Changes to the rules on when companies can delay announcing inside information
The FCA has introduced changes to its guidance on when quoted companies can delay announcing inside information. Companies should now refer to the ESMA guidelines, which contain a non-exhaustive list of the legitimate interests of companies which might justify a delay in announcing inside information, as well as guidance on when a delay is likely to mislead the public. However, although there are some changes in the detail, the new guidelines are unlikely to impact significantly on what companies do in practice. The FCA has also retained elements of its former guidance in DTR 2.5 on permissible delays, so these still remain relevant. In particular, a company in financial difficulties cannot delay announcing this fact on the basis that it needs to keep confidential any ongoing negotiations aimed at its rescue.
New prospectus rules
The FCA’s latest Quarterly Consultation contains a proposal to amend the Prospectus Rules in anticipation of the new EU Prospectus Regulation that will replace the Prospectus Directive. The new EU Regulation is expected to come into force before the summer this year, although there will be the usual two-year period before most of the changes take effect. However, one helpful change is expected to have immediate effect, and the FCA is proposing to update its rulebook accordingly. This will allow a listed company to issue shares via a non-public offer equivalent to up to 20% of its issued share capital on an annual basis without having to publish a prospectus – double the current limit. There is a related change to the exemption for listing shares resulting from the conversion or exchange of other securities.
Reforming the availability of information in the UK IPO process
Does the UK IPO process provide the market with the right information at the right time? The FCA thinks not. Following its April 2016 discussion paper, which reviewed current practice, it has released a consultation paper proposing major changes to the UK IPO process.
The FCA has two main concerns with the current IPO process. First, the main information available to investors is not the official prospectus published by the company, which it believes is issued too late in the timetable. Second (and as a consequence), investors’ chief source of information is connected research (that is, research produced by the underwriting syndicate’s own analysts), and this is perceived to be biased.
To address these concerns, the FCA is proposing to require companies to publish their prospectus or ‘registration document’ (without information about the pricing or size of the fundraising), before any connected research is released. Companies would also have to give providers of ‘unconnected research’ access to their management before any connected research is published.
This would represent a major change to current practice, whereby typically only the underwriting syndicate’s analysts can attend management presentations, and their research is published at the time the company formally announces its intention to float. There is then a 14-day ‘blackout period’ before the draft ‘pathfinder’ prospectus is issued to potential institutional investors, during the course of a further 14-day marketing period. The final-form prospectus is only issued at the end of this process.
Under the proposed new regime, the FCA offers two choices:
- If the company allows both connected and unconnected analysts to attend management presentations, the FCA envisages that these would take place around four weeks before the company publishes its formal prospectus. Analysts would not be permitted to publish their research until the day after the prospectus is published. There would be no blackout period.
- Alternatively, if unconnected analysts cannot attend the initial management presentations, the FCA envisages that the company would give separate information and/or presentations to unconnected analysts immediately after publishing its prospectus. However, with this route, there would need to be a gap of at least seven days between publication of the prospectus and the release of any connected research, to give unconnected analysts a chance to produce their own research.
The FCA also proposes to issue further guidance that would effectively prevent any interactions between a firm’s analysts and the company’s management and its corporate finance advisers until after the firm has been awarded the IPO mandate and its position in the syndicate has been determined. Prior contact would be viewed as involvement in pitching for the work, compromising the analyst’s objectivity.
These proposals would result in significant change to the UK IPO process, and there remain a number of areas of concern. In particular, with a much reduced or eliminated blackout period, there is a need for even greater caution over any involvement by the company’s management in the production of connected research. The FCA has also emphasised the need to ensure inside information is not passed to analysts inadvertently.
At present, the FCA is only proposing to apply its new rules to EU regulated markets such as the London Stock Exchange’s main market, and not to multilateral trading facilities such as AIM. But the FCA is seeking feedback on the admission process for growth markets, and whether it should apply similar rules (in which case it will consult separately on this).
Proposed technical changes to the Listing Rules
The FCA has also launched a consultation on proposed technical improvements to the Listing Rules. The proposed changes include:
- Clarifying the eligibility requirements for premium listing and publishing some new technical notes to provide further guidance on the rules, including the concessionary routes to premium listing for scientific research-based companies and mineral companies.
- Introducing a concessionary route for property companies seeking a premium listing. This would allow a property valuation report to be used to gauge a property company’s maturity, rather than requiring it to have the usual three-year revenue-generating record.
- Revising how premium listed issuers apply the class tests to transactions and amending the FCA’s requirements on when they should consult with the FCA. This would include a change that would allow a company to disregard an anomalous profits test of 25% that would otherwise put a transaction into class 1, requiring shareholder approval, if the other class test results (turnover, assets, consideration etc.) are all below 5%.
- Changing the FCA’s approach to the suspension of listing for reverse takeovers. This will generally allow a company to avoid having its shares suspended when it announces a reverse takeover, unless it is a cash shell.
Review of the effectiveness of primary markets: the UK primary markets landscape
Are the UK’s primary capital markets effective? In a discussion paper issued earlier this year, the FCA poses this question and identifies areas where it believes the current UK listing regime could be improved. The FCA’s discussion paper seeks views on four areas:
- The boundary between standard and premium listing categories, and whether this is too binary. Broadly, the standard listing category is available to list the shares of companies that cannot meet the corporate governance standards required for a premium listing and for which a listing of global depositary receipts (GDRs) may not be suitable when taking into account the company’s investor base. Standard listings of shares have not proved as popular as originally anticipated, with most UK companies opting for a premium listing of their shares and large overseas companies choosing instead a listing of GDRs in London. The FCA is seeking to re-examine the role that standard listings play in practice, particularly for overseas issuers, but also for exchange-traded funds, where the current requirement to have a premium listing may be too onerous. However, the paper also acknowledges that the lack of inclusion of standard listings in the FTSE indices makes them less attractive to both issuers and investors (although this falls outside the FCA’s remit).
- The effectiveness of UK primary equity markets in providing capital for growth, particularly for early stage science and technology companies. While there remains plenty of venue choice in the UK, ranging from the AIM and NEX Exchange growth markets, through to the LSE’s High Growth Segment and the Official List, the short-term focus of equity markets creates challenges for companies that need ‘patient capital’. The FCA is interested in exploring solutions, but clearly there is no easy fix. Some solutions, such as dual-class shares of the kind used in the IPO of Snap, are likely to remain unacceptable in the UK market.
- Whether there is a role for a UK primary-debt multilateral trading facility, similar to those in Luxembourg and Ireland, and its potential structure. More flexibility will now be possible with the proposed widening of the existing withholding tax exemption to include debt traded on a multilateral trading facility, as well as officially listed debt.
- Measures that could be introduced to support greater retail participation in debt markets, which could include some deregulatory measures in relation to debt prospectuses.
Client Alert 2017-132
