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Sullivan & Cromwell Discusses Major Changes to UK Listing Regime

  • Vanessa K. Blackmore, Ben Perry, Esther S. Jeapes, Kirsten E.L. Rodger and Matthew Triggs

    • On December 20, 2023, the UK Financial Conduct Authority (“FCA”) published a detailed consultation paper proposing major reforms to the UK listing regime with particularly significant implications for listings of equity shares in commercial companies. The reforms are broadly consistent with proposals on which the FCA previously consulted in May 2023 (see our report on the May consultation here). Alongside the consultation, the FCA has published draft rules for the most significant elements of the revised regime – indicating that the proposals are near-final.

    This latest consultation represents a significant milestone in a process of reform that began in 2021, when the UK Listing Review, led by Lord Hill, published recommendations on how to boost the UK as a destination for IPOs and optimise the capital raising process. The FCA aims to create a simpler UK listing regime with an increased emphasis on a disclosure-based approach that is attractive to a wider range of companies.

    The centrepiece of the reforms is the creation of a single listing segment for equity shares in commercial companies, meaning such companies seeking to list in London will no longer have to choose to apply for a “premium” or “standard” listing. The FCA has also set out detailed proposals for wider reforms to the UK listing regime. Most significantly, commercial companies will no longer need shareholder approval to carry out significant transactions or related party transactions.

    The reforms are motivated by a perception that the current premium listing standards are overly prescriptive and burdensome. The FCA is of the view, based on its engagement with market participants, that there is a need for a reset of the current UK listing regime, with significant parts of the current listing rules no longer accommodating the needs of companies. For instance, the current shareholder approval requirements for significant or related party transactions over a certain size place premium listed companies at a disadvantage when competing with their global peers for M&A opportunities, and growth companies may find the requirements for a premium listing challenging to meet (such as the requirement to demonstrate a three-year revenue earning track record), whilst a standard listing may not generate the investor interest, liquidity and reputational benefits of a premium listing. The FCA considers that the main potential benefits of its reforms are the reduction of barriers for London listed companies to participate in global M&A, reduction of London listed companies’ transaction costs and the removal of obstacles to listing in London such that investors will benefit from a wider choice of liquid investments.

    This latest consultation recognises that the reforms will remove some protections afforded to investors by the current, more prescriptive listing rules. The FCA has therefore stated that the transition from prescriptive rules to a more disclosure-based approach may require investors to enhance their approach to due diligence and risk assessment, and will place an onus on companies and investors to engage effectively on transactions without FCA intervention. However, the FCA is of the view that the benefits of increased opportunities for investors may outweigh the benefits of the current, more prescriptive rulebook.

    The FCA’s proposed reforms to the listing regime are part of a wider package of measures to reform the UK’s capital markets that has followed in the wake of the UK Listings Review and the UK’s withdrawal from the European Union. The Secondary Capital Raising Review into how companies listed in the UK could raise equity financing more quickly and at less expense (on which we reported here) continues to be implemented. In addition, following publication by the UK Government in 2023 of a draft statutory instrumentsetting out a legislative framework for a new UK prospectus regime, the FCA has announced that it will consult on rules for when prospectuses will be required in summer 2024.

    Given the breadth of the reforms, the FCA proposes to replace the existing Listing Rules in their entirety with a new “UK Listing Rules” section of the FCA Handbook.

    SINGLE SEGMENT FOR EQUITY SHARES IN COMMERCIAL COMPANIES

    The key elements of the new single listing segment for equity shares in commercial companies seeking to list in London are set out below.

    A.    SIMPLIFIED ELIGIBLITY CRITERIA

    The key eligibility criteria for the commercial companies segment will be as follows:

    By virtue of the UK’s current prospectus regime, up to three years of historical financial information and a working capital statement will need to be disclosed in the IPO or listing prospectus. However, commercial companies will no longer be subject to the current premium listing rules that require three years of audited historical financial information representing at least 75% of the issuer’s business and a three-year representative revenue earning track record. Nor will the current requirement to have a “clean” or unqualified working capital statement be carried over. The new regime will therefore accommodate the listing of commercial companies that, for instance, have operated for fewer than three years or cannot make a “clean” or unqualified working capital statement, provided this is disclosed.

    B.    MORE FLEXIBILITY FOR DUAL CLASS SHARE STRUCTURES

    A wider range of dual class share structures will be permitted in the commercial companies segment than is currently provided for in the premium segment, within the following parameters:

    C.    CONTROLLING SHAREHOLDERS REGIME RETAINED

    The FCA has decided to carry over the regime that currently applies where a premium listed issuer has a “controlling shareholder” (i.e., any shareholder who controls 30% or more of the issuer’s voting rights). An issuer with a controlling shareholder will still be required to demonstrate that it can carry on its business independently of its controlling shareholder, and to enter into a legally binding relationship agreement with its controlling shareholder. Independent shareholders will also continue to be granted greater voting power on the election of independent directors and cancellation of listing.

    D.    RELAXATION OF RULES ON SIGNIFICANT TRANSACTIONS

    The FCA proposes materially to relax the rules that currently govern significant transactions by premium listed companies, as follows:

    The FCA has proceeded with the proposals to remove compulsory shareholder votes notwithstanding strong opposition from the investor community. In the consultation, the FCA suggests that such concerns are outweighed by the detrimental impact of compulsory votes on issuers’ ability to compete in global M&A. The FCA reports that it has explored other mechanisms by which shareholders could engage with issuers in lieu of a shareholder vote, and acknowledges that major shareholders, in particular, expect to have regular engagement with an issuer’s management and may also be wall-crossed in advance of significant transactions.However, the FCA does not intend to relax its guidance on the selective disclosure of inside information (in spite of it acknowledging that it received feedback from the legal profession suggesting that it should do so) – policing selective disclosure is a key area of focus for the FCA, having formed part of a recent disciplinary decision by the FCA in August 2022 and been the subject of a Primary Market Bulletin issued by the FCA in December 2023. It therefore remains to be seen whether, and if so how, the FCA’s view set out in the consultation that issuer boards should be incentivised to keep larger shareholders informed of potential significant transactions can be reconciled with the FCA’s increasingly stringent approach to selective disclosure generally.

    E.     RELAXATION OF RULES ON RELATED PARTY TRANSACTIONS

    The FCA also proposes materially to relax the rules that currently govern related party transactions by premium listed companies in the following ways:

    F.     OTHER RETAINED CONTINUING OBLIGATIONS

    The most significant current continuing obligations of premium listed commercial companies (not discussed above) that will be carried over into the commercial companies segment are:

    G.    REQUIREMENT TO APPOINT A SPONSOR

    Issuers in the commercial companies segment will be required to appoint a sponsor:

    A sponsor will no longer need to be appointed simply because an issuer is proposing to enter into a transaction that could amount to a significant or related party transaction.

    Shell companies, which will be listed outside of the commercial companies segment, will also need to appoint a sponsor in certain circumstances. (See Segment for Equity Shares in Shell Companies (including SPACs) below for the new requirements for SPACs to appoint a sponsor.) Closed-ended investment funds will also be required to appoint a sponsor at IPO or initial listing, for listing applications for further share issuances that require a prospectus, for any requests to the FCA for individual guidance, and for any aspect of the significant transactions or related party transaction regime that will be applied to closed-ended investment funds.

    H.    SOVEREIGN CONTROLLED COMMERCIAL COMPANIES

    The FCA proposes to collapse the current premium segment for equity shares in sovereign controlled commercial companies into the new commercial companies segment. Certain aspects of the controlling shareholders and related party transactions regimes will, however, be disapplied to sovereign controlled commercial companies.

    SEGMENT FOR EQUITY SHARES IN SHELL COMPANIES (INCLUDING SPACS)

    Equity shares of shell companies, including SPACs, are currently listed in the standard segment. The FCA proposes to introduce a specific segment for such shares. The segment will be limited to shell companies actively pursuing an acquisition strategy or whose assets consist solely or predominantly of cash or short-dated securities.

    The FCA intends to preserve the rules introduced in 2021 that disapply the presumption that a shell company’s shares will be suspended from listing on the announcement of a potential acquisition target, provided certain investor protections are in place. Two such protections are proposed to become mandatory eligibility criteria for the shell companies segment, namely:

    Continuing obligations for the shell companies segment will be carried over from the (limited) continuing obligations of the current standard segment, except where they do not currently apply to shell companies (e.g., the TCFD or diversity targets reporting regimes).

    Initial acquisitions by issuers in the shell companies segment will be governed by similar rules to those that will apply to reverse takeovers by issuers in the commercial companies segment, including the requirements for mandatory sponsor consultation, shareholder approval and an FCA-approved circular (but with any founding shareholder, SPAC sponsor or director excluded from voting).

    New rules will require shell companies to appoint a sponsor at IPO, for listing applications for further share issuances that require a prospectus, and on any application for re-admission to listing following a successful acquisition.

    OTHER NEW SEGMENTS, AND RETAINED SEGMENTS

    In addition to the new single segment for equity shares in commercial companies and the new segment for equity shares in shell companies, the FCA proposes to create the following new segments for listing shares. Together with the segment for equity shares in shell companies, these will replace the current standard segment.

    The FCA proposes to retain the following listing segments:

    The requirements for the above listing segments are expected to be carried over largely without substantive amendment but with some changes, for example to certain of the requirements of significant transactions and related party transactions by closed-ended investment funds.

    The FCA also proposes to combine the current Listing Principles and Premium Listing Principles into a single set of principles applicable to all issuers listed in any of the new or retained segments. As an exception, existing Premium Listing Principle 3 (equality of voting rights between shares of a listed class) and existing Premium Listing Principle 4 (proportionality of aggregate voting rights between two or more listed classes of shares) will be restated as rules applicable only to the commercial companies and closed-ended investment funds segments.

    NEXT STEPS

    The first tranche of draft rules to implement the new regime, focused on the new commercial companies segment, was published alongside the consultation. In Q1 2024, the FCA proposes to publish a second tranche of draft rules comprising draft rules for the other segments and other provisions impacting all issuers. Feedback on the consultation paper, and on both tranches of draft rules, is due by March 22, 2024. The FCA then intends to publish a policy statement and final rules at the start of the second half of 2024. It is expected that the new regime would take effect as of an implementation date two weeks after the publication of the final rules.

    The consultation also included proposals, beyond the scope of this memorandum, on competence requirements for sponsors. Comments on these proposals are due by February 16, 2024. The FCA intends to implement those proposals within the existing Listing Rules in the spring of 2024, and then carry the changes over to the new rules.

    PROPOSED IMPLEMENTATION PROCESS

    On the implementation date, the FCA proposes to “map” all listings into the most applicable segment with immediate effect. In summary:

    The FCA has proposed a modified transfer process for issuers mapped to the new secondary listing or transition segments on the implementation date that subsequently wish to transfer to the commercial companies segment. This streamlined transfer process would include an eligibility assessment focussed on the additional requirements of the commercial companies segment, rather than overlapping requirements that the issuer would already have satisfied at the time it was originally listed. A sponsor would need to be appointed for the transition to the commercial companies segment. A similar transfer process would also apply to eligible issuers mapped to the transition segment that wish to transfer to either the shell company segment or the secondary listing segment.

    COMMMENT

    Following publication of the FCA’s May 2023 consultation, we noted that the FCA’s proposals will establish a more permissive UK main market listing regime for commercial companies that is more closely aligned with the UK’s main international competitors. This remains the case. In general terms, the proposals represent a move away from prescriptive rules largely towards a disclosure-based approach.

    The FCA’s confirmation that it proposes to remove shareholder votes on significant and related party transactions is particularly welcome from the perspective of commercial companies. It will bring the UK into line with most other jurisdictions, and remove a disadvantage London listed companies face when competing for M&A opportunities against their international peers or the private markets. As highlighted above, however, it remains to be seen whether, and if so how, the FCA’s view set out in the consultation thatcompany boards should be incentivised to keep larger shareholders informed of potential significant transactions can be reconciled with the FCA’s increasingly stringent approach to selective disclosure.

    The FCA’s clarification of how existing issuers of standard listed equity shares will be treated under the new regime is also helpful. Comfort will be taken from the fact that mapping them to new, bespoke segments will largely preserve the status quo for those who wish to preserve it.

    It remains to be seen how index providers will react to the new listing regime. As the FCA notes in its consultation, the criteria for index inclusion will ultimately be determined by the index providers (e.g., FTSE Russell). As a result, it is not yet known whether all companies listed in the new commercial companies segment will be eligible for index inclusion, or if the index providers will impose additional requirements. FTSE Russell has announced that it is reviewing the FCA’s proposals carefully and will provide a further update during Q1 2024.

    Aspects of UK listed company governance that derive from UK company law and other regulation are, of course, unaffected by these reforms. These include binding and advisory votes on directors’ remuneration and corporate reporting requirements under the Companies Act 2006 for UK incorporated companies and the FCA’s Disclosure Guidance and Transparency Rules.

    The wider policy landscape continues to remain relevant to where companies decide to list. The FCA is aware of this. The consultation notes that, “[i]nevitably, the listing regime is not the only element […] in decisions made about when and where to take companies public. Influencing other factors that drive those choices – including the macroeconomic environment, taxation, depth of capital markets, valuations, research coverage, indexation, and many other aspects besides – will require others to also act where they have the levers to do so.” This said, a more accommodating listing regime, taken together with other ongoing efforts to reform UK capital markets regulation, may go some way to levelling the playing field and encouraging companies to decide to list – or to remain listed – in the UK.

    ENDNOTES

    [1]     Currently also applies on a standard listing.

    [2]     Currently also applies on a standard listing.

    This post comes to us from Sullivan & Cromwell LLP. It is based on the firm’s memorandum, “Major Changes to UK Listing Regime,” dated January 2, 2024, and available here. 

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