Locations
Market reCap January 2013 edition
- Enhancing the effectiveness of the listing regime: response to Consultation Paper 12/2
- Major changes proposed for controlled companies with a premium listing
- Primary Market Bulletin No.4: update on UKLA Knowledge Database
- Inside AIM – fifth edition focussing on nomad's consideration of directors
- Takeover Code changes operating satisfactorily concludes Takeover Panel report
- New European plan for online gambling
- The Kay Report: government proposals to tackle short-termism in the UK equity markets
On 26 January 2012, the FSA issued consultation paper CP 12/2 in relation a large number of proposed changes to the Listing Rules.
At the time, there was a significant amount of debate about the increasing number of controlled companies on the premium segment of the Official List that had most of their assets and trading operations in overseas jurisdictions, as well as their controlling shareholders. In particular, it was noted with concern that tracker funds were obliged by their rules to invest in many such companies due to the fact that they were included in the FTSE indices. The FSA noted such concerns in the consultation paper and, whilst it distanced itself from the rules regarding the constituent members of the indices, declared that it would in the future consult upon changes to the Listing Rules and issues around the quality of the premium listing regime, free float requirements, minority shareholder protection and corporate governance in order to ensure that it is meeting its statutory objectives.
On 2 October 2012, in consultation paper CP 12/25, the FSA published its feedback on the changes proposed in CP 12/2. These changes are discussed here in this edition of Market reCap. Most of the changes set out in CP 12/2 came into effect on 1 October 2012. In CP 12/25, the FSA also consulted on proposed changes to the Listing Rules primarily designed to enhance the overall quality of the premium listing regime in light of the concerns voiced at the start of the year.
The most significant proposals are briefly set out in this article. There are likely to be substantial changes by the time the final rules are published.
Unless otherwise stated, the changes explained in this article apply only to companies with a premium listing.
Free float
As noted above, the origin of the disquiet voiced amongst the investor community was the obligation imposed upon some investment funds to invest in certain companies that obtain a premium listing even though they have a controlling shareholder. Companies such as ENRC and Bumi are high profile examples. FTSE has subsequently amended certain rules regarding the criteria for entry into the relevant indices. The FSA noted that there was a significant difference of opinion in the market between those representing investors, who predominantly thought that the free float threshold should be raised in order to protect minority investors, and those representing issuers, most of whom thought that raising the threshold would deter many issuers from joining the London financial markets.
The FSA noted that under the framework of the proposed Financial Conduct Authority objectives, which will become directly applicable to the UK Listing Authority ("UKLA"), the UKLA must have regard to regulatory principles, including proportionality. The FSA acknowledged that the primary purpose of the free float requirement was to ensure sufficient liquidity in a secondary market, rather than ensure adequate governance.
The FSA has proposed a retention of the current 25% threshold for shares in public hands, subject to certain amendments to the current regime. Shares that are subject to a lock up period in excess of 30 days will be excluded from the calculation of shares in public hands. The FSA also set out proposed guidance regarding the circumstances in which it may allow a dispensation from the 25% requirement, although it will say that it will be unlikely to agree a dispensation below 20%, other than in exceptional circumstances.
Importantly, in relation to companies on the standard segment of the listing regime, the FSA said that it proposes to allow admission even with very small percentages of shares in public hands, as long as there is likely to be sufficient liquidity in the secondary market.
Control of business
Under the proposals, a new issuer must control the majority of its business, rather than the majority of its assets.
New guidance is proposed to describe situations in which the FSA believes that an applicant is not able to carry on an independent business.
Independence
Under the proposals, a new applicant will need to demonstrate that it will be carrying on an independent business as its main activity.
Relationship agreements
The FSA is proposing to reinstate the old requirement from the "yellow book" listing rules that an issuer must be capable of acting independently of a controlling shareholder and its associates. Those acting in concert will need to be aggregated, although there is little detail as to who will be considered by the FSA to be acting in concert. Hopefully, there will be guidance in the final rules. Predictably, 30% is the threshold for control.
The FSA is proposing to reinstate the express requirement for a relationship agreement between a company and its controlling shareholder. It has set out certain mandatory content requirements, including the somewhat difficult requirement that the controlling shareholder must not influence the day to day running of the new applicant at an operational level, or hold or acquire a material shareholding in one or more significant subsidiaries. Expect changes to this in the final rules. The existence of the relationship agreement will be a continuing obligation for issuers, and material amendments to the relationship agreement will need approval via a vote of independent shareholders.
Independent directors
The FSA is proposing to introduce a new requirement that, where an issuer has a controlling shareholder, the board of the issuer should be constituted such that independent directors form a majority of the board, or an independent chairman and independent directors together make up at least half of the board. Independence will be defined through a cross-reference to the UK Corporate Governance Code.
Independent directors will need to be appointed through a two vote process, including an independent shareholder vote where the controlling shareholder is not allowed to vote. If the two votes conflict, a further vote will take place not less than 90 days later on a simple majority basis. As a result, a controlling shareholder would ultimately get its wish if it was determined to pursue an appointment.
Interestingly, although perhaps not surprisingly, nothing is said about the removal of independent directors, which is at least as important as the appointment process, since effective independence requires security of tenure.
Reporting obligations
The FSA proposes to expand the current obligation to report to the FSA any non-compliance with the free-float requirement to an obligation to report any non-compliance with any of the continuing obligations imposed on a premium segment issuer.
Listing principles
The standard listing regime is predominantly based on the requirements of EU legislation, whereas the premium listing regime has super-equivalent additional requirements that are deemed appropriate by the FSA for its flagship listing regime. Notwithstanding this, the FSA has proposed that two of the listing principles that previously applied only to premium listed companies, should also apply to standard listed companies. These are the listing principles that require a listed company to have adequate systems and controls in place to comply with its regulatory obligations, and for a listed company to deal with the FSA in an open and co-operative manner.
Certain of the remaining listing principles have also been amended. In particular, listing principle 1 imposes an obligation on a premium listed company to take reasonable steps to enable its directors to understand their responsibilities and obligations as directors. It is proposed that this is extended by the creation of a continuing obligation for a premium listed company to disclose in its annual report details of the steps it has taken to ensure that it has addressed Principle B4 of the UK Corporate Governance Code, which imposes an overlapping requirement.
Conclusion
Whilst at first glance the proposed changes do not seem particularly onerous, they present a considerable number of challenges. In particular, the requirement to address the existence of potential concert parties and potential controllers will need to be considered and explored in the context of IPOs on the main market. The growing importance of such an evaluation is clearly demonstrated by the current investigation by the Takeover Panel into the concert party that existed at Bumi and should have been "whitewashed" at the time of the transaction.
Interestingly, the consultation paper does not deal with how the proposals will be implemented in respect of companies that already have a premium listing. Presumably the new requirements would apply to those companies, subject to some form of grandfathering provision. It will also be interesting to see if the AIM Rules are also amended to deal with some of the governance issues raised by controlled companies. As it is, the proposals might make the AIM market a more attractive market for issuers that are concerned by the increasing volume of regulation faced by issuers with a premium listing.
The consultation period in respect of these proposals ended on 2 January 2013.
Amerjit Kalirai is a Partner in the Corporate Group of Field Fisher Waterhouse LLP in London.