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> Davies Review - Statutory regime for Issuer Liability

Responses to the Davies Review consultation are due by 9 October 2008. The QCA wishes to canvas the views of its members on this issue and to make a submission to the Treasury on their behalf.

Please forward your comments and suggestions to keith.scott@quotedcompaniesalliance.co.uk (include Davies Review in subject line).

Background

In 2006, a new section 90A of the Financial Services and Markets Act 2000 (FSMA) established a statutory civil liability regime for misstatements to the market by issuers of securities admitted to trading on regulated markets, under which issuers would be liable for fraudulent misstatements in periodic disclosures to the market as required under the Transparency Directive (2004/109/EC). This clarified the previously uncertain common law regime.

The scope of the statutory regime was restricted to the area in which statutory provision was required by the Transparency Directive because of the differences of opinion among stakeholders with regard to the impact of any further extension. However, anticipating the benefits of expansion, the Government was granted in section 90B of FSMA, powers to extend the scope of the regime by regulation.

In response to stakeholder concerns about the consistency of the new statutory liability regime and whether common law rights of shareholders were at risk, Professor Paul Davies of the London School of Economics was asked to advise on potential changes to ensure that the regime was comprehensive and soundly based. He reported in 2007 and the Government now proposes to implement proposals that substantially follow his recommendations.

Consultation on extending the statutory regime

The Government published its proposals to extend the statutory regime on issuer liability on 17 July 2008.

The extensions proposed to the scope of the statutory regime follow Davies' recommendations, with adjustments to reflect the implementation issues arising during preparation of the proposals. The following changes are proposed:

• from the current scope of issuers with securities admitted to trading on regulated markets (such as the Main Market of the London Stock Exchange) to include issuers with securities admitted to trading on UK multilateral trading facilities (MTFs, such as AIM and the PLUS-quoted market);
• to issuers with securities admitted to trading on an EEA regulated market or MTF (provided they have a registered office in the UK or the UK is their home state under the Transparency Directive);
• to a broad range of ad hoc and periodic disclosures to markets (at present the regime is restricted to periodic disclosures required under the Transparency Directive). This is to be achieved by extending the regime to information disclosed by issuers by means of a recognised information service. A recognised information service would be defined as any service used to publish regulated information under the Transparency or Market Abuse Directives or information required to be published under the rules of an MTF. The person claiming damages would not have to show that the relevant information was obtained from the recognised information service;
• to permit sellers of securities to recover losses incurred through reliance on fraudulent misstatements (at present only buyers are permitted to recover);
• to permit recovery for losses resulting from dishonest delay of a disclosure. An issuer would be liable where the delay is a dishonest act and is for the purpose of enabling a gain to be made or to cause loss to another or expose another to a risk of loss.

See also Extension of the statutory regime for issuer liability (PDF file, 350KB)

Final report of the Davies Review

The Final Report of Professor Davies’ review was published on 4 June 2007, providing a thorough analysis and clear explanation of the recommendations to the Government. The Review made the case for exercising the powers conferred by the new section 90B of FMSA 2000 to:

• extend the statutory liability regime to cover ad hoc as well as periodic disclosures;
• extend the statutory liability regime to apply to disclosures by issuers with securities traded on exchange-regulated markets, including AIM and Plus Markets;
• identify relevant disclosures to be covered by the statutory regime as all RIS announcements, but without prejudice to the rights of shareholders and others arising out of company circulars addressed to them;
• ensure that the statutory regime encompasses liability for dishonest delay in making RIS announcements;
• extend the statutory regime to confer rights on both buyers and sellers of shares, but to exclude those who continue to hold (or not buy) shares from suing in respect of misstatements in RIS announcements.

The full Final Report can be accessed at the link below.

Final Report of the Davies Review of Issuer Liability (PDF file 327KB)

Further information can be found on HM Treasury’s website at: http://www.hm-treasury.gov.uk/independent_reviews/davies_review/davies_review_index.cfm

> Corporate Governance successes for the QCA

The Financial Reporting Council (FRC) has recently released a revised edition of the Combined Code on Corporate Governance.

The QCA would like to draw the attention of its members to a number of changes to the code that have been successfully lobbied for by the Alliance.

• Combined Code Preamble
  
  Revised preamble reflects almost word for word the purpose of corporate governance as set out in the QCA's Corporate Governance Guidelines for AIM Companies.

Clarifies that the annual report need only state how companies apply the Main Principles of the code (previously Main and Supporting Principles) which should enable much of the "boiler plate" to be cut from annual reports

• Combined Code
  
  Accepts the principle that in smaller companies the Chairman may be independent, but has yet to include our point that the Chairman, where independent on appointment and where he remains independent, may be one of the two independent directors that constitute the audit committee, without the need for explanation of non-compliance with the Provision of the Code.
  
  Still needs to be re-drafted to align the Principles and Provisions with the achievement of the purpose of Corporate Governance as set out in the preamble.
  

• Disclosure and Transparency Rules (DTR)
  
  DTR 7.2 permits some or all of the information required in a Corporate Governance report to be published on a company's web site, with a cross-reference to the relevant part of the web site from the annual report.
  
  This is quite a breakthrough and may clear the way for moving other information away from bulky annual reports to the company website. This is something the QCA will continue to press for.
  
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Writing in the Financial Times on 4 July 2008 David Blackwell further promoted the QCA’s guidance commenting:

“AIM has no prescribed governance requirements, but the main market’s combined code should be seen as the benchmark. The Quoted Companies Alliance has published a guide to show how a small company should adapt appropriate aspects of the combined code to its circumstances.”

Notes:

To order copies of the QCA's Corporate Governance Guidelines for AIM Companies click here

The latest version of the Combined Code on Corporate Governance can be found on the FRC website at: http://www.frc.org.uk/corporate/combinedcode.cfm

> QCA Accounting Standards Committee - Update

The QCA accounting standards committee hosted Hilary Eastman and Henry Venter of the IASB at their June committee meeting held at the offices of Ernst & Young LLP in London.

Ms Eastman was invited in her capacity as manager of the IASB’s Fair Value Measurement Project and she brought the committee up to date with the IASB’s progress on this undertaking.

The project team has completed a standard-by-standard review of existing measurements in IFRSs that are identified as ‘fair value’ to assess whether they were intended to be an exit price. 

This analysis will be made available publicly when the Board deliberates the outcome of the review during the third quarter of 2008.

The round table consultation process is substantially complete and the IASB hopes to issue an exposure draft in 2009.

The committee took the opportunity to press the IASB to canvass the views of smaller quoted companies and not just the larger listed companies in the FTSE 100 when they are consulting on the impact of updating accounting standards.

Hilary Eastman stated that the IASB would welcome any input from QCA members or smaller companies in general. Hilary Eastman can be contacted directly on heastman@iasb.org or alternatively should members wish to remain anonymous they may channel their views via Keith Scott at the QCA on keith.scott@quotedcompaniesalliance.co.uk

> QCA cited in House of Commons debate

Members will be interested to hear that the QCA has been quoted in the Thursday 19 June 2008 parliamentary debate on the Finance Bill by the Public Bill Committee. [ Sir Nicholas Winterton in the Chair]

Mark Horban, the MP for Fareham (Con), flagged the concerns of the Alliance and its members in relation to employers and employee share schemes and the risk that certain proposed amendments to the Bill could potentially be extremely disadvantageous to UK-listed companies, whether they are operating in London or elsewhere, and could create an extra expense for companies which has not existed previously.

The full text of this debate can be found on Hansard online at:

http://www.publications.parliament.uk/pa/cm200708/cmpublic/finance/080619/pm/80619s07.htm

The QCA Share Schemes committee looks at all aspects of share scheme regulation striving to make them more cost effective and easier to use/implement. Share schemes are a particularly important tool for our members because of the need to motivate and retain key staff.

For more information contact the committee chairman Nicholas Stretch on shareschemes@quotedcompaniesalliance.co.uk

> Financial Reporting Council to Update the Combined Code

The Financial Reporting Council (‘FRC’) has announced updates to the Combined Code. One of the two main changes is to allow the chairman of a listed company outside the FTSE-350 to be a member of, but not chair, the audit committee (in addition to, rather than instead of, the two independent members) provided the chairman was considered independent on appointment (provision C.3.1).

We are very pleased that this change has been accepted as it was a QCA proposal put forward by Edward Beale and the QCA Corporate Governance Committee.

The revised Code is expected to be published by the end of July.

> Guidance on Companies Act 2006

For a copy of the Guidance on Companies Act 2006 - Directors' conflicts of interest, provided by the Association of general Counsel and company secretaries of the FTSE 100(GC100) please click here.

 > QCA and Speechly Bircham publish non-executive director survey

Smaller quoted companies are failing to effectively manage their non-executive directors according to QCA/Speechly Bircham research.

The research found that smaller quoted companies were undermining the effectiveness and independence of their non-executives in four key areas.

• Remuneration: 14% of non-executive directors (mostly from AIM companies) said they were paid in share options, going against both the combined code and the QCA guidelines for smaller quoted companies.

• Performance evaluation: 42% of non-executive directors of AIM companies said they received no formal evaluation of their performance going against the guidance of the Higgs review.

• Training: A significant proportion of the non-executive directors said they felt their knowledge in key areas including the Companies Act 2006, Pensions and Corporate Social Responsibility was not adequate.

• Board effectiveness: Over one third of AIM non-executive directors said they were failing to receive board papers in a timely manner ahead of board meetings.

Copies of the results are available from the Speechly Bircham website by clicking here and filling in your details.

 > QCA launches guide for overseas companies

To ensure international smaller companies instil confidence in the London IPO community, the Quoted Companies Alliance has developed a guide; London IPOs: A Practical Guide For International Companies. The guide contains 30 guidance principles focused on the issues of transparency and good governance. Copies can be ordered by downloading an order form from the Guidance booklets page.

An international working group was specifically formed to draft the guide taking in members with broad experience from across the SQC sector. The working group members are:

Adam Fenner, Olswang (Chairman and main author)
Mark Brady, Brewin Dolphin Limited
Simon Bridges, Landsbanki Securities UK
Mark Connelly, Collins Stewart Europe Limited
Joanne Dutton, London Stock Exchange plc
Michael Goldstein, BDO Stoy Hayward LLP
Michael Henman, Cubitt Consulting
Frank Lewis, ZTC Telecommunications plc
Deborah Medley Foye, PLUS Markets Group
John Pierce, Quoted Companies Alliance

The guide was officially launched at a breakfast seminar on 14 February.

> Tax 'loopholes' and smaller quoted companies

The Chancellor has announced in the Pre-Budget Report that capital gains tax (CGT) taper relief will be scrapped in order to clamp down on the private equity 'industry' and in particular the low tax rates that executives of private equity firms have been exploiting. This is a surprising cause for concern for small and medium-sized quoted companies.

Private equity partners have been using CGT taper relief for holding shares in unlisted businesses. However, this tax relief is very important to AIM and PLUS companies as they also fall under the definition of unlisted business assets.

John Pierce, Chief Executive of the QCA commented, "We are very disappointed that the taper relief that has been in place for some while to encourage investment in smaller growing businesses has been removed.  Other solutions were available to the government to tax the private equity industry such as reclassifying carried interest.

"Coming after the reductions to VCT relief in the 2007 budget, this is further evidence that rather than supporting smaller growing companies, the government are hemming them in."

The Quoted Companies Alliance had written to the new Chancellor, Alastair Darling, as well as the Treasury Select Committee, the former Economic Secretary, Ed Balls and his replacement, Kitty Ussher in order to highlight our concerns in the hope that any changes to remedy the private equity 'problem' would not have the unintended consequence of stifling investment in SQCs.

To read the original letter, addressed to Ed Balls on 21 June, click here.

> PKF & QCA Joint Survey Report 2007

Smaller quoted companies are less satisfied with their markets than they were 12 months ago, according to joint research by PKF Accountants & business advisers and the Quoted Companies Alliance.

The survey seeks to shed light on the business issues that occupy the attention of directors, outside the day to day running of their own businesses.

To obtain a copy of the report click here.

> AIM fees rise

The London Stock Exchange has put up the fees for admission to and trading on AIM in line with inflation. The Stock Exchange had promised, after an Office of Fair Trading investigation in 2004, to not increase fees significantly for two years. We are pleased, therefore, that even though they are no longer bound by that earlier promise they have not taken the opportunity to introduce a big rise.

The fees for companies on AIM have risen as of April 2007 to £4535 (+ VAT), up nearly £200 from last year. These fees are payable on admission and then annually – in the first year of trading a pro-rata fee is payable.

> QCA Newsround

2007 saw seen a change in the way the Quoted Companies Alliance communicated with company directors. The QCA Newsround, was released.

The more in-depth quarterly newsletter, the QCA Voice, as a result will be sent only to members of the QCA.

If you are interested in becoming a member click here to find out more.

> Filing dates success

The Quoted Companies Alliance Tax Committee successfully lobbied the Government to retract a proposal to align tax returns with filing accounts at Companies House. To find out more on this and other QCA successes click here.

> Share Option Valuer

A second seminar was held on 9 October to explain and distribute the QCA spreadsheet and notes to assist companies to value their share options as required under IFRS 2. This package could save you considerable fees. If you have been unable to attend these two presentations, we are willing to plan a third if there is enough demand. Please register your interest by clicking here.

> QCA Submissions

To view a copy of the QCA responses to various consultation papers please visit our submissions page. You will also be able to download papers there so that you are fully aware of all those that we are responding to on your behalf. Please do let us know of any other issues that are effecting you or your company. Click here to email us.