The FCA has published a consultation paper (CP23/31) setting out detailed proposals for the major listing rules reforms that it proposed in May this year (see CP23/10 and our Client alert on this). It describes the reforms as “the most far-reaching reforms of the UK’s listing regime in three decades” and the paper attaches in a chunky appendix the draft text of many of the proposed new listing rules (the first of two tranches). The FCA’s intention is to:
Publish the second tranche of proposed new listing rules “later in Q1” 2024.
Implement the proposed changes to the sponsor competency requirements by “mid-Q2” 2024.
Publish a policy statement with the final version of the new listing rules “at the start of the second half of 2024”.
Have a short implementation period of two weeks before the new rules come into force (with the short period intended to confer on premium listed companies the benefits of the more relaxed requirements of the new regime as quickly as possible).
The deadline for responses on sponsor competence is 16 February 2024, with the deadline for responses on all other elements being 22 March 2024.
This alert summarises the more significant of the changes proposed.
The case for reform of the UK listing regime is a compelling one, not least given the long-term decline in the number of UK listed companies and 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. There have been concerning instances of UK incorporated companies choosing to list elsewhere and also of existing premium listed companies being pressured by major investors to consider moving their listing elsewhere. As the FCA acknowledges, a number of factors drive the choice of listing location (e.g. valuations, depth and liquidity of capital markets, indexation and macroeconomic factors), with the regulatory environment being only one factor.
The changes proposed in the consultation paper, whilst obviously not constituting a panacea for the current challenges facing UK capital markets, clearly improve the regime and will make the UK a more attractive listing venue. It is heartening to see how the FCA’s thinking has evolved to reflect the feedback from a substantial number of respondents (though some of that feedback has been conflicting),and the clear timeline for implementation is a welcome boost just in time for the festive season!
In depth
Proposed changes
The key changes being proposed can be summarised as follows.
Structure and categories of new listing regime and restructuring of the listing rules
As previously proposed, the headline reform is that a new single listing category will be created for equity shares in commercial companies (“commercial companies” category), with the current distinction between the premium and standard segments removed. The requirements for this category will be significantly less onerous than those that currently apply to premium listed companies, though more so than those that currently apply to standard listed companies.
Commercial equity share issuers that are controlled by a sovereign shareholder will be included in this commercial companies category, rather than being subject to a separate category.
A new “transition” category will be created based on the current rules for standard listed companies. Certain current standard listed companies will be “mapped” into this new category initially, but it will be a “closed” category, not available to new applicants. There will be a “proportionate transfer process” to enable companies in this category to transfer to the commercial companies category, but no obligation or deadline for them to do so.
There will be a new category specifically for shell companies and SPACs, with the sponsor regime extended to this new category. Additional eligibility requirements will apply in relation to the company’s constitution, including a 24 month time limit on completing a reverse takeover and binding arrangements being in place for shareholder monies to be ringfenced with an independent third party.
There will also be a new “international secondary listings” category for non-UK companies who have a primary listing on a non-UK market. Eligibility requirements will include that the company’s place of central management and control is in either its place of incorporation or its place of primary listing (if different), whilst the overseas market where it is listed must be subject to oversight by a regulator that is a signatory to the IOSCO Multilateral MOU.
A final new category for non-equity shares and non-voting equity shares will be created, to include preference shares and deferred shares.
There will be continue to be separate categories for: closed-ended investment funds; open-ended investment companies; debt and debt-like securities; depository receipts; securitised derivatives; and warrants, options and other miscellaneous securities. In most cases, the rules for those categories will be broadly similar to those that currently apply.
The FCA will map existing listed companies to the new categories and communicate the proposed mapping to the companies prior to the new rules coming into force. Companies who think that they have been incorrectly allocated will have a four week period to respond and discuss this with the FCA, and where an error is identified the FCA will revise the proposed mapping.
A streamlined transfer process for companies to move from the transitional or international secondary listings categories to the commercial companies category will be available subject to the relevant company meeting certain criteria such as having been listed for at least 18 months on a continuous basis. Otherwise, transfers between categories will require one or more of an announcement, a shareholder vote and/or the appointment of a sponsor – the paper sets out in a table which requirements will apply to which transfers.
The Listing Rules themselves will be substantially restructured, with the paper setting out in detail the proposed new structure and how it maps against the current structure.
Changes to eligibility criteria for commercial companies category
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, pre-emption rights 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 hoped the emphasis will shift to disclosure and companies needing to persuade investors of their investment case. In addition, though the working capital statement will not need to be “clean”, the FCA would expect sponsors to consider whether a company has a reasonable basis for making any working capital statement as part of the sponsor assurance process.
Independence, controlling shareholders and dual class share structures
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 remove these requirements generally but to retain rules and guidance in relation to externally managed companies that require an applicant to satisfy the FCA that the discretion of its board to make strategic decisions has not been limited or transferred to a person outside the applicant’s group and that its board has the capability to act on key strategic matters in the absence of a recommendation from a person outside the applicant’s group.
In CP 23/10, the FCA proposed relaxing the current regime for premium listed companies with controlling shareholders, including to remove the current requirement for a relationship agreement with the controlling shareholder. Following the feedback received, including the view that these agreements give comfort and leverage to the independent directors, the FCA now proposes to retain that requirement and broadly to maintain the status quo whereby the approval of a majority of both the shareholders and the independent shareholders will be required for both: 1) the election and re-election of independent directors; and 2) a cancellation of the listing.
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 is proposing under the new regime that there be no time-related sunset requirement but that weighted voting rights shares could only be issued to: 1) directors; 2) natural persons who are investors or shareholders; 3) employees; or 4) persons established for the sole benefit of, or solely owned or controlled by, a person in 1), 2) or 3). No weighted voting rights shares could be issued after the initial listing and restrictions on transfers will apply so that a person could only transfer these shares to a person established for the sole benefit of, or solely owned or controlled by, that person. Enhanced voting rights would not be exercisable in relation to votes to approve:
Employee share schemes, LTIPs or discounted option arrangements.
Share offerings and placings at a discount in excess of 10%.
Share buy backs of 15% or more of the shares other than via a tender offer.
A cancellation of listing or transfer to a different category of 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), with the proposals broadly in line with those suggested in CP 23/10.
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 an 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%, but the current Class 2 requirements will be enhanced to include, for example, details of any break fee arrangements, the effect of the transaction on the company, including benefits and risks, and a statement by the board that in its opinion the transaction is in the best interests of shareholders as a whole. Historical financial information prepared to an appropriate standard should also be included (though for two years rather than the three required currently for a Class 1 circular) or, where this is not possible, the company should provide an explanation of how it arrived at the agreed price for the acquisition/disposal and a statement by the board that it considers the consideration to be fair as far as shareholders are concerned.
There will be no requirements for a working capital statement or in relation to profit forecasts or estimates but the current requirements relating to synergy benefits statements will apply where these are included. No pro forma financial statements will be required to prospectus standards but there must be clear disclosure as to the sources of any unadjusted financial information and the basis on which the pro forma information has been prepared.
The class tests will continue to apply (now without the “profits test”) and there will be a simplification of the rules around aggregation of transfers.
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), but it will continue to be necessary for the sponsor to submit a request to the FCA in relation to any waiver or modification to the class tests.
The regime for reverse takeovers will remain largely as it is currently, with requirements for an FCA-approved circular with sponsor declarations and a shareholder vote. There will be a presumption that the listing of the company will be cancelled and it will seek re-admission with a prospectus, though if the company being acquired is itself already listed in the same (commercial companies) category, the FCA would generally not cancel the listing.
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.
For transaction below the 5% threshold, the appointment of a sponsor will only be required if the company wants to seek FCA guidance or to seek any potential modification or waiver of the class tests.
The FCA proposes to increase the threshold for when a substantial shareholder is deemed to be a related party from 10% to 20%, though it is also seeking views on an alternative approach of whether to move away from a bespoke definition of “related party” in the listing rules and use an accounting standards based definition, similar to that used under DTR 7.3.
Further share issuances, buy backs and other matters requiring shareholder approval and circulars
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).
Share buy back circulars will not need to be pre-vetted by the FCA and, whilst the content requirements will broadly be similar to the current ones, the FCA is proposing to remove the requirement for a working capital statement when a transaction would result in the purchase of 25% or more of the shares.
Annual reporting requirements
The FCA proposes to apply to the commercial companies category 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 commercial companies category would also retain key disclosure and comply or explain requirements that are already apply 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.
Sponsor regime
A revised sponsor regime would be applied to companies in the commercial companies category, companies transitioning to that category from other categories, closed-end investment funds and SPACs and other shell companies. The role of a sponsor at admission 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”), subject to the changes to the eligibility requirements.
After listing, the sponsor’s role would be reduced, focusing largely on significant increases in share capital requiring a prospectus, the provision of fair and reasonable opinions on related party transactions (and guidance as to the application of the class tests in relation to significant and related party transactions) and reverse takeovers.
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, whilst the sponsor declaration period will be increased from three years to five years.
Listing principles and eligibility and ongoing requirements for all categories
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). Current listing principles 3 and 4 will become rules for the commercial companies category rather than listing principles.
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 – however, rather than specifying particular roles (e.g., CEO, CFO or COO), the company must simply provide contact details of at least two executive directors.
Companies must also provide and keep up to date details of a nominated person, including address, for the purposes of receiving service of relevant documents, and an email address or a postal address in the UK for the same purpose.
Suspensions and cancellations
The FCA proposes to carry across the current rules around suspensions and cancellations of listings with minor modifications. Whilst, as currently, the FCA will have the option of cancelling a listing where the company’s shares have been suspended for more than six months, a new obligation will be imposed on a company to contact the FCA immediately prior to its shares being suspended for more than six months to discuss whether a cancellation would be appropriate or whether the suspension should be extended for a further period to be agreed. This is intended to avoid the scenario where a company’s shares can effectively be suspended indefinitely.
Transitional arrangements
For the new requirements that will apply to all companies, there will be a six month transitional period to prepare and put in place appropriate systems and controls to ensure compliance.
Transitional arrangements will also apply to companies that are in the process of applying for a listing at the point at which the proposed rule changes are finalised.
Related initiatives
This consultation sits alongside several other related reforms and initiatives, in particular the independent secondary capital raising review and the FCA’s work to introduce rules under the new Public Offers and Admission to Trading Regulations (POATR). Based on the responses received to the six engagement papers it published, the FCA expects to consult on the rules under the POATR in “summer 2024” and will consider the feedback to this consultation as part of that work.
