Publication of Final Listing Rules Marks Fundamental Overhaul of UK Listing Regime

The new UK listing regime, entering into force on 29 July 2024, is the result of more than three years and multiple rounds of consultation and is intended to make the UK a more attractive market for listing. The Listing Rules have been fundamentally reviewed and reconfigured and are set out in a new UK Listing Rules sourcebook. Notably, the concept of having both premium and standard listings will cease to exist. Listings will instead be divided into 11 categories depending on the nature of the issuer and securities being listed, with different rules applicable to each category.

The new rules will be significantly less onerous than would have previously applied to an equivalent premium listing, but will marginally increase the regulatory burden currently applicable to standard listings. 

More than three years after the publication of the Hill Review, and after numerous further rounds of consultation (most recently CP23/31), the UK Financial Conduct Authority (FCA) has published the final version of its new UK Listing Rules (UKLRs), replacing the existing Listing Rules (LRs). While some parts of the existing LRs appear in the new rules, the UKLRs represent a complete re-write of the existing rules governing listings and listed securities and a shift towards a more disclosure-based approach. The most fundamental changes apply to equity listings by commercial companies, but all types of issuers and listings are affected. The final version of the UKLRs contain further changes from the rules proposed in the most recent consultation.

We have provided below a summary of the most significant changes being introduced. There are many further changes from the current rules, some significant, and the FCA has included in PS24/6 a useful summary table of the key changes being introduced under the UKLRs, a copy of which is attached as an appendix to this LawFlash.

EQUITY LISTINGS BY COMMERCIAL COMPANIES – KEY CHANGES

The concept of having two levels of listing, premium and standard, is to be abolished. Going forward, there will be a single regime applicable to all equity listings by commercial companies. In substance, this will be a significantly pared back version of the current rules applicable to premium listings, with some changes. The focus is on giving greater flexibility to companies wishing to apply for listing, and, once listed, with the focus being on disclosure to the market rather than prescription.

Financial Information

The following criteria currently required to be eligible for a premium listing under the LRs will not apply under the new regime:

• Minimum of three years’ audited consolidated financial information covering at least 75% of group business (LR 6.2)
• Historic financial information showing revenue earning track record and enabling investors to properly assess the business proposition at admission (LR 6.3)
• Operation of an independent business (LR 6.4)
• Operational control over the main business (LR 6.6)
• Sufficient working capital for at least 12 months post-admission (LR 6.7)
• Warrants/options no more than 20% of issued share capital (LR 6.8)

Dual/Multiple Class Share Structures

Under the new regime, certain premium listing principles under the LRs are re-cast as both eligibility criteria and continuing obligations. In essence, these require that listed equity shares of the same class must have equal voting rights, and if an issuer has multiple classes of equity shares listed, these must have broadly proportionate voting rights.

There will be a further relaxation of the rules recently introduced in relation to dual class share structures. Weighted voting rights granted to natural persons will no longer be required to have a sunset provision, and weighted voting rights may now extend to all but a handful of circumstances where a specific shareholder vote is required under UKLR 6.2.30R(1) (in essence delisting, some share-based incentive arrangements, certain new equity offerings, and share buybacks).

In addition, in a change introduced in the final UKLRs, certain legal persons (e.g. institutional investors that invested in the issuer pre-IPO) will be permitted to have weighted voting rights; however, weighted voting rights granted to legal persons will be subject to a 10-year sunset provision (with an exception for rights held by a sovereign controlling shareholder).

Significant/Related Party Transactions

There will be no requirement for a listed commercial company to seek prior shareholder consent for either a significant (Class 1) transaction or a related party transaction; however, shareholder consent (and a shareholder circular meeting certain requirements and pre-approved by the FCA) will be required for a reverse takeover.

A number of other changes are being made to the significant transaction and related party transactions regimes:

• Related Party Transactions: The requirements to publicly disclose prescribed details of the transaction and obtain fairness opinions (from the board and a sponsor) will only apply where the transaction equals or exceeds 5% under one of the class tests (which are also being changed, in particular to remove the profits test). There are no requirements for related party transactions below this level. The percentage interest required for a shareholder to be a related party will be increased to 20%.
• Significant Transactions: The rules only apply to transactions which equal or exceed 25% under one of the class tests, where there will be a requirement to publicly disclose prescribed details of the transaction. There are changes to the disclosure requirements compared to the equivalent provisions in the LRs. Break fees exceeding 1% of market capitalisation will not be caught, but other types of arrangements currently treated as Class 1 (e.g. exceptional indemnities exceeding 1% of market capital) will be covered. Certain information must now be disclosed as soon as possible after such information has been prepared or the company becomes aware of it (e.g. when terms of a significant transaction are agreed). A notification will also be required when a transaction is completed.

In a further change introduced in the final UKLRs, the public disclosures required in relation to significant transactions will no longer require the inclusion of financial information or fairness opinions as had been proposed in CP23/31. In addition, no working capital statement or re-stated historical financial information will be required.

Controlling Shareholders

The requirement for applicants to be independent from controlling shareholders has been retained under the final UKLRs. Applicants must demonstrate that, despite the existence of a controlling shareholder, they are able to carry on the business they carry on as their main activity independently from any such controlling shareholder at all times, which shall also apply as a continuing obligation. Various obligations apply to such issuers including that their constitutions contain provisions related to the election and re-election of independent directors (as approved by the independent shareholders of the issuer) and an obligation to notify the FCA if the issuer has failed to comply with any of its continuing obligations.

There have also been some changes to the controlling shareholder regime introduced in the final UKLRs. The requirement for a binding agreement with controlling shareholders has been removed. Instead, the mechanisms for challenges by independent directors have been strengthened. For example, directors may opine on any shareholder resolutions proposed by a controlling shareholder which the directors consider to be intending to circumvent the proper application of the listing rules, and the relevant circular must set out the director’s opinion.

Other Requirements

The other continuing obligations of such commercial companies once listed will broadly be based on the rules currently applicable to premium listed companies, with some changes.  

A shareholder vote (and circular pre-approved by the FCA) will be required to delist (with additional requirements where the company has a controlling shareholder).

The circumstances where a sponsor is required will be significantly reduced. While a sponsor will still be required for the initial listing process, the requirement to have a sponsor post-admission will be reduced. In brief, a sponsor will be required where a listed company proposes any of the following: significant increases in share capital (where the FCA is required to grant a listing application for further issue of shares or approve a circular or prospectus), fairness opinions on related party transactions, reverse takeovers, moving between listing categories, and seeking FCA guidance. 

Companies in the commercial companies category will be subject to the “comply or explain” regime under the UK Corporate Governance Code as well as be required to report on climate related (TCFD) and diversity matters and make other annual disclosures currently required for premium listed companies.

Annual reporting obligations will broadly reflect the obligations currently applicable to premium listed companies.

The separate listing category for sovereign-controlled commercial companies will cease to exist. However, the rules applicable to the new commercial company listing category will include certain dispensations, which will continue to apply to such companies.

OTHER LISTING CATEGORIES – KEY CHANGES

In addition to the listing category for equity shares of commercial companies, there will be separate listing categories, with tailored obligations, for 10 further categories of listing. A number of these categories reflect existing categories under the LRs (e.g. closed-ended investments funds and certificates representing shares (such as depositary receipts)) and, for the most part, the rules applicable to those categories broadly reflect the rules which currently apply to that type of issuer and listing under the LRs.

However, there are three new listing categories:

• Equity Shares – Shell Companies (including SPACs): The rules will largely reflect the existing rules applicable to such companies, with some changes.
• Other Shares – Secondary Listings: Secondary listings of equity shares by international commercial companies (the rules will broadly be a mix of new rules and rules currently applicable to standard listings of shares).
• Non-Equity and Non-Voting Equity Shares: The rules will broadly reflect those currently applicable to standard listings of shares.

All listed companies will be subject to a set of overriding listing principles which will be an amalgam of the current Listing Principles and Premium Listing Principles (save for those principles now converted into rules).

The sponsor regime will apply to the shell company and closed-ended investment fund listing categories (in addition to the commercial companies category).

NEW CHANGES MADE IN FINAL RULES COMPARED TO PRIOR CONSULTATIONS

Certain further changes to the listing regime have been included in the final UKLRs which were not included in the rules proposed in the most recent consultations. In addition to those highlighted above, other changes include the following:

Closed-Ended Investment Funds

There will continue to be a separate listing category for closed-ended investment funds. However, the rules governing significant or related party transactions for closed-ended funds have been aligned to the rules for commercial companies i.e. separate shareholder approvals will not be required for these transactions (but the disclosure regime will still apply).

SPACs/Shell Companies

• Time Limits: While the proposed 24-month deadline to complete an initial transaction remains in place, a right will exist to extend the deadline by up to 12 months up to three times (subject to shareholder approval), for a total of 36 months. This can be extended for a further period of up to six months in the specific circumstances set out in UKLR 13.
• Mandated Criteria: The final rules will not require (as proposed) that shell companies have adequate binding arrangements that moneys raised from public shareholders are ring-fenced via an independent third party; obtain shareholder approval for the initial transaction; or require the issuer’s board to publish a fair and reasonable statement if any of the directors have a conflict of interest.
• Investor Protections: The rules have reverted to a guidance approach, under which larger SPACs may voluntarily choose to put in sufficient investor protections to avoid the presumption that their listing would be suspended on the announcement of a proposed initial transaction (similar to existing LR 5.6.18AG).

ALLOCATION TO NEW CATEGORIES

The FCA intends to allocate each existing listing to the new listing category which the FCA considers most appropriate (indicated in the table below, noting issuers in the six categories being retained will remain in their existing category). If an issuer believes it has been allocated to the wrong category, it will have a four-week window to appeal the decision with the FCA.

As indicated above, existing standard listings of equity shares (and some other existing listed issuers) will be moved to a new “transition” category, which will be closed to new entrants. Companies in the transition category will be required to comply with obligations broadly reflecting their existing continuing obligations under the LRs. Companies in this category will be encouraged to migrate to one of the other categories, and there will be a modified (and simplified) migration process for companies seeking to effect such a transition. If a company in the transition category effects a reverse takeover, it will be expected to apply for re-admission to one of the other new categories.

At present, the FCA is not proposing a long-stop date for companies to migrate out of the transition category, but the expectation is that this category will be wound down over the medium term. 

EFFECTIVENESS AND TRANSITIONAL ARRANGEMENTS

The new rules come into effect on 29 July 2024. There will be a grace period under some of the rules for companies already listed or “in-flight” on that date.

In addition to the new transition category applicable to some existing listed issuers, there will be transitional arrangements in place for “in-flight” companies (that is, those already in the process of seeking admission to listing at the date of the policy statement i.e. 11 July 2024).

Existing issuers and in-flight applications which are mapped to the shell company category would have a transitional period of one year to allow time to complete their operations or make the necessary changes to comply with the proposed additional requirements. If by the end of this period an initial transaction has not been completed, the initial transaction deadline may be extended as above (i.e. for up to three years, with an additional six months in certain circumstances).

ONGOING REVIEW

It is unlikely that the publication of the final UKLRs will mark the end of the listing regime review, and there remain a number of issues still being considered by the FCA, including, for instance, a possible rule change so that the admission to listing of any shares of a particular class would also cover all further issues of shares of that class.

The FCA has stated that it will conduct a formal review of the final UKLRs after five years.

The review of the regime governing the requirement for and approval of prospectuses in the UK also remains ongoing. However, there are likely to be fundamental changes made to that regime, in particular in relation to public offerings of unlisted securities. 

Financial Times Stock Exchange Group (FTSE) is considering the implications of the changes to the listing regime on inclusion in the FTSE indices. It is likely (indeed, FTSE expects) that any commercial company in the new listing category will qualify for the FTSE UK index series.

See Summary of Final Rules here >