FCA publishes blueprint For listing regime reforms
The FCA has published a policy proposal to reform and streamline the UK's listing regime.
The proposals would collapse the current, two-tier structure of the Official List into a single equity segment for commercial companies. There would also be reduced eligibility criteria for companies seeking an IPO onto the Official List.
The stated rationale for the proposed reforms is to provide greater flexibility for issuers whilst also shifting toward a disclosure-based regulatory framework. Initiative is being shown by the UK's key regulator as part of the UK's general focus in recent months to make the UK public markets more attractive and the UK listing regime more competitive with its international counterparts. The consultation period for the proposed reforms ends on 28 June 2023, following which the FCA intends to issue a follow-up consultation, with implementation of the final reforms targeted in the autumn of 2023.
A single listing category on the Official List
Integral to the FCA's proposal is the creation of a single listing category for commercial company issuers of equity shares ("ESCC") on the Official List of the LSE. Under the proposed reforms, the current two-tier structure of premium and standard listings will be abolished. Separate listing categories will remain in place for equity shares of close ended investment funds ("CEIFs"), open ended investment companies ("OEICs"), special purpose acquisition companies ("SPACs") and other equity shares (such as secondary listings and preference shares).
Reduced eligibility requirements
The FCA is proposing to remove the premium segment eligibility criteria, particularly those relating to financial information; a disclosure-based approach will be adopted in its stead. Current requirements currently under the FCA's knife include:
- historical financial information on 75 per cent of the business covering three years;
- three-year revenue earning track record;
- related "specialist exemptions", such as for companies in the property, mining, oil and gas sectors; and
- "clean" or unqualified working capital statements
The FCA is assuming that financial history disclosures in a prospectus will remain largely the same.
Business independence and control
The FCA is proposing to modify its approach to the business independence and control provisions which currently apply to companies listed on the premium segment. Issuers would still need to comply with the FCA's listing, disclosure and transparency requirements, though the FCA will now consider companies with diverse business models and complex structures. The issuer would therefore be able to satisfy the requirement for sufficient independence and control by demonstrating that it can keep the market informed about its operations and performance.
Disclosure-based approach for controlling shareholders
Under the new proposals, the FCA has said it is willing to consider removing the eligibility requirements concerning the independence of a listed company from a controlling shareholder. The FCA is considering whether to delete the other guidance around factors that demonstrate whether a company is deemed independent of its controlling shareholder. It is also proposing a risk-based disclosure approach to controlling shareholders; shareholders would themselves establish the nature of the relationship between the company and any controlling shareholder. The current requirement for a relationship agreement to be in place between issuers and their controlling shareholders will be replaced with a 'comply or explain' obligation; if there is no such agreement in place, this will be disclosed in the IPO prospectus and annual reports.
Dual class share structures
The FCA is proposing to adopt an amended form of the significant transactions regime in the ESCC category. The new form of dual class share structures would include:
- enhanced voting rights on all matters (rather than just in relation to preventing a change of control to protect a founder's position as a director). The exception to this would be in the case of an issuance of new shares at a discount in excess of 10 per cent;
- a maximum sunset period of 10 years for such protections;
- enhanced voting rights shares to be held only by directors (in line with current rules); and
- removal of limits on the maximum enhance voting ratio (currently 20:1)
Proposals would lead to an amended form of the significant transactions regime (specifically as it applies to the ESCC category). The proposals include:
- removing the current requirement for premium-listed companies to obtain prior shareholder approval for Class 1 transactions (except in the case of reverse takeovers) as well as the requirement to publish an FCA-approved circular in these cases; and
- retaining announcement requirements for Class 2 transactions, but only at the current Class 1 threshold of 25 per cent (i.e. transactions falling below the current Class 1 threshold of 25% will not require an announcement to the market)
The impact of these changes would be to shift greater responsibility onto shareholders to carry out due diligence in assessing a company and its risk profile. However, issuers may welcome the flexibility that the proposals provide; they will also have the benefit of Sponsors to help them interpret the Listing Rules, the Disclosure Guidance and Transparency Rules and the UK Market Abuse Regulation.
Related party transactions
Whilst certain controls in respect of larger related party transactions will be retained, the FCA is proposing to remove the requirements for:
- mandatory independent shareholder approval of related party transactions at or above the 5% threshold (or where related party transactions involve a controlling shareholder); and
- related requirements for shareholder circulars and FCA pre-approval of a circular
So-called larger related party transactions i.e. those meeting the 5% class test thresholds will require announcement to the market, including full details of the transaction and a statement by the company's board of directors that the transaction is fair and reasonable.
There will also be modified requirements for smaller transactions above 0.25% and below 5%, including an announcement obligation and Sponsor comfort.
Retained investor protections
Certain investor protection mechanisms afforded to companies with a premium listing segment will be retained, including:
- the requirement for a shareholder vote to cancel listings of shares in the single ESCC category: 75% majority required and supported by an FCA-approved circular;
- shareholder approval for discounted share issuances and share buy-backs; and
- requirements to "comply or explain" against the UK Corporate Governance Code as well as to comply with annual reporting requirements
There is no secret that the FCA's proposals aim to strike a delicate balance between improving London's attractiveness and competitiveness as a leading international listing destination, whilst safeguarding existing investor protections. The shift toward a disclosure-based approach should allow investors to greater control and more room for their own judgement on their investment decisions and create enhanced flexibility for companies looking to list, as well as being less onerous for those already listed. These changes are being trailed and consulted on at a time when capital markets globally remain subdued, globally. It may take some time still before we can begin to assess whether these steps to revitalise London's reputation and create an ever-more attractive listing environment have the intended impact and perhaps more importantly, whether equity capital market participants welcome the evolution.