Key Takeaways
- Responding to a 15-year decline in the number of UK-listed companies and a challenging period for UK IPO activity, the UK Financial Conduct Authority (FCA) has proposed reforms that are the most significant in over a generation and will result in a less onerous regulatory regime for premium listed issuers.
- While the FCA’s proposals for a new combined listing segment for equity shares in commercial companies will significantly reduce the regulatory burden for premium listed issuers, the proposed amendments will, in some instances, increase the current regulatory requirements for standard listed issuers. However, the impact of the proposed reforms should not be unduly burdensome.
- In many cases, the proposed changes will align the UK listing regime with other regimes by removing a collection of long-standing super equivalent investor safeguards not typically seen in other jurisdictions.
Introduction
As part of the wider review of the UK’s capital markets regulatory landscape, the FCA published Consultation Paper CP23/10, which sets out reforms for companies with listed shares on the Main Market of the London Stock Exchange. The proposals set out in CP23/10 address issues raised in the Hill Review and, in some instances, expand beyond those proposals. These reforms are part of a programme of reforms aimed at overhauling UK capital markets in order to promote innovation and make London a more attractive listing venue while still maintaining high standards of market integrity and investor protection.
The FCA intends to publish a final consultation paper in autumn 2023 detailing the final proposed rule changes.
Key Proposals and Considerations
The FCA intends to replace standard and premium listing share categories with a combined listing segment for equity shares in commercial companies (ESCCs). The appendix sets out how the FCA proposes to apply (or in some cases remove) existing listing principles, eligibility criteria and initial and continuing obligations for issuers in the new combined listing segment for ESCCs.
Overall, the creation of a combined listing segment for ESCCs and shift toward a more disclosure-based approach will result in a significantly lighter-touch regime for premium listed companies while only marginally increasing the regulatory burden for standard listed issuers. These changes will align the UK’s regulatory framework more closely with those of other jurisdictions, including the U.S., which follow a more disclosure-based approach for listed companies.
Sponsor Regime Reform
While the sponsor regime in the UK will undergo significant reform in reducing the role of sponsors post IPO, the sponsor regime will be applicable to all issuers listed in the combined listing segment. A sponsor declaration will still be required for an IPO, but the sponsor’s role post IPO will be mainly limited to giving the required opinions when an issuer undertakes a related party transaction and, in certain circumstances, assisting the issuer with significant transactions where the issuer’s board deems it appropriate.
Significant Transactions
The FCA’s proposals remove the requirement for a sponsor declaration, an FCA-approved shareholder circular and shareholder approval for significant transactions. Instead, issuers will be required to make an announcement to the market with prescribed content requirements (similar to the current Class 2 transaction requirements). The rules governing significant transactions will apply to all issuers on the combined listing segment, but this should not create an increased burden for standard listed companies because they are already required to disclose significant transactions pursuant to their obligations under the UK Market Abuse Regulation.
The relaxation of the significant transactions regime will make it easier for UK issuers to participate in M&A transactions and compete with financial sponsors on the buy-side, particularly in auction processes. Without the requirement to produce an FCA-approved circular or seek shareholder approval, UK issuers will be able to pursue and execute transactions with more certainty and at a greater speed.
Related Party Transactions
Issuers on the combined listing segment will be subject to the rules governing related party transactions (RPT). While the RPT regime will also be deregulated for premium listed issuers to eliminate the requirements for independent shareholder approval and an FCA-approved circular, the FCA’s proposals will still require a sponsor to provide a fairness opinion.
Eligibility Criteria
The elimination of the requirement for new equity issuers to have a three-year track record, financial statements that represent 75% of their business and a clean working capital statement will increase the pool of companies that are able to list on the London Stock Exchange’s Main Market. This will be of particular importance to young companies in the technology sector and those with a non-conventional corporate structure.
Delisting
All issuers on the combined listing segment (as opposed to just premium listed issuers) will be required to post an FCA-approved circular and to obtain shareholder approval (75% majority plus, in certain circumstances, a majority of independent shareholders where the issuer has a controlling shareholder) in order to cancel a listing. This will give investors in standard listed issuers significantly more protection against the consequential loss of transparency and liquidity that delisting entails.
Corporate Governance
The FCA is proposing that all issuers on the combined listing segment be required to adhere to the UK Corporate Governance Code on a “comply or explain” basis. This is unlikely to impact standard listed issuers, which, in accordance with typical market practice, adopt many of the principles of the UK Corporate Governance Code on a comply-or-explain basis.
Dual Class Share Structures
A time limit on dual class share structures (increased from five years to 10 years) and transfer restrictions on shares with weighted voting rights both remain, but the amendments eliminate a maximum limit on weighted voting rights ratios and on the matters subject to the exercise of weighted voting rights. This change makes the ability to have a dual class share structure more meaningful. This development is significant given the S&P’s recent rule changes permitting the inclusion in S&P indices of companies with dual classes of shares.
FTSE Index
How FTSE Russell will change its indexation rules given these proposed reforms to the listing regime remains to be seen.
GDRs and Debt Securities
The FCA has not proposed any changes regarding global depositary receipt (GDR) issuers, which will continue to be subject to the existing regulatory regime. In addition, the FCA is not proposing any material changes to the listing rules for non-equity securities such as bonds or for the majority of other standard listed instruments (e.g., open-ended investment companies and depositary receipts).
Transitional Arrangements
To facilitate the creation of the combined listing segment and to maintain market integrity during implementation of the proposed changes, the FCA proposed arrangements to:
- Enable existing issuers to transfer from the current standard and premium listing categories to the new combined ESCC listing segment.
- Allow issuers that will be affected by these proposals sufficient time to prepare and implement the necessary changes.
Conclusion
While the FCA’s proposals are far-reaching, market participants and the FCA recognise the need to accompany these reforms with a broader package of reforms aimed at increasing London’s attractiveness as a capital markets and financial services hub. These additional reforms include closing valuation gaps for UK-listed companies (particularly companies with U.S.-listed peers); increasing liquidity in UK capital markets; expanding the breadth of the UK investor base, in particular raising pension fund participation in UK equity markets; reforming rules regarding research; revisiting stamp duty on share transfers; and changing UK investor attitudes toward executive remuneration.
Knowledge strategy lawyer Sharon Jenman contributed to this article.
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Appendix: FCA Proposed Requirements Within Single Listing Segment1
| Key Listing Rules | Standard Listing Requirements | Premium Listing Requirements | Requirements Under Proposals for New Single Listing Segment |
|---|---|---|---|
| General | |||
|
Listing principles |
Two principles apply |
Additional principles apply |
Combined and enhanced principles apply |
|
Sponsor regime |
Does not apply |
Applies |
Applies – subject to changes to significant transaction and related party transaction rules |
| Eligibility | |||
|
Minimum market capitalisation |
£30 million |
£30 million |
£30 million |
|
Historical financial information on 75% of business covering three years |
Not required |
Required |
Not required |
|
Three-year revenue track record |
Not required |
Required |
Not required |
|
Clean working capital statement |
Not required |
Required |
Not required |
|
Free float |
10% |
10% |
10% |
|
Independence |
Not required |
Required |
|
|
Control of business |
Not required |
Required |
|
| Initial/Ongoing Obligations | |||
|
Controlling shareholder regime |
Does not apply |
Applies |
|
|
Dual class share structures/weighted voting rights |
No restrictions |
Permitted but subject to the following restrictions:
|
Generally permitted subject to the following restrictions:
|
|
Task Force on Climate-Related Financial Disclosures (TCFD) and UK diversity and inclusion disclosures |
Required (on a comply-or-explain basis) |
Required (on a comply-or-explain basis) |
Required (on a comply-or-explain basis) |
| Continuing Obligations | |||
|
UK corporate governance code disclosure |
An issuer must disclose if it is subject to or opts to follow any code |
Required (on a comply-or-explain basis) |
Required (on a comply-or-explain basis)
|
|
Related party transaction rules |
At value ≥ 5%:
|
At ≥ 0.25% value:
At ≥ 5% value:
|
At ≥ 5% value:
The FCA is seeking views on the merits of any further disclosure enhancements |
|
Significant transaction rules |
None apply |
At ≥ 5% value (Class 2):
At ≥ 25% value (Class 1):
|
At ≥ 25% value (class test rules are being reviewed):
The FCA is seeking views on the merits of any further disclosure enhancements |
|
Shareholder vote on reverse takeovers |
Not required |
A reverse takeover is subject to shareholder approval and information requirements similar to those for a Class 1 significant transaction |
A reverse takeover is subject to shareholder approval and information requirements similar to those for a Class 1 significant transaction (as amended pursuant to the proposals) |
|
Shareholder vote to delist |
Not required |
Required (75% approval) and controlling shareholder regime applies |
Required and controlling shareholder regime applies |
|
Shareholder vote on discounted share offers |
Not required |
Required |
Required |
Knowledge strategy lawyer Sharon Jenman contributed to this article.
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1 This table is sourced from Table 1: Simple overview of single equity category proposal on pages 11-14 of CP23/10.
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