UK FCA Requests Consultation on Proposed Listing Rule Reforms

The UK Financial Conduct Authority (FCA) recently launched a consultation on proposed reforms to its Listing Rules, designed to enhance the attractiveness of UK markets for companies seeking to go public. The proposed changes aim to make it easier and cheaper for companies to list in the United Kingdom. The proposals aim to maintain high standards of transparency and investor protection, although immediate reaction from some investor groups has reflected concern about the perceived watering down of a number of existing protections.

The significant changes would include replacing the existing “standard” and “premium” listing share categories with a single listing category for equity shares in commercial companies (and potentially sovereign controlled commercial companies).

The proposals have come as a result of widely discussed concerns around the long-term decline in the number of UK listed companies, which the UK Listing Review found had fallen by 40% since 2008. The reforms aim to capture the opportunities of a shift towards “new economy” technology companies as drivers of growth. Responses on these preliminary policy proposals are sought by 28 June 2023.

BACKGROUND

On 19 November 2020, the UK Listings Review was launched by the Chancellor as part of a plan to strengthen the UK’s position as a leading global financial centre. The UK Listing Review suggested that the UK premium listing standards are regarded as overly burdensome and are deterring some companies from listing in the UK. Furthermore, feedback indicates that while the standard listing segment offers much greater flexibility, by contrast, it is poorly understood and seen as an inferior “brand” by companies.

PURPOSE OF CONSULTATION

In a rapidly evolving global capital markets environment, the FCA’s proposals are aimed at encouraging more companies to go public and list in the UK as well as ensuring that investors are given access to more diverse investment opportunities in transparent UK public markets.

The FCA’s proposals have been welcomed by businesses, including in the tech and life sciences sectors, which have traditionally looked abroad to list and raise capital due to the perceived inflexibility of the UK’s listing rules and cumbersome disclosure requirements.

However, there are concerns that the proposed changes could undermine market standards and erode shareholder rights, for example, by removing mandatory shareholder votes on transactions such as acquisitions.

The consultation invites feedback and views on the proposals both overall and on the specific provisions.

PROPOSED CHANGES

The FCA is consulting on its existing framework for listing commercial companies’ equity securities, and have proposed, inter alia, the following changes (by comparison to premium listing rules):

Financial Information

• Current requirement: A three-year financial and revenue earning track record as a condition for listing, as well as a “clean” working capital statement.
• Issue: These requirements were seen as too costly, onerous, and impractical for companies, and could act as a deterrent for issuers electing to list in the UK. It was also found that 3-year-old information was of little value to investors.
• Proposal: Relying more on disclosure and removing certain eligibility criteria relating to financial information currently required in the premium listing segment (such as historical information, revenue earning track records, and working capital requirements). The requirements for financial information contained in the prospectus will remain, which includes specific provisions for issuers with complex financial histories and requirements for working capital statements.

Eligibility Rules

• Current requirement: An applicant and/or a listed company must demonstrate that it carries on an independent business as its main activity and that it exercises operational control over that business.
• Issue: The existing rules were reported to have created uncertainty for particular business models (for example, franchise-type models or companies making minority investments in other entities) and were too inflexible to accommodate joint ventures (commonly used by mineral and oil companies).
• Proposal: Modified and simplified eligibility and ongoing rules requiring that a company has an independent business and operational control over its main activities, to create a more permissive approach to accommodate a range of business models and corporate structures. The underlying principle of ensuring a business can comply with listing, disclosure, and transparency requirements will be maintained, while amendments will be made to provide clarity and illustrate that a UK listing is suitable for diverse and complex business models. Other existing criteria, such as those relating to a company’s constitutional documents and the 20% limit for warrants or options to subscribe, remain unchanged.

Controlling Shareholders

• Current requirement: Various rules protecting minority shareholders, including a requirement for a controlling shareholder to enter into a shareholders’ agreement (with provisions ensuring, inter alia, transactions between the controlling shareholder and the company are done on arm’s length and standard commercial terms) and a requirement for shareholder votes on transactions with or for the benefit of the controlling shareholder.
• Issue: The absolute requirement to have a shareholders’ agreement in place may not be applicable across all applicants and, in practice, shareholder votes are relatively infrequent and usually result in approval.
• Proposal: Modified rules which adopt a comply or explain and disclosure-based approach (whereby the lack of a controlling shareholder agreement would have to be justified by an applicant or listed company), again to create a more permissive approach for a wider range of business models and corporate structures.

Dual Class Share Structures (DCSS)

• Current requirement: A targeted and time limited form of DCSS involving (1) takeover deterrent or use to prevent director removal, (2) 5-year sunset clause, (3) 20:1 cap on voting ratio, and (4) restrictions on transfer. This is intended to allow founders of innovative companies to exercise enhanced voting rights in relation to the removal of the holder as a director and (following a change of control of the company) enables them to implement their vision and keep control of the company. In short, this is akin to a poison pill mechanism and enhanced voting rights which expire after five years.
• Issue: Respondents to a prior consultation indicated that the current DCSS rules were too restrictive and suggest that this is a key area to improve the attractiveness of a UK listing (particularly targeted at applicants from “new economy” industries).
• Proposal: A more permissive approach to dual class share structures. This would include (1) enhanced voting rights being exercisable on all matters and at all times, (2) an extended 10-year time limit for expiry of enhanced voting rights, (3) restrictions on transfer by automatically converting shares with enhanced voting rights upon the holder ceasing to be a director, (4) a requirement that enhanced voting rights can only be held by directors, and (5) removal of any voting ratio or weighting limits.

Related Party Transactions (RPT)

• Current requirement: The regimes applicable to standard and premium listings are not in the course of ordinary business. These include requirements to (1) announce the terms of the RPT, obtain board approvals, and put procedures in place to identify RPTs (applicable to standard listings and RPTs of 5% or above) or (2) to obtain guidance and a “fair and reasonable” confirmation from a sponsor, announce the terms of the RPT and obtain consent of shareholders pursuant to an FCA-approved circular (applicable to premium listings and RPTs of 0.25% or above).
• Issue: In practice, the FCA found that such shareholder votes are relatively infrequent and usually result in approval. It is also suggested that the prospect of obtaining shareholder approval may deter a company from entering into such transaction. With respect to joint ventures, these requirements can also be triggered when a company is trying to negotiate exit provisions.
• Proposal: The removal of compulsory shareholder votes and shareholder circulars for RPTs, even where a controlling shareholder is involved and a controlling shareholder agreement is not in place.

Single Set of Listing Principles

• Current requirement: Listing structure based on premium and standard listing segments, whereby stricter rules are imposed upon premium listings of equity shares in commercial companies (ESCC), and a separate regime applicable to sovereign controlled commercial companies (SCCC) (pursuant to Listing Rule 21).
• Issue: As alluded to above, it is suggested that the premium listing rules are overly burdensome and are deterring some companies from listing in the UK and while the standard listing segment offers much greater flexibility, it is poorly understood and seen as an inferior “brand” by companies.
• Proposal: A new single listing category applicable to all ESCCs being listed in the UK (in line with the proposals outlined above). It is also suggested that these changes also be applicable to SCCCs which were formerly subject to their own separate and more specific premium listing category.

GREATER ONUS ON INVESTORS

Throughout the consultation paper, the FCA is conscious that these proposals shift greater responsibility and risk onto investors in public companies, placing greater importance on the due diligence process and greater responsibility on shareholders to secure sufficient engagement with companies on key transactions. While this may be the norm for institutional investors (which represent the majority of investors in UK listed companies), it will likely have a large impact on the operations of retail investors who may lack the depth of knowledge and sophistication of institutional investors.

Nevertheless, the proposals seek to balance investor protection with access to a potential wider range of investment opportunities by focusing on ensuring sufficient, timely disclosures that allow investors to make informed investment decisions and promote the engagement of shareholders with the boards of the listed companies they have invested in.

The changes outlined in the consultation paper will not in themselves be the sole cause of increasing UK listings (not least because listing trends are impacted to a large extent by macroeconomic and other factors), but are a clear and unequivocal indication that the FCA is seeking to address the decline in attractiveness of the UK listings market, and might therefore be seen as a net positive for investors in the UK.

DEADLINE TO RESPOND

The FCA is consulting for eight weeks on these preliminary policy proposals, with a closing date of 28 June 2023. Further consultation on these proposals and the wider proposed changes to the FCA listing regime will occur in the autumn.