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The UK’s financial regulator (the “FCA”) has published a consultation paper outlining a wave of proposed approaches to overhaul the stock market listing rules (“CP23/10”).
The proposals follow a string of high-profile companies shunning the City in favour of New York, and aim at making the UK a more attractive place to list. The number of UK listed companies has fallen 40% since 2008.
Several UK fund managers have voiced concerns over the proposed changes, suggesting they would dilute investors’ voting rights and leave them exposed to riskier stocks.
Under the existing regime, there are two listing segments – a premium listing segment and a standard listing segment. The listing rules were designed this way to give issuers the option of a standard listing if they were unable to meet the high standards required in the premium listing segment. In practice, the perceived “second-class status” associated with issuers who choose to list in the standard segment means those that are not eligible for a premium listing often elect to list elsewhere in Europe.
CP23/10 follows the FCA’s May 2022 discussion paper (“DP22/2”) and Lord Hill’s Listing Review report (the “Report”) which highlighted specific elements of the listing regime that act as barriers to companies listing.
It is worth noting that changes to the UK listing regime by themselves will not necessarily increase the number of companies choosing to list in the UK. The FCA itself acknowledges many other factors, including taxation and renumeration, that influence where a company chooses to list.
The proposed changes
In CP23/10 the FCA proposes to remove the existing structure of premium and standard listings, which many market participants find confusing, in favour of a single listing category for equity shares in commercial companies (“ESCC”).
Removing Premium and Standard Listing segments
Removing the existing structure of premium and standard listing segments should result in a set of bespoke rules tailored to each listing category based on the type of security and issuer each category permits.
Such a structure would include a new category for equity shares in commercial companies as well as new listing categories for special purpose acquisition companies (“SPACs”) and other shares (including preference and deferred) that are currently eligible to list under the standard listing segment.
The proposed structure would retain discrete listing categories for equity shares in closed-ended investment funds (“CEIFs”), equity shares in open-ended investment companies (“OEICs”) and potentially equity shares in sovereign controlled commercial companies.
In total the proposed listing structure could comprise of ten discrete listing categories.
Single set of Listing Principles
A single set of Listing Principles has been proposed to underpin these categories. These will apply to all listed companies and should provide consistency and clarity for issuers and investors alike. The single set of Listing Principles would combine the current Listing Principles and Premium Listing Principles with modifications to clarify expectations and promote good corporate governance and accountability.
More detail on the application of this combined set of principles is set to be released in a follow-up consultation paper in the autumn.
a. Proposed Role in ESCC
As part of the proposals for a new ESCC category, the FCA proposes to apply the sponsor regime. The regime would apply to all new commercial companies that are applying for a listing of their equity shares after a certain date and to those existing listed commercial companies that will transition to this new single category. The approach is designed to ensure that all listed commercial companies are treated equally and remove any perceived inconsistent treatment of these entities. For example, all commercial companies will benefit from support and high-quality expert advice with new listings and when preparing an application to list.
The sponsor’s role would be predominantly the same as that currently undertaken by sponsors involved in an IPO under the premium listing category that being to provide key assurances at the listing gateway. However, a sponsor’s due diligence would need to extend to take account of the new eligibility requirements proposed in CP23/10.
b. Proposed Role for Other Issuers
The sponsor regime would continue to apply to CEIFs and the FCA will consider whether this should extend to other issuer types, such as SPACs.
c. Sponsor Services
A sponsor’s role at the listing stage in assessing the eligibility of a listed company will predominantly remain the same, save where certain premium listing eligibility criteria are being removed (see below) or new ones being introduced. It remains that the sponsor will assess whether the listed company is compliant and that it can remain compliant on an ongoing basis. The sponsor will still be required to make confirmations to the FCA, after due and careful enquiry, that, for example, the listed company is eligible to list and submit a sponsor declaration for an applicant (LR 8.4.3R).
The role of sponsors in relation to significant transactions and related party transactions (“RPTs”) will change, given the FCA’s intention to remove the requirement for shareholder approval (i.e. sponsors will no longer have a role in Class 1 circulars or RPT circulars). However, the FCA intends to maintain the requirement for companies to obtain the guidance of a sponsor, and a sponsor’s fair and reasonable opinion, ahead of entering into RPTs at or above the 5% threshold.
It is proposed that an issuer would need to appoint a sponsor if it wanted to transfer into the new single ESCC category from other categories for equity shares (such as the category for equity shares in CEIFs). The FCA also anticipates a role for sponsors as issuers transition to new categories as the new listing regime structure is implemented. Further details on this will be released in the FCA’s autumn consultation.
d. Sponsor Competence
The changes suggested by the FCA mean less transactions will require the appointment of a sponsor for the purposes of providing a declaration to the FCA. As such, the FCA plans to alter the sponsor declaration requirements such that, when assessing competence, the FCA will be likely to consider a broader spectrum of transactions (including those where no sponsor declaration is required). Such transactions could include advising companies admitted to AIM.
e. Record Keeping
The feedback that the FCA received to DP22/2 suggested that the risk of regulatory action may be causing an overly cautious approach to record keeping by sponsors. Consequently, the FCA has said that it will consider how it can best assist sponsors in taking a proportionate approach to record keeping, with further details to be included in its autumn consultation.
Looking at the Listing Categories
The main proposals, set out in CP23/10, relate specifically to the replacement of the standard and premium listing segments with a single listing for commercial company issuers of equity shares. Key provisions are considered below.
On listing eligibility criteria, the FCA proposes to remove the following requirements that currently apply to premium listings from the rules that will apply for the new ESCC category:
Instead reliance is to be placed on prospectus disclosures.
Initial and Continuing Obligations
a. Independent business and control of business
The current premium listing rules in LR 6.4.1R and LR 9.2.2AR require an applicant and a listed company to demonstrate that it carries on an independent business and exercises operational control over its main activities. There are no similar requirements for issuers of shares in the standard listing segment.
The FCA proposes to explore a modified form of these obligations, albeit one that retains the underlying principle of ensuring a business is capable of complying with listing, disclosure and transparency requirements. The single listing category is proposed to be more flexible to better accommodate diverse business models.
The FCA is not proposing to change its existing position on undiversified CEIFs that do not meet the requirements of LR15. The FCA would retain the power (in s75(5) FSMA) to refuse an application for listing if, for a reason relating to the issuer, the FCA considers that granting it would be detrimental to the interests of investors.
b. Dual class share structures
Currently there are no rules that preclude the listing of shares in commercial companies with dual or multiple share structures in the standard segment.
The FCA proposes a more permissive approach to dual class share structures (“DCSS”) with the following features:
The FCA considers a time-related sunset provision to be the most effective safeguard against the entrenchment of enhanced voting rights and the permanent exposure to moral hazard by minority shareholders.
c. Controlling shareholders
The current controlling regime in the premium listing segment seeks to address the risk that the interests of minority shareholders are overridden by controlling shareholders and requires a company to put in place a relationship agreement with shareholders that meet the definition of a “controlling shareholder”. There are no such rules in the standard listing segment. However, the FCA has questioned the effectiveness of a controlling shareholder agreement if there is no requirement for a shareholder vote to approve RPTs when the related party is a controlling shareholder. As such, the FCA proposes to reframe requirements to comply or explain any disclosure-based approach. It would then be for shareholders to satisfy themselves that any relationship a company has with a controlling shareholder is within their risk appetite.
Premium issuers must run four class tests (also referred to as percentage ratios) when proposing to enter into a transaction. There are four class tests used to classify the size and importance of a transaction and these are:
The results of the class tests are expressed as percentage ratios that are then used to determine how significant the transaction is and what action the listed company needs to take. CP23/10 proposes that the class tests for classifying transactions would continue to exist, with the exception of the profits test.
However, the FCA aims to reduce the regulatory burden on listing companies by removing the requirement for compulsory shareholder votes and shareholder circulars for significant transactions and RPTs.
a. Significant transactions
The requirement for shareholder approval of significant transactions has been attributed to Barclays not acquiring Lehman Brothers before Lehman Brothers collapsed.
Notwithstanding, the FCA aims to reduce the perceived regulatory burden on listing companies by removing the requirement for compulsory shareholder votes for significant transactions.
The proposals would also increase the threshold that dictates when significant transactions need to be announced. Under ESCC rules the company would not be required to announce significant transactions that would fall below the current Class 1 thresholds (for non-ordinary course transactions ≥25%), nor to seek prior shareholder approval or publish a shareholder circular at any level.
The FCA is considering a different approach for transactions that would have the characteristics of a “reverse takeover” or are Class 1 and proposed by the company because it is in financial difficulty, as discussed below.
b. Related party transactions
SoftBank’s decision to list Cambridge-based chip designer Arm on Nasdaq earlier this year has been attributed in part to the rules forcing a shareholder vote on transcations with related parties.
Currently there are two regimes for RPTs that are not in the ordinary course of business: one for standard listed issuers and one for premium listed issuers.
In CP23/10, the FCA proposes a single ESCC category for RPTs. For proposed RPTs meeting the 5% threshold, the listed company would be required to announce the transaction to the market with a statement by the board that the RPT is fair and reasonable and that the directors have been so advised by the sponsor. The FCA proposes to remove the requirements for shareholder votes and circulars in relation to RPTs at or above the 5% threshold and remove the modified requirements for smaller transactions above 0.25% and below 5%. Overall, these proposals would reduce obligations on premium listed companies, but increase the regulatory burden on existing standard listed companies.
In short, under the proposals in CP23/10 there would be no requirement for independent shareholder approval of RPTs at or above the 5% threshold, although UK listed companies will still have to disclose such transactions
c. Other matters requiring shareholder approval
The FCA is in favour of retaining shareholder votes and circulars on reverse takeovers, de-listing and discounted share offers. These requirements will now apply to all equity share issuers, including those which currently have a Standard listing.
Currently premium listed companies must obtain the approval of 75% of shareholders before cancelling their listing and a circular, approved by the FCA, must be sent to shareholders. The circular must include the proposed cancellation date which cannot be less than 20 business days after the passing of the shareholder resolution. The FCA has proposed that such requirements shall remain and will apply to listing of shares in the single ESCC category.
The requirement for shareholder approval for transactions that constitute a reverse takeover (under LR 5.6), including requirements for an FCA approved circular and the related content requirements, shall also continue to apply. The company will also still be required to cancel its existing listing on completion of the reverse takeover and to re-apply for admission with a new prospectus.
Currently, premium listed issuers in financial difficulty must have regard to the Listing Rules when proposing to undertake a transaction. The FCA’s proposals for transactions undertaken by companies in financial difficulty in the ESCC category shall be covered in a future consultation paper.
The current premium Listing Rules require shareholder approval in certain other circumstances, including for certain share issuance or re-purchase situations (e.g. discounted non pre-emptive share offers where the offer price represents a discount of more than 10% to the current share price). The FCA proposes to keep shareholder approval provisions in the single ESCC category that provide shareholders with a say on transactions that have the potential to cause a material dilution or other impacts on the capital structure of the company.
d. Pre-emption rights
The existing premium listing continuing obligations (under LR 9.3.11R – LR 9.3.12R) concerning pre-emption rights will continue to apply to issuers in the new single ESCC category.
e. Annual reporting requirements
The current “comply or explain” approach, as set out under LR 9.8.6R(5) and (6), in relation to the UK Corporate Governance Code shall continue to apply but, instead of applying just to those companies who shares are listed on the premium segment, they will now apply to all equity shares that are listed within the new ESCC category.
The consultation paper goes into little detail in relation to these entities. The specifics are to be refined when the FCA considers this further.
From the information set out in the paper, the FCA has made clear that its approach to CEIFs under LR15 would remain largely unchanged. The FCA has said that it will consider, where proposed changes to premium listing rules for commercial companies are also applicable to CEIFs, whether similar changes for CEIFs are also needed to retain consistency. Any bespoke rules to CEIFS, or carveouts and modifications within the premium listing rules for CEIFs shall also be retained unless the FCA later identifies that these need to be amended. The FCA has noted that some premium listed CEIFs have classes of shares in the current standard listed segment (LR14) and it has said that these securities will be taken into account in their further considerations.
UK Listing Review
On 3 March 2021, the UK Listing Review, chaired by Lord Hill, recommended significant changes to the listing regime. A number of Lord Hill’s recommendations have been considered in the FCA’s latest consultation paper, as set out below.
The Report suggested charging the FCA with the duty of taking expressly into account the UK’s overall attractiveness as a place to do business (recommendation 2). While CP23/10 does not refer to any “duty”, clearly the focus of CP23/10 is to enhance the attractiveness of UK public markets by creating a more compelling option for companies considering a listing.
Like CP23/10, the Report proposed a more permissive approach to DCSS with certain restrictions (recommendation 3), albeit suggested that companies with DCSS should be able to list in a premium segment (as discussed in this article, CP23/10 does not anticipate a premium segment in the reform proposals).
The Report proposed to lower the amount of shares an issuer is required to have in public hands (i.e. free float) from 25% to 15% and allow more choice for companies of different sizes to use measures of liquidity (recommendation 5). Since then, the FCA has reduced the free float percentage to 10% – a further reduction than the Report had recommended – with the new rules coming into force on 3 December 2021. In CP23/10, the FCA does not propose to change the requirements regarding shares in public hands, so a free float percentage of 10%, currently required for both standard and premium listings, is retained in the new single category proposals.
The Report suggested revising the Listing Rules which can require trading to be suspended in the shares of SPACs on accouncement of a potential acquisition (recommendation 6). CP23/10 considers a category specifically for shell companies, including SPACs, to sit alongside the new ESCC category, with further details expected in a follow-up consultaition, subject to the feedback received.
In CP23/10 the FCA proposes to remove rules requiring 3-year historical financial information and revenue track record, going further than what was recommended by the Report (recommendations 10 and 11).
The Report also made the following recommendations which were not addressed in CP23/10:
The proposals in CP23/10 represent the FCA’s attempt to strike a balance between providing investors with an appropriate level of protection and promoting broader access.
While the changes envisioned would reduce the regulatory burden on premium listed companies, they would subject standard listed companies to regulatory requirements that had previously not applied.
The FCA is keen to engage with interested groups of market participants and a consultation period on the preliminary policy proposals will run until 28 June 2023. As a follow-up to the topics discussed in CP23/10, the FCA expects to bring forward a draft legal instrument setting out the revised listing rules in full, alongside proposals for transitional arrangements and consequential changes in the autumn. Subject to feedback received, the FCA is aiming for an accelerated timetable with substantial progress by the end of 2023.
If you would like to discuss any aspects of the proposed changes as they relate to your business, please feel free to reach out to:
M +44 (0) 7896 151376
Head of Funds
M +44 (0) 7595 958 766
M +44 (0)208 159 2574
M +44 (0)208 159 2577
RW Blears LLP
6 Kinghorn Street
This note does not constitute legal advice and should not be relied upon on that basis.
RW Blears LLP, 9 June 2023