On 3 May 2023 the Financial Conduct Authority (“FCA”) published its consultation paper on the proposed UK equity listing rule reforms (and feedback to its discussion paper published in May 2022). The consultation paper follows extensive engagement on the UK listing regime and the recommendations from the UK Listing Review. It represents a substantial and welcome overhaul of the current listing regime, with the aim of making UK equity capital markets more competitive with other markets and attractive to companies considering an IPO.
The consultation paper sets out a detailed overview of the core aspects of FCA’s intended approach to create a single listing category for equity shares in commercial companies, removing the distinction between standard and premium listing. The FCA is not proposing any material changes to the listing rules for non-equity securities (e.g. bonds), nor for the majority of other standard listed instruments (e.g. open-ended investment companies and depositary receipts). The approach to premium-listed, closed-ended investment funds (CEIFs) is expected to remain largely unchanged, but where the FCA is proposing changes to premium listing rules for commercial companies, it will consider whether similar changes are also needed for CEIFs.
The single listing category for commercial companies aims to be more straightforward and sufficiently flexible to cater for a wide range of issuers, whilst maintaining investor protections. The principal proposed changes are:
- Historical financial information, 3-year revenue track record, ‘clean’ working capital statement – removing eligibility rules which require a 3-year financial and revenue earning track record as a condition for listing, and no longer requiring a ‘clean’ working capital statement
- Independence, control of business – modifying/simplifying eligibility rules and continuing obligations which require that a company is an independent business and has operational control over its main activities, and creating a more permissive approach to accommodate a range of corporate structures and business models (incl. amending rules or guidance to reduce uncertainty for ‘franchise’ type companies and strategic investment companies with a view to including within the new commercial company category)
- Controlling shareholder regime – modifying rules which require listed companies to have in place a shareholder agreement with a controlling shareholder to ensure flexibility by moving to a comply or explain and disclosure-based approach.
The requirement for a controlling shareholder agreement and the weak sanctions for breach have not been seen as offering much real protection for investors.
- Dual class shares structures (DCSSs) – creating a more permissive approach to DCSSs (i.e. enhanced voting rights), incl. DCSSs broadly permitted subject to one exception (in relation to the approval of discounted share offers); 10-year expiration clause; DCSSs can only be held by a director and are subject to transfer restrictions; no specified voting ratio or weighting limits.
The changes made initially in 2021 to allow DCSSs were widely seen as far too restrictive to attract listings from companies attracted by the more permissive regimes on other markets, with narrow limitations on the applicability of weighted voting rights.
- Significant transactions – removing compulsory shareholder votes and shareholder circulars for significant transactions; preserving the requirement to make a ‘Class 2 announcement’ when a transaction is entered into but only at the current Class 1 threshold of 25% and other Class 1 thresholds, rather than also at the current Class 2 threshold of 5%.
The time, uncertainty and expense involved in requiring companies to issue a circular and hold a general meeting for shareholders to vote on major transactions have long been seen as adversely impacting the competitiveness of UK listed companies bidding for other companies or assets.
- Related party transactions (RPTs) – removing compulsory shareholder votes and shareholder circulars for RPTs, including where a controlling shareholder is involved and a controlling shareholder agreement is not in place.
This restriction on the ability of major shareholders to transact with companies has been cited as a significant push factor away from a UK listing in recent years
- Listing principles - a single set of Listing Principles and related provisions
The proposed reforms are positive as they remove some of the complexity of the current UK listing regime (such as the eligibility criteria around independence and control of business) and look to make UK equity markets internationally competitive (e.g. with respect to the dual class shares structures, which would be more aligned to the approach taken in the US). As mentioned in the consultation paper, the reformed UK listing regime should help encourage a more diverse range of companies to list in the UK, especially companies that are at an earlier stage of their development, are highly acquisitive and/or innovative.
There may be some concern that some of the long-standing protections in the UK listing rules, in particular shareholder approvals for certain transactions, will be removed. It is worth pointing out that these provisions have generally not been viewed in other international markets as essential. It is likely that the proposed reforms will mean that investors may need to carry out more substantial due diligence on potential issuers before investing, and shareholders will need to engage with companies on important transactions. The consultation paper points out that institutional investors have informed the FCA that they already undertake such due diligence on prospective UK listed companies as part of their standard investment processes and most institutional investors already invest in other markets where this is the standard arrangement. In addition, the consultation paper is seeking views on the merits of any further disclosure enhancements, mainly with respect to significant transactions and related party transactions.
The key principle behind these proposals is a move from restrictions on corporate freedom to act and organise as major shareholders and boards think appropriate to reliance on full disclosure to current and potential investors of actions proposed by the company.
The FCA are proposing that any 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). Transitional arrangements will also be provided for applicants for listing that are in the application pipeline at the point the proposed rule changes are finalised.
The FCA will be consulting for eight weeks on these preliminary policy proposals, with a closing date of 28 June 2023. As a follow-up to the preliminary proposals set out in the consultation paper, the FCA is aiming to issue a further consultation on these proposals and the wider proposed changes to the listing regime in the autumn. Subject to consultation feedback and FCA Board approval, the FCA is aiming for an accelerated timetable, with substantial progress by the end of 2023.