Board Changes - Company must notify an RIS following: (a) appointment of new directors (must state appointed director's name and whether they are an executive/nonexecutive director); (b) resignation/removal/retirement of a director; (c) important changes to role/functions/responsibilities of an existing director.
- Notification must be made as soon as possible and in any event before the end of the business day following the decision/receipt of notice of change to board.
- Financial Information - Listed companies must produce statements of their financial results on a regular basis, including: (a) annual reports + annual accounts (LR 9.8 + DTR 4.1 + DTR 7.2); and (b) half-yearly reports (DTR 4.2R)
- Disclosure must indicate the website on which the documents relevant to the disclosure are available (DTR
- Companies Act 2006 s.420: Directors' Remuneration Report - Listed companies must publish a directors' remuneration report for each year + shareholders must have a (non-binding vote) on the report at the company's AGM. (4) Monitoring Continuing Obligations and Making Disclosures to Market
- LR 9.2.11R: FCA Contact - Listed companies must ensure that they provide FCA with up-to-date contact details for person within company who is the FCA's primary contact in relation to monitoring of company's compliance with LR's
+ DTR + MAR.
- DTR 2.2.8G: Directors' Duties - Directors of listed companies must continuously monitor whether changes in company's circumstances require an announcement of inside information to be made under MAR 2014 Art 17(1).
- Where directors realise that company has committed a breach of continuing obligations it must promptly contact FCA in order to seek guidance on how to resolve issue.
- DTR 6.3: Regulatory Information Service (RIS) - Issuer should comply with disclosure requirements by using RIS to disseminate information to market - RIS qualifies as a PRIMARY INFORMATION PROVIDER.
- RIS then circulates information received from issuer to SECONDARY INFORMATION PROVIDERS (e.g. Reuters/Bloomberg) which then make the disclosed information available to market users/public/journalists.
- DTR 6.3.7R: Form of Communication - Regulated Information must be communicated to an RIS in a form which makes clear that the information is 'Regulated Information' + clearly identifies the issuer concerned/subject matter of Regulated Information + time/date of communication of the Regulated Information to the RIS.
- 'Regulated Information' - All information which must be disclosed under EU Transparency Directive + MAR Arts 17-19 + DTR's + LR's as part of a listed company's continuing obligations.
- DTR 1A.3.2R: Statements/Forecasts - Any statements/forecasts/other information amounting to 'Regulated Information' disclosed to an RIS must NOT be misleading/false/deceptive + must NOT omit important matters.
- MAR Art 17(1): Website Publication - Issuer must post + maintain on its website for at least 5 years, all inside information it is required to publicly disclose (10 years for financial reports under DTR 4.1.4R/DTR 4.2.2R(3)).
- LR 9.6.1R: Document Viewing facility - Listed company must forward to FCA for publication through document viewing facility 2 copies of all circulars/notices/reports/other documents to which the Listing Rules apply at time at which they are issued.
- LR 9.6.2R: Resolutions - Listed company must forward 2 copies of all resolutions passed at general meetings of listed companies (other than resolutions relating to ordinary business of company) as soon as possible after the general meeting has taken place.
- National Storage Mechanism (NSM) - Regulated Information must be forwarded to Morningstar Plc which operates the NSM - Morningstar Plc automatically receives all disclosures made to an RIS (i.e. no separate disclosure necessary where disclosure of inside information achieved by way of a disclosure to an RIS). (5) Insider Lists
- MAR 2014 Art 18(1): Insider Lists - Issuer or any person acting on behalf/on account of issuer must draw up a list of all persons who have access to inside information and who are working for them under a contract of employment or otherwise performing tasks through which they have access to inside information (e.g. accountants/credit ratings agencies).
- Purpose - Assists FCA when conducting enquiries into allegations of market abuse/insider dealing as FCA will seek to establish link between 'insider' who had access to the inside information (i.e. person on insider list) and person who traded in shares on basis of that inside information.
- MAR 2014 Art 18(2): Acknowledgement from Listed Insiders - Issuer/person acting on its behalf/account must take all reasonable steps to ensure that all persons on insider list acknowledge in wrong their legal/regulatory duties 4
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