With the UK fast approaching a ‘No-Deal Brexit’, this week has been said to be ‘make-or-break’ for the Brexit talk.
The Government’s attempts to negotiate a new ongoing trade deal with the EU have not borne fruit since the signing of the withdrawal agreement. It is now highly likely that a trade agreement with the EU may not be concluded before the end of the transition period, which falls on 31 December 2020.
What impact can we expect a no-deal Brexit to have on listed companies?
The ‘Great Repeal Bill’ (The European Union (Withdrawal) Act 2018) now commonly referred to as the Withdrawal Agreement, was introduced to allow the UK to leave the EU. The European Union (Withdrawal Agreement) Act 2020 is the key piece of legislation giving effect to the Withdrawal Agreement in the UK.
The Withdrawal Agreement requires that, as from 31 December 2020, all directly applicable EU law and EU Regulations will be ‘on shored’ in the UK, converting EU law into UK domestic law. The regimes for listed companies (disclosure, prospectus and market abuse) will mostly reflect the present legal framework, with the removal of references to EU law and the replacement of references to UK Law, as well as the removal of references to European institutions and European Economic Area (EEA) states.
The end of this year marks the start of a regime whereby prospectuses relating to securities issued in the UK by EEA issuers must be approved by the Financial Conduct Authority (FCA), even if already approved by an EEA competent authority. If issuers have a listing on another market in the EEA, it is unclear whether they will be required following the transition period to have a prospectus approved by both the FCA, and the competent authority in the relevant EEA state. This would have the effect of duplicating the effort and costs of the issuer.
The FCA expects issuers to continue to pay attention to the European Securities and Markets Authority guidelines and recommendations as from 31 December 2020. It appears, in the main therefore, that there will not be any relaxation of the requirements for preparing a prospectus, except where incompatible with the changes made to the current regime from 31 December 2020.
Transparency requirements and notification rules
The Disclosure Rules and Transparency Rules (the DTRs) set out (amongst other things) rules for ongoing disclosure. DTR 1A, DTR 4 and DTR 6 currently apply to all issuers with shares traded on an EU regulated market and where their home competent authority is the FCA. There is an exemption available to issuers whose home state is in an EEA member state, who instead need to comply with their equivalent local requirements.
As from 31 December 2020, the DTRs will apply not only to those issuers where the home competent authority is the FCA, but also to all other issuers whose securities are admitted to trade on a regulated market in the UK. This means that the exemption referred to above as being available to EEA-issuers will no longer apply and they will need to comply with the DTRs
The Market Abuse (Amendment) (EU Exit) Regulations 2019 (UK MAR) is designed to ensure that the EU Market Abuse Regulation (EU MAR) continues to operate effectively after 31 December 2020, and that UK markets continue to be subject to the protections and requirements of the EU MAR. It is envisaged that, in the event of a no-deal Brexit, there will be close corporation between the UK and the EU on offerings of financial services. The same scope of financial instruments trading on UK and EU platforms will therefore be covered.
There will be slight differences in the reporting requirements for inside information and delaying disclosure. Issuers who have admitted financial instruments to UK trading platforms will be required to send to the FCA any notifications on delayed disclosure of inside information, and obtain the consent of the FCA for any delay of disclosure of inside information. This is in addition to sending a notification and obtaining the consent of any relevant EU competent authority required by the EU MAR.
A number of powers previously held by the ESMA and the European Commission will transfer to the FCA, and UK regulators will no longer be required to share information with EU authorities with no guarantee of reciprocity. There will still be the option however of responding to information requests from overseas regulators.
As from 31 December 2020, issuers will be required to use UK-adopted international financial reporting standards in preparing consolidated accounts, for financial years starting on or after 31 December 2020. For financial years beginning before 31 December 2020, issuers will however be allowed to continue to prepare financial statements using EU-adopted International Financial Reporting Standards (IFRS). Third country issuers (including issuers from the EEA) will also still be able to continue to use EU-adopted IFRS if deemed equivalent to UK-adopted standards, provided the FCA has granted the third country issuers an exemption.
Free float requirements
Issuers currently have to show that at least 25% of the shares are given to the public in one or more EEA states, shareholders in any jurisdiction will count towards the free float. As from 31 December 2020, in the event of a no-deal Brexit, shareholders from any jurisdiction and not just EEA states will count towards the free float.
AIM listed companies will still need to follow the AIM Rules, and, similarly, nominated advisers will still have to adhere to the AIM Rules for Nominated Advisers. The disclosure obligations of AIM companies will also continue to apply.
Only minor changes to the AIM Rules have been proposed, including amendments to references to EU law in glossary terms, and minor amendments have been made to references in the AIM rulebooks. It is likely that in the event of a No-Deal Brexit these proposed changes will be subject to an updated market notice.
Currently, non-EEA issuers trading on a UK regulated market can use an EEA auditor for their annual audit reports. As from 31 December 2020, if there is a no-deal Brexit, EEA auditors will be required to register with the FCA and will have to comply with the same rules as auditors based in any third country.
Changes to the UK Takeover Code
The Takeovers (Amendment) (EU Exit) Regulations will update the law underpinning the UK Takeover Code (the Code) to reflect the fact that the UK is leaving the EU. This is necessary to ensure that the takeovers regime in the UK continues to operate effectively after 31 December 2020, at which point the EU Takeover Directive will no longer apply in the UK.
Whilst most changes to the Code are immaterial, one important change is that the shared jurisdiction regime will cease to apply to companies incorporated in the UK. The UK Takeover Panel will no longer be required to share jurisdiction of a bid where: (i) the company has its registered office in the UK but it’s securities are admitted to trading on a regulated market in an EEA Member State, unless the company satisfies the residency test (i.e. it’s place of central management and control is in the UK); and (ii) EEA-incorporated companies have admitted securities to trading in the UK. If a company does satisfy the residency test, it seems that that offer will be subject to the ‘dual’ jurisdiction of both the UK Takeover Panel and the relevant member state supervisory authority.
How can companies prepare for a No-Deal Brexit?
The longer-term effects of a No-Deal Brexit remain unknown, and preparation for Brexit has been disrupted by the more immediate challenges faced during the Covid-19 pandemic. Those firms with proper contingency planning however will be best placed to mitigate any potential Brexit disruption, and time has therefore come for firms to re-focus their attention on the potential implications of a No-Deal Brexit scenario in the near future.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at December 2020.