Enhancing the effectiveness of the listing regime: response to Consultation Paper 12-2
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 28 September 2012, the FSA published Handbook Notice 123 which amended the FSA Handbook. The main changes include amendments to the Listing Rules following FSA consultation paper CP 12/2. The objective of CP 12/2 was to identify where the rules needed to be updated and to introduce new protections to safeguard the UK's regulated markets. Most of the changes came into effect on 1 October 2012.
On 2 October 2012, the FSA published consultation paper CP 12/25 to set out the response to consultation paper CP 12/2 and to propose consultation on further amendments to the LRs. This article explains the most notable changes arising from CP 12/2 adopted pursuant to CP 12/25.
Further commentary on CP 12/25 can be found here in this edition of Market reCap.
1. Externally managed companies
The FSA has seen the increased use of corporate structures where management functions are conducted by advisory firms (typically in respect of cash shells incorporated with the intention of acquiring targets). The FSA raised concerns that the management of these "externally managed companies" could be beyond the reach of some of the shareholder protections that are fundamental to the listing regime. The main changes include:
- new rules which, in effect, exclude companies using an external management from obtaining a premium listing. These do not, however, apply to externally managed investment companies (i.e. closed-ended investment funds and collective investment undertakings); and
- an extension of the definition of "persons discharging managerial positions" to include persons who do not hold employment contracts with the issuer, but have regular access to inside information and the power to make managerial decisions (i.e. senior executives of advisory firms).
Although the new rules apply from 1 October 2012, premium listed issuers which fall within the new obligations benefit from a transitional provision and have until 1 January 2014 to comply. The transitional period allows existing externally managed companies the opportunity to give notice on current external management contracts and put new arrangements into place.
2. Reverse takeovers
The FSA's proposals in this area are intended to prevent "back-door" listings of entities that would otherwise not be eligible for listing. The main changes include:
- the widening of the reverse takeover regime so that issuers with both premium and standard listings, including issuers of depositary receipts, are subject to the reverse takeover rules;
- amendments to the rules relating to the information requirements (which an issuer must meet in order to avoid a suspension of listing) and the eligibility requirements (which an issuer must satisfy following a cancellation of listing); and
- new guidance on the timing of when an issuer (or its sponsor, if premium listed) must contact the FSA before announcing a potential reverse takeover. The FSA clarified that this is likely to occur when a transaction is sufficiently advanced, such as when an issuer has approached a target's board, entered into an exclusivity period or been given access to commence due diligence work.
The FSA has amended the provisions relating to the sponsor regime, thereby strengthening the existing rules and providing greater emphasis on the role of sponsors. The main changes include:
- the inclusion of "related party transactions" in the list of transactions where sponsors are required to act;
- the strengthening of communication requirements between sponsors and the FSA where sponsor services are being performed:
(i) the definition of a "sponsor service" has been extended to include all sponsor communications;
(ii) a sponsor must take reasonable steps to ensure that any communications with the FSA are "to the best of its knowledge and belief accurate and complete in all material respects"; and
(iii) a sponsor must promptly notify the FSA if it becomes aware that it or any issuer with a premium listing is failing or has failed to comply with its listing obligations. In addition, an issuer must co-operate with its sponsor by providing the sponsor with "all information reasonably requested". This concept has also been added as a continuing obligation under the premium listing regime;
- a new principle for sponsors to act with integrity; and
- clarification that sponsors have an overriding duty to the UK Listing Authority ("UKLA") when identifying conflicts of interests, which should be done on a continuous basis.
The following changes in relation to transactions largely codify existing market practice contained in the UKLA Technical Notes:
- a requirement for issuers to produce a supplementary circular where there has been a material "change" or "new matter". This is likely to arise in cases where information (not disclosed in the circular) would enable shareholders to make a properly informed decision if voting or other action is required;
- clarification on the disclosure of risk factors in class 1 circulars. The risks disclosed should be material to the vote and not obscured by risks that are irrelevant to the purpose for which the circular has been produced;
- clarification of the approach to break fee arrangements; and
- the removal of the concept of class 3 transactions.
5. Financial information requirements
The following changes largely codify existing practice in respect of the financial information requirements and clarify where existing rules are either silent or unclear:
- an amendment to remove the financial information requirements on a premium listed company which is proposing to set up a new holding company (provided that no transaction is undertaken that increases the assets or liabilities of the group);
- a new requirement that financial information disclosed in a prospectus/listing particulars (produced pursuant to an application for a premium listing) must be not more than six months old at the date of the document and not more than nine months old at the date of admission;
- clarification that a mineral or scientific research company (seeking a premium listing) must have published or filed accounts since the inception of its business activities if it has not been operating for the required period of three years;
- clarification of the rules relating to the modification of accounts and track record requirements for issuers seeking a premium listing;
- amendments to the rules relating to financial information in class 1 transactions (including, inter alia, the removal of the requirement for a mineral expert report (in certain circumstances), the FSA's discretion on the requirements for a valuation report, and the requirement for issuers to disclose certain information relating to synergy benefits); and
- clarification of the rules relating to profit forecasts and estimates (including the validity of a profit forecast or estimate and the extension of the requirements for profit forecasts to class 1 disposals).
Given the substantial number of changes which have been made to the LRs, hard copies of the rules will now be out of date so we recommend that issuers and advisers refer to the FSA Handbook which can be found online (click here) or contact us for clarification.