• MKT 9. MKT 9. GOVERNANCE OF REPORTING ENTITIES

    • Guidance

      Governance requirements set out under this chapter are designed for the purposes of section 73 of the FSMR.

    • MKT 9.1 MKT 9.1 Application

      • MKT 9.1.1 MKT 9.1.1

        (1) This chapter applies to every Reporting Entity except where a narrower application is provided in respect of any particular class of Securities.
        (2) This chapter does not apply to a Reporting Entity of a Listed Fund.

        • Guidance

          See chapter 3 for the governance requirements applicable to Reporting Entities of Listed Funds.

    • MKT 9.2 MKT 9.2 Corporate Governance Principles

      • Application

        • MKT 9.2.1

          This section applies to a Reporting Entity in respect of Shares, and the Board of Directors ("the Board") of such a Reporting Entity.

      • Corporate Governance Principles

        • MKT 9.2.2 MKT 9.2.2

          Pursuant to section 73 of the FSMR, the principles in Rules 9.2.3 to 9.2.9 are hereby prescribed as "the Corporate Governance Principles".

          • Guidance

            1. The Corporate Governance Principles in this section apply to Reporting Entities as mandatory high level requirements. APP 4 sets out best practice standards that may be adopted by a Reporting Entity to achieve compliance with these principles.
            2. The best practice standards in APP 4 are designed to provide a degree of flexibility so that a Reporting Entity can achieve outcomes intended by the Corporate Governance Principles whilst taking into account the nature, scale and complexity of its business.
            3. Generally, if a Reporting Entity does not adopt the best practice standards set out in APP 4, or adopts them only partially, the Regulator would expect the reasons for doing so and any alternative measures adopted to achieve the outcomes intended by the Corporate Governance Principles to be disclosed in the Prospectus and thereafter pursuant to the disclosure required under Rule 9.2.10. Any inaccurate or false representations would lead to the imposition of civil liability in accordance with section 70 of the FSMR.

      • Principle 1 — Board of Directors

        • MKT 9.2.3

          Every Reporting Entity must have an effective Board which is collectively accountable for ensuring that the Reporting Entity's business is managed prudently and soundly.

      • Principle 2 — Division of responsibilities

        • MKT 9.2.4

          The Board must ensure that there is a clear division between the Board's responsibility for setting the strategic aims and undertaking the oversight of the Reporting Entity and the Senior Management's responsibility for managing the Reporting Entity's business in accordance with the strategic aims and risk parameters set by the Board.

      • Principle 3 — Board composition and resources

        • MKT 9.2.5

          The Board, and its committees, must have an appropriate balance of skills, experience, independence and knowledge of the Reporting Entity's business, and adequate resources, including access to expertise as required and timely and comprehensive information relating to the affairs of the Reporting Entity.

      • Principle 4 — Risk management and internal control systems

        • MKT 9.2.6

          The Board must ensure that the Reporting Entity has an adequate, effective, well-defined and well-integrated risk management, internal control and compliance framework.

      • Principle 5 — Shareholder rights and effective dialogue

        • MKT 9.2.7

          The Board must ensure that the rights of Shareholders are properly safeguarded through appropriate measures that enable the Shareholders to exercise their rights effectively, promote effective dialogue with Shareholders and other key stakeholders as appropriate, and prevent any abuse or oppression of minority Shareholders.

      • Principle 6 — Position and prospects

        • MKT 9.2.8

          The Board must ensure that the Reporting Entity's financial and other reports present an accurate, balanced and understandable assessment of the Reporting Entity's financial position and prospects by ensuring that there are effective internal risk control and reporting requirements.

      • Principle 7 — Remuneration

        • MKT 9.2.9

          The Board must ensure that the Reporting Entity has remuneration structures and strategies that are well aligned with the long-term interests of the entity.

      • Annual reporting on compliance

        • MKT 9.2.10 MKT 9.2.10

          The annual financial report of a Reporting Entity to which this section applies must:

          (1) state whether the best practice standards specified in APP 4 (the "Corporate Governance Principles") have been adopted by the Reporting Entity;
          (2) if the best practice standards in APP 4 have not been fully adopted or have been only partially adopted explain:
          (a) why the best practice standards were not adopted fully or adopted only partially, as is relevant; and
          (b) what actions, if any, have been taken by the Reporting Entity to achieve compliance with the Corporate Governance Principles to the extent the relevant best practice standards were not adopted, or were only partially adopted; and
          (3) include a statement by Directors whether or not, in their opinion, the Corporate Governance framework of the Reporting Entity is effective in promoting compliance with the Corporate Governance Principles, with supporting information and assumptions, and qualifications if necessary.

          • Guidance

            1. Rule 9.2.10 reflects the "comply or explain" approach adopted by the Regulator in respect of the Corporate Governance Principles.
            2. With regard to the opinion required under Rule 9.2.10(3), adequate information relating to the Corporate Governance framework of the Reporting Entity should be included to support the opinion, such as the identity of its chair, any committees of the Board and their role and membership, the Chief Executive and persons undertaking key control functions such as the head of compliance, risk control and internal audit and how their independence is achieved. See also the disclosure of information required under APP 2.
            3. Note that Reporting Entities are also required to produce an annual report in accordance with Rule 10.1.4.

    • MKT 9.3 MKT 9.3 Directors' duties and fair treatment of Shareholders

      • Application

        • MKT 9.3.1 MKT 9.3.1

          (1) This section applies, subject to (2), to:
          (a) the Board of a Reporting Entity in respect of Shares; and
          (b) each individual Director who is a member of such a Board.
          (2) The requirement in Rule 9.3.3 applies to every Reporting Entity.

          • Guidance

            1. Where a Person referred to in Rule 9.3.1(1) is required under any legislation applicable to such a Person to comply with a similar or more stringent requirement than the requirements in this section, compliance with those other requirements would be sufficient compliance for the purposes of the relevant requirement in this section.
            2. For example, in the case of a reduction of Share capital, more stringent procedures such as a special resolution (i.e. a vote of at least 75% of the Shareholders in voting) may be required under the Company law or other legislation applicable to a Reporting Entity in its jurisdiction of incorporation. Where this is the case, compliance with the more stringent requirements applicable to the Reporting Entity suffices for the purposes of compliance with the requirements in this section dealing with a Shareholder approval by simple majority in Rule 9.3.8.

      • Directors' duties

        • MKT 9.3.2 MKT 9.3.2

          A Director of a Reporting Entity must act:

          (1) on a fully informed basis;
          (2) in good faith;
          (3) honestly;
          (4) with due diligence and care; and
          (5) in the best interests of the Reporting Entity and its Shareholders.

          • Guidance

            In order to meet the obligation to act with due diligence and care, a Director should (amongst other things) ensure that he has enough time and capacity available to devote to the job. See also the best practice standards in APP 4 which apply to Directors of Reporting Entities who are subject to the Corporate Governance Principles.

      • Equality of treatment

        • MKT 9.3.3

          The Board of a Reporting Entity must ensure equality of treatment of all holders of Securities of a particular class or type in respect of all rights attaching to the Securities of that class or type of Securities.

      • Reduction of Share capital

        • MKT 9.3.4

          The Board of a Reporting Entity must ensure that a Reporting Entity does not purchase its own Shares unless:

          (1) the purchase does not materially prejudice the Reporting Entity's ability to pay its creditors as they fall due;
          (2) it has obtained prior approval of Shareholders in meeting by a majority vote; and
          (3) prior to the meeting seeking the consent referred to in (2), the notice of the meeting and any accompanying documents relating to the purchase is filed with the Regulator.

      • Pre-emption rights

        • MKT 9.3.5

          The Board of a Reporting Entity must, except where otherwise provided in the constituent documents of the Reporting Entity, ensure that a Reporting Entity provides pre-emption rights under which, on an issue of Shares by the Reporting Entity for cash, the Shareholders of the Reporting Entity are offered any Shares to be issued in proportion to their existing holdings prior to the Shares being offered to third parties, unless there is prior approval of the issue of Shares without pre-emption rights by Shareholders in meeting, by a majority vote.

      • Communications with Shareholders

        • MKT 9.3.6 MKT 9.3.6

          (1) The Board of a Reporting Entity must ensure that all the necessary information and facilities are available to its Shareholders to enable them to exercise the rights attaching to their Shares on a well-informed basis.
          (2) Without limiting the generality of the obligation in (1), the Board must ensure that the Shareholders:
          (a) are provided with the necessary information relating to the matters to be determined at meetings to enable them to exercise their right to vote, including the proxy forms and notice of meetings; and
          (b) have access to any relevant notices or circulars giving information in relation to the rights attaching to the Securities.

          • Guidance

            In adhering to its obligations in (2)(b), the Board must comply with the time periods for giving such notices outlined in section 324 of the Companies Regulations 2015.

      • Proxy solicitation

        • MKT 9.3.7

          The Board of a Reporting Entity must ensure that for each meeting at which Shareholders are eligible to exercise voting rights attaching to their Securities, each Shareholder is given the right and means to vote by proxy.

      • Other matters requiring Shareholder approval

        • MKT 9.3.8 MKT 9.3.8

          (1) The Board of a Reporting Entity must, subject to (2), ensure that a majority of Shareholders in voting approves:
          (a) any alteration of the constitutional documents of the Reporting Entity including any alteration to the memorandum of association, articles of association, bylaws or any other instrument constituting the Reporting Entity;
          (b) an alteration of the issued Share capital, for example Share reductions or Share consolidations, of the Reporting Entity which is more than 20% of the existing issued Share capital;
          (c) any acquisition or disposal of an asset of the Reporting Entity where the value of the asset involved is 25% or more of the value of the net assets of the Reporting Entity as at its last published financial reports;
          (d) the appointment or removal of a Director of the Reporting Entity and the terms of such appointment;
          (e) the appointment or removal of the auditor of the Reporting Entity;
          (f) the placing of the Reporting Entity into voluntary liquidation;
          (g) the reduction of the Share capital of the Reporting Entity, in accordance with Rule 9.3.4(2);
          (h) the issuance of Shares without pre-emption rights, in accordance with Rule 9.3.5;
          (i) a Related Party Transaction that falls within Rule 9.5.3(1) or (3);
          (j) any creation or issuance of new securities;
          (k) the appointment of the Chief Executive as the chairman of the Board; and
          (l) any purchase by a Listed Entity of its own Securities, where requested to provide such approval in accordance with Rule 2.7.5(1).
          (2) The requirement in (1) does not apply, subject to any requirements in the constitutional documents of the Reporting Entity, in relation to the appointment or removal of a Director or auditor of a Reporting Entity in circumstances where the immediate appointment or removal is necessary in the interests of the Reporting Entity.

          • Guidance

            1. Under Rule 9.3.8(1)(b), an increase in the issued Share capital of a Reporting Entity which results in an increase of more than 20% of its current Share capital requires Shareholder approval regardless of whether or not such an increase is within the authorised capital of the relevant Reporting Entity.
            2. The circumstances in which the immediate removal of a Director or auditor may become necessary include matters affecting that Person's fitness and propriety, such as professional misconduct of such a Person.

    • MKT 9.4 MKT 9.4 Dealings by restricted persons

      • Application

        • MKT 9.4.1 MKT 9.4.1

          (1) This section applies to:
          (a) the Board of every Reporting Entity; and
          (b) a Restricted Person in relation to such a Reporting Entity.
          (2) For the purposes of (b), a Person is a Restricted Person in relation to a Reporting Entity if he is involved in the Senior Management of the Reporting Entity.

          • Guidance

            1. Persons are considered as involved in the Senior Management if they are in a position of authority and influence in making management or executive decisions with regard to the day-to-day management of the business of the Reporting Entity. Some members of the Board, such as executive Directors, will be subject to the requirements in this section because they undertake managerial functions and responsibilities relating to the day-to-day management of the Reporting Entity.
            2. Chapter 3 contains requirements applicable to Reporting Entities of Listed Funds.

      • Prohibition on dealing

        • MKT 9.4.2

          (1) A Restricted Person must not engage in Dealing in the Securities of the Reporting Entity during a Close Period except in the circumstances specified in Rule 9.4.3.
          (2) For the purposes of this Rule:
          (a) a "Close Period" is:
          (i) the period from the relevant financial year end up to and including the time of the announcement or publication of the annual financial reports; and
          (ii) if the Reporting Entity reports on a semi-annual basis, the period from the end of the relevant semi-annual financial period up to and including the time of the announcement or publication; or
          (iii) if the Reporting Entity reports on a quarterly basis, the period from the end of the relevant quarter up to and including the time of the announcement.
          (b) "Dealing in Securities" means:
          (i) any acquisition or disposal of, or agreement to acquire or dispose of, Securities of the Reporting Entity;
          (ii) entering into a contract (such as a contract for difference) the purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the price of the Securities of the Reporting Entity;
          (iii) the grant, acceptance, acquisition, disposal, exercise or discharge of any option to acquire or dispose of any Securities of the Reporting Entity;
          (iv) entering into, or terminating, assigning or novating any stock lending agreement in respect of the Securities of the Reporting Entity;
          (v) using as security, or otherwise granting a Charge, lien or other encumbrance over the Securities of the Reporting Entity; or
          (vi) any other transaction including a transfer for no consideration, or the exercise of any power or discretion effecting a change of ownership of a beneficial interest in, the Securities of the Reporting Entity.
          (3) The prohibition in (1) applies to any dealing by Restricted Persons whether or not such dealings are with another Restricted Person or any other Person.

      • Exempt dealings

        • MKT 9.4.3

          The prohibition in Rule 9.4.2(1) does not apply in relation to any dealing in Securities in the Reporting Entity if such dealing by the Restricted Person relates to:

          (1) undertakings or elections to take up, or the taking up of, an entitlement under a rights issue or dividend reinvestment Offer, or allowing such an entitlement or Offer to lapse;
          (2) undertakings to accept, or the acceptance of, a Takeover Offer under Takeover Rules;
          (3) dealings where the beneficial interest in the relevant Security does not change;
          (4) transactions between the Restricted Person and the Restricted Person Associate; or
          (5) transactions relating to dealings in an Employee Share scheme in accordance with the terms of such a scheme.

      • Clearance to deal

      • MKT 9.4.4

        (1) The prohibition in Rule 9.4.2(1) does not apply in relation to any dealing in Securities where the Restricted Person has obtained prior clearance to deal as provided in (2) and (3).

        (2) For the purposes of (1), prior written clearance to deal in the Securities of a Reporting Entity must be obtained:
        (a) from a Director designated by the Board for the purposes of providing clearances to deal; and
        (b) in the case of dealings by the Director designated for the purpose of providing clearances to deal, from the full Board or another Director designated by the Board for the purposes of providing such clearance.

        (3) For the purposes of (1) and (2), a Director of the Reporting Entity must not be given written clearance to deal in any Securities of the Reporting Entity during any period when there exists any matter which constitutes Inside Information unless the Person responsible for granting clearance has no reason to believe that the proposed dealing is or may be in breach of the FSMR or the Rules

    • MKT 9.5 MKT 9.5 Related Party Transactions

      • Application

        • MKT 9.5.1

          This section applies, subject to Rule 9.5.4, to:

          (1) A Reporting Entity; and
          (2) a Related Party of such a Reporting Entity.

      • Definitions

        • MKT 9.5.2 MKT 9.5.2

          In this section, unless otherwise provided:

          (1) a Person is a Related Party of a Reporting Entity if that Person:
          (a) is, or was within the 12 months before the date of the Related Party Transaction:
          (i) a Director of the Reporting Entity or a member of its Group;
          (ii) a Related Party Associate of a Person referred to in (1)(a)(i); or
          (b) owns, or has owned within 12 months before the date of the Related Party Transaction, voting Securities carrying more than 10% of the voting rights attaching to all the voting Securities of either the Reporting Entity or a member of its Group; or
          (c) is a Person exercising or having the ability to exercise significant influence over the Reporting Entity or a Related Party Associate of such a Person.
          (2) A transaction is a Related Party Transaction if it is a transaction:
          (a) between a Reporting Entity and a Related Party;
          (b) entered into pursuant to an arrangement between the Reporting Entity and the Related Party under which the Reporting Entity and the Related Party each invests in another Undertaking or asset, or provides financial assistance to another Undertaking;
          (c) between the Reporting Entity and any other Person, the purpose or effect of which is to benefit a Related Party; or
          (d) of the kind referred to in (a) to (c) and is between a Subsidiary of a Reporting Entity and a Related Party of the Reporting Entity.

          • Guidance

            1. A Person is regarded as exercising significant influence over a Reporting Entity, for example, if that Person is a consultant or adviser or a shadow director of the Reporting Entity. For the purposes of this rule, "shadow director" means a person in accordance with whose directions or instructions the Directors of the Reporting Entity are accustomed to act.
            2. Any transactions between a Subsidiary of a Reporting Entity and a Related Party are included within the definition of a Related Party Transaction. This is because a Related Party may, through the Reporting Entity, be able to influence terms which are more favourable to the Related Party when transacting with the Subsidiary. Such transactions could be detrimental to the interests of the Reporting Entity.

      • Related Party Transaction procedures

        • MKT 9.5.3

          A Reporting Entity must ensure that:

          (1) if the value of a Related Party Transaction is equal to or greater than 5% of value of the net assets of the Reporting Entity as stated in its most recent financial reports, it does not enter into such a transaction unless the transaction has been put to Shareholder approval and has received prior approval by a majority of the Shareholders in voting of the Reporting Entity;
          (2) if the value of the Related Party Transaction is less than the 5% threshold referred to in (1):
          (a) it obtains a written confirmation from its Sponsor before entering into the transaction or, where a Sponsor has not been appointed its compliance adviser, that the terms of the transaction are fair and reasonable; and
          (b) as soon as possible after entering into the transaction, it discloses the Related Party Transaction to the market in accordance with Rule 7.7.1;
          (3) if the cumulative value of a series of Related Party Transactions with the same Related Party which have not received Shareholder approval reaches the 5% threshold referred to in (1) in any 12 month period, it does not enter into the last of the series of the transactions unless such proposed action has been put to Shareholder approval and received approval by a majority of the Shareholders in voting of the Reporting Entity;
          (4) if, after obtaining Shareholder approval pursuant to Rule 9.5.3(1) but before the completion of the Related Party Transaction, there is a material change to the terms of the transaction, the Reporting Entity must comply again separately with Rule 9.5.3(1) in relation to the Related Party Transaction; or
          (5) the Related Party does not vote on the Shareholder resolution referred to in Rule 9.5.3(1) and takes all reasonable steps to ensure that any Related Party Associates of the relevant Related Party also do not vote on the Shareholder resolution.

      • Exemptions

        • MKT 9.5.4 MKT 9.5.4

          The requirements in this section do not apply to a transaction referred to in Rule 9.5.2(2):

          (1) where the transaction is made in the ordinary course of business;
          (2) where it, or any series of transactions with the same Related Party in any 12 month period, does not exceed 0.25% of the value of the net assets of the Reporting Entity as stated in its most recent financial reports;
          (3) where it is made in accordance with the terms of an Employee Share scheme or other Employee incentive scheme approved by the Board of the Reporting Entity;
          (4) where it involves the issue of new Securities for cash or pursuant to the exercise of conversion or subscription rights attaching to Securities issued to existing Shareholders where the Securities are traded on a Recognised Body or a Regulated Exchange;
          (5) where its terms were agreed before any Person became a Related Party;
          (6) where it involves a grant of credit (including the lending of money or the guaranteeing of a loan) to:
          (a) the Related Party on normal commercial terms;
          (b) a Director of the Reporting Entity or a member of its Group for an amount and on terms no more favourable than those offered to employees of the Group generally; or
          (c) by the Related Party on normal commercial terms and on an unsecured basis;
          (7) where it involves granting an indemnity to or maintaining a Contract of Insurance for a Director of the Reporting Entity or a member of its Group;
          (8) where it involves underwriting by a Related Party of Securities issued by the Reporting Entity or a member of its Group if the consideration to be paid for the underwriting is no more than the usual commercial underwriting consideration and is the same as that to be paid to the other underwriters (if any), except that this exception will not apply if the Related Party is underwriting Securities it is entitled to take up as part of the issuance; or
          (9) where it involves a joint investment arrangement between the Reporting Entity (or a member of its Group) and a Related Party for each to invest in, or provide finance to, another undertaking or asset if:
          (a) the amount contributed by the Related Party is not more than 25% of the amount contributed by the Reporting Entity (or a member of its Group); and
          (b) a Sponsor or, if one has not been appointed, an independent third party has provided a prior written opinion that the terms and circumstances of the contribution of finance by the Reporting Entity (or a member of its Group) are no less favourable than those applying to the contribution of finance by the Related Party.

          • Guidance

            In assessing whether a transaction is in the ordinary course of business, the Reporting Entity shall have regard to the size and incidence of the transaction and also whether the terms and conditions of the transaction are unusual.