The FCA has published a consultation paper (CP23/10) proposing major changes to the listing rules. The deadline for responses is Wednesday 28 June 2023 and the FCA expects to publish a further consultation “in the autumn” which will include the proposed revised listing rules in full (the current consultation discusses the changes proposed but not specific drafting). The FCA is aiming for “an accelerated timetable, with substantial progress by the end of 2023”, but there is no specific timetable for the amendments to come into effect. The proposals relate to the rules as they apply to listings of equity shares in commercial companies, with no material changes currently proposed to the rules as they apply to non-equity securities nor the majority of other standard listed instruments (e.g., depositary receipts). This alert summarises the more significant of the changes proposed.
As the FCA acknowledges, a company’s decision as to where to list is driven by a number of factors, of which the regulatory environment is only one. The changes proposed in the consultation paper are, however, intended to remove much of the potential “friction” perceived by many in the current regime and encourage, rather than deter, a diverse range of companies – in particular early-stage and high-growth companies – to list in London. In general, the changes are sensible and have the potential to contribute to the achievement of these objectives and, in the view of many market participants, the sooner that they can be implemented the better. Some of the “devil will be in the detail” and the FCA’s consultation on specific rule changes in the autumn will be eagerly anticipated. In high-level terms, while we do not consider that market participants are likely to be under any misapprehension that the proposed reforms constitute a comprehensive solution to the current challenges facing UK capital markets, it is clear that the proposed reforms will make the UK a more attractive listing venue, better able to compete on the global stage.
The case for reform
The consultation paper discusses some of the reasons why the FCA is looking to reform the listing regime, including:
- A desire to make the UK listing regime “more accessible, effective, easier to understand and competitive”.
- The long-term decline in the number of UK-listed companies (down 40% since 2008).
- Feedback from market participants that the high standards imposed by the UK premium listing rules are regarded as overly burdensome and are deterring some companies from listing in the UK.
- To encourage a more diverse range of companies to list and grow on UK markets, especially early-stage and more innovative or acquisitive companies.
The FCA acknowledges that a number of factors drive the choice of listing location (e.g., valuations, depth and liquidity of capital markets, indexation and macroeconomic factors) and that the proposed changes will mean passing greater investment risk to investors and greater responsibility to shareholders to hold companies to account, but still believes that overall the proposed changes are desirable and justified. We agree with this sentiment.
The key changes being proposed can be summarised as follows.
Single listing category and eligibility criteria:
The FCA proposes to create a new single listing category for equity shares in commercial companies, for new applicants for listing and for existing premium and standard listed companies.
- Certain core eligibility criteria that currently apply to all equity share listings on the premium and standard segments will be retained (e.g., minimum market capitalisation and free float requirements).
- The following are proposed to be removed as eligibility requirements:
- Historical financial information requirements (on 75% of the business over three years).
- Three-year revenue earning track record.
- Clean working capital statement.
- The FCA recognises that financial history disclosures in prospectuses on admissions are generally likely to remain substantially similar as investors should be given all information necessary to make an investment decision. By removing these eligibility criteria, however, it is anticipated that the emphasis will shift to disclosure and companies needing to persuade investors of their investment case.
- New eligibility and continuing obligations will be introduced around strengthening co-operation and information gathering, including a requirement for companies to have in place appropriate record keeping arrangements, a requirement for companies to confirm that they are able to comply with applicable continuing obligations (in addition to the sponsor confirmation of this) and eligibility and continuing notification obligation requirements to provide the FCA with contact details of key persons within the company eg the CEO, CFO and COO.
Independence, dual class share structures and controlling shareholders:
- The current Listing Rules require (both for eligibility and continuing obligations purposes) a premium listed company to demonstrate that it carries on an independent business as its main activity and that it exercises operational control over that business. There are no similar requirements for a standard listing company. The FCA proposes to explore a modified form of these obligations, showing an openness to diverse business models and, potentially, more complex corporate structures. The FCA is seeking views on how to balance a desire for consistency and simplification with potential risks to investors and whether, for example, to require more specific and explicit disclosure or assurance (e.g., from sponsors) in certain cases.
- Currently, dual class share structures are permitted in the standard segment, whilst a restricted form of these (within specific parameters including a five-year sunset period) is permitted in the premium segment. The FCA has received feedback that this is a critical area to get right to improve the attractiveness of a UK listing. The proposal under the new regime would be to have a more flexible structure under which:
- Enhanced voting rights would be able to be exercised on all matters and at all times, with the exception of reverting to “one share one vote” for the approval of issuing new shares at a discount in excess of 10%.
- Dual class share structures could only be put in place at admission, and the sunset period would be extended from five years to 10 years.
- Enhanced voting right shares could only be held by directors and transfer restrictions would apply such that the shares with enhanced voting rights would automatically convert to ordinary shares upon the holder ceasing to be a director.
- The current limits on maximum enhanced voting rights would be removed and left for the market to determine.
- The FCA proposes relaxing the current regime for premium-listed companies with controlling shareholders. The current requirement for a relationship agreement with the controlling shareholder would become optional on a “comply or explain” basis, where the lack of such an agreement would require specific disclosure and risk factors in the prospectus and annual report. Other protections would be retained, including the requirement for the approval of a majority of both the shareholders and the independent shareholders of: 1) the election and re-election of independent directors; and 2) a cancellation of the listing.
Significant and related party transactions:
- The FCA is proposing a material relaxation of the rules that currently apply to premium listed companies regarding significant and related party transactions (though these rules will be stricter than those that currently apply to standard listed companies).
- Under the proposed new regime for significant transactions:
- The requirement for shareholder approval and a circular for “Class 1” transactions will be abolished except for reverse takeovers.
- The requirement for a “Class 2” announcement will apply only to transactions that hit the current Class 1 threshold of 25% rather than also to the current Class 2 threshold of 5%.
- The class tests will continue to apply, with the exception of the “profits test” which will be removed on the basis that it frequently produces anomalous results, and the requirement to aggregate transactions will continue to apply.
- A company will only be required to obtain guidance from a sponsor where it is any doubt as to the correct application of the rules, rather than in every instance (as is currently the case).
- Sponsors will have more discretion to apply appropriate modifications to the class tests without having to submit a request to the FCA (though they will still have that option).
- Under the proposed new regime for related party transactions:
- The requirement for shareholder approval and a circular for related party transactions that hit the 5% threshold under the class tests will be removed, with these transactions instead being required to be announced to the market, including a fair and reasonable opinion from the directors supported by a sponsor.
- The modified requirements that currently apply for transactions above 0.25% and below 5% will be removed.
- A company proposing to enter into a transaction that is or may be a related party transaction must obtain the guidance of a sponsor, whilst (unlike the proposals for significant transactions) sponsors must consult with the FCA to agree any potential modification to the class tests and resulting classification of a transaction.
- The separate disclosure regime for related party transactions under DTR 7.3 will be maintained, though (as currently) compliance with the Listing Rules will be deemed sufficient to comply with DTR 7.3.
Other matters requiring shareholder approval:
- The requirement for a circular and shareholder vote (with a 75% majority) to approve a delisting, that currently applies to premium listed companies but not to those listed on the standard list, would apply under the proposed new regime.
- The requirement for a circular and shareholder approval for a reverse takeover transaction would apply under the new regime in the same way that it currently applies.
- As a general approach, the FCA proposes to retain shareholder approval requirements that currently apply to premium listed companies in relation to potentially material dilution or other impacts on the company’s capital structure (e.g., non-pre-emptive share offers at a discount of more than 10% to the current share price).
Annual reporting requirements
- The FCA proposes to apply to the new regime the existing premium listing requirements in respect of reporting against the UK Corporate Governance Code (how the company has applied the principles and, on a “comply or explain” basis, whether the company has complied with the provisions).
- The new regime would also retain key disclosure and comply or explain requirements that are already applied in the areas of diversity and TCFD reporting, whilst the FCA’s starting point would be a presumption of maintaining other annual reporting requirements contained in LR 9.8 where they remain relevant.
- The sponsor regime would be applied to all new commercial companies applying for a listing of equity shares after a specified date, and to all existing listed companies that transition to the new single category. The role of a sponsor at that stage would largely reflect the current role sponsors play on an IPO for a premium listing (i.e. providing key assurances at the “listing gateway”).
- After listing, the sponsor’s role would be reduced, in particular given the changes proposed in relation to significant and related party transactions. Less frequent assurance on a company’s continuing obligations will need to be provided to the FCA by sponsors, with fewer transactions post-IPO requiring the appointment of a sponsor for the purposes of providing a declaration to the FCA.
- Accordingly, the FCA proposes to amend the sponsor declaration requirements to clarify that when assessing competence the FCA would be likely to consider a wider range of transactions (including where no sponsor declaration is required), including advising other companies such as those admitted to AIM.
- The FCA received feedback that the risk of regulatory action may be driving an overly cautious approach to record keeping by some sponsors and has said they will consider further how best they can facilitate a proportionate approach, with more details to be included in their autumn consultation.
Listing principles and new listing regime structure:
- The FCA proposes having a single set of listing principles, combining the current listing principles and premium listing principles, with limited modifications (e.g., to reflect the proposed approach to dual class share structures).
- Structurally, the proposal is to remove the current two-segment approach of premium and standard listings and instead to have categories tailored to different issuer and security types.
Approach for other issuers and restructuring of the listing rules:
- The FCA considers that commercial equity share issuers that are controlled by a sovereign shareholder may be included in the new listing category, which would result in the deletion of the separate category currently covered by LR 21.
- A new category is proposed specifically for shell companies and SPACs, with the potential for the sponsor regime to be extended to this new category.
- There may also be a need for a separate category (referred to in the consultation as an “other shares” category) for: 1) those existing standard listed companies not eligible to transfer to the new single category nor to the proposed new SPAC/shell company category; 2) secondary listings of overseas incorporated companies; and 3) non-equity shares such as deferred shares and preference shares.
- Other current categories of standard listed companies (e.g., debt securities and depositary receipts) are likely to remain largely the same, though the term “standard listing” will no longer be used. The FCA will include further details on depositary receipts in its autumn consultation.
- The Listing Rules themselves will require significant changes and re-structuring. Helpfully, the FCA’s proposed new structure (showing current versus new chapters) is set out in an annex to the consultation paper.
- The FCA intends to put in place transitional arrangements to facilitate the implementation of the proposed new regime. More detail on these will be set out in the autumn consultation but in high-level terms are intended to include the following:
- The rule changes would come into effect from a specified date, which would be some time after the final rules are confirmed.
- Whilst the expectation is that standard listed commercial companies would transfer across to the new single category, the FCA will consider whether companies that are unwilling or unable to do so should be allowed to transfer to the “other shares” category, potentially on a time-limited basis.
- Sponsors are likely to have a role in assisting existing listed companies with the transition.
- Transitional arrangements will be put in place for companies that are in the process of applying for a listing at the point at which the proposed rule changes are finalised.
Related UK initiatives
- This consultation sits alongside several other related reforms and initiatives. These include in particular: 1) the independent secondary capital raising review and related work by HM Treasury to propose draft legislation to create a new public offers and admission to trading regime, to replace the UK Prospectus Regulation; 2) the Government’s potential reforms relating to their initiative around restoring trust in audit and corporate governance; and 3) the FRC’s plans to consult on updates to the UK Corporate Governance Code later this year.
- The FCA will continue to work closely with the relevant parties to consider interactions with the listing rules as these reforms are progressed.