What are the major changes to the UK’s Listing Rules
As you’ll be aware, the FCA’s new Listing Rules will come into effect today. The FCA saw this as the biggest change to the UK’s Listing Regime (UKLR) in thirty years and their announcement was quickly followed by the King’s Speech placing a focus on audit and corporate governance with a Draft Audit and Corporate Governance Bill expected by the end of the year.
The changes to the Listing Rules will affect any existing or future listings on the Main market with AIM and companies listed on other Multilateral Trading Facilities outside of scope.
The changes are made with an aim to stimulate growth in the number of IPOs within the UK markets after several years of declining numbers of new listings prompting fears of an uncompetitive market offering compared to those enjoyed in the United States and on the continent. The amendments to the framework seek to align the UK’s listing system to other markets whilst providing a more simplified and streamlined process.
When looking to create a simpler regime, the FCA wanted to put a heavier focus on disclosures and a single ‘commercial companies’ category , both of which have come to fruition in the new Listing Regime. Clare Cole, the FCA’s Director of Market Oversight, stated the changes would put greater responsibility on investors and not just boost UK growth and competitiveness but also make the listing regime more appealing to a wider range of companies.
“We’ve moved to a much more proportionate set of eligibility requirements. We’ve removed shareholder approval in certain circumstances, and we’ve moved to a much more permissive disclosure-based regime. Whereas, historically, we’ve been quite focused on decisions around eligibility and the requirement for shareholder approval.”
With a disclosure-based eligibility test, investors will need to be more hands-on when deciding which companies they provide capital for.
It’s worth noting that the application of the Market Abuse Regulation (MAR) and the Disclosure Guidance and Transparency Rules (DTR) will remain largely unchanged, and their application remains as previously applied.
The FCA believe the proposals target a levelling-up between UKLR and other markets abroad. A note from the regulatory body stated: “…it remains the case that there is no discernible evidence that companies ‘benefit’ from our premium listed rules such as additional shareholder approvals for transactions, in terms of better valuations, capital allocation or overall corporate outcomes.”
Single Listing
The FCA have replaced the Premium and Standard listings for a singular listing category, Equity Shares (Commercial Companies) (ESCC). The definition of an ESCC has been left intentionally broad but there will be 11 listing categories comprised of six existing categories and five newly created categories for existing and newly listed companies to be allocated.
For dual-listed companies, now referred to as Equity Shares (International Commercial Companies Secondary Listing), they will replicate standard listing rules with targeted obligations tailored to them.
The FCA has mapped all existing companies on the main market to the appropriate category.
Revision of the significant transaction regime: removal of requirement of shareholder approval
Previously, material transactions required the approval of shareholders.These were determined by class tests with a percentage ratio based on comparisons of gross assets, profits, and gross capital of the subject of a transaction with that of the listed company. It also involved comparative considerations for the transaction with the market cap of the listed company. If any of those ratios rose above 25% then it would be deemed a “Class 1” transaction which would then require a shareholder vote as well as an FCA-approved circular.
Under the new Listing Rules, the ratios have been retained, however, when entering into a significant transaction, rather than a shareholder vote and circular, a listed company will have to make an enhanced announcement detailing key information about the transaction and any effects it will have on the company.
Revision of the related-party regime: removal of requirement of shareholder approval
ESCC companies are no longer required to obtain shareholder approval for transactions with a related party. However, if a non-ordinary course transaction represents 5% or more in any of the class tests mentioned previously, the company will need to make an RIS announcement that includes certain prescribed information. This information will broadly match the information required from premium-listed companies when disclosing under the previous listing regime but there is an additional requirement to include “any further information the company considers relevant having regard to the purpose of the related-party transaction (RPT) rules.”
Sponsors will still need to be consulted and confirm that the transaction’s terms are fair and reasonable concerning shareholders.
It’s predicted that fewer transactions will be caught by the RPT rules because a shareholder will now be seen as a “substantial shareholder”, and thus a related-party, only if they hold 20% (instead of 10%) or more of the voting rights in the company.
Board declaration and listing principles
Former premium listed companies will see continuing obligations of certain listing principles, whereas those companies formerly classified as standard-listed issuers will be subject to new obligations under the combined set of six listing principles for all issuer companies. This includes the principle regarding adequate systems and controls, and directors’ responsibilities to ensure suitable procedures and internal controls are in place. Additionally, the new Listing Rules emphasise the role of directors and the requirement to access information in a timely fashion when required by the FCA.
Another new requirement is the need for the board of a company making an application for listing, to provide a written declaration to confirm that the issuer company has taken reasonable steps to establish adequate procedures, systems and controls to enable the company to comply with the obligations of the Listing Rules, as well as timely and accurate disclosure of information to the market and the FCA. Not only should this declaration be made at the point of application, but it is the obligation of the directors to ensure adequate governance arrangements are maintained at all times in order to comply with the listing principles.
Modified Sponsor Regime
The FCA were keen to highlight the importance of the role of the sponsor and believe the regime benefits well-functioning markets by ensuring that a company is well supported and receives expert advice. It also believes the sponsor’s services help to safeguard market integrity and provide investor protection.
Due to the changes in the Listing Rules, sponsors will now be involved in a smaller number of transactions. Transactions that will require sponsors will be:
- Increases in the issuer’s listed share capital involving a prospectus that are deemed ‘significant’.
- Sponsors to provide opinions on whether a transaction is fair and reasonable, if it is ruled to be a ‘Class One’ dealing.
- Listed companies proposing to enter a reverse takeover.
The FCA will still require the same range of sponsor confirmations that they required on a premium listing when granting a listing application for a further issue of shares for companies in the ESCC category. Furthermore, closed-ended investment funds will still use a sponsor for significant and related-party transactions.
Abolition of relationship agreements with controlling stakeholders (those with >30% of the company voting rights)
The previous Listing Rules required a company to have a written agreement with the controlling shareholder that ensured compliance with specific undertakings that were set out in a relationship agreement. These have now been removed but a requirement remains for listed companies to demonstrate that they can carry out their business activities and obligations despite the controlling shareholder.
A new mechanism allows directors to give an opinion on a shareholder resolution suggested by a controlling shareholder where the director is of the belief that the resolution is intended to circumvent the proper application and adherence of the Listing Rules.
Rules-based admission to the main market replaced by disclosure-based criteria
In a move designed to open listings to previously ineligible companies, the FCA has moved their admission criteria from one around rules to that of a disclosure-based criteria list.
They announced the removal of the five-year sunset provision for companies with weighted voting rights (dual-class share structures). Now, alongside directors of the applicant company, weighted voting rights can be held by investors or shareholders as well as employees of the company wishing to be listed. In doing so, they have also outlawed the transferral of weighted voting rights to any third party. This is included to grant investors visibility and certainty of the identity of those able to exercise influence on the direction of the company via these shares.
In cases where weighted voting rights are held by entities rather than individuals, these will only count towards shareholder votes for the first 10 years after a company’s date of admission to the market.
When dealing with employee share schemes, long-term incentive plans and discounted option arrangements, share insurance at a discount of more than 10%, share buybacks, and the cancellation of a listing: shareholder approval excluding the holders of weighted voting rights is still required.
The new UK Listing Rules relax rules for companies with limited or no accounting track record or recent complex financial histories. Previously they needed three years of financial information that represented three-quarters or more of the applicant company’s business over the period that demonstrated a revenue earning tracked record and included a clean working capital statement.
Now, replacing these criteria, will be Prospectus rules which are hugely simplified with financial track record of up to three years and a working capital statement. There is also a sponsor requirement for new applications requiring declarations similar to existing ones , including that an issuer has met its prospectus obligations and has a reasonable basis for the working capital statement within it .
The changes mean that high growth companies would be eligible to list at an earlier stage in their lifespan. It is also hoped that these relaxed regulations for companies looking at an IPO would open up opportunities to those with more diverse business models than were previously allowed.
Reaction from the city and beyond
Largely, reactions across the board have been positive with Rachel Reeves, Chancellor of the Exchequer, being quoted as saying “These new rules represent a significant first step towards reinvigorating our capital markets, bringing the UK in line with international counterparts and ensuring we attract the most innovative companies to list here.”
This has been echoed by our friends at Herbert Smith Freehills: “The FCA’s sweeping reforms represent a monumental shift for the UK listing regime, revitalising our market’s appeal on the globe stage. The FCA are to be commended for this re-set of the listing regime that puts to bed any suggestion that the UK regime is more complex or restrictive than other markets.” – Michael Jacobs, Partner, Herbert Smith Freehills.
Perhaps the only voice of concern belongs to those worried that the rules may harm the UK’s reputation for corporate governance. Alistair Osborne in The Times opined “Fewer rules may force investors to do better research. And maybe they’ll be less gullible next time bankers try to dump them into the likes of Made, Moonpig or Dr Martens. But too few rules may also hurt the UK’s reputation for good governance. It’s not obvious that’ll make our market more attractive.”
But, for those onside with the changes, the new UK Listing Rules represent an opportunity for new players to enter the main market. “The FCA’s new listing rules could unblock the UK’s tech ecosystem by making public markets more accessible to early-stage companies…For startups, the streamlined eligibility requirements and reduced procedural hurdles mean faster and less costly access to capital, allowing them to scale more rapidly” – Naureen Zahid, Director of Investor Relations, OpenOcean.
Cytec’s View
“The proposed changes to the UKLR appear to bring the UK in line with international equivalents. We are hopeful that these reforms, alongside the stability that comes with a new government, create market conditions that will encourage companies to list in the UK and thereby reverse the trend of listed companies moving their listing overseas” – Shervin Binesh, Commercial Director, Cytec Solutions
