The FSA has published a consultation paper (Amendments to the Listing Rules, Prospectus Rules, Disclosure Rules and Transparency Rules, CP12/2) (the “Consultation”) on changes to its rules for listed companies. While many of the proposed amendments merely formalise or clarify existing practice, a number are likely to have a significant impact, particularly in relation to the role and responsibilities of sponsors. The changes are most likely to affect:
- UK or overseas issuers with UK-listed securities or contemplating listing in the UK;
- firms advising on the issuance of UK-listed securities; and
- firms or persons investing in or dealing in UK-listed securities.
The LRs allow the UK Listing Authority (“UKLA”) to meet its objectives of:
- providing an appropriate degree of protection for investors in listed securities;
- facilitating access to listed markets for a broad range of enterprises; and
- seeking to maintain the integrity and competitiveness of UK markets for listed securities.
The current Listing Regime came into force in 2000 and, despite regular reviews by the FSA, the technical content of the LRs has remained the same. The purpose of the Consultation is therefore to identify specific areas where rules may need to be updated to reflect the emergence of new practices. At the same time, the FSA proposes to incorporate into the formal body of the LRs other relevant materials that have been published by the FSA, for example, in Technical Notes.
The changes to the LRs envisaged by the Consultation cover the following areas:
Reverse takeovers (LR 5)
The current exception that an acquisition of one listed issuer by another is not a reverse takeover will be narrowed so that only acquisitions by a listed issuer of another listed issuer in the same listing category will be exempt from the reverse takeover regime (LR 5.6, replacing the current LR 10.6). This will prevent the use of reverse takeovers as a “back-door” route to listing for companies that would otherwise be ineligible.
The reverse takeover regime is particularly relevant to special purpose acquisition companies that initially list under the standard listing regime, because their initial acquisition is always treated as a reverse takeover. The concept of proportionality has also been addressed, with a reduction of the information requirements that need to be met in order for a suspension of listing to be avoided and a reduction of the eligibility requirements following the cancellation of a listing.
Sponsors (LR 8)
The sponsor regime is fundamental to the effectiveness of the Listing Regime as it ensures that premium listed issuers are aware of, and are complying with, the LRs. The following principles underpin the FSA’s proposed changes:
- a requirement to act with honesty and integrity in relation to a sponsor service; and
- an obligation to notify any fact or circumstance relating to the sponsor or any of its employees providing sponsor services which, in its reasonable opinion, could adversely affect market confidence in the sponsor regime.
The amended sponsor regime will extend the remit of sponsor services to include introductory work and communications with the UKLA, even before a decision is made to act as a sponsor. The FSA will have the authority to require sponsors to provide it with such explanations or confirmations as it reasonably requires to ensure that the LRs are being complied with by an issuer; there will ultimately be heavier burdens placed on sponsors under the new regime. The FSA is seeking to formally express its expectations of sponsors in relation to communications with the regulator while providing sponsor services, and firms should be aware of the FSA’s increased vigilance.
Transactions (LR 10, 11 and 12)
The FSA will require issuers to produce a supplementary circular in the event of a significant change arising before a shareholder meeting. Another change will clarify the FSA’s approach to break fees, in particular clarifying that it is the substance of the arrangement that is important, rather than the legal form. In view of recent changes to the Takeover Code, break fees are much less common than they used to be. Changes to the application of class tests should make compliance easier for market participants.
Otherwise, changes will codify the existing practice and bring into the LRs much of what is already contained in the FSA’s Technical Notes.
Circulars (LR 13)
An important change to the LRs is the proposed requirement to publish a supplementary circular (new LR 10.5.4R). Such a circular would be required where a vote is needed under the LRs and there is a material change affecting a matter which should have been disclosed in the circular, or a material new matter arises. If the supplementary circular is released less than seven days before the date of the meeting, the meeting would need to be adjourned in order to allow sufficient time for shareholders to consider the matter before voting.
Firms will need to be aware of this additional burden and the timetabling issues that it is likely to bring, especially in the context of public takeovers, where the Takeover Code largely governs the transaction and may cause a conflict.
Externally managed companies (LR 6)
Under the proposed LRs, externally managed companies will no longer be eligible for a premium listing and the management of an offshore advisory company, which provides significant management functions to a listed company, will become responsible for any prospectus issued by the listed company and subject to existing rules about dealing in the shares of the listed company. The FSA is concerned about the advent of a governance structure, modelled on that used by investment trusts, that has been used by some special purpose acquisition companies – i.e. cash shells incorporated with the intention of acquiring, running and transforming target businesses – where the functions that would conventionally be performed by executive directors (such as the formulation of strategy, decision-making on acquisitions and leading in negotiations and on subsequent implementation) are outsourced to an offshore advisory firm.
Since the Consultation was published in January this year, the FSA has made a number of changes, including the following:
Substantial shareholders (new LR 11.4.1AR and changes to LR Appendix 1.1)
In March 2012, the FSA proposed an amendment to the definition of “substantial shareholder” aimed at carving out situations where a shareholder holds more than 10% of the shares in an issuer but such shares are held for a very brief period and as an incidental consequence of arranging transactions for other parties, such as block trades.
This was implemented by changes to the FSA Handbook that were approved by the FSA Board on 26 July 2012, and in fact the definition of “substantial shareholder” has been further altered to include a carve-out in which voting rights held by a person will be disregarded if such securities are held for a period of five trading days or less and during this period voting rights are not exercised and no attempt is made to exert influence on the management. The changes come into force on 1 August 2012.
Requests on a “no names” basis (new LR 1.2.6G and changes to LR 1.2.5G)
The FSA Board has also decided that the UKLA helpdesk should cease to accept requests for individual guidance on a “no names” basis. Where consultation with the FSA is required in relation to any LR or Disclosure and Transparency Rule, the submission should be made in writing, except in cases of exceptional urgency or if the submission is from a sponsor and relates to the provision of a sponsor service. The changes come into force on 30 September 2012.
Technical and Procedural Notes
The FSA reviewed and revised its existing Technical and Procedural Notes in July 2012 to reflect legal and regulatory amendments and changes in market practice since the notes were first published in October 2010. Where guidance remains current and relevant, it has been reproduced in the draft revised notes, which are organised on a topic-specific basis, and outdated or superseded guidance has been revised or withdrawn.
The new notes comprise eight Technical Notes and three Procedural Notes, including guidance on the approval of circulars, certain aspects of related party transactions and block listings. The UKLA proposes that the notes published following the consultation process will constitute FSA guidance and responses to the consultation are requested by 24 August 2012.
The series of consultations and updates to the FSA Handbook focus on the changes that the FSA believes are required as a matter of priority to ensure that the operational effectiveness of the Listing Regime is maintained. The deadline for responding to the Consultation was in April and the FSA is expected to revert with a Policy Statement by September on the proposed changes.
The FCA, when it comes into force, will monitor the ongoing compliance of issuers and major shareholders with the ad hoc and periodic disclosures required under the Disclosure and Transparency and Listing Rules and the proposed changes to the LRs are at the centre of this. The major regulatory tool in the area will remain, ensuring that disclosures made by issuers, both in key documents such as prospectuses, and on a continuing basis, provide the information required to protect investors.