PLC QTRLY - Q4 2022

This is our regular quarterly update to help our listed company clients and other market participants keep up to date with key developments relevant to issuers on the Main Market and AIM market of the London Stock Exchange.

Pre-emption rights: Pre-Emption Group 2022 statement of principles and template resolutions

On 4 November 2022, the Pre-Emption Group published a revised Statement of Principles, together with template resolutions, for the disapplication of pre-emption rights following the recommendations of the UK Secondary Capital Raising Review.

The revised Statement of Principles has increased the limits for the annual disapplication of pre-emption rights to include:

• 10% of issued ordinary share capital to be issued on an unrestricted basis.
• An additional 10% of issued ordinary share capital to be used for "an acquisition or specified capital investment" either announced contemporaneously with the issue or which has taken place in the preceding 12 months and is disclosed in the announcement of the issue.
• Up to 2% of issued ordinary share capital to be used only for a follow-on offer to the company’s retail and other existing holders of securities not allocated shares under an issue made under either of the above authorities.

The effect of these changes is that the Pre-Emption Group's previous disapplication limit of 10% (5% unrestricted + 5% for acquisitions / specified investments) has been increased to 20% (10% + 10%), with the ability to make an additional follow-on offer of up to 2%.

As with the previous guidance, the disapplication of pre-emption rights should last no more than 15 months or until the company's next annual general meeting, whichever is the shorter period.

The revised Statement of Principles also includes new guidance in relation to so-called “capital hungry companies” that need to raise larger amounts of capital more frequently. The revised guidance states that such companies may seek additional disapplication authority, for use whether or not in connection with an acquisition or specified capital investment, and seek disapplication authority for a longer period.

The Pre-Emption Group has withdrawn its previous recommendation that companies limit any non-pre-emptive issues of shares for cash to not more than 7.5% in any rolling three-year period.

Companies are expected, each time they propose to undertake a placing using any general disapplication of pre-emption rights, to:

• Consult with major shareholders, to the extent reasonably practicable and permitted by law.
• Give due consideration to the involvement of retail investors and other existing investors not otherwise allocated shares in the offer.
• Provide an explanation of the background to and reasons for the offer and the proposed use of proceeds, including details of any acquisition or specified capital investment.
• As far as practicable, make the issue on a soft pre-emptive basis (meaning that the bookrunner for the issue of shares should allocate shares to investors in accordance with an allocation policy that seeks, to the extent possible within the constraints of the exercise, to replicate the existing shareholder base).
• Involve company management in the process of allocating the shares issued.

Within a week of completion of a non-pre-emptive issue under a general disapplication, companies are expected to publish a post-transaction report in the form set out in the revised Statement of Principles. Those details should also be included in the company's next annual report.

In their proxy voting guidelines for the 2023 AGM season, both Institutional Shareholder Services (ISS) and Glass Lewis have stated that they support the Pre-Emption Group's revised Statement of Principles and will not recommend votes against resolutions for authorities in line with these principles.

FRC reports key areas of supervisory focus for 2023/24

The FRC has announced its key areas of supervisory focus for 2023/24, including priority sectors, for corporate reporting reviews and audit quality inspections.

The Corporate Reporting Review team will conduct four thematic reviews during the next year:

• Insurance contracts (IFRS 17): The new standard on insurance contracts will have a significant effect on corporate reporting in the insurance sector.
• The FRC will review a selection of insurers’ 2023 interim accounts to identify compliance with IFRS 17 and examples of good disclosures.
• Large private companies: The proposed change to the definition of a Public Interest Entity will bring an enhanced regulatory focus on the largest private companies. The Government’s intended threshold is entities that exceed £750 million annual revenue and 750 employees. The FRC will review a selection of private companies’ annual reports to identify whether and where there are areas of poor compliance with reporting requirements with a view to informing their monitoring activities going ahead.
• Task Force on Climate-related Financial Disclosures (TCFD): climate-related metrics and targets, including companies’ “net zero” plans, are seen as increasingly important by investors, and the TCFD’s recommendations in this area were updated in 2021. Following the FRC’s thematic review of TCFD disclosures in 2022 (carried out in collaboration with the FCA) which highlighted room for improvement in many companies’ metrics and targets disclosures, the FRC will undertake a targeted follow-up in 2023, with a focus on the metrics and targets disclosures of companies from four relevant sectors. The FRC will also consider how adequately these companies’ net zero commitments have been addressed in their financial statements.
• Fair value measurement (IFRS 13): The FRC’s review will focus on companies in the non-financial sector and will provide an overview of the disclosure requirements of the standard, highlighting examples of better disclosure and common pitfalls.

The FRC’s Audit Quality Review team will pay particular attention in its audit quality inspections to areas including going concern, fraud risks, climate-related risks, and risk identification and assessment.

In selecting both corporate reports and audits for review, the FRC will give priority to the following sectors, which are considered to be higher risk by virtue of economic or other pressures:

• Travel, Hospitality and Leisure
• Retail and Personal Goods
• Construction and Materials
• Industrial Transportation

FRC publishes report on what makes a good annual report and accounts

The FRC has published a new report on what makes a good annual report and accounts. The report states that a high-quality annual report and accounts must:

• Comply with relevant accounting standards, laws, regulations and codes.
• Be responsive to the needs of stakeholders in an accessible way.
• Demonstrate the corporate reporting principles and effective communication characteristics set out below.

The corporate reporting principles are that the annual report and accounts must be:

• Accurate
• Connected and consistent
• Complete
• On-time
• Unbiased
• Navigable
• Transparent

The effective communication characteristics (the 4 Cs) require the annual report and accounts to be:

• Company specific
• Clear, concise and understandable
• Clutter free and relevant
• Comparable

The report also includes a review of materiality considerations and various examples of good quality reporting.

Climate transition plans: Transition Plan Taskforce consultation on disclosure framework and implementation guidance

On 10 November 2022, the UK Transition Plan Taskforce (TPT) published for consultation its proposed disclosure framework and accompanying implementation guidance for use by private sector businesses when preparing their organisations’ plans for transitioning to a low carbon economy.

Transition plans are a key part of the disclosure framework under the recommendations of the Task Force on Climate-related Financial Disclosures as well as the disclosure recommendations in the International Sustainability Standards Board's proposed standards for sustainability-related financial information.

The TPT expects to finalise the disclosure framework and implementation guidance in 2023. Once the final framework and guidance have been published, the TPT expects that the FCA will draw on them for its transition plan disclosure expectations of listed companies, asset managers and regulated asset owners.

The TPT Disclosure Framework is structured around the following five elements (with disclosures recommended in relation to 19 sub-elements):

• Foundation
• Implementation strategy
• Engagement strategy
• Metrics & targets
• Governance

The implementation guidance notes that a transition plan is integral to an entity’s overall strategy, setting out its plan to contribute to and prepare for a rapid global transition towards a low greenhouse gas (GHG) emissions economy. It advises that a good practice transition plan should cover:

• An entity’s high-level ambitions to mitigate, manage and respond to the changing climate and to leverage opportunities of the transition to a low GHG and climate resilient economy. This includes GHG reduction targets (e.g. a net zero commitment).
• Short, medium and long-term actions the entity plans to take to achieve its strategic ambition, alongside details on how those steps will be financed.
• Governance and accountability mechanisms that support delivery of the plan and robust periodic reporting.
• Measures to address material risks to, and leverage opportunities for, the natural environment and stakeholders such as the workforce, supply chains, communities, or customers which arise as part of these actions.

In addition, the implementation guidance sets out the three guiding principles of Ambition, Action and Accountability, and recommends that entities consider a strategic and rounded approach to the design, development and disclosure of transition plans, using the three inter-related channels of decarbonisation; responding to climate-related risks and opportunities; and contributing to economy-wide transition.

UK prospectus regime: HM Treasury publishes proposed changes

On 9 December 2022, HM Treasury published an illustrative statutory instrument setting out proposed changes to the UK's prospectus and public offers regime using the powers set out in the Financial Services and Markets Bill. The proposals form part of HM Treasury's "Edinburgh Reforms" and reflect the approach outlined in its March 2022 review of the prospectus regime.

While a prospectus will still be required for admission to a regulated market, a prospectus will no longer be required for a public offer of shares. Instead, public offers will be prohibited unless an exemption applies, including exemptions for:

• Offers of shares to be admitted to UK regulated markets (e.g. the Main Market) or certain UK multilateral trading facilities (e.g. the AIM market).
• Offers made to a company's existing shareholders, subject to offers being made pro-rata and certain other conditions being fulfilled.
• Certain offers by companies listed on designated overseas stock markets or by private companies via a public offer platform.

The details of these proposed exemptions are not included in the illustrative statutory instrument and the government intends to legislate separately to create a new regulated activity covering the operation of a public offer platform.

Other proposed changes include:

• The statutory prohibition on requesting admission to trading on a UK regulated market without an FCA-approved prospectus will be removed and the FCA will be given rule-making responsibilities to specify when a prospectus is required.
• Admission documents published in accordance with the rules of certain UK multilateral trading facilities will be treated as a type of prospectus.
• The detailed content rules for prospectuses will be set out in FCA rules rather than in statute.
• A recklessness standard will apply to liability for forward-looking information in prospectuses.