#10497 - Continuing Obligations - Equity Finance

CONTINUING OBLIGATIONS

Introduction

• The obligations that a company must comply with once its shares are listed are known as ‘continuing obligations’.

• The price of greater access to a market is the additional rules and regulations a listed company must adhere to. Ongoing compliance can lead to significant additional time and expense and scrutiny, and is an important consideration to consider when making a decision to list.

• The LPDT rules achieve the aims of continuing obligations by three methods:

1. Disclosure of information to the market and shareholders

2. Approval of key transactions by shareholders

3. Regulating information sent to shareholders

The sources of these continuing obligations are:

1. LR 9 – continuing obligations

2. DTR 2, 3, 4, 5, 7 and DTR 6.1 – disclosure and control of inside information, periodical financial reporting and continuing obligations

3. LR 10 – significant transactions involving listed companies

4. LR 11 – transactions with related parties

5. LR 13 – circulars to shareholders

A. DISCLOSURE REQUIREMENTS

• LR 9 requires a listed company to disclose to the public specific information relating to the company. A listed company must also observe the DTRs (DTR 1.1.1R and DTR 1A.1.1G).

• When complying with the LRs and DTRs, a listed co. must also ensure it abides by the Listing Principles set out at LR 7.2.1R. These LPs are designed to assist listed companies in identifying their obligations and responsibilities under both the LRs and DTRs (LR 7.1.3G).

• The most relevant LPs:

  • LP 2: A listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations.

  • LP 4: A listed company must communicate information to holders and potential holders of its listed equity shares in such a way as to avoid the creation or continuance of a false market in such listed equity shares.

Inside information

• DTR 2 requires listed companies to disclose inside information. Under DTR 2.2.1R, an issuer must notify a RIS asap of any inside information which directly concerns the issuer unless DTR 2.5.1R applies.

• Inside information is defined in s.118C FSMA:

  • Information of a precise nature;

  • Not generally available;

  • Relates directly/indirectly to the company;

  • If made public, would have a significant effect on the price of its qualifying investments.

• The ‘reasonable investor’ test in s.118C(6) is designed to determine whether inside information exists. Hence, the information is likely to be inside information if it would be likely to have a significant effect on price because it is information of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions.

  • See DTR 2.2.5G for further guidance on the reasonable investor test

• Exceptions to the obligation to disclose inside information immediately:

1. When there has been an unexpected and significant event (DTR 2.2.9(2)G) – a short delay may be acceptable, but a holding announcement should be made if there is a danger of inside information leaking before the facts and impact can be confirmed.

2. Where disclosure may prejudice the issuer’s legitimate interests (DTR 2.5.1R) – this is provided that the conditions of DTR 2.5.1R are met (omission will not be likely to mislead the public, any person receiving the information owes the company a duty of confidentiality, and the company can ensure the confidentiality of the information).

• DTR 2.5.3R: Legitimate interests may relate to negotiations in course where the outcome of the negotiations would be affected by public disclosure, or decisions taken which need approval of another body of the issuer to become effective.

• DTR 2.5.4G(1): Delay in public disclosure is not permitted where the information relates to an issuer’s financial difficulty or worsening financial condition.

• DTR 2.5.7G: Selective disclosure of information is possible to persons owing the issuer a duty of confidentiality – but such disclosure must be made in the normal course of the exercise of employment, profession or duties.

Specific disclosure requirements

• LR 9 and DTR 6 contain a number of rules requiring listed companies to make specific disclosures, some of which are considered here.

1. DTR 6.1.9R: Change in rights attaching to various classes of shares

2. LR 9.6.11R: Certain board changes must be notified to a RIS as soon as possible and in any event by the end of the business day following the decision

3. Disclosure of financial information – every listed company must produce financial results statements:

• Annual report and accounts (LR 9.8, DTR 4.1, DTR 7.2) – to be published within four months of the end of the financial year

• Half-yearly reports (DTR 4.2R) – to be published within two months of the end of each six-month period

• Interim management statement which contains an explanation of material events and transactions that have taken place (DTR 4.3R) – to be published once in every six-month period, between ten weeks after the beginning and six weeks before the end of the six-month period.

4. Dealings or holdings in company shares

Insider lists – ensuring compliance with LP 2

• Listed companies must maintain insider lists of personnel who have access to the listed company’s inside information (DTR 2.8.1R).

• DTR 2.8.7G: Staff working for an adviser to an issuer only need to be placed on the insider list if:

  • They are the principal contact of the issuer with the adviser;

  • They act on behalf of the issuer and are in direct contact with the issuer; and

  • They have access to inside information.

• DTR 2.8.1R and DTR 2.8.8G: Issuer must ensure that it makes effective arrangements for its advisers to maintain their own insider lists, and that advisers take necessary measures to ensure that any person whose name is on an insider list acknowledges the legal and regulatory duties entailed (DTR 2.8.10R) – i.e. issuers must ensure obligations are contained in the engagement/confidentiality letters entered into with advisers.

• DTR 2.8.3R: Contents of insider lists

• DTR 2.8.5R: Insider lists must be kept for five years

The process for making disclosures

• Disclosures are made by way of announcements. Issuers should use a RIS to disseminate information in accordance with DTR 6.3 (DTR 6.2.3G).

• DTR 6.3.7R states that Regulated Information must be communicated to a RIS in a way which makes clear that the information is Regulated Information and identifies clearly the issuer concerned, the subject matter of the Regulated Information and the time and date of the communication of the Regulated Information by the issuer.

• DTR 1.3.6R and 1A.3.3R: If a RIS is not open for business, the company must release the information to at least two national newspapers and at least two newswire services and to a RIS for release as soon as it opens.

• General disclosures made under the DTRs must also be placed on the issuer’s internet site:

  • Inside information announced by a RIS must be available by the end of the business day following the day of the RIS announcement (DTR 2.3.2R)

  • Inside information must be notified to a RIS before or simultaneously with publication of such inside information on its site (DTR 2.3.3R); and

  • For a year following publication, an issuer must post any information that it is required to disclose via a RIS (DTR 2.3.5R)

• LR 9.6.1R: The listed company must forward to the FCA for publication through the document viewing facility two copies of all circulars, notices, reports or other documents to which the LRs apply at the same time as they are issued.

• LR 9.6.2R: The listed company must forward to the FCA two copies of all resolutions other than those relating to ordinary business asap after the GM.

• DTR 4.1.4R, DTR 4.2.2R(3) and DTR 6.3.5R(3): Annual financial reports and half-yearly reports must be placed on the website for five years.

Consequences of breaching continuing obligations

• FCA can impose one or more of the following sanctions for failure to make disclosures under the LRs:

  • Require the issuer to provide to the FCA or publish such information as it considers appropriate to protect investors/ensure the smooth operation of the market (LR 1.3.2R)

  • Publish a statement censuring the issuer or director* (s.91(3) FSMA)

  • Suspend or cancel the issuer’s listing (LR 5.1, 5.2, s.77 FSMA)

  • Impose an unlimited penalty on the issuer or director (s.91(1) FSMA)

• FCA may impose the following sanctions for failure to make necessary disclosures under the DTRs:

  • Suspend trading of company’s shares (DTR 1.4, s.89L FSMA)

  • Statement of censure or financial penalty imposed on issuer and/or directors (s.89K, s91(1ZA), s.91(1B), s.91(3) FSMA)

• An issuer may also incur liability to investors as a result of untrue or misleading statements in, omissions from and delays in publishing ‘published information’ under s.90A and Schedule 10A FSMA.

  • Published information means any information published through a RIS – so liability could arise as a result of disclosures under DTR 2, announcements required by the LR, publications of annual accounts, etc.

  • Requires knowledge by a PDMR of the untrue/misleading statement or dishonest concealment of a material fact (para 3(2) Sched 10A and para 3(3) Sched 10A)

• False or misleading announcements may also give rise to further criminal or civil liability.

B. SHAREHOLDER RIGHTS

Notice periods for GMs

• Notice period for an AGM is 21 clear days (s.307A(1)(b) and s.360(a) CA 2006)

• Notice period for any other GM is at least 21 clear days but may be reduced to 14 clear days if following conditions are met (s.307A(1)(a) and s.360(1)):

  • General...