Global | Publication | December 2023
On 20 December 2023 the Financial Conduct Authority (FCA) published Consultation Paper CP23/31 setting out detailed proposals for the reform of the UK listing regime. This follows on from the “blueprint” contained in its previous consultation (CP 23/10) published in May 2023.
The proposals confirm a radical overhaul of the current rules with a marked shift towards a more disclosure-based framework, reflecting the underlying intention of encouraging a more diverse range of issuers to list and grow on UK markets.
The approach set out in the consultation is largely consistent with that proposed previously, although certain changes have been made in response to feedback and there is now greater clarity on the detail in a number of areas, including intended transitional provisions for existing issuers. The detailed underlying draft rules for the new equity shares in commercial companies (ESCC) category are also appended to the consultation.
The period for responses closes on 22 March 2024. The FCA aims to set out the final rules in summer 2024, with them coming into force two weeks later.1
We will be publishing a briefing with our views on the consultation in due course but have summarised below some of the key differences between the current requirements for premium listed commercial companies and those applicable to the new ESCC category, as well as an overview of the transitional provisions for existing issuers.
ESCC: Eligibility
As proposed in the earlier consultation, the approach to eligibility will be less prescriptive and more disclosure-based. In particular, an issuer would not be required to meet any minimum track record requirements or to give a clean working capital statement. Nor would it have to be operating an independent business (although see below in relation to companies with a controlling shareholder) or to have operational control over its main activities.
Requirements for free float, minimum market capitalisation and pre-emption rights would continue to apply.
Dual-class share structures
A more permissive approach would be taken to dual-class structures, broadly as discussed in the earlier consultation but with certain changes including the removal of mandated sunset clauses (ten years had previously been proposed) and permitting a slightly broader set of individuals beyond directors to hold weighted voting rights shares provided they have involvement or a stake in the issuer at the point of listing (e.g. investors/shareholders or employees).
Certain types of votes would continue to be reserved to holders of shares in the listed class (e.g. delisting, transfer of listing category, and approval of issues at a discount in excess of 10%).
Controlling shareholders
Companies would still be required to demonstrate an ability to carry on their business independently of any controlling shareholder and to have a written relationship agreement in place – this differs from the position in the previous consultation which proposed a “comply or explain” approach. Current rules on de-listing and election or re-election of independent directors would also be retained.
Significant transactions
Transactions at the current Class 1 threshold (25%+ on the class tests) would need to be disclosed to the market but would not, other than in the case of reverse takeovers, need to be approved by shareholders.2 In its previous consultation, the FCA proposed that the announcement requirements for such transactions would essentially mirror the current Class 2 rules. However, it has now revised its approach and proposes enhanced disclosure in a number of areas including (amongst other things) the need for the announcement to include:
New guidance is proposed on when a transaction would be in the “ordinary course of business” and, as discussed in the previous consultation, the profits test is being removed.
Related party transactions
Related party transactions would not need to be approved by shareholders, however specific requirements would apply at 5%+ including the need for board approval (excluding any conflicted directors) and announcement of certain details. The announcement would also be required to include a “fair and reasonable” statement from the board having been so advised by the sponsor.
The FCA has proposed that the threshold at which a shareholder becomes a related party should be increased to 20%. More generally, it also welcomes further views on whether it should (in the alternative) consider moving away from a bespoke definition of related party in the Listing Rules in favour of a definition used in accounting standards.
It is no longer proposed that companies in the ESCC category would also be subject to the separate related party requirements of DTR7.3.
Whilst a sponsor would continue to be required on IPO, the need to appoint a sponsor in a post-listing context would be significantly reduced.
Companies would continue to be required to comply or explain against the UK Corporate Governance Code. Reporting on climate and diversity, and most other premium listing annual disclosures, would also be retained.
In line with current requirements, shareholder approval would continue to be needed in relation to, amongst other things, issues at a discount and share buybacks.
Shareholder approval (and publication of an FCA-approved circular) would also still be required for reverse takeovers and for de-listing (including the specific rules for approval of de-listing where the company has a controlling shareholder).
The FCA has set out its thinking on transitional provisions for existing issuers as well as how it would propose to deal with “in flight” listing applications and with “mid-flight” transactions by premium listed companies.
Transitional provisions for existing issuers
Existing premium listed companies would automatically be mapped to the ESCC category when the new regime goes live.
Certain existing standard listed commercial companies would be mapped to a new “transition” category which would replicate existing standard listing continuing obligations but be closed to new entrants. This category would not have a fixed end date, although the FCA notes that it may (subject to future consultation) seek to remove it in the medium-term as issuer numbers reduce. Issuers mapped to the “transition” category could choose to apply to transfer to the ESCC category – this would require the appointment of a sponsor, although the FCA proposes a targeted eligibility assessment and sponsor role for such transfers.
Mapping would also take place to move other existing standard listed share issuers into the new “shell companies” category or the new “international secondary listing” category (designed for non-UK incorporated companies with more than one listing where the “primary” listing is on a non-UK market).
The FCA intends to contact issuers in advance of the prospective changes to notify them of the category it has proposed they will be mapped to.
“In-flight” listing applications
The FCA discusses how it proposes to deal with listing applications that are “in flight”3 when the policy statement and final rules are published. In summary, these would be mapped to the corresponding new listing category. In-flight applications for a standard share listing that correspond to either the transition category, the shell companies category or the secondary listings category would have a one-year period from the date of implementation of the new rules to complete their admission process, after which time the application would lapse (certain additional transitional provisions would apply to existing issuers and in-flight applications mapped to the new shell companies category).
In the event an issuer is in the process of transferring between listing categories at the point of implementation, the FCA proposes that it be considered in the same way as an in-flight listing application.
“Mid-flight” transactions by premium listed issuers
The new rules on transactions would apply with immediate effect when the regime comes into force. As such, if at that point a premium listed issuer is part way through a transaction that has not yet completed it would cease to be required to comply with any premium listing obligations not carried forward into the new regime.
Whilst the draft rules appended to the consultation relate to the ESCC category, the consultation discusses in some detail the FCA’s proposed approach to other listing categories, including the new “shell companies” and “international secondary listing” categories as well as closed-ended investment funds. A second tranche of draft rules covering the non-ESCC listing categories is expected to be published in Q1 2024.
(FCA, Primary Markets Effectiveness Review: Feedback to CP 23/10 and detailed proposals for listing rules reforms – CP 23/31, 20.12.2023 and press release)
On 19 December 2023, the Financial Conduct Authority (FCA) published Primary Market Bulletin No 46 (PMB 46). This addresses specific questions relating to Article 10 of the UK Market Abuse Regulation (UK MAR) and market conduct issues more generally in the context of shareholder co-operation regarding Environmental, Social and Governance (ESG) stewardship. It also reports on an initial assessment the FCA has conducted of sponsor procedures in relation to the TCFD-aligned disclosures made by listed companies.
Noting that the extent to which any engagement between shareholders, or those between a company and its shareholders might contravene UK MAR or raise other market conduct issues will depend on the specific circumstances in any given case, the FCA draws attention to two publications that it considers are of continuing relevance and assistance to firms in considering their obligations under the market abuse regime. These are:
FCA’s approach to assessing shareholder engagement
The FCA confirms that the ABI letter and the observations in Market Watch 20 are still relevant to considering issues of shareholder activism, engagement and co-operation, including in the context of ESG stewardship. The FCA also confirms that the outcome of the Gent case, as discussed in Primary Market Bulletin No 42, did not change the FCA’s approach to Article 10 and UK MAR in general and should not inhibit or stifle high quality engagement between companies and their shareholders. Collective engagement by institutional shareholders designed to raise legitimate concerns on particular corporate issues, events or matters of governance with the management of investee companies, including matters related to ESG considerations, should be possible.
Strategy and voting intentions
While the FCA is unlikely to consider that market abuse rules have been contravened where a shareholder trades based simply on its own intentions and knowledge of its own strategy, it may reach a different conclusion if other market participants also trade based on the knowledge of that party’s voting intentions or stewardship plans. While the FCA’s approach will always depend on the circumstances, it does not think this situation is likely to arise in the context of bona fide discussions between shareholders in respect of ESG stewardship.
Major shareholders, concerned that their voting intentions or broader stewardship plans concerning an issuer may constitute inside information, are reminded to consider the requirements under Article 8 and 14 UK MAR (Insider dealing, Prohibition of insider dealing and of unlawful disclosure of inside information) and Article 10 UK MAR (Unlawful disclosure of inside information). Where the information is not inside information, shareholders may choose to publish that information and the FCA points out that some shareholders or groups of shareholders voluntarily publish voting intentions for an upcoming “Say on Climate” resolution.
The FCA comments that asset managers and institutional shareholders may make their broad or sector-specific ESG stewardship programmes public and this transparency reduces the risk of inside information arising from stewardship plans for specific issuers and so makes stewardship collaboration between shareholders more straightforward.
Disclosure of major shareholdings
The FCA reminds shareholders that when collaborating, they should bear in mind their disclosure obligations under DTR 5.2.1R(a), which may require shareholdings to be aggregated in certain circumstances. Voting power needs to be aggregated where there is an agreement between two or more persons which obliges them to adopt a lasting common policy towards the management of the issuer through the exercise of their voting rights. While the FCA considers this is unlikely to include ad hoc discussions and understandings which institutional shareholders might reach in relation to particular issues or corporate events, shareholders need to be aware of these rules and take advice as necessary when considering collaborative shareholder discussions in respect of ESG (or other) stewardship.
LR 9.8.6R(8) requires premium listed commercial companies to include a statement in their annual report on whether they have made disclosures consistent with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and to explain any departures. Sponsors also have a responsibility, where a sponsor service is being provided to a new applicant, to assess whether the issuer has established procedures to enable it to comply with the Listing Rules and the Disclosure Guidance and Transparency Rules (DTRs) on an ongoing basis, including compliance with the TCFD-aligned disclosures.
As a result, the FCA has: (i) reviewed the work sponsors have done in relation to assessing issuers’ TCFD-related procedures and controls; (ii) asked wider questions around how sponsors have updated their approach to due diligence in areas where climate related issues may be a material consideration more generally; and (iii) sought to understand in more detail the work that sponsors perform in relation to the obligation in LR8.4.3R(3) as it relates to their assessment of whether the admission of securities would be detrimental to investors’ interests and to verify the climate-related statements made in prospectuses.
Findings of review
The FCA sets out its findings in relation to the following:
FCA’s commentary on its findings
It is pleased to see that sponsors appear to be giving increased focus to climate-related matters, but the FCA believes it is good practice for sponsors to assess their current policies and procedures to consider whether they need to be updated in particular areas. It also provides examples of certain provisions that could be incorporated into sponsors’ systems and controls, and notes that it is good practice to consider, on a case-by-case basis, how the nature and extent of a new applicant’s climate-related risks might be relevant to the due and careful enquiry a sponsor should make to gain assurance in relation to the issuer’s ability to meet the TCFD-aligned disclosure requirements on an ongoing basis. The FCA comments that it may be appropriate for sponsors to undertake a deeper analysis of these issues for a mining company than for a financial services issuer, as an example.
The FCA comments on the upskilling being undertaken by sponsors in this area and the use of third party experts, as well as on sponsors’ record management requirements under LR8.6.16AR in relation to third party reports.
The FCA points out that its expectation that sponsors should have sufficient skills, knowledge and expertise to be able to interpret and apply relevant elements of the FCA Handbook in the specific context of a listed issuer’s business and operations, including where an understanding of a specialist industry sector may be relevant, extends to understanding the climate-related implications of a new applicant’s operations, being able to consider the risks for investors and acknowledging that the amount of due diligence required and the verification of disclosure will vary by the nature of the company and its areas of operation.
However, as with the approach to other specialist areas such as the application of accounting standards, this does not mean that the FCA expects sponsors themselves to be experts in TCFD-aligned disclosures or climate reporting. Having said that, sponsors are reminded that they should consider if they have sufficient access to relevant expertise, internally or externally, to comply with sponsor obligations in relation to TCFD-aligned disclosures and to assess the adequacy of an issuer’s procedures to meet future TCFD or climate-related reporting obligations.
On 18 December 2023 the Takeover Panel (Panel) published Panel Statement 2023/16 concerning Instrument 2023/4 which has been published on the Panel’s website.
Instrument 2023/4 makes amendments to Note 18 on Rule 9.1 of the Takeover Code to introduce a new paragraph (b). This provides that Rule 9.1 (the mandatory offer requirement) does not apply in relation to any change in interests in shares or other transaction which is effected by the use of CCP resolution tools, powers and mechanisms (within the meaning given in regulation 2 of The Resolution of Central Counterparties (Modified Application of Corporate Law and Consequential Amendments) Regulations 2023 (the “CCP Regulations”).
The amendments to Note 18 on Rule 9.1 will take effect on 31 December 2023.
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