Corporate finance adviser criticised for failing its Listing Rules obligations as a sponsor
BDO LLP, the accountant and corporate finance adviser, has today been publicly censured by the Financial Services Authority (the FSA) for failings while acting as a sponsor to a listed company. The censure relates to BDO’s behaviour whilst advising Shore Capital Group plc on its takeover (the Transaction) of Puma Brandenburg Limited in 2009. The FSA Final Notice to BDO can be read here and the FSA’s press release can be read here.
The FSA censured BDO for failing to consult with the UK Listing Authority (the UKLA) ahead of the Transaction – as the Listing Rules required BDO to do, because the Transaction was likely to be a reverse takeover for the purposes of Listing Rule 10. The FSA Final Notice states that:
“….instead of liaising with the UKLA in advance of the Announcement of the Transaction to ascertain whether suspension of Shore Capital’s shares was appropriate, BDO:
(1) agreed with Shore Capital from the outset that it would not contact the UKLA until after the Announcement; and
(2) in the run up to the Announcement, reworked the class tests several times in an attempt to classify the Transaction as a class 1 rather than a reverse takeover, despite recognising at the time that this was highly unlikely to succeed”.
Background
A listed company must obtain the guidance of a sponsor when proposing to enter into a class 1 transaction or reverse takeover. Shore Capital approached BDO to act as sponsor on its potential merger with Puma in May 2009. Shore Capital, in the words of the FSA Final Notice:
“expressed a preference for expediting the Transaction and for not involving the UKLA as far as this was possible in case this caused any delay.”
From the start of its involvement, BDO was aware that the Transaction was likely to be classed as a reverse takeover.
Listing Rule 10.6.3G makes clear that a suspension of trading in a company’s shares is generally appropriate upon the announcement or leak of details relating to a proposed takeover, and that it is for the FSA to decide whether a suspension is required:
“Before a listed company announces a reverse takeover which has been agreed or is in contemplation or where details of the reverse takeover have leaked, a listed company should consider whether a suspension of listing is appropriate. Generally, when a reverse takeover is announced or leaked, because of its significant size there will be insufficient information in the market about the proposed transaction and the company will be unable to assess accurately its financial position and inform the market accordingly. So, suspension will often be appropriate….But, if the FSA is satisfied that there is sufficient information in the market about the proposed transaction it may agree with the company that a suspension is not required.”
BDO should therefore have liaised with the FSA as to whether a suspension was required ahead of the announcement of the Transaction. BDO did not do so, contacting the FSA only after the Transaction was announced. (In the event and perhaps ironically, the FSA decided that a suspension of Shore Capital’s shares would not have been required.)
BDO’s duties as a sponsor
As a sponsor, BDO was required to comply with the six general principles for sponsors set out in Listing Rules 8.3.3 to 8.3.14. Listing Rule 8.3.3 required BDO to act with due care and skill, and 8.3.5(1) required BDO to deal with the FSA in an open and cooperative way. The FSA concluded that BDO’s conduct did not satisfy these requirements, BDO having:
- Failed to liaise with the UKLA at any time prior to the announcement of the Transaction, despite being aware of its duties with regard to the potential classification of the Transaction as a reverse takeover.
- Reworked the class tests several times to seek to classify the Transaction as a class 1, whilst being aware that these re-worked class tests were, in the words of an internal BDO communication, “flakey”.
- Failed, as a result of the above and by focusing on avoiding delay to the Transaction and the suspension of its client’s shares, to provide the objective oversight required of a sponsor.
Censure powers of the FSA
The FSA has the power under section 89 of the Financial Services and Markets Act 2000 to publicly censure a sponsor for breach of the Listing Rules. The FSA has no power to fine a sponsor.
BDO’s response
The Final Notice summarises the changes that BDO has made to its processes and procedures since the Transaction. Those changes include establishing a corporate finance public risk committee to which all new public company transactions must be reported for approval. That committee also decides whether a second partner should be appointed to the transaction for reviewing purposes. Further training has also been held within BDO, and its internal guidelines for sponsor and PLC advisory work revised.
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