Newsletter for primary market participants
December 2022 / No. 42
About this edition
Welcome to the 42nd edition of the Primary Market Bulletin (PMB).
The National Security and Investment Act
In this edition, we highlight the relationship between the UK Market Abuse Regulation (UK MAR), the Listing Rules and the National Security and Investment (NSI) Act 2021. The NSI Act came into force on 4 January 2022, and it allows the Government to review acquisitions that could harm the UK’s national security.
What is the National Security and Investment Act?
The NSI Act is the Government’s system to scrutinise and – where necessary – intervene in qualifying acquisitions that could harm the UK’s national security. It is administered by the Investment Security Unit in the Department for Business, Energy, and Industrial Strategy (BEIS).
If the Secretary of State for BEIS reasonably suspects that an acquisition meets the criteria to be a ‘qualifying acquisition’ and that it has given rise to, or may give rise to, a risk to national security, the acquisition can be ‘called in’ for scrutiny. There is also a legal requirement for an issuer to make a mandatory notification to BEIS when a proposed acquisition is in respect of a ‘qualifying entity’ in one of 17 defined sensitive areas of the UK economy and where the acquirer gains a certain level of control over the entity, such as exceeding certain thresholds in shares or voting rights.
The 17 areas are:
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Computing Hardware
- Critical Suppliers to Government
- Cryptographic Authentication
- Data Infrastructure
- Military and Dual-Use
- Quantum Technologies
- Satellite and Space Technologies
- Suppliers to the Emergency Services
- Synthetic Biology
These acquisitions are known as ‘notifiable acquisitions’. Issuers must obtain approval from the Secretary of State before a notifiable acquisition is completed, otherwise the acquisition is void.
Issuers need to carefully consider whether a proposed acquisition is notifiable under the NSI Act. Further information on which acquisitions qualify, those that will require mandatory notifications and the process following notification can be found on the Government’s website.
NSI and Inside Information under UK MAR
Interim or final orders made by the Secretary of State under the NSI Act are not published by the Government. Final orders (but not interim orders) are subject to a publication notice, on the Government’s website, that makes public the fact of the order and reasons for it, but the order itself is not made public. This will not preclude an issuer from complying with its disclosure obligations. However, under the NSI Act there is a possibility that the Secretary of State could include a non-disclosure requirement as part of an interim or final order. Non-disclosure requirements are expected to be uncommon.
Issuers are reminded that they need to continue to consider their obligations under UK MAR to disclose inside information when acquisitions are subject to review, assessment or in relation to interim or final orders under the NSI system.
Inside information under UK MAR is information, which is of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments (See UK MAR, Article 7 (Inside Information)).
Inside information can also be considered as information that a reasonable investor would be likely to use as part of the basis of his or her investment decisions.
Issuers should contact BEIS ([email protected]) and the FCA if they consider that any information in interim or final orders could constitute inside information under UK MAR and if BEIS is considering imposing conditions requiring the non-disclosure of that inside information on national security grounds.
If this were to be the case and inside information is not disclosed when it should be under UK MAR, the FCA may need to consider the suspension of the listing of the issuer’s securities under the Listing Rules to protect the smooth operation of the market or to protect investors. For this reason, issuers are encouraged to engage with BEIS and FCA at an early stage to discuss any potential issues.
Notifiable acquisitions which are completed without the prior approval of the Secretary of State are legally void under the NSI Act. Completing a notifiable acquisition without Secretary of State approval, without reasonable excuse, is an offence under section 32 of the NSI Act that could result in civil or criminal penalties.
However, where a notifiable acquisition has been completed without first notifying BEIS, issuers can make a retrospective validation notification to BEIS. BEIS is also able to proactively and retrospectively review acquisitions to consider whether the acquisition should have been notified, and if so, to assess whether to approve the acquisition under the NSI Act.
Issuers will need to consider whether the void status of an acquisition, which has not been notified in accordance with the NSI Act, would constitute inside information under UK MAR.
Issuers should contact BEIS ([email protected]) if they have failed to properly notify an acquisition under the NSI system, and FCA to discuss any resulting disclosure or Listing Rules obligations.
Key reminders for issuers
We would like to:
- remind issuers that they need to continue to consider their obligations under UK MAR to disclose inside information when acquisitions are subject to review or assessment under the NSI Act system
- encourage issuers and their advisers to make sure they are aware of their obligations under the NSI Act to notify relevant acquisitions to BEIS to avoid the potential impact on their securities and the market caused by an acquisition being void
- encourage issuers to contact BEIS or the FCA where they identify any potential issues with complying with their disclosure obligations under UK MAR or the Listing Rules
- refer issuers to the Government’s website for more information on the NSI system
Unlawful disclosure by Sir Christopher Gent
On 5 August 2022, the FCA imposed a financial penalty of £80,000 on Sir Christopher Gent, former Chairman of Convatec Group plc (Convatec), for unlawfully disclosing inside information, in breach of Article 10 of the EU Market Abuse Regulation (Article 10 and MAR). This action has generated market and media commentary about both the specific case against Sir Christopher and also about Article 10 of MAR in general.
In this article we describe some key features of the FCA’s decision in this case and also describe some general themes arising, and concerning behaviours identified, in enquiries that the FCA’s Primary Market Oversight department has carried out recently in respect of suspected unlawful disclosures.
The Final Notice
Convatec is a premium-listed issuer and in his role as non-executive Chairman, Sir Christopher was responsible for governance over Convatec’s market announcements. In October 2018, Sir Christopher disclosed inside information concerning a revision of Convatec’s financial guidance and the retirement of its CEO to senior individuals at two of the company’s major shareholders. This unlawful disclosure took place 5 days before Convatec released a regulatory announcement disclosing this information to the market.
In issuing the Final Notice, the FCA accepted that Sir Christopher acted negligently and had no personal financial motive for making the unlawful disclosures. It also took into account that: when he made the unlawful disclosure, Convatec had not formally classified the information as inside information; Sir Christopher had informed another Convatec board member and one of its brokers that he was intending to contact or had contacted the major shareholders; Sir Christopher imposed confidentiality and no-dealing obligations on the individuals to whom he made the disclosures (and Convatec already had a relationship agreement to that effect with one of the shareholders).
Rules and guidance
Annex A to the Final Notice contains a statement of the law and guidance relevant to the outcome against Sir Christopher. Annex B to the Final Notice (which contains a detailed summary of the key representations made by Sir Christopher which the FCA has not accepted and the FCA’s conclusions in respect of them) cites other relevant law and guidance.
Of particular note for the purpose of this article are the following:
- Article 10 of MAR provides: '…unlawful disclosure of inside information arises where a person possesses inside information and discloses that information to any other person, except where the disclosure is made in the normal exercise of an employment, a profession or duties.'
- Article 17(1) of MAR provides: 'an issuer shall inform the public as soon as possible of inside information which directly concerns that issuer...'
- Recital 19 to MAR states: 'This Regulation is not intended to prohibit discussions of a general nature regarding the business and market developments between shareholders and management concerning an issuer. Such relationships are essential for the efficient functioning of markets and should not be prohibited by this Regulation.'
- Recital 23 to MAR concerns the prohibition against insider dealing and states its essential characteristic, '…consists in an unfair advantage being obtained from inside information to the detriment of third parties who are unaware of such information and, consequently, the undermining of the integrity of financial markets and investor confidence.'
- Chapter 1.4.5 of the FCA’s Code of Market Conduct includes a list of factors to be taken into account in determining whether or not a disclosure is made by a person in the proper course of the exercise of his employment, profession or duties. This includes whether the disclosure is accompanied by the imposition of confidentiality requirements upon the person to whom the disclosure is made and is reasonable in both broad and certain specific purposes.
- Chapter 2.5.7 G (2) of the FCA’s Disclosure Guidance and Transparency Rules provides: 'Selective disclosure cannot be made to any person simply because they owe the issuer a duty of confidentiality.'
- For the purposes of this article it is important to note the FCA’s application of the decision of the ECJ in Grongaard and Bang (Case C-384/02  ECR I-9939), in which the ECJ interpreted the exception to the rule in relation to non-disclosure of inside information to be one that must be interpreted strictly, such that the disclosure of such information is justified only if it is 'strictly necessary for the exercise of an employment, profession or duties and complies with the principle of proportionality'.
We set out below what we consider to be the key issues relating to unlawful disclosure that arise from the Final Notice.
Readers should note that we shall not in this article address the FCA’s decision that the information disclosed was inside information – an obvious pre-cursor to the decision that Article 10 had been breached - which is discussed in detail at paragraphs 5.4 to 5.19 of the Final Notice and also in Annex B where the FCA’s rejection of Sir Christopher’s representations on that issue is explained.
This article is concerned only with the FCA’s decision that inside information was unlawfully disclosed.
- As explained in its Recital 19, MAR does not prohibit discussions of a general nature between an issuer and its shareholders. However, Recitals 23 and 24 to MAR explain that the purpose of MAR – protecting the integrity of the financial market and enhancing investor confidence – is based on the assurance that investors will be placed on an equal footing. No investor should be given an unfair advantage by the misuse of inside information. This is the context in which the FCA has viewed Sir Christopher’s disclosures.
- Whilst engaging with, and fostering good relations with major shareholders may be considered part of a Chair’s duties, when Sir Christopher made the disclosures he was not doing so in the normal exercise of his employment, profession or duties for the purposes of Article 10. As set out in the Final Notice (para 5.21) the disclosures were not necessary for Sir Christopher to perform his functions. As the FCA’s investigation discovered, his primary objective in making the disclosures was to forewarn the two specific major shareholders of imminent events.
- Sir Christopher’s actions were considered in the light of his own considerable experience and position, having received relevant training on EU MAR. In this context, he could not justify the disclosures on the basis that Convatec (having engaged its brokers) had not formally classified the information as inside information and that he had not been warned against the disclosures by another Convatec board member and one of the company’s brokers, despite having discussed the disclosures with them.
- Imposing confidentiality and no-dealing obligations on the recipient of inside information does not render a disclosure of inside information lawful if the disclosure was not reasonable (or, applying Grongaard and Bang, strictly necessary) in the first place. This is explained at DTR 2.5.7 G (2) which provides examples of when selective disclosure of inside information (including to major shareholders) may be permissible, none of which applied to Sir Christopher’s disclosures.
Themes from FCA Market Oversight enquiries into unlawful disclosure
Whilst the FCA’s Enforcement division publishes disciplinary outcomes into market abuse, such as the Final Notice against Sir Christopher Gent, the source of such Enforcement outcomes is enquiries carried out by the FCA’s Market Oversight directorate. In particular, the FCA’s Primary Market Oversight department (PMO) carries out numerous enquiries into suspected unlawful disclosures of inside information by issuers, directors, advisers and other parties.
Certain situations and types of behaviour crop up repeatedly in our enquiries and PMO concludes that they clearly present a particular risk of unlawful disclosure of inside information.
We describe below some such behaviours and situations, in order that issuers can consider how they can mitigate or avoid such risk. Issuers should bear in mind the following law and rules which are critical to our observations below:
- Article 17(1) of MAR requires inside information to be disclosed as soon as possible to the 'public'.
- Article 17(1) of MAR forbids issuers from combining the disclosure of inside information with marketing material.
- DTR 6.3.3 R requires issuers to entrust a Regulatory Information Service (RIS) with the disclosure of inside information – an issuer’s website or social media account alone will not suffice.
- DTR 2.5.9 G guides that, 'An issuer should bear in mind that the wider the group of recipients of inside information, the greater the likelihood of a leak…'
1. Social media
In recent years issuers have sought to adopt and sometimes pioneer innovative communication opportunities allowed by social media to release important information and market their products and services. Ease of communication has led investors to want and sometimes expect immediate access to issuers’ executives. In recent years PMO has opened numerous enquiries into suspected disclosure of inside information via issuers’ social media offerings, particularly Twitter, or in direct communications between issuers’ executives and investors through open or private social media channels. When developing their communication and social media offerings issuers should remember that inside information must be disclosed via RIS (which ensures disclosure to the 'public') and cannot be disclosed by social media alone. Furthermore, inside information cannot be disclosed in a manner which combines the information with marketing material.
2. Mainstream media
PMO has opened numerous enquiries, and indeed referred to Enforcement, instances of suspected unlawful disclosure where issuers, through their executives or communications departments, have leaked significant (and possibly inside) information to mainstream media outlets, often resulting in press articles publicised before the requisite RIS announcement has been issued. The FCA understands that issuers will want to develop proactive and successful media strategies and will need to pass information to high-profile media outlets for this purpose. However, this does not justify leaking inside information and before any such communications the issuer must consider very carefully whether the information to be disclosed is inside information. In the FCA’s view such disclosures will very rarely, if ever, be made in the normal exercise of an employment, a profession or duties for the purposes of Article 10 of MAR. Furthermore, where a press article containing the inside information is subsequently published, the FCA does not consider it a significant mitigant that the article was published outside market hours, which is a common feature of our enquiries.
PMO has opened numerous enquiries into potential leaks of inside information regarding issuers’ fundraising activities, such as placings, subscriptions and rights issues. Often such leaks are in respect of smaller issuers and are reported on bulletin boards or smaller media outlets or blogspots. It is often not possible for PMO to determine the source of such leaks although in most instances it seems likely that the source is not the issuer itself, whose fundraising may be damaged by the leak. Bearing in mind the guidance at DTR 2.5.9 G, issuers can protect themselves from such behaviours by putting in place tight systems and controls around fundraisings, restricting access to the information as far as possible, creating proper MAR-compliant insider lists and insisting that their advisers do the same and follow wall-crossing procedures as set out in Article 11 of MAR.
4. Analyst and media briefings
While executives will often be briefed on market disclosure obligations prior to such events, PMO continues to open enquiries into suspected unlawful disclosures by issuers’ senior executives in analyst briefings, earnings calls or media events. Typically, troublesome disclosures have arisen where executives are unsure about the detail of the results being presented, speak unscripted or where they are drawn off script in Q&A sessions. Issuers are reminded that analysts do not represent “the public” for the purposes of MAR and that its executives must be thoroughly prepared for market and media events to avoid a selective disclosure of inside information to people attending the event
Systems and controls
In our enquiries PMO typically asks issuers to send us their written policies and procedures for handling inside information and, if the relevant disclosure has taken place over social media, their social media policies.
Our general observations here are that, whilst it is comforting that all issuers we have questioned have some sort of written policies and procedures in place, they vary in quality. Whilst some are cursory, many are lengthy reproductions of MAR and the relevant FCA rules and guidance which will be difficult for relevant employees and executives to digest and put in context.
We have not seen a written policy or procedure that puts the issuer’s (and its employees’ and executives’) legal obligations in the context of its day-to-day activities and identifies practical situations/behaviours that create risk. Nor have we seen any social media policy that explicitly recognises the specific risk of unlawful disclosure of inside information through the improper use of social media.
Issuers should therefore consider whether their written policies and procedures are adequate to address the risks identified in this article and update and socialise them as necessary.
Cash shells and special purpose acquisition companies (SPACs) on reverse takeovers
In this edition we remind shell companies (which includes companies that are cash shells or SPACs) of our rules and guidance in relation to reverse takeovers. This information will also be of relevance to any issuer which may carry out a reverse takeover.
FCA’s rules and guidance for cash shells and SPACs on reverse takeovers
Recently it has come to our attention that shell companies may not be properly applying the definition of a reverse takeover to a prospective transaction or may not have considered that a transaction the company is contemplating may potentially be a reverse takeover. As a consequence, some shell companies may not have contacted us to discuss whether a suspension was appropriate and applied to us to be cancelled and re-admitted to listing post completion of the transaction.
Shell companies as defined in LR 5.6.5A R of the Listing Rules are companies whose assets consist solely or predominately of cash or short-dated securities, or whose predominant purpose or objective is to undertake an acquisition or merger, or a series of acquisitions or mergers. Under the definition in LR 5.6.5A R, shell companies include cash shells and SPACs.
Given the purpose of a SPAC is, and the purpose of a cash shell may be, to identify acquisition opportunities, the FCA’s rules around reverse takeovers will be relevant for all such entities and of paramount importance in ensuring that they comply with their continuing obligations.
We have therefore written to directors of shell companies with securities listed on the Official List with the information set out below to remind them of their obligations.
Definition of a reverse takeover
As per LR 5.6.4 R, a reverse takeover is defined as a transaction, whether effected by way of a direct acquisition by the issuer or a subsidiary, an acquisition by a new holding company of the issuer or otherwise, of a business, a company or assets:
- where any percentage ratio is 100% or more; or
- which in substance results in a fundamental change in the business or a change in board or voting control of the issuer
The issuer referred to in the definition above is a listed company.
In particular, please note that the definition of a reverse takeover in LR 5.6.4 R is broad and refers to a 'transaction'. In this context, it is not just an acquisition of a company's entire issued share capital that would be caught but is likely to include any transaction of an acquisitive nature.
This could include an acquisition of assets such as the issuance of a loan, a purchase of a minority stake or entrance into a joint venture arrangement.
When calculating the percentage ratio, the issuer must apply the class tests and our rules on the aggregation of transactions in LR 10.2.10 R.
For a shell company, the percentage ratios of any transaction are likely to be 100% or more because, in applying the class tests as per paragraph 8 R (5) of LR 10 Annex 1, the cash and short-dated securities held by the shell company must be excluded in calculating its assets and market capitalisation.
In addition, we will generally consider that any form of transaction undertaken by a shell company will change the nature of its business and therefore result in a fundamental change in its business. Further guidance is set out in LR 5.6.5 G on factors the FCA considers as being indicators of a fundamental change.
As a result, given the nature of the companies and the wide scope of our rules, it is often the case that the first transaction that a shell company enters will constitute a reverse takeover.
Impact of a reverse takeover
Where a shell company proceeds with a reverse takeover there will be a number of impacts as follows.
Suspension of listing
Generally, when a reverse takeover is announced or has leaked, there will be insufficient publicly available information in the market about the proposed transaction and the shell company will be unable to assess accurately its financial position and inform the market accordingly. As a result, the FCA will often consider that a suspension of the listing of the shell company's shares will be appropriate (LR 5.6.8 G).
An exception will be where a shell company is an issuer which falls within LR 5.6.5A R (2) and confirms that it meets certain conditions and has made certain disclosures in its admission prospectus such that we are satisfied that the shell company has sufficient measures in place to protect investors and so that the smooth operation of the market is not temporarily jeopardised (LR 5.6.8 G and LR 5.6.18A G to LR 5.6.18F R).
We remind issuers of Listing Principle 1 (LR 7.2.1 R), which requires that a listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations.
Issuers may wish to include a plan for contacting the FCA in order to discuss whether a suspension is appropriate or to request a suspension, as part of any planning they may do when considering any potential transaction.
Cancellation and re-admission
We will generally seek to cancel the listing of an issuer's shares when the issuer completes a reverse takeover (LR 5.2.3 G and LR 5.6.19 G). If the issuer wants its shares to remain listed and admitted to trading post completion, it will need to apply to us to be re-admitted to listing as well as making appropriate arrangements with the operator of the relevant market about its re-admission to trading.
The application for re-admission to listing and to trading on a regulated market is most likely to trigger the requirement for the issuer to publish a further prospectus and an eligibility review. The purpose of requiring re-admission is to ensure that ineligible companies cannot remain listed post completion of a reverse takeover.
Please note that a company applying for re-admission will need to comply with our transitional provisions for shell companies in relation to market capitalisation under LR 2.2.7 R (1) as set out in LR TR 16.
Early engagement on reverse takeovers
A listed shell company must contact us (LR 5.6.6 R) as early as possible:
- before announcing a reverse takeover which has been agreed or is in contemplation, to discuss whether a suspension is appropriate, or
- where details of the reverse takeover have leaked, to request a suspension
Early engagement with us is particularly important in circumstances where the issuer intends to pursue the transaction or has reached a stage where the transaction can be described as being in contemplation (LR 5.6.7 G).
A decision to suspend listing can have a significant market impact and so early engagement, preferably before the point where a reverse takeover can be considered in contemplation, is essential. In these circumstances, issuers should contact the Primary Market Monitoring emergency line on 020 7066 8354 or email [email protected].
We would also like to remind issuers of the need to ensure that they consider Listing Principle 2 (LR 7.2.1 R), which requires issuers to deal with us in an open and co-operative manner, when considering the appropriate time to contact us.
Where our rules are not complied with
Issuers should be aware that in the event we suspect a breach of our rules has occurred we may decide to open an investigation via our Enforcement division. Such an investigation could include both the listed company and its directors in its scope.
Were such an investigation to establish that a breach had occurred then the FCA can impose a range of penalties, including financial penalties.
Separately, in order to be re-admitted to listing, the company's securities must be eligible for listing. As part of assessing eligibility for listing we will review the historic compliance of the company and its directors with our rules and may refuse a listing where we consider such a listing would be detrimental to investors' interests (LR 2.1.3 G). Therefore, the extent to which a company and its directors complied with our rules, including around reverse takeovers, prior to the transaction may affect the eligibility of the enlarged company for listing.
Issuers should also note that any non-compliance may affect the eligibility of other new applicants to listing with which the directors are connected.
Written requests for guidance
If issuers are in any doubt whether any actions by the company may constitute a reverse takeover, they can submit a request for written guidance via our electronic submission system (ESS) or contact our general administrative line on 020 7066 8348.
Structured digital reporting: Improving quality and usability
On 23 September 2022, the Financial Reporting Council’s (FRC) Lab released a report 'Structured Digital Reporting – Improving Quality and Usability'. The report identifies lessons learnt from the first year of mandatory structured digital reporting under the TD ESEF regulation.
The report was also discussed at a joint FRC FCA Webinar on 8 November 2022.
The Lab’s review found many companies have risen to the challenge of producing a report in the new digital format. However, in the Lab’s view there remains much to be done as data quality and usability remain below the level expected for companies in a leading capital market.
We encourage listed companies and their advisers to examine the report. It also includes a number of better practice examples for companies to consider and a reminder that the FCA’s covid-related timetable extension for the filing of annual reports has ended.
We have summarised the report’s findings below.
DTR 4.1.14 R requires companies in scope to produce their annual financial reports in the electronic reporting format specified in the TD ESEF regulation, the UK’s on-shored version of the ESEF Regulatory Technical Standard. With structured electronic format mandatory for reporting periods starting on or after 1 January 2021, the Lab reviewed a sample of UK filings using public data and data made available by the FCA. In addition, the Lab engaged with companies and a range of stakeholders including tagging software and service providers, design agencies and assurance providers, to gather feedback and identify areas for improvement.
The Lab focused on companies’ process for preparing and submitting structured reports, the usability and design of the reports and XBRL tagging, highlighting what they were pleased to see companies are doing and what many companies need to improve, and we have grouped our summary under the headings below.
Pleased to see:
- companies rising to the challenge to produce a report in line with the new requirements
- high use of the FCA’s test facility to iron out issues ahead of the final submission
- some examples of companies providing disclosures about governance and internal and external assurance process
Many companies need to improve:
- the naming and structure of file(s) submitted to the National Storage Mechanism. This was the cause of many rejected filings
- their review and governance processes — more engagement and education is needed, including at the management and board levels
Usability and design
Pleased to see:
- improvement in the design of the structured reports – most issues with fonts and images displaying incorrectly have been addressed
- some companies filed their structured report relatively early in the reporting season
- many companies put the structured report on their website
More companies need to improve:
- the usability of the report, by making a validated report available on a company's website with an inline viewer
- the timing of their report — the deadline is reverting to 4 months after year-end, which means many companies may need to speed up the process from this year
Pleased to see:
- the use of ‘concealed’ tags has largely disappeared.
More companies need to improve:
- their selection of tags, including by focusing on the accounting meaning of their disclosures and by avoiding unnecessary extensions
- the selection of appropriate anchors for extensions
- the completeness of calculations
In the first year of mandatory structured reporting, tagging was limited to the primary financial statements and a few mandatory note tags.
For financial years starting on or after 1 January 2022, companies are also required to tag the notes, including accounting policies. The report recommends that companies start testing text block tagging now in readiness for this additional requirement.
Keeping up to date
Issuers can find the latest information on structured digital reporting on our website. We have recently added a section to our Filing of Structured Annual Financial Reports page regarding the 2022 European Single Electronic Format (ESEF) Reporting Manual.
We plan to consult in early 2023 on updating our rules and guidance, which will reference the proposed addition of the ESEF 2022 taxonomy and the UKSEF 2023 approach (see FRC UKSEF tagging guide and developers’ guide).
We expect our system to be set up to process these in January 2023.