New controls on controlling shareholders
Market reCap February 2014 edition
- Primary Market Bulletin No.7
- Sponsor competence review under Listing Rules
- New controls on controlling shareholders
- AIM Notice 38
- Takeover Panel Practice Statement No 27
- ESMA statement
- Success fees
- Service of English legal proceedings on overseas directors
The Financial Conduct Authority (FCA) is proceeding with changes to the Listing Rules, including new requirements for premium listed companies with a controlling shareholder. Such companies will have to enter into a relationship agreement with the controlling shareholder and amend their constitution to provide for a dual voting structure for the appointment of independent directors.
On 5 November 2013, the FCA published consultation paper CP 13/15, which sets out details of proposed revisions to the Listing Rules as well as giving feedback on consultation paper CP 12/25 and requesting further responses on a limited range of issues. CP 13/15 sets out draft Listing Rules which are likely to be adopted by the FCA in the second half of 2014. The consultation closed on 5 February 2014.
A new Listing Rule will be introduced requiring premium listed companies with a controlling shareholder to put an agreement in place to safeguard the independence of the company. The FCA proposes that premium listed companies which already have a controlling shareholder will have six months to comply with the new rule when it comes into force. A similar grace period will apply if a controlling shareholder subsequently emerges.
CP 13/15 sets out a proposed definition of controlling shareholder and asks for feedback. The draft rules propose that a controlling shareholder will be any person who, either individually or with associates or persons with whom they are acting in concert, controls 30% or more of the votes of the company. "Acting in concert" is not defined and, while the consultation paper notes that the same term is used in the Takeover Code, it also acknowledges that the concept will not always have the same meaning in the context of the Listing Rules as it does in the context of the Takeover Code. In particular, the list of persons who are presumed to be acting in concert for the purposes of the Takeover Code will not apply.
The agreement must be written and legally binding and must ensure that the controlling shareholder complies with certain "independence provisions". These are, broadly, that transactions and relationships between the company and the controlling shareholder will be on an arm's length basis and on normal commercial terms and that that the controlling shareholder will not take any action which prevents the company from complying with its obligations under the Listing Rules or propose any shareholder resolution which would circumvent the proper application of the Listing Rules.
If a company fails to put a relationship agreement in place with a controlling shareholder, if the company breaches the provisions of the agreement or if the company becomes aware that the provisions of such an agreement have been breached, "enhanced oversight" measures will apply to the company. These provisions require all transactions with the relevant controlling shareholder to be subject to prior independent shareholder approval regardless of their size. This effectively means that the safe harbours for the related party transactions regime cease to apply to such transactions and that independent shareholders are able to veto them.
The FCA also consulted on requirements for the board to make certain disclosures in its annual report about entry into a relationship agreement and compliance with the agreement. The enhanced oversight measures would also apply if any independent director disagrees with any of these statements.
In addition to requiring a legally binding relationship agreement, where a premium listed company has a controlling shareholder, its constitution must also allow for the election of independent directors to be approved by separate resolutions of the shareholders of the company as a whole and by the independent shareholders of the company as a separate class. If either resolution is defeated there is a cooling off period of 90 days. If a resolution to elect the director is re-proposed after that period, it can be passed by a vote of all the shareholders acting as one class, so this provision provides only limited protection to the independent shareholders who are successful in the first instance in blocking an appointment. This voting structure will require a change to the articles of association of the listed company and it is proposed that companies will be given until the next general meeting for which a notice has not already been issued to amend their articles accordingly.