9 October 2014 UK Corporate Update. Competition & Markets Authority publishes final order on mandatory tendering of audit contracts In this issue The Competition & Markets Authority has published a final order to require FTSE 350 companies to put their audit contracts out to tender every 10 years and to give more powers to audit committees in relation to auditor appointments. The order takes effect on 1 January 2015 and applies to financial years commencing on or after 1 January 2015. Competition & Markets Authority publishes final order on mandatory tendering of audit contracts .......................................... 1 Background European Commission consultation on impact of international accounting standards in the EU .......... 2 The order implements the remedies set out in the final report on the supply of statutory audit services by the CMA's predecessor, the Competition Commission. The report was published in October 2013 following a two year review by the Competition Commission. The implementation of the remedies was, however, delayed pending adoption of the EU statutory audit package in the form of Directive 2014/56/EU (the "Statutory Audit Directive") and Regulation 537/2014 (the "Statutory Audit Regulation") in June 2014. Final order The final order is substantially the same as the draft on which the CMA consulted in July 2014. The main changes are to permit audit committee disclosures to be included in the annual report if there is no audit committee report, to bring forward the start date for the transitional provisions to 16 June 2014 to tie in with the date the Statutory Audit Regulation came into force and to amend the definition of "Competitive Tender Process" so that it is deemed to be completed before the start of the financial year to which the audit appointment relates. Main provisions The main provisions of the final order are as follows: > a FTSE 350 company must not enter into an agreement for statutory audit services unless the company has made an auditor appointment pursuant to a competitive tender process in relation to one or more of the preceding nine years or has conducted a competitive tender process in relation to the next financial year (the mandatory tender processes rule). A competitive tender process must involve at least two auditors, one of which may be the incumbent auditor, and must be initiated and supervised by the audit committee; > if a competitive tender process has not been completed for auditor appointments in relation to five consecutive financial years, the audit committee must state in the audit committee report (or in the annual report if there is no audit committee report) when the company intends to put the audit contract out to tender and why this is in the best interests of the 1 ESMA sets out detail of how voting rights will be calculated under revised Transparency Directive ..... 3 ESMA consults on regulatory technical standards for prospectuses .......................................... 4 company. The statement must be repeated in each subsequent report until a competitive tender process is conducted; > to the extent permitted by law or regulation, only the audit committee, on behalf of the board, may negotiate and agree the audit fee and scope of the audit, oversee a competitive tender process and make recommendations on auditor appointments to the board; and > the audit committee must also include a statement of compliance with the CMA order in the audit committee report (or in the annual report if there is no audit committee report). The CMA has sought to align the transitional provisions in the order regarding the mandatory use of competitive tender processes with the transitional provisions in Article 41 of the Statutory Audit Regulation regarding the mandatory rotation of auditors. This means that, as at 16 June 2014: > where an auditor has been appointed for 20 or more consecutive financial years, the mandatory use of tender processes rule applies to audit appointments made on or after 17 June 2020; > where the auditor has been appointed for 11 or more but less than 20 years, the rule applies to appointments made on or after 17 June 2023; and > where the auditor has been appointed for less than 11 years, the rule applies to auditor appointments made on or after 17 June 2016. The CMA notes that the Statutory Audit Regulation does not specify when the period for calculating the duration of the audit engagement should begin. Given the guidance so far (in particular the European Commission's letter to national oversight bodies in September 2014), the CMA considers that the duration should be calculated from the first appointment (that is from the first financial year covered in the audit engagement letter for which the auditor has been appointed for the first time to carry out consecutive statutory audits). However, given the lack of clarity, the CMA has reserved the right to review the operation of the order if "substantial guidance" is forthcoming which differs from the CMA's interpretation. The CMA's order, explanatory notes, response statement and press release are available here. European Commission consultation on impact of international accounting standards in the EU The Financial Reporting Council has published a reminder to encourage interested parties to respond to a recent consultation by the European Commission on the impact of IFRS in the EU. The consultation was published in August 2014 and is part of an evaluation by the Commission of whether the IAS Regulation has delivered the expected benefits of comparability and transparency of financial reports. The Regulation became effective in January 2005 and requires EU companies listed on regulated markets to prepare their consolidated accounts on the basis of IFRS adopted by the EU. The consultation paper consists of 42 questions, including: > whether company respondents use IFRS and, if not, the reasons why not; > whether the scope of the IAS Regulation should be extended beyond consolidated accounts of EU companies listed on regulated markets; > whether applying IFRS in the EU has made financial statements more transparent, altered the comparability of financial statements, increased 2 UK Corporate Update the protection for investors and/or increased confidence in financial markets; > whether IFRS has affected investors' ability to assess stewardship by management; > whether the differences between IFRS as issued by the International Accounting Standards Board and IFRS as adopted by the EU cause problems and whether the European Commission should have more leeway to modify standards adopted by the IASB; and > how IFRS compare with other GAAPs in terms of providing a true and fair view and how often is was necessary to depart from IFRS to reflect the reality of the company's financial performance and position. The deadline for responses is 31 October 2014. The FRC also refers interested parties to a recent staff paper published by the IFRS Foundation (the oversight body of the IASB). This sets out the views of staff on some of the main issues highlighted in the consultation questionnaire. The consultation questionnaire is available here. The staff paper is available here. ESMA sets out detail of how voting rights will be calculated under revised Transparency Directive The European Securities and Markets Authority has published draft regulatory technical standards relating to the notification of major shareholdings under the Transparency Directive. The draft standards set out the detail of how shareholding levels should be calculated and what financial instruments are covered by the notification obligations. Background The Transparency Directive was amended in November 2013 and the changes have to be implemented by Member States by 26 November 2015. The amendments included extending the requirements for companies to notify interests in shares and related financial instruments such as contracts for difference, to ensure greater consistency across the EU. This will bring the EU rules broadly in line with the UK’s super-equivalent rules in DTR 5 which already require notification of financial instruments which create a long economic interest in a UK issuer’s shares. However, under the amended Transparency Directive, non-UK incorporated issuers with the UK as their Home Member State will also be subject to the requirement to disclose related financial instruments. ESMA also confirms that the new rules only relate to instruments relating to shares in issue, while the FCA’s rules capture interests in shares that have not yet been issued. ESMA standards ESMA was required to publish regulatory technical standards to provide more detailed rules implementing the directive. The draft standards cover: > an indicative list of financial instruments subject to the notification requirement; > the calculation of voting rights in relation to financial instruments referenced to a basket of shares or an index; > a method for determining the delta for the purposes of calculating voting rights in the case of financial instruments which provide exclusively for a cash settlement; and 3 UK Corporate Update > the method of calculation of the 5% threshold exemption for trading books and market makers, including when voting rights of different categories of holdings should be aggregated. What happens next? The draft standards will be submitted to the European Commission by 27 November 2014 and the Commission has three months from that date to decide whether to endorse them. The draft standards can be found here. ESMA consults on regulatory technical standards for prospectuses The European Securities and Markets Authority has published a consultation paper seeking views on its proposed draft regulatory technical standards on prospectus-related issues under the Omnibus II Directive. Background The Omnibus II Directive amends the Prospectus Directive in respect of the powers of ESMA (amongst other things). It came into force on 23 May 2014, must be transposed into national law by 31 March 2015 and applied from 1 January 2016. In particular, the Omnibus II Directive replaces existing requirements for ESMA to draft level 2 measures in certain areas. For each area ESMA is required to prepare draft regulatory technical standards for submission to the European Commission. The Commission may then adopt those standards by way of a delegated regulation. Consultation The proposed draft includes standards in the following areas: > Procedure for the approval of prospectuses. The draft standards outline what must be submitted to national competent authorities alongside a prospectus, how to submit a prospectus and other information, how to present subsequent drafts and how the authority shall communicate its decision. > Information that may be incorporated into prospectuses by reference. The draft standards set out an exhaustive list of information that complies with the conditions for incorporation by reference set out in Article 11(1) of the Prospectus Directive. > Provisions relating to the publication of prospectuses. The draft standards replace in near identical form Articles 30 to 32 of the Prospectus Regulation on the publication of a prospectus. ESMA also lays down rules for establishing easy access to prospectuses published electronically, how final terms should be published and exactly how a competent authority is to provide hyperlinks to prospectuses approved during the preceding 12 months. > The dissemination of information relating to offers to the public and admissions to trading on a regulated market. ESMA sets out four categories of communication through which advertisements may be disseminated. The draft standards also address how information concerning the offer to the public or the admission to trading that is disclosed in an oral or written form, even if not for advertising purposes, will comply with the need to be consistent with that contained in the prospectus. 4 UK Corporate Update What happens next? The consultation closes on 19 December 2014. ESMA must submit draft standards to the Commission by 1 July 2015. The consultation can be found here. Contacts For further information please contact: Lucy Fergusson Partner (+44) 20 7456 3386 [email protected] Lucy Reeve Senior Associate (+44) 20 7456 3459 [email protected] Author: Lucy Reeve This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. © Linklaters LLP. All Rights reserved 2014. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by emailing us at [email protected]. Linklaters LLP (www.linklaters.com) is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm regulated by the Solicitors Regulation Authority (www.sra.org.uk). The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of Linklaters LLP members together with a list of those non-members who are designated as partners and their professional qualifications, may be inspected at our registered office, One Silk Street, London EC2Y 8HQ and such persons are either solicitors, registered foreign lawyers or European lawyers. 5 UK Corporate Update A list of Linklaters LLP members together with a list of those non-members who are designated as partners and their professional qualifications, may be inspected at our registered office, One Silk Street, London EC2Y 8HQ and such persons are either solicitors, registered foreign lawyers or European lawyers. [email protected] One Silk Street London EC2Y 8HQ Telephone (+44) 20 7456 2000 Facsimile (+44) 20 7456 2222 Linklaters.com