A&O Shearman’s opinion
Few surprises in the final rules, which are due to become effective on July 29th before the next possible IPO window. There is a further shift towards a disclosure-based regime and a greater reliance on the engagement between listed companies and their investors and the exercise of stewardship rights. Whilst not everyone will be pleased with the removal of certain shareholder protections, the FCA is seeking to balance differing views in furtherance of its new secondary obligations to promote growth and make the UK more competitive. With greater uncertainties in other major international markets, this may be the UK’s moment to reestablish itself as a secure and predictable venue of choice.
Background
With the reduction in London IPOs and growth companies turning to alternative stock exchanges in recent years, the FCA has sought to boost London as an attractive listing venue with wide-sweeping reforms to its Listing Rules. In May 2023, the FCA published a consultation paper (Consultation Paper CP23/10), which set out proposed reforms for companies with listed shares on the Main Market of the London Stock Exchange. On December 20, 2023, the FCA published a further Consultation Paper CP23/31 following market feedback on Consultation Paper CP23/10.
The Policy Statement sets out the FCA’s final UK listing regime rules. These rules confirm a shift towards a more disclosure-based approach, whilst retaining certain key investor safeguards. The rules steer away from a prescriptive, one-size-fits-all approach to regulation and place emphasis on the choices available to investors and companies, allowing investors to change how they engage with companies and to make more use of shareholder rights, and other mechanisms to scrutinise boards and business strategies.
What hasn’t changed since the rules were previously consulted on?
The FCA has adopted most of the proposals set out in Consultation Paper CP23/31. These include:
- The removal of eligibility rules requiring a three-year financial track record and a revenue earning track record as conditions for listing, and no longer requiring a clean working capital statement.
- The removal of eligibility and ongoing rules requiring that an issuer has an independent business and has operational control over its main activities.
- Retaining rules preventing externally managed companies from listing in the commercial companies category.
- The removal of compulsory shareholder votes for significant transactions, with a market notification regime for transactions at ≥25% in size under the class tests, and not mandating working capital statements or restated historical financial information.
- The removal of compulsory shareholder votes for related party transactions, including where a controlling shareholder is involved, but with market notification, a sponsor fair and reasonable opinion and board approval for transactions at ≥5% in size under the class tests.
- Retaining the sponsor regime for commercial companies, shell companies and closed-ended investment funds at application stage and on reverse takeovers. Limiting ongoing sponsor role to further issuance listing applications with a prospectus, related party fair and reasonable opinions, or where issuers seek guidance, modifications or waivers to FCA rules (including on class tests).
- Retaining the requirement for an FCA approved circular and prior shareholder approval for reverse takeovers, i.e. transactions ≥100% under the class tests or involving a fundamental change in business.
- A new international secondary listing category for non-UK incorporated companies with a primary listing on a non-UK market, which will replicate the current standard listing rules with targeted ongoing/continuing provisions tailored to a secondary listing.
What is different from the rules that were previously consulted on?
In response to feedback received, the Policy Statement makes several changes from the proposals in Consultation Paper CP23/31. These include:
- Providing more flexibility on the timing and content of the market notification disclosures that are required for significant transactions. Under the previous proposal there was a single announcement with detailed disclosures at the time of announcing the transaction which raised concerns regarding the practicalities of disclosing all such information at that time. Under the revised proposal, disclosure is bifurcated. Shareholders must now be notified and informed of certain key information as soon as possible after the terms are agreed, not dissimilar to the information currently required to be disclosed in a Class 2 announcement. Certain further information is then required to be announced as soon as possible after the first announcement, and in any event by no later than the completion of the transaction.
- An extension of the persons who may hold enhanced voting rights in a listed company. In the prior proposal, only natural persons were permitted to hold such rights and they could not therefore be held by private equity and other institutional investors. Under the new rules, pre-IPO investors that are legal persons may also benefit from such rights but subject to a maximum 10-year period after which enhanced rights should expire. The sunset provision does not apply to natural persons or to sovereign wealth funds if they are controlling shareholders.
- Retaining the requirement that companies must be independent from any controlling shareholder but not mandating a controlling shareholder agreement, as was the case under Consultation Paper CP23/31. The rules aim to support independence from a controlling shareholder through disclosures and a new requirement for a director to formally opine on any resolutions proposed by a controlling shareholder when the director considers the resolution is intended or appears to be intended to circumvent the proper application of the listing rules.
The FCA has therefore further embraced a disclosure-based regime leaving it more up to market participants to self-regulate and is emphasising growth, innovation, and risk-adjusted returns. This, in turn, relies on effective investor engagement with listed companies, which is part of the focus of the review of the Financial Reporting Council’s Stewardship Code in the second half of the year. In addition, we would expect executive remuneration and workers’ rights to be subject to even more scrutiny over the coming months, in particular as the new Labour Government looks to implement its new deal for workers.
Next Steps
The new Listing Rules will now be subject to a short implementation period before coming into force on July 29 2024. Once the rules are implemented, existing issuers will be mapped into the relevant category, and all new applications submitted for eligibility review will need to comply with the processes and requirements of the new Listing Rules.
The FCA will now turn its attention to the next piece in the puzzle of unlocking the UK public markets that is the proposed new regime for public offers and admissions to trading. Under the Public Offers and Admissions to Trading Regulations 2024 (POATRs), the FCA has been granted more power to decide whether a prospectus is required as part of an application to admit securities to trading on a regulated market or a multi-lateral trading facility. The FCA expects to consult on the POATRs in the summer of 2024, with the aim of finalising the rules in the first half of 2025.
