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PROPOSED CHANGES TO THE LISTING RULES
On 21st May 2004, the FSA published Consultation Paper CP04/8
("CP04/8"), inviting comments on proposed miscellaneous
amendments to the Handbook. It proposes amendments in seven
areas, including the following changes to the Listing Rules:-
1. to require shareholder approval before the cancellation
of a listing, in order to provide adequate protection to minority
shareholders; and
2. in relation to the responsibilities of a company's auditors
under the Combined Code.
1 Cancellation of Listing
CP04/8 accelerates the FSA's proposal, first raised in Consultation
Paper CP203 entitled "Review of the Listing Regime"
in October 2003 ("CP203"), to introduce a requirement
that, save where the UKLA otherwise agrees under Rule 1.11,
any issuer that wishes to cancel the listing of its shares
or preference shares must firstly obtain the approval of at
least 75% of the total votes cast by its shareholders in general
meeting. This proposed requirement is in addition to the current
requirements in the Listing Rules that an issuer must notify
a regulatory information service ("RIS") and also
send a circular to the shareholders of those securities, giving
at least 20 business days of the intended cancellation. It
should be noted that the circular sent to shareholders under
the present regime is solely for information purposes and
that currently no shareholder approval is required prior to
cancellation.
In CP203 the FSA expressed a concern that the current regime
does not provide adequate protection for minority shareholders,
who may be forced to sell their shares at a price they consider
to be unfairly low, or alternatively may be forced to hold
unlisted securities. The FSA has therefore put forward the
proposal that shareholder approval must firstly be obtained
before the cancellation of a listing takes place.
Three situations were identified in CP203 where shareholder
approval would not be required:-
| 1. |
in offer situations where an offeror has
made clear its intention to cancel the securities of the
target in the offer document, and the offeror received
acceptances from 75% of shareholders; |
| 2. |
in schemes of arrangement, where shareholder
approval and the sanction of the Court has been obtained;
and |
| 3. |
when the issuer is moving to another quoted
market, as minority shareholders would still then have
a market for their shares. |
The responses to CP203 were that the vast majority (85%)
supported the proposal to require shareholder consent when
an issuer wishes to cancel its listing. The main reason cited
for this support was that the decision to cancel the listing
of shares should be one for the shareholders, rather than
the management, of a listed company.
CP04/8 therefore follows the proposal in CP203 proposing a
requirement that, save where the UKLA otherwise agrees under
Rule 1.11, any issuer that wishes to cancel the listing of
its shares or preference shares must obtain the prior approval
of at least 75% of the total votes cast by its shareholders
in general meeting. The FSA does not, however, propose:-
| (a) |
To require the approval of a majority of
independent shareholders. The FSA argues that this would
be going too far and could result in a small minority
of shareholders wielding disproportionate power over the
running of the Company. By contrast the FSA argues that
its proposal is an appropriate balance between the protection
of investors and a restriction on the activities of the
Company. |
| (b) |
To extend the proposal to issuers of debt
securities, securitised derivatives and other securities.
However, issuers would still be expected to notify a Regulatory
Information Service in respect of these three categories
of securities and, in respect of a debt securities only,
issuers would also be required to notify the holders of
the relevant securities. |
The FSA states that the adoption of the proposed rules will
contribute to investor protection by increasing the influence
they have in a decision to cancel a company's listing, a decision
that can have a significant effect on the value and liquidity
of their investment. There is however an associated cost to
the listed entity in complying with this proposed rule change
and holding an Extraordinary General Meeting. It is also worth
noting that AIM Companies had a similar provision introduced
form 1 December 2003, as reported in our January 2004 Update.
2 Responsibility of the company's auditors under the Combined
Code
A new Code on Corporate Governance, incorporating the review
of non-executive directors by Sir Derek Higgs and a review
of audit committees by Sir Robert Smith, was published in
July 2003 by the Financial Reporting Council (the 2003 Code),
superseding and replacing the Combined Code.
The Listing Rules currently require an issuer to provide a
statement in its annual report and accounts explaining how
it has complied with the provisions of the Combined Code and
if it has not complied with them, or with only some of them,
to provide reasons for non-compliance (known as the Comply
or Explain Statement). In addition, the Listing Rules require
the Comply or Explain Statement to be reviewed by the issuer's
auditors in relation to certain provisions of the Combined
Code. Under the 2003 Code, there are now 25 objectively verifiable
provisions (out of a total of 48 provisions). The FSA recognised
that in the context of the introduction of the 2003 Code it
would be appropriate to review the role of auditors, so that
investors are clear as to which provisions are subject to
auditor review and which ones are not.
The FSA identified five possible options for the role of auditors:-
| 1. |
To require auditors to review all of the
25 objectively verifiable provisions. |
| 2. |
To require auditors to review the ten provisions
relating to audit and accountability. |
| 3. |
To discontinue the review requirement with
respect to objectively verifiable provisions and, instead,
require the auditors to consider whether the directors'
statement about internal control (provision C2.1) has
been made after 'due and careful enquiry'. |
| 4. |
To discontinue the review requirement with
respect to objectively verifiable provisions and instead
require the auditors to consider whether the directors'
Comply or Explain Statement has been made after 'due and
careful enquiry'. |
| 5. |
Require a combination of Options 2 and 4. |
In the light of the recent high profile corporate failures
both in Europe and in the U.S., in particular in relation
to misstatements of companies' annual accounts, the FSA wanted
to at least to maintain its current standards and considered
raising them. The FSA has concluded that its preferred approach
would be Option 5; i.e. to require auditors to review the
ten provisions relating to audit and accountability and
also to require auditors to consider whether the Comply or
Explain Statement has been made after due and careful enquiry
by the directors. However, the FSA noted that the DTI has
recently issued a consultation paper setting out its proposals
for the requirement to include an Operating and Financial
Review (OFR) in annual accounts and reports, which also involves
a proposed 'due and careful enquiry.' The FSA further noted
that the DTI's proposal has not been greeted with enthusiasm,
and so it has opted to proceed with Option 2. The FSA has
however also stated that it remains its intention to review
the proposal set out in Option 4, once there is more clarity
over the approach to be taken in respect of the OFR.
Again, as with the proposal regarding de-listing, there is
an additional concern that compliance with this proposal would
increase the costs for the listed entity. Also, the proposals
are currently expected to be adopted in November 2004 although
the consultation also includes whether there should be a transitional
period for companies whose reporting date is before 31 December
2004.
If you require further information on any matter covered
in this note, please contact your principal contact at Charles
Russell or Simon
Gilbert, Katy
Knight, Clive
Hopewell or Alexander
Keepin (London), Francis
Rundall or Richard
Norton (Cheltenham) or Geoff
Sparks (Guildford) on 0207 203 5000.
Please note that the summaries above are a general indicative
guide only. They are not exhaustive. This information has
been prepared by the firm as a service to our clients. As
it is a general guide, we recommend that you seek professional
advice before taking action. No liability can be accepted
by the firm for any action taken or not taken as a result
of this information. The firm is not authorised under the
Financial Services and Markets Act 2000 but we are able in
certain circumstances to offer a limited range of investment
services to clients because we are members of the Law Society.
We can provide these investment services if they are an incidental
part of the professional services we have been engaged to
provide.
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