Newsletter for primary market participants
August 2020/No. 30
About this edition
Welcome to the 30th edition of the Primary Market Bulletin (PMB).
This edition starts with general news and information, moving on to the latest changes we have made, or are proposing to make, to our Knowledge Base.
We include a reminder on the importance of the PDMR regime under MAR, give updates on recent changes to the Prospectus Regulation and comment on the prospectus requirements for Global Depository Receipts.
We also finalise technical notes we consulted on in PMB 24, consult on a new technical note on prospectus requirements for schemes of arrangement and give further updates of our technical and procedural notes to reflect the EU Prospectus Regulation.
Directors’ dealings – importance of the PDMR regime under MAR
In December 2019, the FCA fined Mr Kevin Gorman, a former Managing Director at Braemar Shipping Services plc (the issuer), £45,000 for failure to notify his trades in the issuer’s shares during 2016 and 2017 as required under Article 19 of the Market Abuse Regulation 596/2014 (MAR). This is the first enforcement action we have taken against a person discharging managerial responsibilities (PDMR) for failure to make such notifications since MAR came into force in 2016.
With this public sanction, we send a strong message to PDMRs and issuers about the importance of this regime. The key purposes of the regime are to promote transparency about transactions made by PDMRs in an issuer’s financial instruments and to prevent market abuse, particularly insider dealing. The prompt notification to issuers and the FCA of transactions conducted by PDMRs is also a means by which we supervise markets.
We want to reinforce this message and remind PDMRs and persons closely associated with them (PCA) of their obligations under Article 19 of MAR to notify issuers and the FCA of relevant transactions in a timely way. We also remind issuers of their obligations to make public, via regulatory announcements, all notifications received from PDMRs and PCAs.
The definition of a PDMR under Article 3(1)(25) of MAR includes a director on the board or a senior executive who has regular access to inside information relating directly or indirectly to the issuer and power to take managerial decisions affecting the issuer’s future developments and business prospects.
DTR3.1.2AG (2) also provides that a senior executive may fall within the definition of PDMR under MAR, irrespective of the nature of any contractual arrangements in place with the issuer, and notwithstanding the absence of such arrangements.
Transactions that should be reported
PDMR notifications must be made once aggregated transactions in a calendar year reach EUR 5,000.
Article 19(7) of MAR and Article 10 of Commission Delegated Regulation (EU) 2016/522 set out non-exhaustive lists of transactions that PDMRs and their PCAs should notify under the rules. Transactions that must be reported to the FCA and issuers include:
- acquisition, disposal, pledging, borrowing and lending of shares or other financial instruments
- the acceptance or exercise of a stock option, including of a stock option granted to managers or employees as part of their remuneration package, and the disposal of shares stemming from the exercise of a stock option
The European Securities and Markets Authority (ESMA) has also provided further information on PDMR and PCA transaction reporting in its Questions and Answers on MAR document.
Please take the time to read the rules and additional materials as this will help PDMRs and PCAs to better understand their obligations and comply with notification requirements under MAR Article 19.
Submitting PDMR/PCA notifications to us
Submit the notification via our Electronic Submission System (ESS) on our MAR pages, using the notification form and guide in the Managers’ transactions section.
Please submit the notification to us and to issuers promptly, and not later than 3 business days from the date of transaction.
We will provide further information on reporting requirements under the PDMR regime in future articles.
Prospectus Regulation – exemptions from the requirement to prepare a prospectus
On 31 December 2019, a new regulation to promote the use of SME (small/medium sized enterprises) growth markets came into force (the SME Regulation). The Regulation amended both the Prospectus Regulation and MAR. While the amendments to the Prospectus Regulation applied with the coming into force of the SME Regulation, the amendments to MAR will apply from 1 January 2021.
The Prospectus Regulation provides a number of exemptions from the requirement to publish a prospectus for the offer of securities to the public and the admission of securities to a regulated market.
Among others, these exemptions relate to securities offered in connection with a takeover by means of an exchange offer and securities offered, allotted or to be allotted in connection with a merger or division, provided that a document is made available to the public containing information describing the transaction and its impact on the issuer (Prospectus Regulation Art. 1(4) and (g) and Prospectus Regulation Art. 1 (5)(e) and (f)).
The SME Regulation, via Article 2, inserted into the Prospectus Regulation an amendment (Article 6a Prospectus Regulation), which limits this exemption to equity securities only and,
- in relation to takeovers, to cases where:
- equity securities are fungible with existing securities already admitted to trading on a regulated market prior to the takeover, and the takeover is not considered to be a reverse acquisition transaction, or
- the supervisory authority that has the competence to review the offer document has issued a prior approval of the document referred to in the exemption
- in relation to mergers or divisions, to cases where:
- the transaction is not considered to be a reverse acquisition transaction, and
- the equity securities of the acquiring entity have already been admitted to trading on a regulated market prior to the transaction or the equity securities of the entities subject to the division have already been admitted to trading on a regulated market prior to the transaction
As a result of the Financial Services and Markets Act 2000 (Central Counterparties, Investment Exchanges, Prospectus and Benchmarks (Amendment) Regulations 2020 (SI 2020/117), the FCA was designated in the Financial Services and Markets Act as the supervisory authority under Article 1(6a)(b) of the EU Prospectus Regulation for the purpose of issuing the approval of the exemption documents referred to in Article 1(4)(f) and (5)(e).
Prospectus Regulation – changes to the prospectus annexes
On 4 June the EU published Commission Delegated Regulation. This amends and corrects Delegated Regulation (EU) 2019/980 in relation to the format, content, scrutiny and approval of prospectuses. Some of the measures will apply retrospectively from 21 July 2019. The measures will enter into force following publication in the EU Official Journal.
Key amendments and corrections include:
- Convertible, exchangeable and derivative securities will no longer be subject to the equity disclosure content requirements, but instead will be subject to the lighter disclosure rules applicable to non-equity securities. This is effectively a reversion to the treatment under the Prospectus Directive.
- Amendments to Annexes 1, 3, 6 to 9, 24 and 25 to require that where audit reports on the historical financial information have been refused by the statutory auditors or where they contain qualifications, modifications of opinion, disclaimers or an emphasis of matter, such qualifications, modifications, disclaimers or emphasis be reproduced in full and the reasons given.
- Amendments to the Annexes for the EU Growth prospectus:
- to include placeholders for additional information which may be required about underlying shares, derivative securities and the consent given to use the prospectus, and
- to Annex 26 to clarify that a working capital statement should be included in an EU Growth prospectus issued by an issuer of equity securities, irrespective of its market capitalisation
- In the securities note for secondary issuances of non-equity securities, the description of the type, class, and amount of the securities being offered and/or admitted to trading, which is currently set out as category A, is moved to category B. This is because not all details of that information are known at the time of approving the base prospectus. Also, to align with the disclosure requirements for primary issuances, it is clarified that if the prospectus summary for a secondary issuance of retail non-equity securities includes a PRIIPS KID, that information should also be contained in the securities note. This is because the prospectus summary must be consistent with the other parts of the prospectus. Annex 16 is amended accordingly.
On the same day, the EU published Commission Delegated Regulation. This amends and corrects Commission Delegated Regulation (EU) 2019/979 in relation to regulatory technical standards underpinning the Prospectus Regulation.
Key amendments and corrections include:
- Issuers of debt securities which are convertible or exchangeable into third party shares are not required to publish a supplement to the prospectus in case of new annual audited financial statements, a change in control, a new take-over bid, a new significant financial commitment and a change in the working capital statement. This is to reinstate the position as under the Prospectus Directive.
- In Annex I of the Prospectus RTS Regulation, Table 3 (Cash flow statement for non-financial entities (equity securities)) is proposed to be replaced because the third year of cash flow information was omitted from the key financial information in the summaries of the prospectuses.
Global Depository Receipt (GDR) Facilities and the Prospectus Regulation
Market participants have asked for clarity as to whether ESMA’s Prospectus Q&A remain in force and, in particular how to apply the Prospectus Regulation to GDR facilities (an important area covered in the Q&A). In response, we confirm that the FCA’s approach to GDRs remains unchanged. For the avoidance of doubt, our approach to the key question of whether a further prospectus is required to cover fluctuations in the number of GDRs is in accordance with ESMA’s Q&A 77 on Prospectuses: ‘it is acceptable for an issuer applying for admission of GDRs to trading to produce a prospectus covering the admission of ‘up to’ a specified number of GDRs. The number of GDRs can be no more than the equivalent of 100% of the issued capital of the issuer at the date of the GDR prospectus, because they can only reflect the existing amount of the issuer’s shares. The prospectus will be valid for admission(s) for so long as the total number of GDRs in issue does not exceed the ‘up to’ limit set out in the prospectus.’
Please note ESMA published guidelines on disclosure requirements under the Prospectus Regulation on 17 July 2020, together with an explanatory statement confirming that the Q&A continue to apply.
However, if, between now and the expiry of the EU Withdrawal Implementation Period, ESMA publishes new guidelines or Q&A on this matter which have the effect of superseding or altering the approach set out in Q&A 77, we will reconsider our approach taking into account the new guidelines. Please contact us if you have any additional questions on how we apply the Prospectus Regulation to GDRs.
Consultation feedback and changes to the Knowledge Base
Outcome of guidance consultations in PMB 24 and published guidance
We have made the following changes to the Knowledge Base following consultation in PMB 24:
Category: Closed-ended investment funds
FCA/TN/409.2 – Master-feeder structures (Amendment)
We have received no comments on the suggested amendments and so finalise this in its current form.
FCA/TN/411.1 – Class testing changes to an investment management agreement where there are unquantifiable benefits (New)
We received comments on this technical note in a joint response from 2 parties. The respondents were supportive but highlighted a number of areas for further consideration.
One suggestion was to combine this technical note with our technical note on alterations to investment management fees (UKLA/TN/403.1). As this note already discusses changes to investment management agreements, we agree it makes sense to combine the proposed new technical note with the existing technical note to make it more convenient for market participants and advisers when considering these matters. The existing technical note UKLA/TN/403.1 effectively deals with changes where the benefits are quantifiable. The proposed new technical note deals with unquantifiable benefits. We have therefore added the 2 substantive paragraphs of UKLA/TN/403.1 verbatim into the text for the new technical note FCA/TN/411.1 with appropriate headings to clarify which parts of the note address quantifiable or unquantifiable benefits.
The combined note will be Primary Market/TN/403.2. We hope this will make it easier for users.
The respondents queried why we may also ask questions about any unquantifiable benefits to a related party, given our statement in FCA/TN/411.1 that a class test percentage would be zero if there is no quantifiable financial benefit to a related party. We want to clarify that we are not introducing a general principle that any material change is caught. Our experience has been that, without having a full understanding of all parts of a transaction, we cannot be confident that some element which has an economic impact has not been missed. We have clarified this in the note.
The respondents also considered our approach inconsistent in the treatment of the introduction of a termination fee versus an extension of an existing agreement on the same terms. The former would be subject to class testing under the related party rules, but the latter would not. The respondents thought this could give scope to issuers to structure arrangements to avoid the need for shareholder approval. We note that any termination fee payable in the latter scenario would have been part of the existing unchanged management agreement, rather than a new fee, so there has been no change to the level of fees payable. With regard to issuers structuring arrangements so as to avoid the need for shareholder approval, we expect premium listed issuers to act with integrity towards the holders and potential holders of its premium listed securities (LR 7.2.1A R). We have also tweaked the note to ensure there is no risk of misinterpreting the guidance where a specific contingent event may lead to a different fee outcome as this applies to any type of event, not solely a termination event.
Finally, in the new proposed note we stated that we recognise that there may be potential for future benefit depending on future value movements, but that any such potential benefit is speculative and so not quantifiable at the date of the amendment to the agreement. The respondents felt that this statement was inconsistent with UKLA/TN/403.1, which explains that where there is no definitive way of calculating the maximum value of the variation, the variation will be treated as uncapped and require shareholder approval under LR 11. Our treatment of fee changes for which a definitive maximum cannot be calculated has not changed, and we have amended the note to clarify this.
Proposed changes to our guidance
We are consulting on the following further proposed change to the Knowledge Base:
Category: Public offers, admission to trading and the marketing of securities
Primary Market/TN/606.1 – When a prospectus is required where securities are issued pursuant to Schemes of Arrangement
In PMB 20, we said that, as a result of our request for feedback in PMB 18 on proposed amendments to FCA/TN/602.2 arising from the new Prospectus Regulation, we had received requests for further guidance about applying the technical note on exemptions from the requirement to prepare a prospectus to cover ‘mix and match’ in the scheme of arrangement context. We said we would consider this request further as a separate piece of guidance. As a result of our considerations and further indications from market participants that additional guidance would be useful, we propose to publish a new technical note on which we are seeking feedback.
Prospectus Regulation – updated technical notes
- Supplementary prospectuses – Primary Market/TN/605.3
- Final Terms – Primary Market/TN/629.4
- Significant change statements – Primary Market/TN/628.3
- Choice of home member state under the Prospectus Regulation – Primary Market/TN/630.2
- Block Listings – Primary Market/PN/907.3
- Passporting – Primary Market/PN/905.3
- Review and approval of documents – Primary Market/PN/903.4
- Current trading and trend information – Primary Market/TN/625.2
- Directors' and management disclosures in share prospectuses – Primary Market/TN/626.2
- Exemptions from the requirement to produce a prospectus – Primary Market/TN/602.3