Since the announcement of the UK government’s Edinburgh reforms to financial services in December 2022, which set out a large number of proposals aimed at making London the “world’s most innovative and competitive global financial centre”, the past two years have seen significant changes to the UK capital markets landscape, including:
- Overhauls of the UK Listing Rules and Prospectus Rules.
- Systemic changes to the financial services sector as set out in the Edinburgh reforms.
- Plans for the biggest pension reforms in decades announced in Chancellor Rachel Reeves’ 14 November 2024 Mansion House speech.
- Updates to the UK Corporate Governance Code, a consultation on the UK Stewardship Code and revisions to the Investment Association’s Principles of Remuneration.
The common goal of these changes is to level the playing field for London as a listing venue, while retaining the best corporate governance practices that have long made London popular with institutional investors.
As we come to the end of 2024 and look ahead to 2025, we highlight below a few of the changes already made as well as those to come in the near-term and how they support London’s reputation as an established centre for capital markets and as an innovator, with proposals for new means of capital raising.
The New UK Listing Rules in Action
In July 2024, the new UK Listing Rules (UKLR) came into effect, instituting a simpler, more flexible, disclosure-based listing regime. See our 29 July 2024 alert “New UK Listing Rules Come Into Force”. The UKLR and the new listing categories facilitate the listing of a greater variety of companies, ensuring that London remains attractive to IPO candidates and can cater to a broader investor appetite. For instance, the creation of the new equity shares (commercial companies) (ESCC) listing category to replace the previous premium and standard segments streamlines the listing regime by creating a single category for corporates.
Although companies listed on the standard segment were initially mapped to the transition category, which maintains the status quo for previously standard-listed issuers (unless another category was more appropriate), some companies that were listed on the standard segment (mainly to keep their dual-class share structure) have already transferred or announced an intention to transfer to the ESCC, including Deliveroo plc and THG plc. Both Deliveroo and THG have cited increased protection for investors and the opportunity to be eligible for FTSE indexation as key reasons for their transfers.
The ability to retain a dual-class share structure and list on the ESCC, and therefore be eligible for FTSE indexation, is expected to encourage more founder-led businesses, such as technology companies, to seriously consider London as their primary listing venue.
Additionally, some international companies have already taken advantage of the new international commercial companies secondary listing category (Secondary Listing Category), including International Paper Co. and CK Infrastructure Holdings Ltd. The Secondary Listing Category enables international companies to access UK investor capital while limiting their continuing obligations. While dual listings remain relatively rare, this option may prove to be attractive for foreign-listed companies that would like to maintain an overseas listing to increase liquidity in their shares.
Going forward, the relaxation of the rules governing significant transactions and related party transactions is expected to have the greatest impact on UK-listed companies. The removal of the onerous and time-consuming requirements for the approval and publication of a circular and a subsequent shareholder meeting will enable UK-listed companies to more readily compete against private UK or foreign bidders in M&A auction processes and all-cash transactions, and we expect to see listed entities engaging in more M&A over the next 12 months.
The Potential of the Proposed UK Prospectus Rules
In July 2024, the Financial Conduct Authority (FCA) also published a consultation paper setting out the proposed rules for companies seeking to admit securities on a regulated market. See our September 2024 article “UK Public Offers and Admissions to Trading Regime: A New Framework”. The FCA’s proposed amendments to the Prospectus Rules are also intended to bolster London’s standing on the international stage by amending the EU regime retained following Brexit to make it more flexible. Two of the most notable proposed changes to the rules are the concept of protected forward-looking statements (PFLS) and a significant increase in the threshold for a prospectus to be required when issuing new shares.
Currently, the rules have a negligence liability standard for forward-looking statements, which has not only deterred issuers from including these in their prospectuses but has also resulted in a reluctance amongst IPO candidates to provide any forward-looking guidance to investors given the need to include any outstanding profit forecasts in a prospectus.
The new PFLS would institute a higher liability threshold for certain forward-looking statements, based on fraud or recklessness, with the intention of encouraging useful financial disclosure that should better inform valuations and pricing and attract more investment on IPO.
Increasing the prospectus requirement for further issuances from 20% of issued share capital to 75% represents a significant departure from the existing EU regime and the new EU Listing Act, adopted in November 2024, which only increases the threshold where a prospectus is required to 30%. This would provide UK issuers with greater flexibility for future capital raising, particularly compared to EU issuers. However, it remains to be seen if issuers will rely on this exemption in practice, especially given the Pre-Emption Group’s current guidelines, which recommend that shareholders only approve the disapplication of pre-emption rights on non-pre-emptive offerings up to a certain percentage of a company’s issued share capital and this threshold will likely remain below 75%. While the new higher threshold would provide UK-listed companies with more flexibility for raising capital, it is unlikely that a large secondary issuance would be conducted on an undocumented basis given investor expectations for accompanying disclosure.
Additionally, the FCA has proposed several changes aimed at encouraging issuers to support the participation of retail investors in UK capital markets. Currently, retail investors may only participate in an IPO if the prospectus is published six working days prior to closing. This has generally discouraged issuers from including retail investors in their offerings, and the proposed shortening of this period to three working days has been welcomed by the market. There is also a proposal for a multi-lateral trading facility (MTF) admission prospectus for initial admissions to MTFs, such as AIM. This would enable retail investors to participate in IPOs on AIM, where their participation could offer an additional source of capital.
The FCA is also proposing to remove the prospectus requirement for public offers with a total consideration of more than €8 million, identifying this as a restraint on smaller companies looking to raise capital, given the significant costs associated with publishing a prospectus. Instead, a new public offer platform (POP) regime would be introduced. The POP regime is intended to provide a framework for issuers looking to make offers of securities to retail investors outside of public markets when raising more than £5 million while ensuring there is robust regulation surrounding this investment activity. These changes are intended to facilitate greater retail investment in early-stage or smaller companies by alternative means, such as investment-based crowd funding, and enable these companies to develop and raise capital before seeking a listing on a regulated market.
These changes would not only improve accessibility for retail investors to the UK capital markets, but could unlock further capital for issuers from which they are currently unable to benefit.
Updated Guidance on Executive Remuneration
Perceived lower levels of remuneration for UK executives compared to their US counterparts has long been a challenge for London when seeking to attract companies that are considering the merits of different listing venues. A number of institutional investors have sought to address this issue, at least in part, in their updated guidance on executive remuneration, in particular the Investment Association’s (IA) updated Principles of Remuneration (Principles) and Glass Lewis’ 2025 Benchmark Policy Guidelines. Institutional Shareholder Services has also published a request for comment on its 2025 Benchmark Policy Recommendations.
In its Principles, the IA acknowledges the “significant debate” around executive remuneration in the UK and the concerns of balancing global competitiveness and talent retention with the expectations of UK shareholders (and their mandatory right to vote on executive pay). The updated Principles attempt to address these concerns by relaxing certain guidelines and emphasising that the Principles are not prescriptive in nature.
Some of the notable changes in this year’s approach include: removal of the 5% dilution limit for discretionary share schemes; recognition of the prominence of hybrid incentive schemes in companies with a significant US footprint and/or competing for global talent; and clarification around levels of deferral.
Additionally, the Principles encourage remuneration committees to set out the impact of attracting global talent on their processes for determining appropriate levels of executive remuneration where a company is deriving significant revenues from particular markets, such as the US, or competing for talent globally.
While the updated guidance from institutional investors does not represent a seismic shift, there appears to be a recognition that greater flexibility is needed to enhance the UK’s attractiveness as a destination for top executive talent, particularly vis-à-vis the US.
A New Regulated Market: PISCES
On 14 November 2024, the UK Government published its proposal for the creation of a new regulated market to trade shares in private companies: the Private Intermittent Securities and Capital Exchange System (PISCES).
Reflecting a broader trend of the appeal of private capital and the limited liquidity opportunities for private investments in the past three years, PISCES creates an arena for shareholders of private companies, whether UK- or overseas-incorporated, to exit investments quickly and easily with capital from external investors. The proposed intermittent trading windows, with bespoke disclosure requirements aimed at certain investors, provide a method of accessing liquidity which is more streamlined than private transactions, where costly due diligence may be required, and less burdensome than the full disclosure required for public transactions.
Combined with an exemption from stamp duty and discretion on price parameters, this new method of creating liquidity may be particularly attractive to young companies on a steep growth trajectory. The practicality of these proposals remains to be seen because creating a trading venue for private securities is a novel development, but it is another facet in the UK’s efforts to foster a healthy environment for capital. See our 3 December 2024 alert “PISCES: Assessing Its Key Features and Potential Impact” for more information on PISCES.
Dawn of the Next IPO Cycle?
Alongside these once-in-a-generation changes to the UK capital markets landscape, the macro-economic backdrop is also shifting in London’s favour as we look ahead to 2025. The Bank of England is cutting the base rate in line with investor expectations, although rate-cutting has slowed down in recent months, given geopolitical events. The new Labour government has confirmed its ongoing focus on and support for UK capital markets, with the chancellor identifying capital markets as one of the five priority growth opportunities in her Mansion House speech. This support is being underpinned by the ongoing reforms, including most recently the announcement of the formation of pension “mega funds” that aim to unlock and pool together more capital for UK equities. In addition, the UK’s GDP is improving faster than the EU’s and, given the increased total shareholder return seen by UK-listed companies and two years of low volatility, UK valuations are also improving.
These economic factors, combined with the radical shifts to the London legislative and regulatory environment, point towards increased capital markets activity in 2025 and London poised to compete as a pre-eminent listing venue.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.