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 currently be 12 April 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.

No deal Brexit: FCA near final changes to the listing, transparency and prospectus regime
  • On 28 February 2019, the FCA published near final rules and guidance (PS19/5) that will apply if the UK leaves the EU with no deal. This follows consultations on the changes in CP 18/36 (published on 23 November 2018) and CP 18/28 (published in October 2018). This includes the proposed amendments to the Listing Rules, Disclosure Guidance and Transparency Rules (DTRs) and Prospectus Rules.

    The FCA had intended to publish the final instruments on 28 March 2019 if the Withdrawal Agreement is not ratified. See Brexit negotiations: recent developments for the current status of the Withdrawal Agreement.

    On 20 March 2019, the FCA published Primary Market Bulletin No. 22 which summarises the key changes to the Listing Rules, the Disclosure Guidance and Transparency Rules and the Prospectus Rules that will apply if the UK leaves the EU with no deal.

    The FCA’s amendments follow 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 government also published the draft Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations on 12 December 2018, together with explanatory information.

    PS 19/5

    Set out below is a summary of the final proposed amendments to the Listing Rules, DTRs and Prospectus Rules.

    General approach

    When making changes to the FCA Handbook (as a whole) and the Binding Technical Standards (BTS), the FCA has taken the following approach:

    • in general, it treats the EU and its member states in the same way as it treats non-EU or third countries, although there will be instances where it will diverge from this approach
    • references to EU law that will no longer apply after Brexit have been removed and replaced with references to UK law
    • passporting provisions that will no longer apply after Brexit have been removed, as have references to "home" and "host" state regulators
    • references to European institutions (such as the European Commission) have been removed or replaced, and
    • references to "other member/EEA states" and "other competent authorities" have been removed.

    EU guidelines, recommendations, opinions and Q&A produced by, among others, ESMA (Level 3)

    The FCA expect firms and market participants to continue to apply ESA Guidelines to the extent that they remain relevant, as they did before exit day. Market participants will need to interpret the materials sensibly and in light of the Brexit-related amendments to UK law. Queries regarding Level 3 material can continue to be raised with the FCA and it will provide a repository of all EU Level 3 material in effect at exit on its Handbook website.

    FCA Knowledge Base and Handbook forms

    The FCA is not making changes to forms at this stage but has set a default approach to interpreting certain EU-based references. References to UK legislation should be read as references to the legislation as amended under the EUWA.

    Listing Rules

    The main changes in PS 19/5 include the following:

    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 in one or more EEA states, shareholders in any jurisdiction will count towards the free float. The FCA concluded (in CP 18/36) that replacing the EEA with the UK would have been too restrictive and it is therefore removing any reference to “EEA states” instead. This applies to premium and standard listings of equity shares and depositary receipts.

    Admission to trading

    Shares will have to be admitted to trading on a UK regulated market instead of an EU regulated market operated by an RIE. References to “regulated market” in the Listing Rules will be to a regulated market which is a UK RIE (which excludes recognised overseas investment exchanges).

    Non-UK companies

    Shares of an applicant incorporated in a third country (which replaces applicants incorporated in non-EEA states only) that are not listed either in its country of incorporation or in the country in which a majority of its shares are held, will not be admitted to listing unless the FCA is satisfied that the absence of the listing is not due to the need to protect investors.

    Prospectus Rules

    The main changes in PS 19/5 include the following.

    When is a prospectus required and passporting

    The prospectus regime in the UK will apply to all issuers that:

    • have securities admitted to trading, or have applied to admit securities 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 will apply regardless of the country that the issuer is incorporated in.

    The current Prospectus 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”). Passporting will, however, cease if there is a no deal exit. Instead issuers incorporated in an EU member state will need to have a prospectus approved by the FCA as well as by its own home state authority.

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

    There are no reciprocal arrangements in the remaining EU member states for UK approved prospectuses after exit day. New Q&As on Prospectuses, published by ESMA in January 2019, confirm that, as the UK will be a third country after exit day if there is no deal, prospectuses and supplements approved by the FCA before the exit date cannot be used in EU27/EEA EFTA after exit date.

    DTRs

    Transparency requirements and vote holder notifications

    DTR 1A and 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).

    After exit, these chapters will 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 will become subject to these rules. Consequently, issuers that are required to comply with corresponding requirements in a remaining EEA member state will no longer be exempted from complying with the DTRs.

    Consolidated accounts

    Issuers will be required to use IFRS adopted by the UK to prepare their consolidated accounts, instead of IFRS adopted by the EU. After exit, issuers from third countries (which will include issuers from the EEA) will continue to be able to use other accounting standards if these have been deemed equivalent to UK-adopted IFRS, and the FCA have granted an exemption for that standard. The FCA states that the existing Commission equivalence decisions and FCA exemptions will continue to apply after Brexit to the amended rules. 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. The DTRs will include transitional provisions to allow for this.

    Audit committees

    An issuer must currently have an audit committee, unless it is a subsidiary undertaking and its parent undertaking is required to have an audit committee under the DTRs or certain requirements in another EEA member state.

    After exit, this exemption will only be available if the parent undertaking must have an audit committee as required by DTR 7.1. The other limb of the existing exemption will continue to apply for any 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 a no deal exit, EEA auditors will 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 need to register 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 information society service established in an EEA state. After exit, only PIPs can disseminate the information.

    Corporate governance statements

    After exit, an overseas company with a premium listing must comply with the requirements in DTR 7(2) about corporate governance statements, regardless of whether it already complies with similar requirements imposed by another EEA state. Any regulated information will also have to be disclosed in English.

Prospectus Regulation
  • The Prospectus Regulation repeals the current Prospectus Directive. The majority of the Prospectus Regulation will come into effect on 21 July 2019, some provisions having already become effective in June 2018.

    No deal Brexit

    If there is a no deal Brexit, 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.

    Withdrawal agreement exit

    If Brexit occurs with a transition period, then the Prospectus Regulation will have direct effect in the UK from 21 July 2019 as the UK will continue to comply with EU laws during that period.

    FCA consultation (CP19/6)

    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 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.

    The FCA has flagged the following points in particular:

    • the Prospectus Rules currently reproduce text from the underlying Prospectus Directive, which isn’t strictly necessary as the Prospectus Regulation will have direct effect; however, the FCA considers this is helpful for issuers and other stakeholders, and
    • the FCA anticipates some changes to its IT systems to capture more information from issuers so that it can comply with submissions that have to be made to ESMA under the new prospectus regime.

    Proposed changes

    The changes that are proposed are:

    • New PR Sourcebook: the FCA proposes to create a new PR Sourcebook, with a different name. It will closely follow the existing sourcebook and contain (1) content reproduced from the Prospectus Regulation and (2) FCA rules that are required to be prepared under the Prospectus Regulation, details of some of which are set out in the consultation paper.

    • Filing of prospectuses: currently, issuers are required to file approved prospectuses with the FCA, which is done through the National Storage Mechanism (NSM). As the Prospectus Regulation does not require prospectuses to be filed with the FCA (it just requires that they are made public), issuers will no longer have to file prospectuses with the NSM. However, as the FCA is required to publish all prospectuses that it has approved, the FCA plans to do this through the NSM. This means that issuers will no longer have any control over the timing of publication of prospectuses, which could be published by the FCA before the issuer itself does so.

    • Data submission: the Prospectus Regulation requires certain data to be provided to ESMA in a prescribed electronic format when national competent authorities (NCAs) (such as the FCA) notify ESMA of the approval of a prospectus. Draft regulatory technical standards setting out the information that has to be provided have been published by ESMA which contemplate NCAs requiring issuers to provide the relevant data to NCAs. The FCA is proposing that this information will be provided by issuers using the existing Electronic Submission System, or alternatively a system-to-system solution aimed at frequent issuers (though this may entail some cost).
No deal Brexit: ESMA Q&As
  • On 31 January 2019, ESMA published three new Q&As on Prospectuses and the Transparency Directive dealing with a "no-deal" Brexit. These Q&As will only apply if there is a no deal Brexit.

    The Q&As provide the following clarifications:

    • when issuers of equity securities and non-equity securities with a denomination below EUR 1,000 who currently have the UK as their Prospectus Directive home Member State choose a new home Member State, they should choose between the EU27 Member States/EEA EFTA States1 in which they have activities after the exit day (either for offers/admissions made after the exit date or admissions made before the exit date which continue after the exit date)
    • issuers admitted to trading on a regulated market within EU27/EEA EFTA States who currently have the UK as their Transparency Directive home Member State should choose and disclose their new home Member State without delay following the exit date, and
    • as the UK will be a third country, prospectuses and supplements approved by the FCA before the exit date cannot be used in EU27/EEA EFTA after the exit date.
Market Abuse regime
  • The government has published The Market Abuse (Amendment) (EU Exit) Regulations 2018 (and explanatory notes) with its changes to the market abuse regime (UK MAR).

    The changes are designed to ensure that UK markets and financial instruments continue to be subject to the same requirements as under the EU Market Abuse Regulation (EU MAR).

    The changes will become fully effective either on the ‘no deal’ exit date or at the end of the transition period, if there is one (certain provisions having already come into effect on 19 February 2019).

    The amendments to EU MAR include:

    Scope: EU 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 to trading or traded on both UK and EU trading venues.

    Issuer’s notification obligations: under EU 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, issuers with financial instruments admitted to trading or traded on UK venues will have to make these notifications to the FCA. This could result in notifications having to be made to two regulatory authorities (the FCA and one in a remaining EEA member state) if, for example, an issuer is dual listed.

    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.