Brexit: the implications for equity capital markets

The impact of the UK leaving the EU on offers of equity securities in the UK will depend both on the final terms of the exit and the extent to which the UK Government and the Financial Conduct Authority (FCA) maintain the current regime. The London Stock Exchange’s Main Market is a leading international securities market and the UK Government want that to continue.

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EU (Withdrawal) Act 2018
  • The European Union (Withdrawal) Act 2018 (EUWA) provides that, on exit day, broadly any UK law implementing an EU Directive will be retained and all directly applicable EU law and EU Regulations will be converted into domestic law.

    If there is no deal, then exit day will be 29 March 2019.

    If, however, the draft Withdrawal Agreement agreed between the UK and the EU (see Brexit negotiations: recent developments) is approved and ratified, exit day is likely to be at the end of a transition period. The transition period is proposed to be from 30 March 2019 to 31 December 2020 and can be extended, by mutual agreement, for up to one or two years.

    If there is a transition period, changes to the listing, transparency and prospectus regime will depend on the outcome of the negotiations on the future relationship between the UK and the EU. During this period, EU rules will continue to apply and access to the EU markets will continue on the current terms.

    The EUWA also gives ministers the power to amend legislation to ensure the retained EU law functions effectively after exit. The regulators (including the FCA and the PRA) have also been given delegated powers to amend EU-derived provisions in their rulebooks and existing EU technical standards to correct deficiencies arising from the UK leaving the EU so that they function effectively after exit.

    The FCA has published two consultation papers setting out its proposed changes to the Handbook and Binding Technical Standards as a result of Brexit. See below for a summary of the one which includes proposed amendments to the listing, transparency and prospectus regime.

FCA Consultation Paper (CP 18/36)
  • The FCA consultation paper, published on 23 November 2018, includes the amendments that the FCA is proposing to make to the Listing Rules, Disclosure Guidance and Transparency Rules (DTRs) and Prospectus Rules on exit day. The consultation closed on 21 December 2018. The FCA intends to give feedback on the consultation paper and publish near final instruments in early 2019.

    These amendments follow the initial guidance issued by the Treasury on draft regulations to amend the listing and prospectus regime. An updated version was published together with the draft regulations on 12 December 2018. It also follows the Treasury’s paper setting out its approach to financial services legislation under EUWA. In that paper the Treasury indicated that, in the event of a no deal, it will, in general, treat the EU and its member states in the same way as it treats non-EU or third countries, although there will be instances where the Treasury will diverge from this approach where necessary.

    The main changes proposed in the FCA’s consultation paper are:

    Listing Rules

    Free float requirements - instead of applicants and listed companies having to show that at least 25% of the shares (or any such other level that has been agreed) are in public hands within the EEA, shareholders in any jurisdiction would count towards the free float. The FCA has concluded that replacing the EEA with the UK would have been too restrictive and it is therefore proposing to remove any reference to “EEA” instead.

    Prospectus Rules

    When is a prospectus required and passporting - the UK government is proposing that the prospectus regime in the UK will apply to all issuers that:

    • have securities admitted to trading on a regulated market in the UK or admitted to listing in the UK, or
    • are making an offer to the public in the UK.

    This would apply regardless of the country that the issuer is incorporated in.

    The current rules allow a company to offer shares throughout the EU using a prospectus which has been approved in only one member state (this transferability is known as “passporting”).

    The new rules would mean that issuers incorporated in an EU member state would need to have a prospectus approved by the FCA as well as by its own home state authority and would not be able to use a passported document.

    There will be a grace period so that any prospectuses that are valid in the UK before exit (including those approved by a competent authority in a different EU member state) will remain valid for 12 months after their date of approval.

    If other EU member states also cease to allow passporting, UK companies will have to have their prospectuses approved both in the UK and in other member states and may have to comply with different approval and content requirements, which could make it more time consuming and costly to offer shares in other member states.

    DTRs

    Transparency requirements and vote holder notifications: Chapters 4 to 6 of the DTRs currently apply to issuers with securities admitted to trading on a regulated market in the EU and for which the FCA is the home competent authority. DTR 5 also applies to issuers admitted to a UK ‘prescribed’ market (such as AIM).

    These chapters would be amended so that, after exit, they would apply to issuers with securities admitted to trading on a UK-regulated market , wherever the home competent authority is. This means that an issuer on, for example, the Main Market, whose home competent authority is not the FCA would become subject to these rules.

    Consolidated accounts: the rules would be amended to require issuers to use IFRS adopted by the UK to prepare their consolidated accounts, instead of IFRS adopted by the EU. To allow for a transition period, the UK government intends issuing an equivalence decision so that issuers can continue to use EU-adopted IFRS, for Transparency Directive requirements and to prepare a prospectus, for any financial year beginning before the exit day but will have to use IFRS adopted by the UK for any financial year starting on or after exit day.

    Audit committees: an issuer must currently have an audit committee, unless it is a subsidiary undertaking and its parent undertaking is required to have one under the DTRs or certain requirements in another EEA member state. This would be amended so that the exemption will only be available if the parent undertaking has to have an audit committee under the DTRs but the other limb of the existing exemption would continue to apply for a financial year beginning before exit day.

    EEA auditors: currently UK traded non-EEA issuers can use an EEA auditor to provide the audit report for their annual financial statement. After exit, EEA auditors would become subject to the same rules as third country auditors and will have to register with the FCA.

    Non-registered EEA auditors will be able to audit results for financial years beginning before exit day, but they will have to have been registered for any financial years beginning on or after exit day.

    Dissemination of information: issuers can currently choose whether to disseminate information using a Primary Information Provider (PIPs) or an incoming society service. After exit, only PIPs would be able to disseminate the information.

Prospectus Regulation
  • The Prospectus Regulation will have direct effect in all EU Member States on 21 July 2019. If Brexit occurs with a transition period, then this Regulation will have direct effect in the UK as the UK will continue to comply with EU laws during that period. If, however, there is a no deal Brexit on 29 March 2019, the current expectation is that the UK would implement the new Prospectus Regulation, pursuant to the UK’s Financial Services (Implementation of Legislation) Bill and explanatory notes. However, there is inevitably uncertainty around when that would happen, or if the UK Government would choose to implement a separate reform of the UK prospectus regime.

    On 28 January 2019, the FCA published a consultation paper (CP19/6) with the proposed changes to the FCA Handbook to ensure that the Prospectus Rules sourcebook is consistent with the Prospectus Regulation. The consultation closes on 28 March 2019. CP19/6 is prepared on the basis that Brexit will occur with a transition period. If Brexit occurs on 29 March 2019 with no transition period (which would be the case in the event of a “no-deal” Brexit), the FCA will not proceed with these proposals and will instead prepare revised proposals once the UK Government has published its proposals.

    See here for an overview of CP19/6 and new ESMA  Q&A on Prospectuses and the Transparency Directive dealing with a “no-deal” Brexit. These Q&As will only apply in case of a no-deal Brexit.

Market Abuse regime
  • The government has published the draft Market Abuse (Amendment) (EU Exit) Regulations 2018 (and explanatory notes) with its proposed changes to the market abuse regime.

    The amendments proposed to the Market Abuse Regulation (MAR) include:

    Scope: MAR currently applies to financial instruments admitted to trading or traded on an EU trading venue.  It also applies to financial instruments admitted to trading or traded elsewhere, where the price or value of those instruments depends on, or has an effect on, the price or vale of a financial instrument admitted to trading or traded on an EU trading venue.

    UK MAR will continue to apply to the same markets as the wording will be amended so that it captures financial instruments admitted trading or traded on both UK and EU trading venues.

    Issuer’s notification obligations: under MAR an issuer has to make certain notifications to the relevant competent authority, including any delay in the disclosure of inside information, providing insider lists, if requested and reporting PDMR transactions.

    Under UK MAR these obligations will only apply to issuers with financial instruments admitted to trading or traded on UK venues to avoid double reporting.

    Suspicious transaction reporting: UK MAR will keep the requirement for firms and venues in the UK to provide suspicious transaction reports to the FCA.

    ESMA’s role: functions relating to the preparation and making of regulatory or implementing technical standards will be transferred to the FCA to enable it to effectively enforce market abuse in the UK.  The FCA will be designated as the UK regulator for the purposes of UK MAR.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.