HM Treasury has published the recommendations of Lord Hill's UK Listing Review. They include wide-ranging proposals for the reform of the UK listing regime. The driving factor behind the Review is to encourage more growth companies to list on London's main markets, amid concerns that the lack of flexibility in London's listing rules is playing a part in encouraging businesses to list elsewhere. The Review's key recommendations include allowing companies with dual classes of shares to obtain a premium listing, reducing the 'free float' requirement and changing the rules on listing special purpose acquisition companies (SPACs). The Review also advocates a fundamental review of the UK's prospectus regime.
Some of the proposals would represent a significant departure from the UK's existing regime, most notably those centring around the free float and dual classes of shares. However, while many will welcome the efforts to improve the competitiveness of London as a listing venue, others will remain concerned that rulebook changes alone will not answer the question of what the UK should be doing to improve the broader environment for innovative, high growth companies, and to encourage them to list on its capital markets.
The government will now consider the recommendations and set out next steps. Many of the proposals will require either primary legislation or further consultation and rule changes by the Financial Conduct Authority (FCA). The FCA has welcomed the Review and announced that it aims to publish a consultation paper by the summer, with a view to issuing new rules by late 2021.
Recommendations of the Review
- Liberalising listing rules to allow dual class share structures in the London Stock Exchange’s (LSE) premium listing segment. The Review envisages that directors (and only directors) could hold B shares carrying enhanced voting rights on decisions to remove a director or on a change of control, with a weighted voting ratio of no more than 20:1. The rights would be lost on transfer (subject to limited exceptions, for example, for estate planning) and would last for a maximum of five years (unless, with shareholder approval, the company chose to step down from the premium segment).
- Reducing 'free float' requirements – the percentage of a company’s shares that are in public hands – from 25 per cent to 15 per cent and allowing companies more flexibility to use other measures to demonstrate liquidity if they cannot meet the 15 per cent threshold. The free float could also include the shares of institutional investors up to a 10 per cent level (rather than the current 5 per cent) and of other non 'inside' shareholders acting purely in an investment capacity, but exclude shares subject to lock up restrictions of any duration that cannot realistically form part of the regular liquidity pool.
- Revising the rules applying to special purpose acquisition companies (SPACs) so as not to require trading to be suspended in their shares when the company announces a potential acquisition. Shareholders would have other protections at the time of the acquisition, such as a shareholder vote and redemption rights.
- Rebranding and repositioning the LSE’s standard listing segment to increase its appeal to companies of all sizes and types and encouraging investor groups to develop guidelines on areas they see as particularly important to allow for companies on the rebranded segment to be index eligible.
- A fundamental review of the prospectus regime, with admission to a regulated market and offers to the public being treated separately. This would include changing how the prospectus exemption thresholds function so that documentation is only required, and alternative documentation can be used, where appropriate. The Review also suggests that a clearer, and potentially wider, regime to recognise the equivalence of prospectuses drawn up in other jurisdictions could also expedite secondary listings in the UK.
- Encouraging companies to include forward-looking information in prospectuses, by amending the liability regime for issuers and their directors. This is thought to be of particular importance for high growth technology and life sciences companies.
- Maintaining the three-year track record requirement for the premium listing segment, but reviewing the provisions for scientific research-based companies regarding the revenue earning requirement, in order to broaden their application to a wider range of high-growth, innovative companies across a variety of sectors.
- Amending the requirement for historical financial information covering at least 75 per cent of a company's business for premium listings, so that this test only applies to the most recent financial period within the three-year track record. The Review considers the current rules complicate the process for companies that have grown by acquisition.
- Reviewing aspects of the recently introduced rules on connected research analysts. The Review concludes that this has, in practice, added seven days to the public phase of an IPO process without apparent benefit.
The Review's other recommendations include: an annual report on the state of the City, and its competitive position, delivered to Parliament by the chancellor; considering how technology can help retail investors participate in the stewardship of companies; updating the FCA’s statutory objectives to include a duty to take into account the UK’s attractiveness as a place to do business; tailoring information to better meet investors’ needs; reconsidering capital raising models used in other jurisdictions to make secondary issues quicker and more efficient, while allowing retail investor participation; and addressing issues in the wider financial ecosystem concerning pension investment, the tax environment and SME research provision.
Client Alert 2021-064