Primary Market Bulletin: Guidance on sponsor’s obligations proposed

On 31 August 2017, the Financial Conduct Authority (FCA) published Primary Market Bulletin No. 18. This edition provides feedback on changes to the FCA’s Knowledge Base proposed in Primary Market Bulletin Nos. 16 and 17. The FCA is also consulting on further changes to the Knowledge Base.

This article focuses on the key aspects of the FCA’s guidance in respect of sponsors’ obligations under LR 8.3.4R, LR 8.4.2R(3) and 8.4.12R(2), as set out in three new proposed technical notes. See the following article for a summary of Primary Market Bulletin No.18: new technical notes confirmed and new sponsor technical notes proposed.

Common themes

The common themes across all three new proposed technical notes are:

• The guidance is not intended to be exhaustive and a sponsor will still be expected to exercise professional judgement when it decides what steps to take to comply with the applicable rule.
• The requirement for a sponsor to demonstrate that it has undertaken a systematic approach in considering whether it can give each of the sponsor declarations.
• A reminder that a sponsor’s obligations under LR 8.3.4R, LR 8.4.2R(3) and 8.4.12R(2) sit alongside (and should be read in conjunction with) Premium Listing Principle 1 or Listing Principle 1.
• The FCA’s expectation of sponsors to enhance the work undertaken by the applicant (or listed company) by drawing on its experience of advising on other sponsor services and its interaction with the FCA on matters concerning the application of the Listing Rules, the Disclosure Requirements and the Transparency Rules (together with the Rules).
• The FCA’s confirmation that reliance on the work or comfort provided by an applicant (or listed company), reporting accountant or other professional adviser is unlikely to be sufficient evidence to demonstrate that a sponsor has reached a reasonable opinion after due and careful enquiry without an appropriate level of enquiry and challenge by the sponsor. A sponsor is expected to review and challenge using its own knowledge and experience of the applicant (or listed company), its operating environment and other companies in its sector.
• The importance of record-keeping and the FCA’s expectation that a sponsor keeps clear records to demonstrate its own enquiries, challenge and action at all stages of an engagement, particularly when defining the scope of an adviser’s work and reviewing its observations and recommendations.

Sponsors’ duty regarding directors of listed companies - LR 8.3.4R

The new technical note Sponsors’ duty regarding directors of listed companies (UKLA/TN/718.1) sets out the work the FCA expects a sponsor to carry out in order to comply with its obligations under LR 8.3.4R to ensure that the directors of an applicant or listed company understand their responsibilities and obligations under the Rules.

Meaning of "reasonable steps"

Sponsors should assess at an early stage the circumstances in which their guidance or advice will be given to determine what action (if any) to take. What constitutes "reasonable steps" will vary depending on the circumstances and the technical note sets out those factors that a sponsor should typically consider: the type of sponsor service being provided, the nature of the listed company or applicant and the directors’ level of understanding and experience.

Sponsors are required to satisfy LR 8.3.4R up to completion of the relevant sponsor service. Where there is to be a period between the publication of a circular and completion of the relevant transaction or a period between publication of a prospectus and admission to the Official List, the FCA advises that a sponsor must ensure that directors understand under what circumstances they may need to obtain guidance or advice from the sponsor on their responsibilities and obligations during this period about the publication of a supplemental document.

The sponsor’s role

The FCA reminds sponsors that LR 8.3.4R requires a sponsor to take action rather than rely on the work of third parties, the listed company or the applicant. Where a sponsor relies on the work of a third party to satisfy LR 8.3.4R, on account of LR 8.3.2AG, the FCA expects the sponsor to form a judgement as to whether the third party’s work is sufficient for the purpose of forming its reasonable opinion. Where a memoranda or training may be provided to directors on their responsibilities and obligations to assist them to comply with Premium Listing Principle 1, the FCA would expect the sponsor, typically in conjunction with its legal advisers, to review any memoranda or training materials.

If the sponsor determines there are gaps in the directors’ understanding of the relevant rules, the FCA advises that the sponsor will need to decide upon the most effective way of addressing the gaps. Examples of actions a sponsor could take are set out in the technical note.

The FCA advises that sponsors should ensure directors are provided with an opportunity to ask questions about their responsibilities and obligations and, where it is apparent that further work is necessary, an appropriate follow-up should take place.

The FCA helpfully reminds issuers of their obligation to cooperate with the sponsor under LR 8.5.6R by providing all information reasonably requested by the sponsor for the purpose of carrying out the sponsor service in accordance with LR 8. This is likely to include providing access to relevant meetings with directors, and, where applicable, senior management. The sponsor should also have regard to its obligation to promptly notify the FCA of the company’s failure to comply with its obligations under LR 8.3.5AR.

Sponsors’ obligations on established procedures - LR 8.4.2R(3)

The new technical note Sponsors’ obligations on established procedures (UKLA/TN/719.1) sets out the work the FCA expects a sponsor to carry out in order to comply with its obligations under LR 8.4.2R(3) to ensure the directors of an applicant have established procedures which enable it to comply with the Rules on an ongoing basis.

Whilst the FCA acknowledges that there is likely to be some overlap and connection between the work carried out by sponsors in order to make the LR 8.4.2R(3) and LR 8.4.2R(4) (financial position and prospects) declarations, the FCA also confirms that LR 8.4.2R(3) is a separate declaration requiring a broader consideration of the applicant’s procedures, systems and controls.

Listing Principle 1 and LR 8.4.2R(3) encompass all ongoing obligations of the issuer under the Rules and corporate governance rules. The FCA provides a non-exhaustive list of such obligations in the technical note and also directs sponsors to LR 7.2.2G and LR 7.2.3G (which provide guidance on Listing Principle 1) by way of specific obligations that the FCA would expect a sponsor to have a particular focus on.

The meaning of "established"’

In circumstances where not all necessary procedures, systems and controls may have been operated at the time the sponsor declaration is given, the FCA advises that the applicant should have taken reasonable steps to have designed, documented, approved and communicated them to those responsible for their implementation and use at the point of admission to the Official List. The sponsor should review the applicant’s implementation plan in order to form a view on whether it is sufficient for the purpose of enabling the sponsor to comply with LR 8.4.2R(3).

Appropriate procedures, systems and controls

The FCA advises that there is no "one size fits all" approach and a sponsor should assess the circumstances and characteristics of the applicant in order to form a reasonable opinion of what procedures, systems and controls are appropriate. Factors that the FCA would expect a sponsor to take into account, together with actions that a sponsor might take to assess whether the procedures, systems and controls put in place by the applicant are established, are set out in the technical note.

IPO preparatory work prior to a sponsor’s engagement

Should a sponsor be subsequently engaged after IPO preparatory work has been undertaken in relation to establishing procedures, systems and controls for the purpose of complying with Listing Principle 1, the FCA advises that it would expect to see evidence that the sponsor has reviewed the work undertaken by the adviser(s) and applicant to be done, and assessed the appropriateness and timing of any work outstanding.

Sponsors’ obligations on no adverse impact - LR 8.4.12R(2)

The new technical note Sponsors’ obligations on no adverse impact (UKLA/TN/720.1) sets out the work the FCA expects a sponsor to carry out in order to comply with its obligations under LR 8.4.12R(2) on the publication of a circular in connection with certain transaction (eg Class 1) to ensure that a listed company’s ability to comply with the Rules are not adversely affected by the transaction.

Although LR 8.4.12R(2) does not contain a specific reference to the directors’ ability to make judgements on an ongoing basis about the financial position and prospects of the listed company and its group, the FCA advises that it would expect a sponsor to assess this as an integral part of its work under LR 8.4.12R(2).

Determining due and careful enquiry

The FCA advises that when assessing the impact of the transaction, the sponsor should have regard to the type of transaction being undertaken and the circumstances and characteristics of the listed company and, if applicable, the subject of the transaction. This will allow the sponsor to determine the due and careful enquiry required to form its reasonable opinion. Factors that may be relevant for a sponsor to consider are set out in the technical note.

Appropriate procedures, systems and controls

The FCA advises that a sponsor should first understand the listed company’s existing procedures, systems and controls in order to assess the extent to which they will be impacted by the transaction. If the transaction involves the acquisition or disposal of a company or business, then the sponsor should also understand the relevant procedures, systems and controls of the subject of the transaction in order to assess the impact it may have on the listed company.

Should the listed company prepare a board memorandum or integration plan, the FCA would expect to see evidence that the content of these documents have been reviewed and challenged by the sponsor. This includes defining the scope of these documents to ensure that they deal with issues that might arise in relation to the listed company’s ability to comply with all aspects of the Rules. The FCA would also expect the sponsor to be present at key meetings with the listed company where the content of the documents are discussed and approved. In the absence of a board memorandum or integration plan, the FCA advises that the sponsor will still need to demonstrate it has undertaken due and careful enquiry to come to its reasonable view that the transaction will not have an adverse impact on the listed company’s ability to comply with the Rules.

In circumstances where not all necessary enhancements to procedures, systems and controls will have been effected at the time the sponsor declaration is given, the FCA would expect the sponsor to have formed a reasonable opinion that the directors have formally committed to implementing the enhancements on a timescale that will ensure the listed company will, following completion, be able to comply with its obligations when required. The FCA advises that the sponsor should review the listed company’s commitment and plan in order to form a view on whether is it sufficient for the purpose of enabling the sponsor to meet LR 8.4.12R(2).

Takeovers with accelerated timetables/limited access

The technical note provides some useful guidance on the FCA’s expectations of sponsors with respect to the scope of their enquiries when acting as sponsor to a listed offeror in a public takeover with an accelerated timetable or where access to information regarding the target is limited.

Our view

The proposed new technical notes codify what the FCA considers to be current best practice among sponsors and do not contain anything particularly new or unexpected. However, it is helpful to have the FCA’s expectations clearly spelt out, particularly with regard to the assessment of no adverse impact for the purposes of LR 8.4.12R(2) and also the (non-exhaustive) list of matters to consider on established procedures.

The reminder of the interaction between some of the declarations and Premium Listing Principle 1, as well as the requirement for issuers to cooperate with sponsors when providing a sponsor service, is welcome as this will provide sponsors with further justification when making certain requests of applicants (or listed companies) as part of their due diligence process for each relevant declaration.

The guidance on the FCA’s expectations with regard to the scope of sponsors’ due diligence will enable sponsors to better comply with their responsibilities and obligations under the Listing Rules. Once finalised, it is anticipated that adherence to such expectations (and appropriate documentation of the same) is likely to be a particular focus of the FCA when reviewing sponsor files in future. In anticipation, sponsors should start reviewing their existing procedures to determine what changes might need to be made to ensure compliance with the proposed guidance.

Next steps

Responses to the FCA’s proposals are due by 11 October 2017.