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UKLR 8.1 Preliminary

Application

UKLR 8.1.1 R

1This chapter applies to a company that has a listing of equity shares in the equity shares (commercial companies) category.

Purpose

UKLR 8.1.2 G

1The purpose of this chapter is to set out governance and notification requirements for a listed company in relation to related party transactions. These requirements are intended to:

  1. (1)

    ensure that the shareholders of companies with listed equity shares are notified of related party transactions when they are entered into by the listed company, and support engagement between the listed company and its shareholders in relation to related party transactions; and

  2. (2)

    enhance market transparency in relation to related party transactions.

UKLR 8.1.3 G

1These requirements are also intended to prevent a related party from taking advantage of its position and prevent any perception that it may have done so.

Sponsors

UKLR 8.1.4 G

1A listed company that is proposing to enter into a related party transaction requiring the listed company to make a notification under UKLR 8.2.1R(4) must comply with the requirement to appoint a sponsor under UKLR 8.2.1R(3).

UKLR 8.1.5 R

1A listed company must appoint a sponsor where it proposes to make a request to the FCA to modify, waive or substitute the operation of UKLR 8.

UKLR 8.1.6 R

1A listed company must appoint a sponsor where it proposes to make a request to the FCA for individual guidance in relation to the listing rules, the disclosure requirements or the transparency rules in connection with a related party transaction.

Definition of ‘related party transaction’

UKLR 8.1.7 R

1In UKLR, a related party transaction means:

  1. (1)

    a transaction (other than a transaction in the ordinary course of business) between a listed company and a related party;

  2. (2)

    an arrangement (other than an arrangement in the ordinary course of business) pursuant to which a listed company and a related party each invests in, or provides finance to, another undertaking or asset; or

  3. (3)

    any other similar transaction or arrangement (other than a transaction or arrangement in the ordinary course of business) between a listed company and any other person, the purpose and effect of which is to benefit a related party.

UKLR 8.1.8 G

1A related party transaction includes the variation or novation of an existing agreement between the listed company and a related party, regardless of whether the party was a related party at the time the original agreement was entered into.

Meaning of ‘transaction’ or ‘arrangement’

UKLR 8.1.9 R

1A reference in this chapter:

  1. (1)

    to a transaction or arrangement by a listed company includes a transaction or arrangement by its subsidiary undertaking;

  2. (2)

    to a transaction or arrangement is, unless the contrary intention appears, a reference to the entering into of the agreement for the transaction or the entering into of the arrangement; and

  3. (3)

    to a transaction or arrangement includes a transaction or arrangement which amends or revises the terms of an existing transaction or arrangement.

Transactions to which this chapter does not apply

UKLR 8.1.10 R

1 UKLR 8.2.1R to UKLR 8.2.5R do not apply to a related party transaction if it is a transaction or arrangement:

  1. (1)

    of a kind referred to in paragraph 1 of UKLR 8 Annex 1 (a transaction the terms of which were agreed before a person became a related party); or

  2. (2)

    of a kind referred to in paragraphs 2 to 8 of UKLR 8 Annex 1 and does not have any unusual features.

Definition of ‘related party’

UKLR 8.1.11 R

1In UKLR, a related party means:

  1. (1)

    a person who is (or was within the 12 months before the date of the transaction or arrangement) a substantial shareholder;

  2. (2)

    a person who is (or was within the 12 months before the date of the transaction or arrangement) a director or shadow director of:

    1. (a)

      the listed company; or

    2. (b)

      any other company which is one of the following (and, if that person has ceased to a director or shadow director, any other company which was one of the following while that person was a director or shadow director of such other company);

      1. (i)

        a subsidiary undertaking of the listed company;

      2. (ii)

        a parent undertaking of the listed company; or

      3. (iii)

        a fellow subsidiary undertaking of a parent undertaking of the listed company;

  3. (3)

    a person exercising significant influence; or

  4. (4)

    an associate of a related party referred to in paragraph (1), (2) or (3).

Definition of ‘substantial shareholder’

UKLR 8.1.12 R

1In UKLR, a substantial shareholder means any person who is entitled to exercise, or to control the exercise of, 20% or more of the votes able to be cast on all or substantially all matters at general meetings of:

  1. (1)

    the company; or

  2. (2)

    any company which is:

    1. (a)

      a subsidiary undertaking of the company;

    2. (b)

      a parent undertaking of the company; or

    3. (c)

      a fellow subsidiary undertaking of a parent undertaking of the company.

UKLR 8.1.13 G

1For the purposes of determining votes that are able to be cast at general meetings of a company, voting rights attached to shares which are not listed shares, including specified weighted voting rights shares, should be taken into consideration.

UKLR 8.1.14 R

1For the purposes of calculating voting rights in UKLR 8.1.12R, the following voting rights are to be disregarded:

  1. (1)

    any voting rights which such a person exercises (or controls the exercise of) independently in its capacity as:

    1. (a)

      bare trustee;

    2. (b)

      investment manager;

    3. (c)

      collective investment undertaking; or

    4. (d)

      a long-term insurer in respect of its linked long-term business,

      if no associate of that person interferes by giving direct or indirect instructions, or in any other way, in the exercise of such voting rights (except to the extent any such person confers or collaborates with such an associate which also acts in its capacity as investment manager, collective investment undertaking or long-term insurer); or

  2. (2)

    any voting rights:

    1. (a)

      which a person may hold (or control the exercise of) solely in relation to the direct performance, by way of business, of:

      1. (i)

        underwriting the issue or sale of securities;

      2. (ii)

        placing securities, where the person provides a firm commitment to acquire any securities which it does not place; or

      3. (iii)

        acquiring securities from existing shareholders or the issuer pursuant to an agreement to procure third-party purchases of securities; and

    2. (b)

      where the conditions in (i) to (iv) are satisfied:

      1. (i)

        the activities set out in (2)(a) are performed in the ordinary course of business;

      2. (ii)

        the securities to which the voting rights attach are held for a consecutive period of 5 trading days or less, beginning with the first trading day on which the securities are held;

      3. (iii)

        the voting rights are not exercised within the period in which the securities are held; and

      4. (iv)

        no attempt is made directly or indirectly by the firm to intervene in or exert influence on (or attempt to intervene in or exert influence on) the management of the issuer within the period the securities are held.

Meaning of ‘ordinary course of business’

UKLR 8.1.15 G
  1. (1)

    1The assessment of whether a transaction is in the ordinary course of business under this chapter will depend on the specific circumstances of the listed company.

  2. (2)

    Factors that may indicate whether a transaction is in the ordinary course of a company’s business include:

    1. (a)

      the size and incidence of similar transactions which the company has entered into;

    2. (b)

      the nature and size of the company’s existing business and common factors within the industry sector in which it operates;

    3. (c)

      the company’s corporate strategy for its business, including in relation to growth and industry focus, as set out in the company’s latest published prospectus or annual financial report;

    4. (d)

      the existing accounting treatment (for a disposal) or planned accounting treatment (for an acquisition or new arrangement) by the listed company; and

    5. (e)

      whether its shareholders could reasonably expect the company to enter into the transaction, taking into account:

      1. (i)

        the factors in (a) to (d);

      2. (ii)

        any further information that the company has already notified to a RIS;

      3. (iii)

        the subject matter of the transaction;

      4. (iv)

        the terms of the transaction;

      5. (v)

        the anticipated impact on the listed company; and

      6. (vi)

        the associated benefits and risks.

UKLR 8.1.16 G

1Transactions that are likely to be in the ordinary course of business include:

  1. (1)

    regular trading activities (if the company is a trading company);

  2. (2)

    ongoing commercial arrangements and purchases commonly undertaken as part of the existing business or within the industry sector in which the company operates;

  3. (3)

    capital expenditure to support and maintain the existing business and its infrastructure;

  4. (4)

    capital expenditure to add scale to the existing business in line with the company’s business strategy as previously notified to a RIS (including, for example, within the latest published prospectus or annual financial report); or

  5. (5)

    in the case of a listed property company, where the accounting treatment of a property that is acquired or disposed is such that:

    1. (a)

      for an acquisition, the property will be classified as a current asset in the company’s published accounts; or

    2. (b)

      for a disposal, the property was classified as a current asset in the company’s published accounts.

UKLR 8.1.17 G

1Transactions that are unlikely to be in the ordinary course of business include:

  1. (1)

    mergers with, or acquisitions of, other businesses (whether structured by way of a share or asset acquisition);

  2. (2)

    transactions that would lead to a substantial involvement in a business activity that did not previously form a significant part of the listed company’s principal activities;

  3. (3)

    transactions that would lead to the listed company no longer having a substantial involvement in a business activity that forms a significant part of its principal activities; or

  4. (4)

    transactions which are entered into to alleviate financial difficulty.

UKLR 8.1.18 R

1For the purposes of this chapter, a transaction in the ordinary course of business excludes a reverse takeover.

Where a related party transaction is also a significant transaction or other transaction under UKLR 7

UKLR 8.1.19 G

1Where a related party transaction is also a significant transaction or is otherwise subject to UKLR 7, the requirements and guidance under UKLR 7 also apply, in addition to the requirements under this chapter.

UKLR 8.2 Requirements for related party transactions

General requirements for related party transactions

UKLR 8.2.1 R

1If a listed company enters into a related party transaction where any percentage ratio is 5% or more, the listed company must:

  1. (1)

    obtain the approval of its board for the transaction or arrangement before it is entered into;

  2. (2)

    ensure that any director who is, or an associate of whom is, the related party, or who is a director of the related party, does not take part in the board’s consideration of the transaction or arrangement and does not vote on the relevant board resolution;

  3. (3)

    before entering into the transaction or arrangement, obtain written confirmation from a sponsor that the terms of the proposed transaction or arrangement with the related party are fair and reasonable as far as the security holders of the listed company are concerned; and

  4. (4)

    notify a RIS as soon as possible after the terms of the transaction or arrangement are agreed.

UKLR 8.2.2 R

1The notification must include:

  1. (1)

    details of the related party transaction, including:

    1. (a)

      the name of the related party;

    2. (b)

      the value of the consideration for the transaction or arrangement; and

    3. (c)

      a description of the transaction or arrangement;

  2. (2)

    the fact that the transaction or arrangement is a related party transaction which fell within UKLR 8.2.1R;

  3. (3)

    details of the nature and extent of the related party’s interest in the transaction(s) or arrangement(s);

  4. (4)

    a statement by the board that the transaction or arrangement is fair and reasonable as far as the security holders of the company are concerned and that the directors have been so advised by a sponsor; and

  5. (5)

    the name of the sponsor that provided the written confirmation in UKLR 8.2.1R(3).

UKLR 8.2.3 R

1The notification must also include any further information the company considers relevant, having regard to the purpose of this chapter set out in UKLR 8.1.2G.

UKLR 8.2.4 G

1 UKLR 8.2.2R(4) does not require the notification to include an explanation of the basis of preparation for the board’s conclusion that the transaction is fair and reasonable, or an explanation of the sponsor’s advice. The FCA does not expect the notification to include explanations of the basis of preparation, as this could be seen to limit the validity of the confirmation. Instead, a clean confirmation, tracking the wording used in UKLR 8.2.2R(4), should be given.

UKLR 8.2.5 R

1If, before the completion of a related party transaction referred to in UKLR 8.2.1R that has been notified in accordance with this section, there is a material change to the terms of the transaction, the listed company must comply again separately with UKLR 8.2.1R to UKLR 8.2.3R in relation to the transaction.

UKLR 8.2.6 G

1The FCA would (among other things) generally consider an increase of 10% or more in the consideration payable to be a material change to the terms of the transaction.

Aggregation of transactions in any 12-month period

UKLR 8.2.7 R
  1. (1)

    1Subject to (3), if a listed company enters into transactions or arrangements with the same related party (and any of its associates) in any 12-month period, the transactions or arrangements must be aggregated.

  2. (2)

    If any percentage ratio is 5% or more for the aggregated transactions or arrangements, the listed company:

    1. (a)

      must comply with UKLR 8.2.1R, in respect of the latest transaction or arrangement; and

    2. (b)

      the notification required by UKLR 8.2.1R(4) must include:

      1. (i)

        all of the information required by UKLR 8.2.2R for the latest transaction or arrangement;

      2. (ii)

        the information required in UKLR 8.2.2R(1) to (3) for the other aggregated transactions or arrangements; and

      3. (iii)

        the information required by UKLR 8.2.3R.

  3. (3)

    Transactions or arrangements completed during the 12-month period in (1) are not required to be aggregated with the latest transaction or arrangement if they were previously classified as a related party transaction notifiable (individually or collectively) under UKLR 8.2.1R or UKLR 8.2.7R(2).

Supplementary notification

UKLR 8.2.8 R
  1. (1)

    A listed company must notify a RIS as soon as possible if, after the notification under UKLR 8.2.1R(4), it becomes aware that:

    1. (a)

      there has been a material change affecting any matter contained in that earlier notification (other than a material change to the terms of the transaction to which UKLR 8.2.5R applies); or

    2. (b)

      a material new matter has arisen which would have been required to be mentioned in that earlier notification if it had arisen at the time of the preparation of that notification.

  2. (2)

    The supplementary notification must:

    1. (a)

      give details of the change or new matter; and

    2. (b)

      contain a statement that, except as disclosed:

      1. (i)

        there has been no material change affecting any matter contained in the earlier notification; and

      2. (ii)

        no other material new matter has arisen which would have been required to be mentioned in that earlier notification if it had arisen at the time of the preparation of that notification.

  3. (3)

    In paragraphs (1) and (2), ‘material’ means material for the purpose of making an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the listed company and the rights attaching to any securities forming part of the consideration.

Sovereign controlling shareholders

UKLR 8.2.9 R

1In the case of a related party which is a sovereign controlling shareholder or an associate of a sovereign controlling shareholder, where:

  1. (1)

    a listed company is a sovereign controlled commercial company and:

    1. (a)

      has a sovereign controlling shareholder which was a controlling shareholder on the first occasion on which the company made an application for the admission of equity shares to the equity shares (commercial companies) category;

    2. (b)

      has made a notification in accordance with UKLR 6.4.18R and UKLR 6.4.19R; or

    3. (c)

      made an announcement in accordance with UKLR 21.5.6.R(2) and UKLR 21.5.9R when it transferred the listing of its equity shares to the equity shares (commercial companies) category; and

  2. (2)

    the sovereign controlling shareholder is either:

    1. (a)

      recognised by the government of the UK as a State; or

    2. (b)

      the UK,

    UKLR 8.2.1R(2) and (3) and UKLR 8.2.2R(4) and (5) do not apply.

UKLR 8 Annex 1 Transactions to which related party transaction rules do not apply

UKLR 8 Annex 1 R

Transaction agreed before person became a related party

11

The related party transaction rules do not apply to a transaction the terms of which:

(1)

were agreed at a time when no party to the transaction or person who was to receive the benefit of the transaction was a related party; and

(2)

have not been amended, or which required the exercise of discretion by the listed company under those terms, since the party or person became a related party.

Issue of new securities and sale of treasury shares

12

The related party transaction rules do not apply to a transaction that consists of:

(1)

the take-up by a related party of new securities or treasury shares under its entitlement in a pre-emptive offering; or

(2)

an issue of new securities made under the exercise of conversion or subscription rights attaching to a listed class of securities.

Employees’ share schemes and long-term incentive schemes

13

The related party transaction rules do not apply to:

(1)

the receipt of any asset (including cash or securities of the listed company or any of its subsidiary undertakings) by a director of the listed company, its parent undertaking or any of its subsidiary undertakings; or

(2)

the grant of an option or other right to a director of the listed company, its parent undertaking or any of its subsidiary undertakings to acquire (whether or not for consideration) any asset (including cash or new or existing securities of the listed company or any of its subsidiary undertakings); or

(3)

the provision of a gift or loan to the trustees of an employee benefit trust to finance the provision of assets as referred to in (1) or (2),

in accordance with the terms of an employees’ share scheme or a long-term incentive scheme.

Credit

14

The related party transaction rules do not apply to a grant of credit (including the lending of money or the guaranteeing of a loan):

(1)

to the related party on normal commercial terms;

(2)

to a director for an amount and on terms no more favourable than those offered to employees of the group generally; or

(3)

by the related party on normal commercial terms and on an unsecured basis.

Directors’ indemnities and loans

15

(1)

The related party transaction rules do not apply to a transaction that consists of:

(a)

granting an indemnity to a director of the listed company (or any of its subsidiary undertakings) if the terms of the indemnity are in accordance with those specifically permitted to be given to a director under the Companies Act 2006;

(b)

maintaining a contract of insurance if the insurance is in accordance with that specifically permitted to be maintained for a director under the Companies Act 2006 (whether for a director of the listed company or for a director of any of its subsidiary undertakings); or

(c)

a loan or assistance to a director by a listed company or any of its subsidiary undertakings if the terms of the loan or assistance are in accordance with those specifically permitted to be given to a director under sections 204, 205 or 206 of the Companies Act 2006.

(2)

Paragraph (1) applies to a listed company that is not subject to the Companies Act 2006 if the terms of the indemnity or contract of insurance are in accordance with those that would be specifically permitted under that Act (if it applied).

Underwriting

16

(1)

The related party transaction rules do not apply to the underwriting by a related party of all or part of an issue of securities by the listed company (or any of its subsidiary undertakings) if the consideration to be paid by the listed company (or any of its subsidiary undertakings) for the underwriting:

(a)

is no more than the usual commercial underwriting consideration; and

(b)

is the same as that to be paid to the other underwriters (if any).

(2)

Paragraph (1) does not apply to the extent that a related party is underwriting securities which it is entitled to take up under an issue of securities.

Joint investment arrangements

17

The related party transaction rules do not apply to an arrangement where a listed company, or any of its subsidiary undertakings, and a related party each invests in, or provides finance to, another undertaking or asset if the following conditions are satisfied:

(1)

the amount invested, or provided, by the related party is not more than 25% of the amount invested, or provided, by the listed company or its subsidiary undertaking (as the case may be); and

(2)

the terms and circumstances of the investment or provision of finance by the listed company or its subsidiary undertakings (as the case may be) are no less favourable than those applying to the investment or provision of finance by the related party.

Insignificant subsidiary undertaking

18

(1)

The related party transaction rules do not apply to a transaction or arrangement where each of the conditions in paragraphs (2) to (6) (as far as applicable) is satisfied.

(2)

The party to the transaction or arrangement is only a related party because:

(a)

it is (or was within the 12 months before the date of the transaction or arrangement) a substantial shareholder or its associate; or

(b)

it is a person who is (or was within the 12 months before the date of the transaction or arrangement) a director or shadow director or their associate,

of a subsidiary undertaking or subsidiary undertakings of the listed company that has, or if there is more than one subsidiary undertaking that have in aggregate, contributed less than 10% of the profits of, and represented less than 10% of the assets of, the listed company for the relevant period.

(3)

The subsidiary undertaking or each of the subsidiary undertakings (as the case may be) have been in the listed company’s group for 1 full financial year or more.

(4)

In paragraph (2), ‘relevant period’ means:

(a)

if the subsidiary undertaking or each of the subsidiary undertakings (as the case may be) has been consolidated in the listed company’s group for 1 full financial year or more but less than 3 full financial years, each of the full financial years before the date of the transaction or arrangement for which accounts have been published; and

(b)

if the subsidiary undertaking or any of the subsidiary undertakings (as the case may be) has been consolidated in the listed company’s group for 3 full financial years or more, each of the 3 full financial years before the date of the transaction or arrangement for which accounts have been published.

(5)

If the subsidiary undertaking or any of the subsidiary undertakings (as the case may be) are themselves party to the transaction or arrangement or if securities in the subsidiary undertaking or any of the subsidiary undertakings or their assets are the subject of the transaction or arrangement, then the ratio of consideration to market capitalisation of the listed company is less than 10%.

(6)

In this rule, the figures to be used to calculate assets and consideration to market capitalisation are the same as those used to classify assets and consideration to market capitalisation in UKLR 7 Annex 1 (as modified or added to by UKLR 7.2.3R to UKLR 7.2.8R where applicable).

(7)

(a)

In this rule, for the purposes of calculating profit, except as otherwise stated in paragraphs (b) to (e), figures used to classify profit must be the figures shown in the latest published audited consolidated accounts or, if a listed company has, or will have, published a preliminary statement of later annual results at the time the terms of a transaction are agreed, the figures shown in that preliminary statement.

(b)

The figures of the listed company must be adjusted to take account of transactions completed during the period to which the figures referred to in (a) relate, and subsequent completed transactions where any percentage ratio was 5% or more at the time the terms of the relevant transaction were agreed.

(c)

The figures of the target company or business must be adjusted to take account of transactions completed during the period to which the figures referred to in (a) relate, and subsequent completed transactions where any percentage ratio would have been 5% or more at the time the terms of the relevant transaction were agreed when classified against the target as a whole.

(d)

Figures on which the auditors are unable to report without modification must be disregarded.

(e)

The principles in paragraphs (a) to (d) also apply (to the extent relevant) to calculating the net annual rent of the target company or business.

(f)

The FCA may modify paragraph (d) in appropriate cases to permit figures to be taken into account.