FCA publishes detailed proposals on the new Listing Rules regime

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On 20 December 2023, the FCA published its detailed proposals on the new Listing Rules regime in Consultation Paper CP23/31. The proposals represent a significant relaxation of the Listing Rules and, along with other proposed changes to the Prospectus Rules to be consulted on in 2024, are aimed at making London’s capital markets more attractive to international companies.

We previously provided our thoughts on the proposals that were consulted on earlier in 2023 here, and in large part the detailed proposals that have been set out are aligned with what was anticipated. However, the FCA has taken on board the feedback received in the consultation and some changes have been made to the original CP23/10 proposals. In addition, there are important proposals for dual listed companies.

What changes have been made to the proposals following the initial consultation?

The FCA received nearly 100 formal written submissions in response to its CP23/10 consultation and conducted multiple roundtable events with stakeholders to obtain their views on the proposals. Following a review of the responses received, the FCA has proposed the following changes to the original proposals:

  • Controlling shareholders – in CP23/10, the FCA sought views on a ‘comply or explain’ approach for controlling shareholder regimes, proposing to reverse the changes made in May 2014 requiring companies with a controlling shareholder to demonstrate that they can carry on their main business activity independently of such controlling shareholder before they will be eligible for admission. As a result of feedback received, the FCA has opted to maintain the current regime that is in place for Premium listed companies in the draft ‘UK Listing Rules’ sourcebook (“UKLR”). This means that standard listed companies who do not have controlling shareholder arrangements in place will need to adopt these before they will be eligible for admission to the new listing category for equity shares in commercial companies (“ESCC”) (more detail below).

  • Dual (or multiple) class share structures – the FCA asked whether companies with dual class share structures should be admitted to the ESCC and has concluded that they should, but with some limitations. Shares with enhanced voting rights will only be available for issue at initial listing, not after listing, and such shares may only be issued to directors, natural persons who are investors in, or shareholders, of the company, employees and legal entities established for the sole benefit of, or solely owned and controlled by any of those individuals. The ability of shareholders with enhanced voting rights to influence a vote that might have a negative impact on the rights and benefits enjoyed by the general listed class of shares will be limited and as a result voting of the shares with enhanced rights will be confined to strategic transactions, including reverse takeovers and the election or re-election of independent directors by shareholders. Further, transfers of shares with enhanced voting rights will be restricted. In a change to the proposals in CP23/10, there is to be no deadline by which the exercisability of enhanced voting rights must be restricted. Instead, this is to be determined by market practice and industry norms applicable to the company.

  • Significant transactions - the disclosure-based regime for transactions which would meet the current class 1 threshold (25%) (“Significant Transactions”) is to be retained, with some refinement to the original proposals. Shareholder approval will not be required for Significant Transactions (except reverse takeovers) and specific notifications will not be required for transactions that would meet the current class 2 threshold (5%<25%). However, there will be enhanced notification requirements for Significant Transactions (based on current class 2 notification requirements with elements of the financial information required for class 1 circulars). These notification requirements will, among other things, oblige companies to provide detail on the reasons for the transaction, including an explanation of the price agreed and any information required to enable shareholders to assess the terms of the transaction and its impact on the company. Ongoing engagement with shareholders is also expected to continue, which will provide safeguards for investors in relation to Significant Transactions. These changes are expected to remove the existing fetter on the ability of listed companies to participate in competitive M&A situations.

  • Related party transactions – in a change to the proposals set out in CP23/10, the UKLR will not require an issuer to obtain the guidance of its sponsor on its Listing Rules, DTR or MAR obligations when a transaction is proposed which ‘may be a related party transaction’. The UKLR will also not require a shareholder vote for related party transactions, although a disclosure-based regime with additional governance requirements is to be implemented. For example, the board will be required to make a public statement that a transaction is ‘fair and reasonable’ and this will need to be supported by a ‘fair and reasonable’ statement from the sponsor. No specific notification or sponsor ‘fair and reasonable’ opinion will be required for related party transactions below the 5% threshold. It was noted in feedback to CP23/10 that related party transactions are relatively rare and more readily anticipated, thus the FCA intends the amended UKLR will strike a balance between continuing to support engagement between a company and its shareholders and enhancing market transparency.

What else is proposed?

  • Single listing category for commercial companies and a separate category for companies with a primary listing on an overseas market - as expected, the existing Premium and Standard segments will be replaced with a single listing category for equity shares in commercial companies (the new ESCC category), which will cover general commercial companies, including listings for sovereign controlled commercial companies (with certain adjustments to the rules to reflect the nature of the controlling shareholder in these companies).

There will then be a separate sub-category for companies incorporated outside of the United Kingdom with a primary listing on an overseas exchange, which the FCA deems to be “equivalent” to the FCA regime – including the ASX, TSX, TSXV and NYSE - for whom London is a secondary listing venue. This separate listing category will largely follow the rules for the existing Standard segment, for example allowing such companies to apply their preferred local corporate governance code rather than the UK Corporate Governance Code; and with no requirements in relation to significant or related party transactions. This is something we championed and included in our response to the Listing Rules reform consultation. This is important news for companies that have, or are considering, a dual listing in London, but note that companies incorporated in the United Kingdom but listed on an overseas market will not be eligible for inclusion in this category.

There will also be a ‘transition’ sub-category, into which the majority of Standard listed companies will be placed following adoption of the new regime. This category would retain the existing Standard segment requirements but would be closed to new entrants. There would be no fixed end date applied to this category, but the FCA would monitor the number of issuers in the category and may seek to remove it in due course as issuer numbers reduce (subject to further consultation). Companies placed into the ‘transition’ category could apply to be transferred to the ESCC if and when they wished to do so. For more details on transition arrangements, see below.

There will then be separate categories for shell companies or SPACs and non-equity shares and non-voting equity shares.

The existing categories for closed-end investment funds, open-ended investment companies, debt securities, convertible securities and depositary receipts will be retained.

  • Eligibility requirements - the eligibility requirements for the new ESCC category have been revised as compared with the existing regime. There is to be no definition of a ‘commercial company’ and any company able to meet the listing criteria will be admitted to the category. Among the changes proposed to the eligibility criteria, there will no longer be a requirement for historical financial information, a revenue track record or a clean working capital statement to be provided for a listing candidate, if these are not available. As previously discussed, the changes will open up the opportunity of a listing to a wider variety of businesses, including the much sought after “unicorn” tech companies, although in practice it is likely that the existing rigor around the examination of qualified working capital statements, for example, will be retained. Other eligibility criteria have also been set out in the consultation, including maintaining existing requirements on pre-emption rights, guidance for a 10% free-float threshold and justifications for overseas companies listing where they do not have a listing in their home country.

  • Ongoing obligations - the ongoing obligations for the new ESCC category are to be amalgamated from the existing rules for the Premium and Standard segments as part of the revised UKLR. Companies with a Premium listing will see a reduction in the ongoing obligations that apply, although companies with a Standard listing will see a modest increase in their obligations in certain areas.

    • Pre-emption rights and share issuances - The current Premium listing requirements relating to pre-emption rights, discounts to market price not exceeding 10% without shareholder approval and matters relating to conduct of rights issues, open offers, vendor consideration placings and offers for sale or subscription are to be retained.

    • Share buy-backs - The rules around share buy-backs at a premium will also be maintained, although there will no longer be a requirement for companies to provide a working capital statement when the transaction would result in the purchase of 25% or more of the company’s issued equity shares and circulars will no longer need to be FCA-approved.

    • Election and re-election of independent directors – shareholder approval will be required in relation to the election and re-election of independent directors where a company has a controlling shareholder. Where companies have weighted voting rights, shareholders with enhanced rights would be permitted to vote on the resolution. The existing rules on circulars relating to such elections will be retained.

    • Annual reporting and governance – the existing Premium listing provisions relating to the UK Corporate Governance Code will be retained, although additional guidance is to be provided on how companies can properly use the “comply or explain” approach. Diversity and climate-related disclosures will also continue to be required as will other financial related reporting requirements in LR 9.8, where these are relevant.
  • Reverse takeovers – the requirement for a shareholder vote and FCA-approved circular for reverse takeovers will be retained, largely mirroring the current Premium list requirements. Listings would be cancelled on completion of the acquisition, with the enlarged group being required to seek re-admission if the listing is to be retained. No cancellation and re-admission would be required where both parties to the transaction are listed in the same category.

  • New Listing Rules sourcebook - the current Listing Rules sourcebook will be replaced with the UKLR which will be structured to reflect the new listing categories and changes to the existing regime. The first tranche of the draft UKLR instrument, covering the core requirements for the ESCC category and sponsor requirements was published in CP23/31 with the second tranche due to be published “later in Q1 2024”. Revisions to the Technical and Procedural Notes will be published to coincide with the publication of the second tranche of the UKLR. The sourcebook will contain a single set of listing principles that will apply to all listed companies.

  • Sponsor requirement – companies will be required to retain a sponsor when seeking admission to the ESCC and certain other listing categories, as well as in targeted circumstances where companies are facing fundamental changes. In particular, companies will be required to appoint a sponsor where they need to engage with the FCA, for example to request approval of a prospectus. Mandatory sponsor appointments will be removed from the Significant Transaction process and, in line with current class 2 requirements, companies will no longer need to have their notifications approved. The expectation is that there will be fewer circumstances where listed companies are required to appoint a sponsor, reducing the burden on companies.

However, it is expected that, in practice, companies will continue to seek guidance on the UKLR and other regulatory requirements where they deem this necessary.

Transitional arrangements

It is expected that companies currently listed on the Premium list will be automatically transferred to the new ESCC category once the UKLR becomes effective. Companies who currently have a Standard segment listing will be mapped according to their operations, many to the new ‘transition’ category. Other Standard segment issuers would be mapped into the shell companies category and international secondary listing category based on FCA analysis. The FCA is proposing to contact issuers in advance of the adoption of the UKLR to notify them of the assumed category they will be placed into.

Next steps

The FCA has requested comments on the proposals regarding sponsor competency requirements by 16 February 2024, reflecting the intention for the FCA to implement those proposals within the existing regime and carry these over to the new UKLR. Broadly, the changes proposed provide more flexibility in assessing the competency of applicants and the FCA will take account of corporate finance advice provided to larger companies listed on other UK recognised investment exchanges such as AIM. The current expectation is for the changes to be published in mid-Q2 2024.

The consultation period for the proposals relating to both the UKLR underpinning the new commercial companies category (set out in CP23/31) and those impacting other categories of issuer and all issuers (to follow in Q1 2024) is open until 22 March 2024.

Subject to responses and final approval by the FCA Board, the FCA is aiming to publish the final UKLR at the start of the second half of 2024. There is expected to be a very short period (likely 2 weeks) between publication and implementation of the new UKLR.

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