Launch of new high growth segment to the Main Market
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On 27 March 2013, London Stock Exchange plc (the "London Stock Exchange") launched the new High Growth Segment to its Main Market.
The new High Growth Segment can be seen as a transitional route to the Official List for quickly-growing companies which are too big for the AIM Market operated by the London Stock Exchange, but which may at present find it difficult to comply with the listing criteria for the Official List.
When the High Growth Segment was first mooted in September 2012, the Department of Business, Innovation & Skills explicitly referred to the US JOBS Act, which has streamlined the regulatory burden for growth companies listing on US markets.
Companies listed on the High Growth Segment will not be admitted to the Official List and so will not be subject to the Listing Rules. A rule book for the High Growth Segment was published on 27 March 2013 (the "Rule Book", accessible here), which sets out the various eligibility criteria and ongoing obligations for companies admitted or applying for admission to trading on the segment.
Eligibility criteria - general
Section A of the Rule Book sets out the eligibility criteria and application process for a company wishing to be admitted to trading on the High Growth Segment (an "Issuer"). The eligibility criteria state, inter alia, that:
- the Issuer must be incorporated in an EEA state and be a public limited company or similar EEA entity;
- it, together with its subsidiaries, must be a trading business (it cannot, for example, be a natural resources company at exploration stage or an investment entity);
- it must control the majority of its assets;
- ten per cent. of the securities to be admitted must be in public hands;
- the value of securities in public hands must be at least £30 million (the majority of which must be raised on admission);
- the Issuer must be able to demonstrate growth in audited consolidated revenue of at least twenty per cent. on a CAGR basis (as defined in the Rule Book) over the prior three financial years;
- there must be a sufficient number of registered holders of the securities to provide an orderly market following admission.
Since the High Growth Segment is a regulated market, the Issuer will also be required to publish a prospectus which complies with the Prospectus Directive and which has been approved by the Financial Conduct Authority ("FCA"), or another EEA state's competent authority. The prospectus is required to include a non-binding statement from the Issuer that it intends to apply for admission to the Official List in the future and how it intends to satisfy the eligibility criteria for admission to the Official List.
To be eligible for admission, the Issuer must also have appointed a "key adviser". A key adviser will perform a similar role to a sponsor on an admission to the Premium segment of the Official List.
A comparison table is available on the London Stock Exchange's website setting out the eligibility criteria for AIM, the High Growth Segment, and for the Standard and Premium segments of the Main Market.
Continuing obligations
Section B of the Rule Book sets out the various continuing obligations for companies whose securities are admitted to trading on the High Growth Segment. These include obligations in connection with notifiable transactions, related party transactions, reverse takeovers and other events.
Notifiable transactions
A notifiable transaction is a transaction which, when applying the class tests, results in any percentage ratio of 25 per cent. or more. The Issuer must notify a Regulatory Information Service ("RIS") as soon as possible after the terms of the notifiable transaction are agreed, but there is no need for shareholder approval.
Notifiable transactions exclude: (i) a transaction in the ordinary course of business; (ii) a transaction involving the issue of securities to raise finance (i.e. a subscription or placing) which does not involve the acquisition or disposal of any fixed asset of the Issuer (or its subsidiary); and (iii) any transaction between the Issuer and its wholly-owned subsidiaries.
Transactions must be aggregated during the previous twelve months in order to assess whether they trigger the 25 per cent. ratio in the class tests if: (i) they are entered into by the Issuer (or its subsidiary) with the same entity or connected entities; (ii) they involve the acquisition or disposal of securities or an interest in one particular company; or (iii) together they lead to a substantial investment in a business activity which did not previously form a significant part of the activities of the Issuer's group.
Related party transactions
A related party transaction is a transaction for which any percentage ratio, after applying the class tests, is 5 per cent. or more and is: (i) a transaction between an Issuer and a related party; (ii) an arrangement pursuant to which an Issuer and a related party each invests in, or provides finance to, another undertaking or asset; or (iii) any similar transaction or arrangement between an Issuer and any other person or entity, the purpose and effect of which is to benefit a related party. The transactions and/or arrangements which are caught above do not include transactions in the ordinary course of business, but do include transactions by the Issuer's subsidiary undertakings.
In the event the Issuer enters into a related party transaction, it must notify a RIS as soon as possible as if this were a notifiable transaction, including some additional prescribed information such as details of the related party. No shareholder consent is required.
If an Issuer enters into transactions or arrangements with the same related party in any twelve month period, the transactions must be aggregated in order to assess whether the 5 per cent. threshold when applying the class tests has been triggered.
Reverse takeovers
A reverse takeover is a transaction for which any percentage ratio, after applying the class tests, is 100 per cent. or more, or which in substance results in a fundamental change in the business, or in a change in board or voting control, of the Issuer and its subsidiaries.
Where an Issuer wishes to undertake a reverse takeover, it must: (i) comply with the notification and other requirements as if this were a notifiable transaction; (ii) send an explanatory circular to its shareholders and obtain their prior approval in a general meeting for the transaction which constitutes the reverse takeover; and (iii) ensure that any agreement which effects such transaction is conditional on shareholder approval.
Where shareholder approval is given for the reverse takeover, the securities of the Issuer will be cancelled. The Issuer, as enlarged by the reverse takeover, must then apply for re-admission of the securities as if it were a new applicant, and would therefore require an FCA-approved prospectus.
In some instances a suspension of trading will be necessary. An Issuer is required to contact the Primary Market Regulation Team as early as possible: (i) before announcing a reverse takeover which has been agreed or is in contemplation in order to discuss whether a suspension of trading of its securities under the Admission & Disclosure Standards is appropriate; or (ii) where details of the reverse takeover have leaked, in order to request a suspension of trading.
Notification requirements
There are various other prescribed events which require notification to a RIS without delay, including board changes, dividend payments, changes to capital structure, new issues of securities and the passing of any shareholder resolutions.
Continuing website disclosures
The Rule Book also includes requirements, similar to Rule 26 of the AIM Rules for Companies, for the Issuer to maintain a website including certain prescribed information.
Corporate governance
An Issuer must ensure that its annual financial reports include the following additional items:
(i) details of the corporate governance code to which the Issuer is subject or which the Issuer has voluntarily adopted;
(ii) a statement as to how the Issuer has applied the main principles set out in the relevant code, in a manner which would enable shareholders to evaluate how the principles have been applied; and
(iii) a "comply or explain" statement setting out which provisions in the relevant code the Issuer has complied with in the accounting period, or, where it has not complied with certain provisions, setting out those provisions and explaining its non-compliance.
Key advisers
The term "key adviser" is unique to the High Growth Segment, but is conceptually akin in some ways to the existing sponsor role for the Premium segment of the Main Market.
An Issuer will be required to appoint a key adviser at admission and seek the key adviser's guidance when proposing to undertake certain key transactions (such as notifiable transactions, related party transactions and reverse takeovers) and other matters following admission.
The Rule Book sets out specific rules which apply to the key adviser, including in connection with:
- the responsibilities of the key adviser when providing information to the London Stock Exchange;
- certain principles, such as requirements to act with due care and skill and to identify conflicts of interest that it may have;
- the role of the key adviser on admission, including in relation to an Issuer's working capital exercise and submission of the key adviser's declaration;
- general notification and record management obligations of key advisers; and
- the supervisory and disciplinary powers of the London Stock Exchange, including its ability to apply unlimited fines.
Firms that would like to act as key adviser would need to be approved to do so by the London Stock Exchange.
Conclusion
The High Growth Segment has been specifically designed as a response to the number of high growth companies, especially technology companies, which are choosing to list on exchanges such as Nasdaq rather than in the UK.
The reduced free float requirement (in comparison to the free float requirements of the Official List) together with the reduced regulatory burden will allow the Issuer a potentially easier transition from being a private company to a public company, whilst still giving it access to the greater funding potential and liquidity that the Main Market offers. We look forward with interest in seeing how the High Growth Segment develops.
Edward Westhead is an Associate in the Corporate Group of Field Fisher Waterhouse LLP in London.