Post on 14-Apr-2018
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9.Corporate governance requirements for
a UK issuer: Premium Listing, Main Market
John Lane and Lucy Fergusson, Linklaters LLP
An applicant for a Premium Listing of equity
securities on the Main Market is likely to need to
make changes to its corporate governance
structure including the composition of the board
and its committees and internal controls in the
context of its transition to a publicly traded entity.
Companies already quoted on other markets such
as AIM may, to a greater or lesser extent, have
some of the appropriate governance structures in
place. However, any company seeking a Premium
Listing must ensure that it is in a position to
comply with the new obligations that will apply.
These obligations are not only those that stem
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from the Listing Rules (the LR) of the UK Listing
Authority (UKLA) including the duty to report
on compliance with the UK Corporate Governance
Code (the Code) and the Disclosure and
Transparency Rules (the DTR) but also the
specific provisions of the Companies Act 2006 that
apply only to UK companies admitted to listing.
These company law provisions include the
requirement for a directors remuneration report,
and the right of shareholders to vote on this
report. More detailed disclosures are required in
the business review section of the companys
annual report, and there are additional rules on the
conduct of annual general meetings and making
information available to investors. These provisions
are part of the corporate governance framework in
that they are designed to help balance the
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relationship between directors, as managers of the
company, and shareholders, as its owners, by
equipping investors with the information and voting
tools they need to ensure directors are
accountable.
Compliance with the corporate governance
principles and the regulations that apply to a
company with a Premium Listing is ultimately the
responsibility of the directors. Moreover, many of
the new obligations that apply to a company when
it has achieved a Premium Listing may result in
potential personal liability for directors if breaches
occur. Therefore, adequate information and
training for directors should be a key part of the
issuers preparation process.
Add to the rules the need to engage with investors
and analysts on an ongoing basis, as well as the
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increased public scrutiny that accompanies listing,
and it is clear that a good deal of work will be
needed to ensure a smooth transition to the public
arena.
Corporate governance structures
Under DTR 7.1, issuers with Premium or Standard
Listings are required to have an audit committee
with at least one member who is independent and
one member who is competent in financial matters.
The first corporate governance disclosure that a
company coming to market will need to make will
be in its prospectus. It will take the form of a
statement as to whether the company complies
with the Code, with an explanation, where
relevant, of why it does not. The explanation, of
course, may be that, as a newcomer to the market,
it has not previously had to comply. However,
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potential investors will expect to see appropriate
structures being put in place to comply with the
Code unless there is a reasonable justification for
not doing so.
Moreover, as discussed elsewhere in this guide,
companies are required to explain in their annual
reports how they apply the principles of the Code,
and specifically how they comply with its more
detailed provisions or to give a reasoned
explanation for any areas in which they are
noncompliant.
From the outset, therefore, directors
must be prepared to meet these enhanced
governance principles and market expectations.
This will generally mean that, by the time of listing,
the company should have at least the main
structures in place, including the appointment of
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independent non-executive directors and, in
addition to the audit committee, appropriately
constituted remuneration and nomination
committees.
In many companies, the former owners will retain
significant stakes after listing. It should be noted
that any members of management and any
directors nominated by key shareholders will not
be considered independent in terms of the Codes
provision that at least half the board should
comprise independent non-executive directors.
Helpful guidance on the establishment of
committees is available in the form of model terms
of reference published by the Institute of
Chartered Secretaries and Administrators. Other
documents to consider include a clear set of
mandates within the corporate group for decisions
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on expenditure and other key matters, and a
schedule of matters reserved for the board.
Assuming there is to be compliance with the
Codes provision that the roles of chairman and
chief executive are separate, there should also be
a suitable division of responsibilities between
them.
AIM companies
As noted above, companies that are already
admitted to AIM will normally have met investor
expectations by adopting certain levels of
corporate governance standards. The London
Stock Exchange set out its position on corporate
governance for AIM companies in its Inside AIM
newsletter in July 2010. It believes that the Code
serves as a standard to which companies should
aspire, but that full adherence should not
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necessarily be the expectation for all AIM
companies.
The London Stock Exchange also notes that AIM
has the benefit of the nominated adviser (Nomad)
system. Nomads are in an excellent position to
work with their AIM clients to consider and set out
the corporate governance standards with which
the company is going to comply, by reference to
factors including size, stage of development,
business sector and jurisdiction. The Exchange
also supports the use of the Corporate
Governance Guidelines for Smaller Quoted
Companies published by the Quoted Companies
Alliance (QCA) in September 2010.
How different life is for an AIM company when it
moves to a Premium Listing on the Main Market
and has to comply or explain against the Code will
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obviously depend on the extent to which its
existing practices have evolved.
Eligibility for listing
A number of formal requirements must be satisfied
in order to meet the requirements of the LR. Most
importantly, the majority of businesses must have
a proven three-year trading record and a sufficient
free float (the number of shares held by persons
not connected with major shareholders or the
management).
The company must appoint a sponsor to confirm
to the UKLA that the directors have established
procedures to enable compliance with the
continuing obligations that apply to listed
companies under the LR and DTR, as well as
procedures that provide a reasonable basis for
the directors to make proper judgements on an
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ongoing basis as to the financial position and
prospects (FPP) of the issuer. The directors must
also make a statement in the prospectus that the
group has sufficient working capital for at least
the next 12 months, and the sponsor must
Document checklist: gDocument checklist: governance
and compliance policies and proDocyDceduresDocument
checklist: governance and compliance policies and
procedurThis checklist sets out key policies and
procedures that a company should consider adopting
before Premium Listing in order to ensure compliance
with eligibility requirements and continuing
obligations, as well as with the UK Corporate Governance
Code
Compliance with Listing, Disclosure and Transparency
Rulesove
l Review of processes for reporting on financial position
and prospects
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l Review of sufficiency of working capital over next 12 (or
more) months
l Briefings for board members on their responsibilitiesand obligations as directors of a Premium
Listed company
l Disclosure procedures manual guidance and
procedures for all relevant employees on identifying
information that the company may be required to
disclose and ensuring it is brought to the attention
of the board
l Insider list procedures processes for maintaining lists
of persons with access to inside information
l Inside information guidance for employees to ensure
they are aware of their obligations where
they have access to inside information
l Securities dealing code
l Procedures to ensure compliance with share-dealing
reporting obligations
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l Guidance note on significant transactions under Chapter
10 of Listing Rules
l Guidance note on related-party transactions underChapter 11 of Listing Rules
Compliance with Corporate Governance Code Code
reference
l Code of values and standards A.1
l Schedule of reserved matters for the board A.1.1
l Division of responsibilities between chief executive and
chairman A.2
l Terms and conditions of appointment of non-executives
B.3.2
l Procedures for board access to independent advice
B.5.1
l Insurance cover for directors A.1.3
l Audit committee terms of reference C.3.2
l Remuneration committee terms of reference D.2.1
l Nomination committee terms of reference B.2.1
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l Risk committee terms of reference (if appropriate)
l Environment, health & safety committee terms of
reference (if appropriate)
l Whistle-blowing arrangements C.3.4
l Design of performance-related remuneration for
executive directors D.1.1rnance and compliance policies
and procedures
confirm that this statement has been made on a
reasonable basis.
In accordance with the duties that the sponsor
owes to the UKLA, each of these confirmations by
the sponsor must be given after having made due
and careful enquiry. This entails an appropriate
due diligence process.
In order to be satisfied it can confirm the
companys ability to meet its continuing
obligations, the sponsor will consider the skills and
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experience of the board and the internal
governance structures that the company has in
place. It will also seek to ensure that the directors
have been fully briefed by advisers on the
companys obligations and their own duties.
In relation to the obligation to have proper FPP
reporting procedures in place, a firm of
accountants will normally be appointed to conduct
an independent review of the financial control
systems. Their report, which will detail the systems
and comment on their effectiveness, will form part
of the sponsors assessment of the adequacy of
the issuers systems. As part of this process, the
directors will normally be expected to prepare a
memorandum describing the companys FPP
reporting procedures.
The outcome of the review will naturally depend on
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the issuer, the extent of its reporting procedures
and any perceived risks or previous failings in
those procedures. There will normally need to be a
dialogue between the company, the reporting
accountants and the sponsor as to how the FPP
reporting procedures should be framed, bearing in
mind the particular financial and reporting risks
that the company is subject to, and the key
performance indicators that need to be monitored
beyond the requirements of the statutory
accounts.
Similarly, the working capital confirmation will
require the board to consider in detail the future
cash flows and capital requirements of the
business against a range of sensitivities. This
work will be reviewed by the accountants
engaged by the sponsor in order to provide
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comfort to the sponsor in making its confirmation
to the UKLA.
Ongoing compliance with Listing Rules
A company with a Premium Listing must comply
with continuing obligations under the LR and DTR.
In the course of preparing for a listing, amid all the
work involved in proving eligibility, drafting a
prospectus and marketing the company to
potential investors, directors must not lose sight of
the fact that compliance with these obligations will
be a fact of life from the day that the company is
listed.
The key provisions of these rules are intended to
protect existing and potential investors by
ensuring proper disclosure of material financial and
other information and giving shareholders rights to
vote on certain matters. Although there are many
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detailed rules, which are outside the scope of this
chapter, they can be broadly summarised by the
Listing Principles, set out in LR 7. These have the
same force as rules but are written in general
terms with the aim of underpinning the specific
obligations set out in the LR and DTR. Under the
Listing Principles, a company with a Premium
Listing must:
take reasonable steps to enable its directors
to understand their responsibilities and
obligations as directors
l take reasonable steps to establish and
maintain adequate procedures, systems and
controls to enable it to comply with its
obligations
l act with integrity towards holders and
potential holders of its listed equity securities
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l communicate information to holders and
potential holders of its listed equity securities
in such a way as to avoid the creation or
continuation of a false market in such listed
equity shares
l ensure that it treats holders of the same class
of its listed equity securities that are in the
same position equally, in respect of the rights
attaching to such listed equity shares
l deal with the Financial Services Authority in
an open and co-operative manner
Two key aspects of the Listing Principles are the
emphasis on directors understanding of their
responsibilities (as the persons ultimately
responsible for their companys compliance with
the rules) and on the need for adequate
procedures, systems and controls. The implication
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of these principles is that directors will not (unless
knowingly at fault) be held accountable for a
failure in compliance, but they may be held
responsible if the failure results from inadequate
systems or procedures.
Inside information
In practice, it is particularly important for
companies to focus on being able to identify and
deal with material, price-sensitive information
that may need to be disclosed promptly to the
market, and must, pending disclosure, be kept
confidential in accordance with the rules in
DTR 2. This includes having procedures for
identifying the information and ensuring that it
is escalated to the board of directors so that
they can consider whether the information
needs to be disclosed. It also includes having
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procedures for training employees and
maintaining lists of insiders.
In addition, companies must be able to identify
transactions that are significant or involve related
parties, and that may be subject to the disclosure
and shareholder approval rules contained in LR 10
and 11.
The FPP reporting work carried out by the sponsor
and accountants, referred to above, is a critical
part of making sure that the company has the
necessary systems in place and that they will
function as intended in the future.
Dealing codes and training should also be put in
place to ensure that directors and other
employees with access to price-sensitive
information do not deal when prohibited by the
UKLAs Model Code and, more broadly, are
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aware of the risks of market abuse.
Conclusion
Preparation for a Premium Listing is a twofold
process of ensuring that the company achieves the
milestones required to gain admission to listing,
and that the directors and other relevant company
employees are prepared, and the systems are in
place, to meet the continuing obligations and
expectations placed on a company with a Premium
Listing. The latter, in particular, will require careful
preparation in terms of designing systems and
procedures.
Above all, it is important that directors and
employees are thoroughly grounded in the rules to
which they and their company will be subject.