UK Listing Reform - a New Chapter

The FCA has published CP 23/10: Primary Markets Effectiveness Review: Feedback to DP22/2 and proposed equity listing rule reforms in which it sets out its preliminary proposals for a restructured UK listing regime. These significant reforms seek to increase the attractiveness of a UK listing for a broad range of companies and to move forward the UK as a competitive global listing venue, whilst protecting market integrity through a focus on disclosure and transparency. The proposals have implications for new applicants to listing and existing listed issuers. 

By way of reminder, in May 2022, the FCA published DP 22/2: Primary Markets Effectiveness Review: Feedback to the discussion of the purpose of the listing regime and further discussion. DP 22/2 set out the FCA's vision for potential reform of the way companies list in the UK, with the overarching aims of attracting more high quality, growth companies and giving investors greater opportunities (see Ashurst AGC Update here). The Discussion Paper followed-on from Lord Hill's UK Listing Review, published in March 2021, and FCA CP 21/21: Primary Markets Effectiveness Review, published in July 2021. The CP 23/10 proposals build-on the rule changes which the FCA has already implemented, in response to the UK Listing Review, to address barriers to listing, including with respect to SPACs, free float requirements and dual class share structures (see Ashurst update here).

The consultation period ends on 28 June 2023. Further to the blueprint for reform set out in CP 23/10, the FCA intends to issue a follow-up consultation on the reforms and the wider proposed changes to its listing regime in the autumn. Subject to feedback received and FCA board approval, the FCA aims to work towards an accelerated timetable with substantial progress by the end of 2023. 

We set out below an overview of the key CP 23/10 proposals.

New single listing category  - equity shares in commercial companies

The central proposals relate to the creation of a new single listing category for equity shares in commercial companies (ESCC) for new applicants and for commercial companies with equity shares currently listed in the premium and standard listing segments. The current bifurcated listing structure, which distinguishes between premium and standard listings, would no longer apply. CP 23/10 significantly reduces the eligibility criteria that apply presently to companies seeking admission to listing on the premium listing segment. It also moves away from the DP 22/2 approach to a two-tier (mandatory and supplementary) continuing obligations regime, which would have arguably reintroduced a perceived quality differential between the two regimes, contrary to the policy objective. Instead, the FCA is now proposing a uniform set of ongoing listing obligations. The FCA highlights in this respect that it is not proposing to change a core set of eligibility and ongoing listing obligations that currently apply to all equity share listings in the premium and standard segment, for example, free float and minimum market capitalisation requirements.

Eligibility requirements - financial information

In line with the overarching aim of increasing access to UK capital markets for a broader range of companies, including start-ups, the FCA is proposing to remove certain eligibility criteria related to financial information currently required in the premium listing segment, relying on a disclosure-based approach in their place. The FCA is proposing the removal of the following requirements from the rules that apply to the ESCC category: 

• historical financial information on 75 per cent of the business covering three years;
• three-year revenue earning track record;
• related "specialist exemptions" to these requirements (as these "concessions" will no longer be relevant); and
• a "clean" or unqualified working capital statement.

The FCA notes the interaction with the prospectus regime in this context which it confirms it will consider as part of its future work on the proposed new Public Offers and Admissions to Trading Regime and stresses that its working assumption is that financial history disclosures in a prospectus will remain substantively the same.

Initial and continuing obligations

Independent business and control of business 

Within the single ESCC category, the FCA is exploring a modified approach to the independence of business and control of business provisions that currently apply to the premium list, with a view to enhancing flexibility. An issuer's business would still need to be capable of complying with the FCA's listing, disclosure and transparency requirements but the FCA will consider amending its rules to clarify that it can accommodate a range of business models and, potentially, more complex corporate structures. The FCA suggests that a move towards a disclosure-based regime in this context may increase risk for investors in certain cases, for example, complex corporate structures and, as such, it is seeking feedback on whether a requirement for more explicit disclosures should be considered in these cases. 

Dual class share structures

Following-on from the targeted and time-limited form of dual class share structure (DCSS) introduced to the premium listing segment in 2021, the FCA is proposing to introduce a more flexible form of DCSS. The FCA notes that the current provisions may be considered as too restrictive for applicants in new industries where DCSS tend to be more prevalent. Interestingly, the FCA highlights that feedback to DP 22/2 suggested that DCSS play a key role in achieving an attractive listing regime.

The proposed form of DCSS would include the following features: 

• enhanced voting rights would be able to be exercised on all matters and at all times, rather than just to prevent a change of control or to protect a founder's position as a director, as is currently the case, subject to one exception, being the issuance of new shares at a discount in excess of 10 per cent;
• a maximum sunset period of 10 years, as opposed to five years, which is currently the case;
• enhanced voting rights shares would be able to be held only by directors, in line with the existing rules, and would be subject to transfer restrictions similar to current restrictions; and
• no specified voting ratio or weighting limits would apply, in contrast to the current 20:1 ratio of weighted voting rights to ordinary shares limitation.

Controlling shareholders

The FCA proposes reframing the current controlling shareholder regime that applies to the premium list. It proposes to remove the requirement for a controlling shareholder agreement and introduce a "comply or explain" and disclosure-based approach under which the absence of a controlling shareholder agreement would require specific disclosures and a discussion of risk factors in the prospectus and annual financial report, also potentially accompanied by a standardised warning. The FCA proposes to introduce a requirement for a market notification if the controlling shareholder agreement is altered post-listing. It is also envisaged that there will be no enhanced oversight of related party transactions for failure to comply with the controlling shareholder regime. 

Continuing obligations

Significant transactions

A key shift in the approach set out in the DP 22/2 proposals, which was outlined in Nikhil Rathi's recent speech (see Ashurst AGC update here), is the FCA's proposal to adopt an amended form of the significant transactions regime in the ESCC category, underpinned by certain disclosure requirements of the existing premium listing rules. In outline, the FCA is proposing to:

• maintain the requirement to make a "Class 2 announcement" when a transaction is entered into, but only at the current Class 1 threshold of 25 per cent, rather than also at the current Class 2 threshold of five per cent; and
• remove the current Class 1 obligations to obtain prior shareholder approval of the transaction on the basis of information provided in a detailed shareholder circular approved by the FCA, except in the case of a significant transaction that constitutes a reverse takeover. The FCA may also introduce a separate approach for Class 1 transactions proposed by a company in financial difficulty.

In terms of the sponsor role, CP 23/10 proposes, amongst other things, that where a company is intending to enter into a transaction that may be required to be announced under the proposed ESCC significant transaction rules, the advisory role of the sponsor would be retained as the rules would require the issuer to obtain the guidance of a sponsor to assess the application of the Listing Rules, the Disclosure Guidance and Transparency Rules (DTRs) and the UK Market Abuse Regulation (UK MAR) if the company is in any doubt about the correct application of the FCA rules and its obligations. The FCA will not be carrying forward the requirement for a sponsor declaration to the FCA in relation to the Class 1 transaction in its current form, and notes that some of the declarations will no longer be relevant. The FCA is also proposing to make ancillary changes to the way in which transactions are classified, including removing the "profits test" on the basis that it often produces anomalous results and allowing sponsors more discretion to apply appropriate modifications to the class tests. 

This proposal removes a long-standing key shareholder protection mechanism in the context of premium listed companies and places greater responsibility on shareholders to ensure effective engagement with the company and to carry out due diligence in order to assess the company's risk-profile. In the FCA's view, the modified significant transactions regime preserves market integrity, through a focus on transparency, whilst offering a more flexible approach to issuers by removing the requirement for shareholder approval – a requirement which can act as a deterrent to applicants looking to list and as an impediment to existing issuers. 

Related party transactions

CP 23/10 sets out an amended regime for related party transactions (RPTs) under the ESCC category rules. The FCA proposes to remove the requirements for: 

• mandatory independent shareholder approval of RPTs at or above the five per cent threshold (or for RPTs involving a controlling shareholder);
• related requirements for shareholder circulars and FCA pre-approval of a circular; and
• modified RPT requirements for smaller transactions above 0.25 per cent and below five per cent, including an announcement obligation and sponsor assurance.

Under the amended regime, transactions which meet the five per cent threshold on the class tests (i.e. larger RPTs) would require an announcement to the market which includes, amongst other things, full details of the RPT and a statement by the board that the RPT is fair and reasonable (as advised by the sponsor). 

In view of the arguably higher risk profile of RPTs, the FCA is proposing to retain the requirement that a company proposing to enter into a transaction which is or may be a RPT should obtain the guidance of a sponsor in order to assess the application of the relevant Listing Rules, the DTRs and UK MAR. It also notes that sponsors should first consult with the FCA to agree any potential modifications to the class tests and resulting classification of the proposed RPT, in contrast to the suggested approach under the significant transactions regime. 

Whilst the FCA appreciates that the removal of the requirement for independent shareholder approval might be received negatively by some stakeholders, it considers that a move to the proposed transparency and sponsor assurance model would arguably provide sufficient shareholder protection.

Investor protection mechanisms

The FCA proposes to retain within the single ESCC category the following investor protection mechanisms that currently apply to the premium listing segment:

Cancellation of listing 

It is envisaged that the requirement for a shareholder vote to cancel listings of shares in the single ESCC category would be retained, including the 75 per cent majority requirement (and additional requirements where a controlling shareholder is involved), supported by a FCA-approved circular. The FCA would also retain the existing notice period of 20 business days following shareholder approval.

Shareholder vote

The FCA proposes retaining the shareholder approval requirement for discounted share issuances and share buy-backs.

Pre-emption and UK Governance Code

CP 23/10 proposes retaining the existing premium listing continuing obligations relating to pre-emption rights and the UK Corporate Governance Code.

Listing Principles

The FCA's approach would be to create a consistent and overarching set of Listing Principles for the revised listing regime by combining the current Listing Principles and Premium Listing Principles, with some enhancements.

Other issuers

Given the proposed restructuring of the listing regime, and the creation of the ESCC category within it, the FCA considers the consequences for issuers that are not issuers of equity shares in commercial companies. This includes a category specifically for shell companies, including SPACs and an "other shares" category to include existing standard listed issuers not eligible to transfer to either the single ESCC category or the category for shell companies. Other current standard listing categories, such as debt and debt-like securities, are expected to remain broadly as they are. Similarly, the approach to closed-ended investment funds, which are currently within the premium segment, is expected to remain largely unaltered. However, to the extent that the FCA is proposing changes to premium listing rules for commercial companies, it will consider whether commensurate revisions are also needed for closed-ended investment funds. 

Sponsor

Highlighting the importance of the sponsor role in safeguarding market integrity and investor protections, the FCA envisages extending the application of the sponsor regime to all new commercial companies applying for a listing of equity shares after a specified date, and to all existing listed commercial companies that transition to the new single ESCC category. Whilst the proposed role of sponsors at the listing gateway of the new ESCC category would be similar to that which applies on IPOs for premium listed companies at present, with appropriate amendments to account for the revised eligibility requirements, a reduced role would be envisaged for sponsors post-listing, given other suggested rule changes, such as the amended significant transactions regime.

The FCA proposes to retain the requirement for a sponsor to be appointed for transfers between listing categories, for example, a transfer into the single category for ESCC from the closed-ended investment fund category. It is also proposed that sponsors would have a role in assisting issuers transitioning to a new category following the implementation of the new listing structure. Further details will be set out in the FCA's follow-up consultation paper.

Indexation

Granted that only premium listed issuers are eligible for FTSE UK index inclusion under current FTSE Russell policies, a reconsideration of index eligibility policies would be required in view of the new single category for ESCC. The FCA notes that it is in dialogue with index providers.

Transitional provisions

CP 23/10 sets out broad provisions to address the implementation of the revised regime, highlighting that proposed changes to existing rules and proposed new provisions would take effect from a specified date, which may involve the need for transitional provisions in certain areas. Further details on the transitional arrangements will be set out in the autumn consultation paper.

Comment

The FCA's proposals aim to rebalance the listing regime by improving both its attractiveness and competitiveness as an international listing destination, whilst seeking to maintain high standards of market integrity and investor protection. The reframing of the listing architecture is underpinned by a shift away from a prescriptive, rules-based approach towards a more flexible, disclosure-based approach, which empowers investors to form their own judgement in making investment decisions based on relevant disclosures, but which may also lead to greater risk being passed to investors. It will be interesting to see the form of the proposed draft rules following stakeholder feedback to this fundamental change. More broadly, however, the proposals are one piece of the puzzle: a revised listing framework will help to shape and improve the status of UK capital markets but other factors, including valuations, taxation, remuneration, indexation and lower levels of liquidity in UK markets as compared with key competitor jurisdictions are also clearly relevant.