Primary Market Bulletin 42

Standard listed companies will be required to make climate-related financial disclosures under our Listing Rule for the first time in their annual financial reports for accounting periods which began on or after 1 January 2022. Many commercial companies with a UK premium listing will be making their second set of disclosures under our Listing Rule.

We encourage all in-scope companies to familiarise themselves with the steps under the ‘Getting ready for TCFD-aligned climate-related disclosures’ section of our July review to help prepare to make the relevant disclosures. This includes improving internal processes, deepening familiarity with the TCFD’s recommendations, and engaging with investors to understand their disclosure expectations.

The steps may also be of interest to prospective issuers in considering how climate-related risks and opportunities should be reflected in their prospectus.

In our detailed analysis of the consistency of disclosures against the TCFD framework, published in July, we observed that a much lower percentage of companies had made disclosures consistent with the TCFD framework than companies self-reported. So, we remind companies of the guidance and standards that they should consider to support their disclosure of transparent and decision-useful climate-related information.

In addition, we reiterate our encouragement in PS21/23 for companies to consider Sustainability Accounting Standards Board (SASB) metrics for their sector when making disclosures against the TCFD’s recommendations (and when making wider sustainability-related disclosures). Use of SASB metrics will also help companies prepare to disclose effectively against the International Sustainability Standards Board’s (ISSB) future standards, given the direction of travel towards industry-based metrics and the status accorded to the SASB standards by the ISSB. This is consistent with the ISSB’s own encouragement for preparers to use SASB standards.

Since our review of the first TCFD-aligned disclosures under our Listing Rule, we have continued to review companies’ disclosures. We have further observed that some companies falling in the TCFD Non-Financial Groups (Energy; Transportation; Materials and Buildings; and Agriculture, Food, and Forest Products) had either:

• not identified climate change to be an applicable or material risk to their business; or
• had identified climate change to be a principal risk but had not made disclosures under the Strategy or Metrics and Targets pillars of the TCFD framework that were consistent with the TCFD’s Supplemental Guidance for Non-Financial Groups

Disclosures under the TCFD’s recommended disclosure Strategy c) (scenario analysis) typically did not appear demonstrably to have considered ‘the implications of different policy assumptions, macro-economic trends, energy pathways, and technology assumptions’, as set out in the TCFD’s Supplemental Guidance for Non-Financial Groups. For example, some oil and gas companies’ disclosures of their hydrocarbon reserves were based solely on current conditions and did not account for changes that might reasonably be anticipated as the wider economy decarbonises.

Disclosures under the TCFD’s recommended disclosure Metrics and Targets a) sometimes did not include forward-looking projections, including on matters such as future demand for reserves and relevant jurisdictions’ climate change policy.

Since the UK and many other governments around the world have made commitments to decarbonise, assumptions based on current conditions may not reveal the transition risks that companies face under these decarbonisation pathways. The potential impacts of transition risk on companies’ business models and hence their future enterprise value have been considered in recent studies, such as Carbon Tracker’s Unburnable Carbon: Ten Years On. Failure to apply forward-looking assumptions may therefore provide insufficient information for market participants to assess climate-related risks and opportunities.

Taking an oil and gas company as an example, disclosures in line with the expectation above may reasonably consider:

Strategy c):

• applying scenario analysis that ‘provides an indication of direction or ranges of potential financial implications, for example, directionally where key financial aspects such as CapEx, R&D, supply chains, or revenue might be headed’ as recommended in the TCFD's Supplemental Guidance for Non-Financial Groups
• using ‘high quality, periodically updated and transparent’ scenarios as set out in the TCFD Guidance on Scenario Analysis for Non-Financial Companies 

Metrics and Targets a):

• providing forward-looking projections consistent with the TCFD’s Supplemental Guidance for Non-Financial Groups
• providing sector-specific metrics, which the TCFD’s Supplemental Guidance for Non-Financial Groups illustrates could include a breakdown of reserves by type and an indication of associated emissions factors to provide insight into potential future emissions

Among the further observations since our July 2022 review of TCFD-aligned disclosures, we found that typically the extent to which financially material climate-related risks identified in the narrative sections of companies’ disclosures are reflected in the financial statements is not clear. This is consistent with the FRC’s analysis, published in July, which also highlighted that better practice examples of how management considered climate-related risks in the preparation of their financial statements showed a coherent link between the narrative reporting of climate risks and the related financial statement disclosures.

In our response to the ISSB’s draft standards for sustainability and climate-related disclosures, we welcomed the emphasis placed on connectivity between climate and sustainability-related disclosures and information in the financial statements. We note that these connections are particularly important for investors’ assessment of a company’s enterprise value.

COP27 emphasised the urgency of the climate challenge and importance of high-quality transition planning to support an economy-wide transition to net zero. Our review of TCFD-aligned disclosures found that while most companies were making net zero commitments, the content of some of those commitments were often not clear and in some cases they risked being misleading as a result.

Although the TCFD’s Guidance on Metrics, Targets and Transition Plans did not apply to the disclosures made for the 2021 reporting period, an explicit reference to this content was added to our Handbook Guidance in PS21/23 (LR 9.8.6C G (5), LR 14.3.29 G (5)). We therefore consider this content to be relevant to listed companies in scope of these rules and guidance when making their disclosures for the 2022 reporting period.

We also note the guidance provisions in LR 9.8.6F G and LR 14.3.32 G (consistent with the TCFD’s own guidance) which clarify that a firm headquartered in, or operating in, a country that has made a commitment to a net zero economy is encouraged to assess the extent to which it has considered that commitment in developing and disclosing its transition plan.

The FCA has worked closely with the UK TPT, which was launched by The Treasury in April 2022. We have committed to drawing on the TPT’s outputs to strengthen disclosure requirements in this area for listed companies and regulated firms.

We therefore encourage early engagement with the TPT’s proposed Disclosure Framework and Implementation Guidance. The TPT’s framework encourages an ambitious approach, which emphasises short-term actions, and supports greater accountability for delivery.

It clarifies that ‘climate change presents foreseeable risks, together with opportunities, in every sector of the economy including but not limited to high-emitting firms’ and encourages a strategic and rounded approach to achieving an orderly transition to net zero.

We will continue to develop our regulatory approach to listed companies’ climate-related financial disclosures.

In particular:

• We will continue to monitor listed companies’ climate-related financial disclosures under our Listing Rules

We intend to continue highlighting our guidance and expectations, as needed, to help companies enhance their disclosures, and we will take action as appropriate in line with our supervisory approach (PMB 36 and Technical Note 802.1). As part of this we, and the FRC, envisage using multi-firm or thematic reviews again next year to consider TCFD-aligned disclosures made by all listed companies in scope of our climate-related financial disclosure rules.

• We intend to build on our TCFD-aligned disclosure rules in line with domestic and international developments, to meet investors’ information needs

We have committed to consulting on adapting our climate-related financial disclosure rules to reference the ISSB’s standards once these are finalised and available for use in the UK. We also consider that this would be an appropriate time to consult on moving to a mandatory compliance basis. We encourage listed companies to continue to deepen their familiarity with the TCFD’s recommendations and further improve internal processes to prepare to disclose effectively against existing and prospective requirements.

• We intend to consult on strengthening our disclosure expectations for transition plans, drawing on the outputs of the TPT, once finalised

We therefore encourage companies to engage with the initial TPT outputs issued for consultation and provide feedback on practical implementation via the online Sandbox.

The NSI Act is the Government’s system to scrutinise and – where necessary – intervene in qualifying acquisitions that could harm the UK’s national security. It is administered by the Investment Security Unit in the Department for Business, Energy, and Industrial Strategy (BEIS).

If the Secretary of State for BEIS reasonably suspects that an acquisition meets the criteria to be a ‘qualifying acquisition’ and that it has given rise to, or may give rise to, a risk to national security, the acquisition can be ‘called in’ for scrutiny. There is also a legal requirement for an issuer to make a mandatory notification to BEIS when a proposed acquisition is in respect of a ‘qualifying entity’ in one of 17 defined sensitive areas of the UK economy and where the acquirer gains a certain level of control over the entity, such as exceeding certain thresholds in shares or voting rights.

The 17 areas are:

• Advanced Materials
• Advanced Robotics
• Artificial Intelligence
• Civil Nuclear
• Communications
• Computing Hardware
• Critical Suppliers to Government
• Cryptographic Authentication
• Data Infrastructure
• Defence
• Energy
• Military and Dual-Use
• Quantum Technologies
• Satellite and Space Technologies
• Suppliers to the Emergency Services
• Synthetic Biology
• Transport

These acquisitions are known as ‘notifiable acquisitions’. Issuers must obtain approval from the Secretary of State before a notifiable acquisition is completed, otherwise the acquisition is void.

Issuers need to carefully consider whether a proposed acquisition is notifiable under the NSI Act. Further information on which acquisitions qualify, those that will require mandatory notifications and the process following notification can be found on the Government’s website.

Interim or final orders made by the Secretary of State under the NSI Act are not published by the Government. Final orders (but not interim orders) are subject to a publication notice, on the Government’s website, that makes public the fact of the order and reasons for it, but the order itself is not made public. This will not preclude an issuer from complying with its disclosure obligations. However, under the NSI Act there is a possibility that the Secretary of State could include a non-disclosure requirement as part of an interim or final order. Non-disclosure requirements are expected to be uncommon.

Issuers are reminded that they need to continue to consider their obligations under UK MAR to disclose inside information when acquisitions are subject to review, assessment or in relation to interim or final orders under the NSI system.

Inside information under UK MAR is information, which is of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments (See UK MAR, Article 7 (Inside Information)).

Inside information can also be considered as information that a reasonable investor would be likely to use as part of the basis of his or her investment decisions.

Issuers should contact BEIS ([email protected]) and the FCA if they consider that any information in interim or final orders could constitute inside information under UK MAR and if BEIS is considering imposing conditions requiring the non-disclosure of that inside information on national security grounds.

If this were to be the case and inside information is not disclosed when it should be under UK MAR, the FCA may need to consider the suspension of the listing of the issuer’s securities under the Listing Rules to protect the smooth operation of the market or to protect investors. For this reason, issuers are encouraged to engage with BEIS and FCA at an early stage to discuss any potential issues.

Notifiable acquisitions which are completed without the prior approval of the Secretary of State are legally void under the NSI Act. Completing a notifiable acquisition without Secretary of State approval, without reasonable excuse, is an offence under section 32 of the NSI Act that could result in civil or criminal penalties.

However, where a notifiable acquisition has been completed without first notifying BEIS, issuers can make a retrospective validation notification to BEIS. BEIS is also able to proactively and retrospectively review acquisitions to consider whether the acquisition should have been notified, and if so, to assess whether to approve the acquisition under the NSI Act.

Issuers will need to consider whether the void status of an acquisition, which has not been notified in accordance with the NSI Act, would constitute inside information under UK MAR.

Issuers should contact BEIS ([email protected]) if they have failed to properly notify an acquisition under the NSI system, and FCA to discuss any resulting disclosure or Listing Rules obligations.

We would like to:

• remind issuers that they need to continue to consider their obligations under UK MAR to disclose inside information when acquisitions are subject to review or assessment under the NSI Act system
• encourage issuers and their advisers to make sure they are aware of their obligations under the NSI Act to notify relevant acquisitions to BEIS to avoid the potential impact on their securities and the market caused by an acquisition being void
• encourage issuers to contact BEIS or the FCA where they identify any potential issues with complying with their disclosure obligations under UK MAR or the Listing Rules
• refer issuers to the Government’s website for more information on the NSI system

Convatec is a premium-listed issuer and in his role as non-executive Chairman, Sir Christopher was responsible for governance over Convatec’s market announcements. In October 2018, Sir Christopher disclosed inside information concerning a revision of Convatec’s financial guidance and the retirement of its CEO to senior individuals at two of the company’s major shareholders. This unlawful disclosure took place 5 days before Convatec released a regulatory announcement disclosing this information to the market.  

In issuing the Final Notice, the FCA accepted that Sir Christopher acted negligently and had no personal financial motive for making the unlawful disclosures. It also took into account that: when he made the unlawful disclosure, Convatec had not formally classified the information as inside information; Sir Christopher had informed another Convatec board member and one of its brokers that he was intending to contact or had contacted the major shareholders; Sir Christopher imposed confidentiality and no-dealing obligations on the individuals to whom he made the disclosures (and Convatec already had a relationship agreement to that effect with one of the shareholders).
 

Annex A to the Final Notice contains a statement of the law and guidance relevant to the outcome against Sir Christopher. Annex B to the Final Notice (which contains a detailed summary of the key representations made by Sir Christopher which the FCA has not accepted and the FCA’s conclusions in respect of them) cites other relevant law and guidance.

Of particular note for the purpose of this article are the following:

• Article 10 of MAR provides: '…unlawful disclosure of inside information arises where a person possesses inside information and discloses that information to any other person, except where the disclosure is made in the normal exercise of an employment, a profession or duties.'
• Article 17(1) of MAR provides: 'an issuer shall inform the public as soon as possible of inside information which directly concerns that issuer...'
• Recital 19 to MAR states: 'This Regulation is not intended to prohibit discussions of a general nature regarding the business and market developments between shareholders and management concerning an issuer. Such relationships are essential for the efficient functioning of markets and should not be prohibited by this Regulation.'
• Recital 23 to MAR concerns the prohibition against insider dealing and states its essential characteristic, '…consists in an unfair advantage being obtained from inside information to the detriment of third parties who are unaware of such information and, consequently, the undermining of the integrity of financial markets and investor confidence.'
• Chapter 1.4.5 of the FCA’s Code of Market Conduct includes a list of factors to be taken into account in determining whether or not a disclosure is made by a person in the proper course of the exercise of his employment, profession or duties. This includes whether the disclosure is accompanied by the imposition of confidentiality requirements upon the person to whom the disclosure is made and is reasonable in both broad and certain specific purposes.
• Chapter 2.5.7 G (2) of the FCA’s Disclosure Guidance and Transparency Rules provides: 'Selective disclosure cannot be made to any person simply because they owe the issuer a duty of confidentiality.'
• For the purposes of this article it is important to note the FCA’s application of the decision of the ECJ in Grongaard and Bang (Case C-384/02 [2005] ECR I-9939), in which the ECJ interpreted the exception to the rule in relation to non-disclosure of inside information to be one that must be interpreted strictly, such that the disclosure of such information is justified only if it is 'strictly necessary for the exercise of an employment, profession or duties and complies with the principle of proportionality'.

We set out below what we consider to be the key issues relating to unlawful disclosure that arise from the Final Notice.

Readers should note that we shall not in this article address the FCA’s decision that the information disclosed was inside information – an obvious pre-cursor to the decision that Article 10 had been breached - which is discussed in detail at paragraphs 5.4 to 5.19 of the Final Notice and also in Annex B where the FCA’s rejection of Sir Christopher’s representations on that issue is explained.

This article is concerned only with the FCA’s decision that inside information was unlawfully disclosed.

1. As explained in its Recital 19, MAR does not prohibit discussions of a general nature between an issuer and its shareholders. However, Recitals 23 and 24 to MAR explain that the purpose of MAR – protecting the integrity of the financial market and enhancing investor confidence – is based on the assurance that investors will be placed on an equal footing. No investor should be given an unfair advantage by the misuse of inside information. This is the context in which the FCA has viewed Sir Christopher’s disclosures.
    
2. Whilst engaging with, and fostering good relations with major shareholders may be considered part of a Chair’s duties, when Sir Christopher made the disclosures he was not doing so in the normal exercise of his employment, profession or duties for the purposes of Article 10. As set out in the Final Notice (para 5.21) the disclosures were not necessary for Sir Christopher to perform his functions. As the FCA’s investigation discovered, his primary objective in making the disclosures was to forewarn the two specific major shareholders of imminent events.
    
3. Sir Christopher’s actions were considered in the light of his own considerable experience and position, having received relevant training on EU MAR. In this context, he could not justify the disclosures on the basis that Convatec (having engaged its brokers) had not formally classified the information as inside information and that he had not been warned against the disclosures by another Convatec board member and one of the company’s brokers, despite having discussed the disclosures with them.
    
4. Imposing confidentiality and no-dealing obligations on the recipient of inside information does not render a disclosure of inside information lawful if the disclosure was not reasonable (or, applying Grongaard and Bang, strictly necessary) in the first place. This is explained at DTR 2.5.7 G (2) which provides examples of when selective disclosure of inside information (including to major shareholders) may be permissible, none of which applied to Sir Christopher’s disclosures.

Whilst the FCA’s Enforcement division publishes disciplinary outcomes into market abuse, such as the Final Notice against Sir Christopher Gent, the source of such Enforcement outcomes is enquiries carried out by the FCA’s Market Oversight directorate. In particular, the FCA’s Primary Market Oversight department (PMO) carries out numerous enquiries into suspected unlawful disclosures of inside information by issuers, directors, advisers and other parties.

Certain situations and types of behaviour crop up repeatedly in our enquiries and PMO concludes that they clearly present a particular risk of unlawful disclosure of inside information.

We describe below some such behaviours and situations, in order that issuers can consider how they can mitigate or avoid such risk. Issuers should bear in mind the following law and rules which are critical to our observations below:

• Article 17(1) of MAR requires inside information to be disclosed as soon as possible to the 'public'. 
• Article 17(1) of MAR forbids issuers from combining the disclosure of inside information with marketing material.
• DTR 6.3.3 R requires issuers to entrust a Regulatory Information Service (RIS) with the disclosure of inside information – an issuer’s website or social media account alone will not suffice.
• DTR 2.5.9 G guides that, 'An issuer should bear in mind that the wider the group of recipients of inside information, the greater the likelihood of a leak…'

1. Social media

In recent years issuers have sought to adopt and sometimes pioneer innovative communication opportunities allowed by social media to release important information and market their products and services. Ease of communication has led investors to want and sometimes expect immediate access to issuers’ executives. In recent years PMO has opened numerous enquiries into suspected disclosure of inside information via issuers’ social media offerings, particularly Twitter, or in direct communications between issuers’ executives and investors through open or private social media channels. When developing their communication and social media offerings issuers should remember that inside information must be disclosed via RIS (which ensures disclosure to the 'public') and cannot be disclosed by social media alone. Furthermore, inside information cannot be disclosed in a manner which combines the information with marketing material.

2. Mainstream media

PMO has opened numerous enquiries, and indeed referred to Enforcement, instances of suspected unlawful disclosure where issuers, through their executives or communications departments, have leaked significant (and possibly inside) information to mainstream media outlets, often resulting in press articles publicised before the requisite RIS announcement has been issued. The FCA understands that issuers will want to develop proactive and successful media strategies and will need to pass information to high-profile media outlets for this purpose. However, this does not justify leaking inside information and before any such communications the issuer must consider very carefully whether the information to be disclosed is inside information. In the FCA’s view such disclosures will very rarely, if ever, be made in the normal exercise of an employment, a profession or duties for the purposes of Article 10 of MAR. Furthermore, where a press article containing the inside information is subsequently published, the FCA does not consider it a significant mitigant that the article was published outside market hours, which is a common feature of our enquiries.

3. Fundraisings

PMO has opened numerous enquiries into potential leaks of inside information regarding issuers’ fundraising activities, such as placings, subscriptions and rights issues. Often such leaks are in respect of smaller issuers and are reported on bulletin boards or smaller media outlets or blogspots. It is often not possible for PMO to determine the source of such leaks although in most instances it seems likely that the source is not the issuer itself, whose fundraising may be damaged by the leak. Bearing in mind the guidance at DTR 2.5.9 G, issuers can protect themselves from such behaviours by putting in place tight systems and controls around fundraisings, restricting access to the information as far as possible, creating proper MAR-compliant insider lists and insisting that their advisers do the same and follow wall-crossing procedures as set out in Article 11 of MAR.

4. Analyst and media briefings

While executives will often be briefed on market disclosure obligations prior to such events, PMO continues to open enquiries into suspected unlawful disclosures by issuers’ senior executives in analyst briefings, earnings calls or media events. Typically, troublesome disclosures have arisen where executives are unsure about the detail of the results being presented, speak unscripted or where they are drawn off script in Q&A sessions. Issuers are reminded that analysts do not represent “the public” for the purposes of MAR and that its executives must be thoroughly prepared for market and media events to avoid a selective disclosure of inside information to people attending the event

In our enquiries PMO typically asks issuers to send us their written policies and procedures for handling inside information and, if the relevant disclosure has taken place over social media, their social media policies.

Our general observations here are that, whilst it is comforting that all issuers we have questioned have some sort of written policies and procedures in place, they vary in quality. Whilst some are cursory, many are lengthy reproductions of MAR and the relevant FCA rules and guidance which will be difficult for relevant employees and executives to digest and put in context.

We have not seen a written policy or procedure that puts the issuer’s (and its employees’ and executives’) legal obligations in the context of its day-to-day activities and identifies practical situations/behaviours that create risk. Nor have we seen any social media policy that explicitly recognises the specific risk of unlawful disclosure of inside information through the improper use of social media.

Issuers should therefore consider whether their written policies and procedures are adequate to address the risks identified in this article and update and socialise them as necessary.

Post its publication, we have received feedback from a number of stakeholders that the public outcome with regard to the conduct of Sir Christopher Gent has raised concerns over a broader spectrum of engagement with listed companies than is covered by the facts of the case. One particular concern was the extent to which any kind of collective engagement by shareholders might be seen as being inconsistent with MAR.  

The FCA is conscious that is has two policy objectives in this area, those of shareholder engagement and preventing market abuse. The intention of MAR is as noted in Recital 23 and it is also the FCA’s view that, as noted in its Consultation on proposals to improve shareholder engagement (CP19/07):

'by exercising stewardship and challenging issuers’ strategies and decisions, asset owners and their asset managers can improve issuers’ understanding of their interests and influence corporate strategy to further those interests. This will contribute to the long-term efficiency and effectiveness of capital allocation, benefitting investors and society.'

We are keen that the public outcome with regard to the conduct of Sir Christopher Gent and indeed our highlighting of the other risk areas described herein do not inhibit or stifle high quality engagement with shareholders. Our intention is to provide this clarity so as to aid issuers, directors and shareholders in understanding the FCA’s concerns and rationale. The extent to which an engagement between a company and its shareholders might contravene MAR will ultimately depend on the circumstances.

Any analysis is likely to focus primarily on the nature of the information that is shared and the rationale for doing so, rather than on the number of shareholders involved in the discussion.

Recently it has come to our attention that shell companies may not be properly applying the definition of a reverse takeover to a prospective transaction or may not have considered that a transaction the company is contemplating may potentially be a reverse takeover. As a consequence, some shell companies may not have contacted us to discuss whether a suspension was appropriate and applied to us to be cancelled and re-admitted to listing post completion of the transaction.

Shell companies as defined in LR 5.6.5A R of the Listing Rules are companies whose assets consist solely or predominately of cash or short-dated securities, or whose predominant purpose or objective is to undertake an acquisition or merger, or a series of acquisitions or mergers. Under the definition in LR 5.6.5A R, shell companies include cash shells and SPACs.

Given the purpose of a SPAC is, and the purpose of a cash shell may be, to identify acquisition opportunities, the FCA’s rules around reverse takeovers will be relevant for all such entities and of paramount importance in ensuring that they comply with their continuing obligations.

We have therefore written to directors of shell companies with securities listed on the Official List with the information set out below to remind them of their obligations.
 

As per LR 5.6.4 R, a reverse takeover is defined as a transaction, whether effected by way of a direct acquisition by the issuer or a subsidiary, an acquisition by a new holding company of the issuer or otherwise, of a business, a company or assets:

• where any percentage ratio is 100% or more; or
• which in substance results in a fundamental change in the business or a change in board or voting control of the issuer

The issuer referred to in the definition above is a listed company.

In particular, please note that the definition of a reverse takeover in LR 5.6.4 R is broad and refers to a 'transaction'. In this context, it is not just an acquisition of a company's entire issued share capital that would be caught but is likely to include any transaction of an acquisitive nature.

This could include an acquisition of assets such as the issuance of a loan, a purchase of a minority stake or entrance into a joint venture arrangement.

When calculating the percentage ratio, the issuer must apply the class tests and our rules on the aggregation of transactions in LR 10.2.10 R.

For a shell company, the percentage ratios of any transaction are likely to be 100% or more because, in applying the class tests as per paragraph 8 R (5) of LR 10 Annex 1, the cash and short-dated securities held by the shell company must be excluded in calculating its assets and market capitalisation.

In addition, we will generally consider that any form of transaction undertaken by a shell company will change the nature of its business and therefore result in a fundamental change in its business. Further guidance is set out in LR 5.6.5 G on factors the FCA considers as being indicators of a fundamental change.

As a result, given the nature of the companies and the wide scope of our rules, it is often the case that the first transaction that a shell company enters will constitute a reverse takeover.

Where a shell company proceeds with a reverse takeover there will be a number of impacts as follows.

Suspension of listing

Generally, when a reverse takeover is announced or has leaked, there will be insufficient publicly available information in the market about the proposed transaction and the shell company will be unable to assess accurately its financial position and inform the market accordingly. As a result, the FCA will often consider that a suspension of the listing of the shell company's shares will be appropriate (LR 5.6.8 G).

An exception will be where a shell company is an issuer which falls within LR 5.6.5A R (2) and confirms that it meets certain conditions and has made certain disclosures in its admission prospectus such that we are satisfied that the shell company has sufficient measures in place to protect investors and so that the smooth operation of the market is not temporarily jeopardised (LR 5.6.8 G and LR 5.6.18A G to LR 5.6.18F R).

We remind issuers of Listing Principle 1 (LR 7.2.1 R), which requires that a listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations.

Issuers may wish to include a plan for contacting the FCA in order to discuss whether a suspension is appropriate or to request a suspension, as part of any planning they may do when considering any potential transaction.

Cancellation and re-admission

We will generally seek to cancel the listing of an issuer's shares when the issuer completes a reverse takeover (LR 5.2.3 G and LR 5.6.19 G). If the issuer wants its shares to remain listed and admitted to trading post completion, it will need to apply to us to be re-admitted to listing as well as making appropriate arrangements with the operator of the relevant market about its re-admission to trading.

The application for re-admission to listing and to trading on a regulated market is most likely to trigger the requirement for the issuer to publish a further prospectus and an eligibility review. The purpose of requiring re-admission is to ensure that ineligible companies cannot remain listed post completion of a reverse takeover.

Please note that a company applying for re-admission will need to comply with our transitional provisions for shell companies in relation to market capitalisation under LR 2.2.7 R (1) as set out in LR TR 16.

A listed shell company must contact us (LR 5.6.6 R) as early as possible:

• before announcing a reverse takeover which has been agreed or is in contemplation, to discuss whether a suspension is appropriate, or
• where details of the reverse takeover have leaked, to request a suspension

Early engagement with us is particularly important in circumstances where the issuer intends to pursue the transaction or has reached a stage where the transaction can be described as being in contemplation (LR 5.6.7 G).

A decision to suspend listing can have a significant market impact and so early engagement, preferably before the point where a reverse takeover can be considered in contemplation, is essential. In these circumstances, issuers should contact the Primary Market Monitoring emergency line on 020 7066 8354 or email [email protected].  

We would also like to remind issuers of the need to ensure that they consider Listing Principle 2 (LR 7.2.1 R), which requires issuers to deal with us in an open and co-operative manner, when considering the appropriate time to contact us.

Issuers should be aware that in the event we suspect a breach of our rules has occurred we may decide to open an investigation via our Enforcement division. Such an investigation could include both the listed company and its directors in its scope.

Were such an investigation to establish that a breach had occurred then the FCA can impose a range of penalties, including financial penalties.

Separately, in order to be re-admitted to listing, the company's securities must be eligible for listing. As part of assessing eligibility for listing we will review the historic compliance of the company and its directors with our rules and may refuse a listing where we consider such a listing would be detrimental to investors' interests (LR 2.1.3 G). Therefore, the extent to which a company and its directors complied with our rules, including around reverse takeovers, prior to the transaction may affect the eligibility of the enlarged company for listing.

Issuers should also note that any non-compliance may affect the eligibility of other new applicants to listing with which the directors are connected.

If issuers are in any doubt whether any actions by the company may constitute a reverse takeover, they can submit a request for written guidance via our electronic submission system (ESS) or contact our general administrative line on 020 7066 8348.  

DTR 4.1.14 R requires companies in scope to produce their annual financial reports in the electronic reporting format specified in the TD ESEF regulation, the UK’s on-shored version of the ESEF Regulatory Technical Standard. With structured electronic format mandatory for reporting periods starting on or after 1 January 2021, the Lab reviewed a sample of UK filings using public data and data made available by the FCA. In addition, the Lab engaged with companies and a range of stakeholders including tagging software and service providers, design agencies and assurance providers, to gather feedback and identify areas for improvement.

The Lab focused on companies’ process for preparing and submitting structured reports, the usability and design of the reports and XBRL tagging, highlighting what they were pleased to see companies are doing and what many companies need to improve, and we have grouped our summary under the headings below.

Pleased to see:

• companies rising to the challenge to produce a report in line with the new requirements
• high use of the FCA’s test facility to iron out issues ahead of the final submission
• some examples of companies providing disclosures about governance and internal and external assurance process

Many companies need to improve:

• the naming and structure of file(s) submitted to the National Storage Mechanism. This was the cause of many rejected filings
• their review and governance processes — more engagement and education is needed, including at the management and board levels

Pleased to see:

• improvement in the design of the structured reports – most issues with fonts and images displaying incorrectly have been addressed
• some companies filed their structured report relatively early in the reporting season
• many companies put the structured report on their website

More companies need to improve:

• the usability of the report, by making a validated report available on a company's website with an inline viewer
• the timing of their report — the deadline is reverting to 4 months after year-end, which means many companies may need to speed up the process from this year

Pleased to see:

• the use of ‘concealed’ tags has largely disappeared.

More companies need to improve:

• their selection of tags, including by focusing on the accounting meaning of their disclosures and by avoiding unnecessary extensions
• the selection of appropriate anchors for extensions
• the completeness of calculations

In the first year of mandatory structured reporting, tagging was limited to the primary financial statements and a few mandatory note tags.

For financial years starting on or after 1 January 2022, companies are also required to tag the notes, including accounting policies. The report recommends that companies start testing text block tagging now in readiness for this additional requirement.

Issuers can find the latest information on structured digital reporting on our website. We have recently added a section to our Filing of Structured Annual Financial Reports page regarding the 2022 European Single Electronic Format (ESEF) Reporting Manual.

We plan to consult in early 2023 on updating our rules and guidance, which will reference the proposed addition of the ESEF 2022 taxonomy and the UKSEF 2023 approach (see FRC UKSEF tagging guide and developers’ guide).

We expect our system to be set up to process these in January 2023.

Article 16 of the onshored version of Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (UK SSR) states that where the shares of a company are traded on a trading venue in the UK and a venue located in a third country, the FCA shall determine, at least every two years, whether the principal venue for the trading of those shares is located in a third country. The purpose of this is to avoid shares admitted to trading on UK trading venues being subject to some regulatory obligations under the UK SSR where they are principally traded on third country trading venues.

Therefore, shares whose principal trading venue is outside the UK are exempt from some of the requirements in the UK SSR, including reporting obligations for position holders under Articles 5 and 6. According to the rules, the FCA shall publish the list of exempted shares which will be effective for 2 years.

The FCA published its initial list of exempted shares on 31 December 2020. This list contains shares admitted to trading on a UK trading venue and on third country venues whose principal venue for trading is outside the UK.

The list is available on our website in an Excel file and is made of 2 tabs:

1. The FCA list of exempted shares as determined under Article 16(2), first sub-paragraph of the UK SSR
2. The ESMA’s List of exempted shares as of the end of the transition period

The list of exempted shares is currently under review as the FCA is undertaking the biannual liquidity assessment that is required under the UK SSR to determine where shares traded on both UK and third country trading venues are principally traded.

Following this review, this list will be replaced as follows:

• The ESMA list of exempted shares tab will no longer be effective, will be deleted and should no longer be used.
• The FCA list will remain and be updated with the results of our liquidity assessment.
• The current structure of the FCA list will remain, this will be an Excel file with the updated list and instructions.

The updated list of exempted shares will be published on the FCA’s website on 30 December 2022.

Further details on the content of this list will be provided on our website prior to the date of publication.

In order to publish an exempt shares list on 30 December 2022, our biannual liquidity assessment will only include shares admitted to trading on UK trading venues up to 31 October. Therefore, the exempted share list published in December will not include shares admitted to trading on UK trading venues in November and December.  

Subsequently, we plan to undertake a further liquidity assessment and publish an updated exempt shares list in Q1 2023 which will include shares admitted to trading on UK trading venues in November and December 2022. This updated list will come into force on 1 April 2023. Firms should use the exempt shares list published on 30 December 2022 until that date.   

If reporting firms and individuals identify any shares that should be added to the exempt shares list, they should contact the Position Monitoring Unit at [email protected] to bring this to our attention.