The key proposal in the consultation paper is to create a single listing category for the equity shares of commercial companies, with the following key features (by comparison to the current premium Listing Rules):
- Admission criteria. Companies would still need to have a market cap of at least £30 million and a “free float” (shares not held by insiders) of at least 10 per cent to list on the Official List. However, companies would no longer need to have a three-year financial and revenue-earning track record, or to satisfy the FCA they have at least 12 months’ working capital – potentially enabling suitable high-growth companies to obtain a listing at an earlier stage. At the same time, the FCA proposes to modify its existing requirements for a company to have an independent business and operational control over its main activities, to accommodate a wider range of business models and structures.
- Controlling shareholders. Where a company has a controlling shareholder (30 per cent or more), the FCA proposes replacing the current requirement for a controlling shareholder agreement to be in place with a more disclosure-based regime (but which would otherwise retain some of the features of the existing regime, such as the rules on electing independent directors and cancelling listings).
- Dual-class share structures. The FCA plans to make its recently introduced rules on dual-class share structures more flexible, which would enable them to operate as more than a takeover deterrent or a block on board changes. Potentially, this would allow the holders of enhanced voting right shares to exercise their rights on most shareholder resolutions for a period of up to 10 years post-IPO. The rules would not set a maximum enhanced voting ratio, so this would be for investors to agree at the time of IPO. However, only founder directors would be permitted to hold the enhanced voting rights, and these would fall away should they step down from the board or transfer the shares (and beneficiaries would no longer be able to inherit these rights).
- Significant transactions. The FCA proposes to go ahead with its plans to remove compulsory shareholder votes and prescriptive FCA-approved circulars for non-ordinary course transactions above a certain size – so-called ‘class 1 transactions’ (i.e., equal to 25 per cent or more under the class tests – which would no longer include a profits test). The new rules would instead focus on public announcement at the time of signing a deal of this size (with the content for a current ‘class 2 announcement’ providing the model). The Market Abuse Regulation might require announcement of transactions below the 25 per cent class 1 threshold, but the Listing Rules would not prescribe the content. The FCA also envisages that sponsors would have reduced obligations under the new rules on significant transactions. However, as now, companies would still need to publish an FCA-approved circular and obtain shareholder approval for a reverse takeover (and apply for re-admission of the enlarged group).
- Related party transactions. The FCA also intends to remove the need for shareholder votes and an FCA-approved circular for transactions with directors and substantial shareholders, including where a controlling shareholder is involved, and a controlling shareholder agreement is not in place. The new rules would instead focus on public announcement at the time of signing a related party transaction in size equal to or greater than the five per cent threshold, under the class tests. The announcement would need to include a fairness opinion from the independent members of the board, supported by the company’s sponsor. UK companies would remain subject to shareholder approval requirements for certain transactions with directors or their connected persons under the Companies Act.
The changes, if adopted, would lead to a significant degree of de-regulation for premium listed companies (and a step up in compliance for existing standard listed companies joining the new listing category). Nonetheless, the FCA is keen to emphasise that a number of core investor protections would continue, including shareholder pre-emption rights on new issues of shares, protection against dilutive issues at significant discounts, premium-equivalent corporate governance standards and shareholder votes on proposals to cancel listings, together with sponsor supervision at the time of IPO and on certain transactions. However, to avoid the continuation of de facto premium and standard listing categories, the FCA has abandoned its original suggestion of including a means in the new rulebook for companies to ‘opt-in’ to a more onerous set of continuing obligations.
The main changes are aimed at the listing of equity shares in commercial companies. The FCA proposes fewer changes impacting other categories of security. The separate regimes for listed funds, listed debt, depositary receipts (GDRs) and secondary listings of overseas companies, among others, would continue. However, the FCA is considering whether some of the above changes should also apply, where appropriate, to listed closed-ended investment funds. It is also considering whether to merge the current regime for Sovereign Controlled Commercial Companies with the new category for equity shares, with any necessary modifications. The FCA also envisages creating a separate listing category for special purpose acquisition companies (SPACs) and other shell companies, to reflect their specific requirements.
The consultation runs until 28 June 2023, so there remains an opportunity to provide the FCA with feedback on its proposals. There are a number of areas raised in the paper where further consideration is required (including the revised regime for sponsors), and the FCA intends to publish a more detailed consultation in the autumn. This will include the draft text of the new rules, which will require a significant re-write of the current Listing Rules source book. The FCA plans to make significant progress on the new regime by the end of the year, but acknowledges that implementation will require a transitional period, particularly for current standard listed companies and other companies moving to a listing category where new obligations apply.
The FCA’s latest consultation forms part of a proposed package of wide-ranging reforms to the UK capital markets, on which we have previously reported. Following on from the recommendations in Lord Hill's UK Listing Review, these include changes to the listing rules on SPACs (effective since 10 August 2021), changes to the rules on the minimum ‘free float’, minimum market capitalisation and dual-class share structures (effective since 3 December 2021), the government’s proposals for the future of the UK's prospectus regime (published in March 2022) and the recommendations of the UK's secondary capital raising review (published in May 2022), together with related changes to the Pre-emption Group Statement of Principles and IA Share Capital Management Guidelines.
Client Alert 2023-115