Consultation proposes far-reaching revamp of UK Listing Rules

Consultation proposes far-reaching revamp of UK Listing Rules.

The Financial Conduct Authority (FCA) has published a consultation paper (CP23/31) that reports on  feedback received on the Listing Rules reforms it proposed in May 2023 (CP23/10).

The paper sets out detailed proposals for what it describes as "the most far-reaching reforms of the UK’s listing regime in three decades".

The reforms in particular look to address concerns that onerous regulatory constraints, particularly for those seeking a premium listing, dissuade would-be issuers from choosing the UK as their listing venue.

The paper proposes the creation of a new UK Listing Rules sourcebook (UKLR) to replace the existing Listing Rules, with the mission of increasing accessibility and reducing complexity for issuers and sponsors alike.

The draft publication suggests setting out the rules in two tranches.

The first tranche will focus on the UKLR underpinning a new "commercial companies" category and sponsor regime. A draft text for the first tranche is supplied by the FCA in an Appendix to the consultation paper.

The second tranche will focus on other listing categories and remaining provisions impacting all issuers. This tranche will provide the full draft rules and is aimed to be published in Q1 2024.

The consultation closes on 22 March 2024 for comments on both tranches of the draft UKLR.

Thereafter, the FCA anticipates publishing a policy statement containing the final version of the new UKLR at the start of the second half of 2024, with the rules coming into force two weeks later.

If all goes to plan, the UK will usher in a much-changed UK listing regime before the end of this year.

Some of the key proposals are summarised below.

A single listing category for commercial companies

The headline proposal, which has been an ever-present consideration of the FCA since Lord Hill's initial review of March 2021, is a new, single category for UK listings of equity shares that will combine and replace the premium listing and standard listing segments for shares.

This category will be relevant for commercial companies with, or seeking, a primary equity share listing in the UK.

Other listing categories

In addition to the new commercial company category, the consultation paper also proposes the following new categories:

-  A transition category: to maintain the status quo for existing commercial companies that are issuers of standard listed shares.

• The new category would carry forward current continuing obligations, and the issuers would be 'mapped' into it from an existing standard listing at implementation.
• This category will be closed to new applicants and to transfers from other categories, so it would have no eligibility requirements.
• It is also worth noting there will be no end date or deadline by which time issuers need to transfer out of the category – instead they may apply to join the commercial companies category when they are ready and eligible to do so.

-  An international secondary listings category: for equity shares of non-UK incorporated companies with a secondary listing in the UK.

• The category will be designed to accommodate companies incorporated outside the UK, where either domestic company law or rules stemming from their ‘primary’ listing venue may make it more difficult to meet certain requirements.
• This category will be open to new applicants but the sponsor regime will not apply.

-  A category for non-equity shares (e.g. preference shares and deferred shares) and non-voting equity shares.

• This category would be open to new applicants and the status quo for these issuers would be maintained based on the current eligibility requirements under the standard listing category.
• Again, no sponsor regime will apply.

-  A shell company category: designed for equity shares in SPACs and other shell companies, to which the sponsor regime will be extended.

• The FCA hopes the distinct category will ensure clarity for both the issuers and investors and allow the proposal of targeted rules going forward.

Separate categories are also retained 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.

New eligibility requirements

The new eligibility criteria will represent a reduction compared with the current premium listing requirements, but an increase compared with the rules for standard listings.

In particular:

• Commercial companies will no longer need to provide:
  • Historical financial information;
  • A three-year revenue earning track record; or
  • A clean working capital statement. 

This is tempered by the fact the prospectus will still need to contain disclosures similar to those previously included in the working capital statement and historical financial information.

The FCA will also continue to examine the consistency of such disclosures and whether any of the financial information in the prospectus gives rise to concerns that could be to the detriment of investors.

• Premium listing eligibility requirements regarding warrants and options, that currently limit the permitted total to 20% of issued equity share capital, will also not apply to commercial companies.
• Other premium listing requirements concerning minimum market capitalisation, pre-emption rights and 10% free float will be retained.

Independence and Controlling Shareholders

There is a limited relaxation of the requirement on any premium listed issuers to demonstrate that it carries on an independent business as its main activity and that it exercises operational control over that business.

Commercial companies will though be expected to satisfy the FCA that the companies are not managed externally, and that the board is able to make strategic decisions without third party recommendations.

The FCA is not expected to mandate eligibility and continuing requirements around independence of business other than where there is a controlling shareholder.

Where a company has a controlling shareholder, the current premium listed requirements will remain largely unchanged. This includes the need for a relationship agreement between the issuer and its controlling shareholder and the requirement for independent shareholder approval when approving the cancellation of listing and the election or re-election of independent directors. 

Dual Class Share Structures

Dual/multiple class share structures will be permitted, with the removal of the existing premium segment requirement of a five-year sunset period.

Shares carrying enhanced voting rights will nonetheless be subject to a number of particular restrictions, including:

• Such shares may only be issued on IPO (and not thereafter);
• Such shares may only be issued to (a) directors (b) natural persons who are investors or shareholders (c) employees and (d) persons established for the sole benefit of, or solely owned and controlled by, a person in (a), (b) or (c); and
• The enhanced voting rights associated with such shares may not be transferred to another person (except to a person established for the sole benefit of, or solely owned and controlled by, the transferor), thus enabling the transfer of the economic value of the shares but ensuring that any enhanced voting rights remain with the person to whom the shares were first issued.

The holders of such weighted shares would be able to vote on the approval of a reverse takeover, as well as on the election or re-election of an independent director by shareholders where the company has a controlling shareholder.

Enhanced voting rights would not however be exercisable in relation to votes to approve:

• A cancellation of listing or the transfer of shares listed in the commercial companies category to another category;
• Employee share schemes, LTIPs and discounted option arrangements;
• Share offerings and placings at a discount over 10%; or
• Dealing in own securities and shares.

Significant transactions

The consultation paper further proposes a major relaxation, compared to the current position for premium listed companies, in the regime applicable to significant transactions.

Perhaps most notably, it confirms that Class 1 transactions (i.e. those reaching the 25% threshold under the class tests) will not require shareholder approval, but instead be subject to an enhanced market notifications regime for transactions at the ≥25% threshold. 

The concept of Class 2 transactions will be abolished completely, meaning the requirement for an announcement will apply only to transactions that hit the current Class 1 threshold of 25% rather than also applying to the current Class 2 threshold of 5%.

The disclosure requirements will though be more onerous than current Class 2 requirements and include:

• An enhanced form of the current Class 2 information (as set out in new rule UKLR 7.3.1R).
• Elements of the financial information currently required for Class 1 circulars, including the historic financial information on the target and the rules governing minimum standards around it.
• Aspects of the current Class 1 circular requirements including a statement of the effect of the transaction on the group's earnings and assets and liabilities.

Under the above regime, no sponsor appointment will be required where the issuer seeks guidance or requests a waiver or modifications of the significant transaction requirements including on the class tests.

The profits test will also be removed and a new guidance on what constitutes 'ordinary course of business' will be established.

The current rules relevant to reverse takeovers will however be largely retained, with an FCA-approved circular accompanied by a sponsor declaration and shareholder approval still the order of the day.

Related party transactions

Commercial companies will no longer be required to issue a circular and obtain shareholder approval for related party transactions.

Instead, a market notification of the related party transaction will have to be made, and where the transaction reaches 5% or more under the class tests, the company will be required to obtain a sponsor opinion that the transaction is fair and reasonable.

To clarify the scope of transactions subject to the related party transaction regime, the consultation paper further proposes to:

• Issue the guidance on the exemption of transactions within the ordinary course of business.
• Clarify when a further related party transaction needs to be aggregated with earlier transactions, or when the issuer is required to comply with the related party rules.
• Increase the threshold at which a substantial shareholder becomes a related party, from 10% to 20%.

Further issuances, buybacks and share schemes

Generally speaking, the premium listed approach to events that could dilute existing shareholders or otherwise have a major impact on an issuer's share capital structure has been carried over to the new single listing category.

This includes the eligibility requirement for pre-emption rights for existing shareholders and the shareholder approval requirement on non-pre-emptive share offers at a discount of more than 10%.

The substance of the current buyback requirements for premium listed companies will also continue to apply to commercial companies, however the requirement for a working capital statement will be removed, and the FCA will no longer be looking to vet and approve a buyback circular, nor appoint a sponsor on a buyback circular.

With respect to employee share schemes, LTIPs and discounted option arrangements, a shareholder approval requirement remains, as does the requirement for a circular.

Role of sponsors

The sponsors' role on an IPO will remain much the same as it currently is for a premium listing IPO. 

Post-admission, the proposals advocate a markedly reduced role for sponsors of commercial companies in particular.

The sponsor's role will be refocused towards circumstances where an issuer is facing fundamental change and certain other circumstances, such as major increases in the issuer’s listed share capital involving an FCA-approved prospectus, fair and reasonable opinions for related party transactions, and reverse takeovers.

Sponsor declaration requirements will be adjusted accordingly to reflect their reduced role under the UKLR, with a wider range of transactions to be considered as relevant corporate finance advisory experience and the extension of the declaration period from three to five years.

Annual reporting

Annual reporting requirements will continue to have regard to the UK Corporate Governance Code on a 'comply or explain' basis.

A commercial company will be required to include a statement of how they have applied the UK Corporate Governance Code in their annual financial report.

If the issuer has departed from any of the provisions they should provide an explanation, setting out their reasons, which may be justified in circumstances based on a range of factors, including the size, complexity, stage of development and ownership structure along with current issues (such as a takeover) of a company. 

The UKLR will also carry over the key comply or explain annual disclosure requirements related to diversity of boards and climate-related financial disclosures for commercial companies.

This article was authored by Adam Jones, Corporate Director at Fieldfisher.